What are you eating Freiburg? Is that Buffalo jerky? What is that? It's a red pepper. It is not the bolt on her lungs. I got kissed. A, she owes and I got a right to her. Oh wait, wait, look at this.
Are these the best? Pistachios? They're the best. Salt salt and vinegar? Yeah, it's not the vinegar. Yeah. There are those unpure mustachios. These guys are so rich people peel their nuts. People have been feeling my nut since the Facebook IPO.
Hey everybody. Welcome to episode 121 of the world's greatest podcast the island podcast with me again, of course, the dictator himself trim off, Bali Hai piteå, the Sultan of science, David Friedberg and the Rain Man himself. Yeah, definitely David Sachs. Gentlemen, Hugh doing the world's greatest genuflect. ER, the world's greatest
Raiders here, all this you guys I got to tell you something, the grift is on a lot of corporate gigs for me to moderate. I don't even have to prepare. I just show up in moderate. Huh. So great what is an example of such a such a gig. This a lot of Corporations and conferences that pay a pretty penny to have the world's greatest moderator come and interview people. This is like the used car parts Association of America having a little bit like I did one with like 1000 litigators at an attorney conference for like
The SAS software. They all use and it was a wonderful Fireside, you know? It's just great. This is like the
graph deserves to have to fly commercial where they fly private. It's commercial at this point. Yeah, what is your what
is your Rider say? What kind of what do you want to do? You ask for spice salted, macadamia nuts but I don't have them feel my nuts. Know what I do is I blend the travel cost into the speaking fee and then nobody knows when I'm in or out what hotel, I'm staying at or whatever but
Basically I'm back on the road, folks. I'm back to jail again trailer, do you get you
know, know know what you're
saying. Is know what he's saying. Is he gets a 25 hundred dollar travel budget and instead he comes the day of and leaves the day of saving and netting himself, an extra twenty five hundred. Well, you know you can optimize if you're saying optimize I did use. I had, you know, during covid I racked up a million and a half two million of these United points and I have just been grinding those United points down. So shout out to United and the pandemic.
All right, it's a lot of news.
You see, right amounts even worse than that it's even working them for travel expenses. When he's my own paying anything,
maybe Jason part that's not my case is in part part of the part of the grifters using the cash app to commit fraud and murder Lord. I mean that Hindenburg before it is. I mean, it's a work of art but we gotta start with the FED hiking rates by 25 basis points and the general
Feeling in the country that maybe the FED doesn't know what they're doing and maybe it's time for regime. Change the FED increased rates by 25 basis points yesterday Wednesday,
So the FED has increase in the federal funds rate from nearly zero in March of 2022 to. Now the range of four point seven five two, five percent fastest rate hike since the 70s speculation the FED might pause rate hikes or even cut. Do the recent banking failures didn't happen so if you bet that they were going to pause you were wrong. If you bet that we're going to cut, you are also wrong but the market has ripped.
A bit a day after.
Which people are trying to figure out in the group chats doesn't seem like anybody has a theory here, but let's start with sacks. Maybe an explainer a little bit on how the Fed works. There's a board there. People serve a 14-year term.
I guess they replace somebody every two years and Jerome. Powell was placed in 2018 by Trump and I guess there's a lot of hand-wringing now that they were late on.
Inflation obviously. And then they went too fast and maybe now they're not slowing down enough. So what's your take on it? Objectively sex putting aside partisanship and you know for this Administration versus that Administration just objectively do they know what they're doing? And how could they do a better
job? No, I don't think they know what they're doing. They clearly reacted way too late to the inflation. We've talked about this before, we had that surprise inflation print and the summer of 2021 5.1%. They said it was transitory, they didn't react.
Till November, they continue to be for another six months. And they've suddenly got hawkish in November of twenty Twenty-One. I didn't even start the first rate increase until March of 2022. So they were really asleep at the wheel and late to react to the inflation by about nine months. Now, I think they're potentially making the opposite decision, which is, they are late to recognize what stress and distress. The economy is under right now and Powell had
There were three choices they could have made. At this meeting, they could have raised rates, which is what they did, they could have cut rates, which they didn't, or they could have done nothing, basically help at. And the argument for raising rates is just that. While we have this inflation problem, we need to keep raising interest rates until the rates are above inflation and that will bring inflation down. Then you can start to lower rates at sort of the conventional view. I think the problem with that view is it ignores that we've just seen a run of bank failures and there's tremendous
Distress building up in the banking system from unrealized losses on long-dated bonds. Also unrealized losses on commercial real estate loans and we've barely scratched the surface of seeing that problem. That's, I think the next shoe to drop in this whole thing. So, I think that the right decision here was to either cut rates or to stand Pat, you may have seen that. Ilan said, listen, we should be cutting rates here. There's way too much latency in this inflation data. The economy is
seizing up and we don't need to be raising rates right now. We actually need to be cutting them. I think that probably if it were me looking at the upside downside of these decisions I probably would have just stood Pat because again we've just seen this banking crisis. Why won't you just wait one month to see. Maybe there is latency in the inflation data. Maybe the banking crisis is not over. Why won't you just stand Pat for one month? You can always raise rates in a month. I think that this move here could in hindsight be seen as the straw that breaks the camel's back
Back
shabbath, would you have paused and waited to see another card and then watch the hand developed or do you think they're doing the right thing by raising? Or should they have cut? I think they did the worst thing possible which is they took the middle path if you think about what the Fed
Has the ability to do, they obviously have the ability to raise and lower interest rates, but we don't talk about is they have a balance sheet that can absorb assets.
For the last 10 or 15 years, we've had a phenomenon called quantitative easing and for folks that have don't understand what that means. That is essentially the Federal Reserve buying assets out of the market and giving people money for it so that that people can then go and buy other things with that money.
Last June, they started, what's called quantitative tightening, which is essentially reversing that policy and restricting liquidity in the system.
So if you look at those tools and you sort of play a game Tree on what the FED could have done, I think that you have two choices. One, is you massively? Let inflation run amok where you have no tools to fix or you have massive illiquidity in the financial system but you actually do have tools to fix that which is through
Some combination of quantitative easing and tightening depending on how much liquidity want in the system. So I think actually, I disagree with socks, I think they should have done the opposite, they should have raised 50 bibs, it would have created a little bit more chaos in the short term, but it would have set us up to understand what was fundamentally broken. And still give the Federal Reserve, the ability to use their balance sheet and use liquidity in the future to solve the problem. They took the worst option.
Option which is neither did they cut nor did they raise enough? And so this problem that sax represents actually is the fundamental problem. Now, which is you won't have enough Clarity and signal to really know whether this 25 basis point enough. Look, I've maintained now for nine months, that rates are going to be long higher than we like and longer than we want. And so I think it's high time that we acknowledge that we have a sticky inflation problem.
Who's back? We have to break, we've known since Volker era. What we need to do to do that? Which is you need to get interest rates to be greater than terminal inflation, which means that if 5% fed funds rate is insufficient. So we're going to need to see a print of five and a half 5.75%.
And that's when you're going to have enough contraction and then the FED can come back with liquidity, but if they don't take these steps, we're going to be in this very choppy. Neither here neither their situation and I think that is what causes the real damage? Because it's the corrosive effects of uncertainty and what that does to lending to risk taking and I think is really bad for the economy. Freiburg, where do you land? We have sack saying they should have stood Pat, we got you're not saying either. Go hard, take them out.
Listen, I don't know. I'm not a lot like an economist on judging the balance that they're trying to weigh right now. I think everyone's got a different, you can hear a cacophony of opinions on this one, what I'm more interested in is.
You know, we talked a lot about the banking crisis underway and I know we're going to talk about this question on Commercial Real Estate in a minute. But if you look at the yield on the 10-year treasury I think coming out of this past.
Two weeks.
You know, the yield on the 10-year, treasury drop from 4.1% down to looks like a closed 3.4% today, nearly a point seven percent decline in the past, two and a half three weeks. And that's also off of 3.8% since the start of the year. And remember, when we talked about the impact on asset values at Banks, I think if you look a lipstick lie, at the roughly seven trillion dollars of assets held at Banks,
with some, you know, whatever, the set of banks that are that we looked at,
The average kind of equity ratio is about 15%, so, you know, a 2% or sorry, 3% adjustment over 10 years on the treasury impact. The value of a chunk of that portfolio down 25%, which starts to put you into dangerous territory. And there's obviously a distribution of what that does to certain banks that are overweight, you know, 10-year bonds, whether their loan obligations on mortgages or treasuries, or corporate bonds, or real estate bonds,
Let's take that. And so the more encouraging point that I think we should pay attention to is, does the market tell us that these short-term rate? Actions are driving down the lawn, the medium and longer-term rates in a way that will improve the balance sheets of. All these institutions that own a lot of this debt particularly the banks and funds and so on. And, you know, I'll do the math here real quick but just in the last two weeks, the impact on the 10.
Our treasury has probably had a pretty sizable impact. You know, we talked about unrealized losses, its reduced, those unrealized losses. Its improved them. So I think that that's like the more important metric to be tracking is, you know, if you look at all the assets that we're all worried about right now, are they going up in value or down in value, in a way that introduces more stability into these kind of banking systems that we care about? And I think right now it looks like maybe things are improving and that might be part of the optimism around.
You know, Equity markets, and folks, buying and so on. Yeah. And so this is I guess where people have started to talk about the next shoe to drop, we obviously had this time base.
Liquidity issues with Silicon Valley bank. Now, the Wall Street Journal is talking about commercial real estate, and how much debt there is since covid. Obviously, people are doing more remote work, a lot of the skyscrapers is not just San Francisco, but in many locations remain empty or underutilized, people are now having their leases come up every year more, and more of these leases will
Become vacant, and then we'll see if these buildings are worth what people paid for them smaller Banks. Hold around 2.3 trillion and Commercial Real Estate debt including rental apartment mortgages. Almost 80% of commercial mortgages or held by Banks. According to this world Street Journal story sacked, you are an owner of some commercial real estate and you play in the space you have a lot of first-hand knowledge, what is you're putting aside your personal Holdings or exposure? What is your take on what you're
Seeing what is the game on the field right now? In terms of commercial real estate in San Francisco and Beyond?
Well, if you talk to the commercial real estate, guys, they'll tell you that the situation is dire. There's two dire the there's two problems first, there's a credit crunch going on, so there's just no credit available. If you're a commercial real estate developer and you have a building and you want to refinance your construction loan or put long-term debt on a building, you just can't do it. I mean, the banks are not open for business. They
Don't want the business and I think that comes back to the fact that Banks right now are hunkered down in a defensive posture, they're seeing deposits flee from their Banks. Unless of course, you're one of the top
four is that does that freeze on the bank's predate? The Silicon Valley Bank crisis and it was exacerbated. We're people having a hard time getting loans before that
it predates it but definitely what your see, what you saw with SV B and these other beings including Credit Suisse is that you know, Banks now are getting much more
A paranoid. And that's why you saw that. If you look at the discount window, which is when the bank's go to the FED, as lender of Last Resort, sand, basically post collateral to get liquidity. We had the biggest spike in discount window borrowing, since the 2008 financial crisis. Yeah. That line on the right side that is that is a spike in one week sparring this exceeds. Anything that happened in 2008. The warning sign should be flashing red over
Thing like this now to bring it
back and I'm sure clear that's Banks who have real estate. Exposure going to the FED going to the government saying, hey, can we get some money to cover these? It's not
specifically about real estate, is more about Bank liquidity. The banks are saying we don't have enough liquidity right now, to cover our needs, which are highly volatile right now because basically, depositors are moving out of community and Regional and small Banks into the big four so-called
Chemically important or sip Banks. So what's happening is that again, banks are hunkering down there getting very defensive. They do not want to make new loans because they can't tie up assets. They are trying to stay liquid themselves, so that's what's happening. Now, in sort of with respect to new lending and then on the other side of it, you have existing loan portfolios. There's something like twenty trillion dollars of commercial, real estate debt. And most commercial real estate lending is done by small.
Banks by Community Banks. So they are sitting on these huge Siri loan portfolios and I think something like 300 billion needs to be refinance or is coming to you and the next year normally that's rolled over and refinanced their is separately, there was a study showing that unrealized losses. These loan portfolios in the banking system may be around two trillion dollars. It was a study that was reported on by The Wall Street Journal. So in the same way that we had huge unrealized losses in these long-dated,
I think we
also have access Token Valley Bank specifically that's
where we saw the worst offender but it's a systemic problem. I think. Similarly, we have huge unrealized losses in commercial real estate loan portfolios. And this is I think even a more subtle and pernicious problem because with Securities like t-bills or mortgage bonds is very easy to know what the unrealized losses are. The reason why they hadn't realized the losses would not because they didn't know what they were was because of a stupid accounting rule. That said they
Have to realize the losses if there were quote-unquote holding them to maturity with these loan portfolios. We don't know how big the exposure is and we won't know until you start seeing some defaults and re pricings of assets and you actually just real
estate is a much more Dynamic market, right? You have to have a buyer there, you have leases, you have Lisa's coming off at different times. You have subleases occurring, and you have the owners of them flipping them, right? And refinancing them constantly to buy new.
Things. And
so and those loans aren't as liquid, right? With a mortgage Bond, those are basically a bunch of Loans mortgage home mortgages typically that I've been packaged up and turned into a security. And there's a liquid Market Place of trade them. And the case of these loan portfolios, there may not be a liquid market place. So you don't really know how impaired that loan portfolio is until you actually get to a place.
Where when will we know what? Because that that's the thing I'm wondering, we saw a lot of headlines, you know, pinch
Just bought themselves out of their new headquarters in the Bay Area. San Francisco. I blew specifically, I heard Facebook got rid of a couple billion dollars in wrote down some expansion. Amazon is selling buildings, they had gotten a ton of buildings and we saw last week they got rid of another 9,000 other planning, another 9,000 or if and they can't get people to come back to the office. So how bad is the over belt? I guess is the question because that will be the driver of the value of these buildings could. If there's too much Supply then
What are these buildings actually were that they worth ninety dollars a square foot but if there's no but if Amazon doesn't want more space, you can see it in the credit. Default spreads of these Banks, it's in the water table already. So you can Nick, you can just throw it up. If you look at any Bank that's lending and that has a portfolio, this is Deutsche bank's, you know, Euro denominated CDs, but it's the same for Barclays. It's the same for sock Jen. It's the same for a bunch of American Banks. There is a risk in the system that sax articulated that is now getting priced in. There are all kinds of
Loans. Who's payments, which the banks need.
Cannot necessarily be insured, which means that then there could be illiquidity there. There could be a flow of deposits out from those Banks which would then make their ability to pay their debt holders lower. You also have this complicated issue already where it's really like the first time in a long, long long time where debt holders actually got wiped out in the Credit Suisse debacle before the equity holders did
And that's created all kinds of ripple effect. So this credit bubble
is here and it's being manifested right now in these very sophisticated parts of the market and eventually, they'll Ripple to the broader economy at large. But how a person feels this is they're not going to be able to get a car loan or a mortgage or the interest rates, they pay will go up. And then how bondholders will react to all of this stuff is they'll just start to find different assets. Probably the front end of the curve money market Cash Gold.
old and they'll just abandon all these assets and then the other problem,
Is that it's just, really, really bad for risk assets. So the things that we invest, in startups, technology companies either in a world of inflation, run amok because the FED isn't hiking fast enough which just destroys future cash flows or in a world where the FED pivots in a moment like this. And Nick, you can show the second chart both result in the same outcome which is that you just see these massive draw Downs, in the value of risk,
Sets, so we're in a really complicated moment.
and this is why I think again the FED needed to take leadership this past week and actually do the hard work of either cutting 50 bits
Or raising 50 bibs and this middle path is the absolute worth path because trying to thread a needle in this complicated economy. I think is just going to be impossible and then what happens is then the markets move around them, right? The markets have completely said, we now discredit, what you did and they're basically banking that the FED will be forced to cut rates, massively in short course because the crisis will be so severe that
It'll outweigh the risk of inflation. Think about the ah yeah so all this real estate comes on the market. There's no buyers for it. The mortgages are due. Does that mean a commercial real estate owner? Just basically gets foreclosed on and they hand the keys back to the bank or the banks as its history Journal story was sort of alluding to that the FED will say, you know what, we'll just extend, will backstop this real estate which happened in the last bubble and we
That over time, it works itself out and demand returns. Now, of course, that's different than a post covid world. So this time could be different. What happens in the case of 2024 2025 all of these office spaces are returned and the keys are handed back.
Yeah, so okay. So Jason, you ask a question like, how does this problem? Manifest me describe, from the point of view of that real estate owner there's basically two problems. One is that you have a tenant who's in a long-term lease five seven, ten years.
That least roles. So that that least comes to you. Now, they don't need the space anymore. You know, we know that takes a Cisco which has got to be the worst market for Siri in the country right now. That's me like 30 to 40 percent of the space is vacant. So that's either space for rent or space for sublease because no one's using it. So they put it back on the market. Well, although subleases, they're still paying rent because they have a contract. So what happens is as those leases roll, now all of a sudden you don't prepare any more, so you're going to stop.
If you still need the space, you're going to negotiate a much, much lower rent. So now all of a sudden the real estate owner can't make their Debt Service Covenant ratios, the income from the building is to substantially less. They can't make their
desks or has on that and explain that ratio to folks you have a certain amount of debt you own. Let's say Salesforce Tower in Salesforce is case there subleasing 125,000 square feet let's say they were into that for 500 million. What is this Debt Service ratio?
Saying that to the
audience when the bank underwrites the loan they just figure out the interest that you got to pay on the loan relative to the value of the building or the income that is generating. But all those ratios are upside down now because the value of the buildings, the rent has gone down so much because there's so much vacancy. I mean, when these loans were underwritten, San Francisco had like a 5% vacancy rate and now it's like 30 to 40 percent there just no tenants. Hmm and then you know in parallel with that Jason you've got all these cases where
You know, we have tenants or Lisa's rolling, you have loans rolling, you know, again if the owner of the building has either a construction loan or a like a long-term debt and that needs to roll, they have to refinance it and if they can even get credit which they may not be able to because of this crunch. They're going to be paying a lot more for it. So now all of a sudden the income statement for that building doesn't make sense. Think about it. You're borrowing costs are higher and your revenue is lower. So now all of a sudden the buildings under water, so where does that end up? Well, they default on the debt.
And the bank ends up owning the building. So then what happens is you end up with, you know, all of downtown San Francisco owned by a bunch of banks? What are they going to do with it? They don't want to be in the real estate business, so they have to fire sale, those buildings in a bunch of auctions at rock bottom prices, Because by the way, there's no cash or liquidity out there. The so, who are the buyers gonna buy her? It was a nobody commercial buyers. We have a three percent vacancy rate, there's no rent or
so. So what happens? Detroit like is it just like a dead
City and then the tax base collapses, the city because so much of the tax
Space is dependent on, you know, real estate. So listen, I think they're gonna have to work this out. I don't think they can just let the free market tickets course here because you're going to end up with the snare. I just painted. So I think what hopefully would happen maybe is that the banks do some sort of deal with the real estate owners that you know, they blend and extend or whatever. But in order to do that, they're going to be back stop by somebody and that's the FED
Freiburg. What are your thoughts? Just writ large as it were on the commercial real estate, it's 9:00.
Ours is it was ninety dollars a square foot right for class A sax in the city, is that the price was that going to be
60, 70, 80, 90 bucks a foot depending on what kind of building you're talking about. I mean, you have all these empty office Towers so look, I never invest in office Towers. I do small boutique kind of brick and Timber spaces and Jackson Square, we're doing. Okay, because people still want to be in those spaces, but these office Towers on Market Street, or in Soma, I mean, which is where all the investment went during the boom. Nobody wants.
To be in those buildings anymore. And it doesn't help that the city has allowed this giant, you know, open-air drug Market to metastasize right outside their
door Freiburg. Yeah, I think it's inevitable, will have probably two to three trillion dollars of federal money.
You know, spent backstop and support the asset. I mean that's the general theme here in case, everyone isn't paying attention at home, is that the fed the US government will continue to print money and create programs to effectively support asset values, such that there isn't
A crippling economic ripple effect. And this is the danger with depth spiral of debt, and it's why I always talk about how concerned I am about global debt levels and particularly debt levels in the US, but really, Global debt levels. I'll say the statistic again, and over and over again three hundred and sixty percent Global debt to Global GDP.
But, you know, even within some of these asset classes, a significant amount of debt has been used to fuel asset prices, and to fuel Equity value, and then met Equity value gets levered and reinvested. And so the Rippling effect in the economy of declining, a asset value can be magnified through Leverage
And unfortunately, debt in general forces growth without growth debt fails. And so, when we use debt to demand growth on a macro perspective, it causes you know, significant stress and strain on the system when you're going through periods of like we are right now. What should be natural recessionary effects from covid and shutting down the economy or natural asset price declines, because of that. And we can't let it happen because if it were to happen, the Rippling effect would be
A crippling. So this is a good example. You'll probably, I don't know what the facility will look like, maybe the government passes, some Congressional bill that says, hey guys, here's three trillion dollars to support, you know, all this real estate is another, you know, to trillion to support Banks and you know, giving them liquidity through the other problem. As you guys know is most people's most of the population in the US has most of their assets, their asset value of our Equity value in their home.
And those home prices are supported by residential loan programs. And, you know, if you actually have a massive write down the value of that asset class. That's when, you know, everything kind of falls apart. So, you know, we will continue to be buoyed by that that kind of inflationary Behavior. Unfortunately, Balaji, I think has it, right? We'll talk about it in a minute.
That there has to be money printing to get out of this hole. I don't know if it's necessarily in this moment hyperinflationary as he predicts. You know he uses the Deutsche Mark in the Weimar Republic has this kind of story line that this is what's about to happen in the US? The truth is it looks a little bit more like the pound sterling. At the end of the British Empire where, you know, there's certainly a an inflationary and evaluation effect that arises but it's not. It is the reserve currency of the world today. Let's so it's really hard to kind of just say, hey, it's going to be hyperinflationary in the
He's going to go to zero it's just not going to happen. So that seems to be the vltava dollar of the dog. Yeah. So that seems to be the BET. Now trim off at
Some folks are predicting catastrophizing. Hey, this is the end of u.s. Supremacy. The end of the dollar, of course, modern monetary Theory, seems to stay. You can just keep printing dollars and couple trillion dollar coins back. Stop it. And by the way, tarp was profitable modestly for the United States and the backstop of real estate totally work. So where do you land on this? Do you think these backstops? And modern monetary Theory stating that you can just print money? You own your own fiat, currency is going.
To work or as we pivot to the billion-dollar. Sorry, the million-dollar Balaji Bitcoin bet that this is the end of days. All right, I think it's not the end of days, but I think you're conflating a bunch of things together. So, look mmt as I am. Yes, was in hindsight idiotic in the moment. It never quite made sense, but in hindsight is clearly idiotic and
I think that we can properly dispense with that.
But the reason that we print so much money is sort of what free Brooke says which is that we just want a well functioning society and the simplest and shortest way to do that is to make sure that there aren't any winners and losers anymore and the most effective way to do that in the markets is with money, print a bunch of money and there are no more winners and losers and so everybody can kind of win some people may may win more but nobody really ever loses.
So I think that's the that's the mo that were operating under.
The thing is, I do something unhealthy to that Tremonti or sort of alluded to it. No losers. That's a more philosophical and a commentary on capitalism and a bunch of other things and you're right, I don't think it makes sense. I do think you need winners and losers.
To really make Society function. Well,
But the other part of it is like does it reinforce or does it decay US dollar hegemony? And I think it actually reinforces it and the reason it just very practically speaking, when you look at how dependent other people other countries are on the US dollar in times of stress, they actually become more dependent and that has a lot to do with their boring patterns, the amount of dollars, central banks need outside the United States. And so, what did you see in a moment of stress actually the Fed?
Opened up swap lines to all the central banks that they work with their most important, operating partner, so Europe, Canada, Japan, Etc, Switzerland. And they move the liquidity window from weekly to daily, and they pounded, the swap lines. So I don't know. I think that most people that that kind of like it's like a boy crying wolf. Maybe. At some point somebody will be right. But you're going to lose so much money trying to take a point of view.
Around this topic that it's more practical to just look at Dollar flows and dollar flows. Go up in moments of stress, not go down and they go up in a Distributive manner across the monetary Plumbing of the world. All right, so let's explain the Balaji bad since that trended and he is the boy, boom. As you're saying what? Cried wolf this past week. Cry Bitcoin. Yeah. The bike rides and climb very well
said.
So friend of the Pod Balaji on March 17th
Predicted that Bitcoin will reach 1 million dollars in 90 days due to u.s. hyperinflation, hyperinflation is defined as prices going up, fifty percent month-over-month just so we're clear on exactly how dramatic that is. He made the bet on March 17th against a pseudo Anonymous. Twitter, user. James Medlock who said they would bet 1 million that the US would not experience hyperinflation. So, Balaji sort of inserted
Bitcoin into that bed. It wasn't a Bitcoin bet that and I think he's done two of these bats. So he's betting two million in total on bitcoin hitting 1 million by June 17, which there's probably no chance of that happening were very tiny chance. I'll ask the panel in a second. Bitcoin was trading at twenty-five, twenty-six thousand at the time. It's now trading, at over 28,000
And Balaji has been on every podcast known to man in the last 72 hours. Talking about this, I've watched one or two of them, and it's pretty out there argument. I think you can just type in Balaji on YouTube and watch any of the 20. He's done. He believes Regional banks are insolvent. He thinks the feds need to because going to need to print a massive amount of money. Like we've said here, do more QE and then cut rates as well seems reasonable. But that, that will lead to
It's not reasonable. Wow, no, no. All sounds reasonable. So we just print. We just printed that they're going to cut rates. We just discussed. They're going to eventually cut rates and they'll be more QE. So that part is reasonable. Just that one little piece but it then he believes that the part that is so kind of out there that hyperinflation is going to devalue the dollar and this is the time he does not and I made a bunch of I asked him it's a bunch of times and he would not be honest about it or didn't want to answer my question. I said, hey, what percentage are you in bit?
When somebody says he's 99% in Bitcoin, he will not confirm. And so I was like, well, if you want 1000 Bitcoins, if this goes up, you know, a very small amount for 5%, you're going to pay for the bets and are you talking your own book here or not sacks? What do you think of this overall bat? Is that a stunt? He's saying like this is the lifeboats moment and just to add to it he says you have to leave the United States and get to Singapore or a place or if you're gonna stay in.
United States, you need to get to Wyoming, or Texas or somewhere that explicitly allows Bitcoin, because the closer you are to the United States banking system, what happened to Silicon Valley Bank on that fateful weekend, where people couldn't get their cash. And we're going to have to, you know, Miss payroll. He says that's the dry run for the entire US banking system
sacks. So first of all, I don't think you can, disparage. Balaji because someone who cries wolf says this repeatedly and makes a dire prediction repeatedly and is wrong. And we can't say yet that Balaji is wrong.
Do I think that we're gonna have a million dollar Bitcoin 90 days? I personally find that very unlikely but you can't say yet he stuck his neck out, making a prediction that will be easily falsified if he's wrong second. The last time that Balaji made a dire prediction he has covid and he's right about
that one.
So you can't say that this is just like a Doomer who throws out crazy predictions and is always wrong. He's actually pretty selective about his now. That one predictions. Yeah.
Is a tweet from January 30th of 2020 in which he basically predicted a pandemic based on a coronavirus and laid out a whole bunch of consequences that mostly came true, which is why we're talking about this. This is not just some like random person, like he actually has yes, pedigree and a track record. Here's my view on. It is
duping. Yes. Him and Nassim taleb the two of our opening speakers at all. In some in 2023. Those are we are booked and speakers.
Put them down. Anyway, so so look. Now, what do I think about it? I I posted my own Theory today, which I would call sort of bulgy light, which is okay. Look, if you think about this spike in interest rates that we've had, and that trauma things. Washing continue quite a bit longer. There are three main effects that it in dispute. Lee has never won undercuts the value of long-dated. Bonds number two, it's made lending much more expensive particularly, for
Big purchases, like real estate, number three is increased government, lending costs, okay. Now play that through the financial system, what does that mean? Well, if the value of long-dated, bonds has sharply decreased, well, that's led to this banking crisis with the unrealized losses. That's already happened. Number two, it's made lending more expensive, the credit Crunch, and cre, where we ain't to see that. And I believe that's going to play out is the second crisis of this larger financial crisis. And then number three is the increase in government borrowing costs that will eventually play out in terms.
Being a government debt crisis of some kind and I think it'll involve, you know, a spike in borrowing costs to the federal level and involve sovereign debt issues internationally. I think it will involve budget deficits at State and cities. So I think there's three phases to this financial crisis. We're in phase one and I think, cre and government debt over the next two phases. And I think, I think a lot of that lines up with what Balaji thinks where I disagree with him, as I don't think we can know what's going to happen in.
Three days. I think that the Serie crisis is highly deflationary, it's going to create distress everywhere in the economy that is going to lead to a massive reduction liquidity. I think that the government debt crisis, assuming the government wants to inflate and monetize the debt, as a way to solve that problem, that will be highly inflationary but when these things play out we can't know. I think that's what makes this really hard is I think jumping all the way to the sort of finish line and saying we're going to a million-dollar Bitcoin in 90 days because
u.s. dollar is worthless. I think that's premature. I think this could play out over the next couple of
years. We have a real problem if Bitcoin is the exit ramp
Why are an inflationary crisis? Because it's not accessible enough. It's not easily transact tubule for. I'm sorry to be - to the Bitcoin maximalist. I'm generally in favor of this kind of independent storage system that's outside of government State control. I think there's just this unfortunate reality. We saw at the Wells notice to coinbase today.
They just arrested that crypto Geico Quan was arrested in kuantan, egg row of operation grow, great country. Kraken will let you wire money in or out as of I think Monday or Tuesday. And so, you know, it's clearly becoming kind of a less accessible system of storage. Know what's more accessible? Well, I do think that one of the reasons we're seeing the market move the way it does is because folks are shifting, their risk assets around quite a bit right now, to figure out where is a good place to put money.
I was talking with a asset manager, you know, this morning and, you know, they had a very strong point of view. Folks are moving Capital away from what they think are going to be most impacted by the risk of this kind of massive inflationary event that may arise or this massive banking crisis, that may arise, or this massive real estate crisis, that may arise. And there are other places to then put your Capital. That's not just Bitcoin, and sure, maybe some of these things are dollar-denominated. But, for example,
Many businesses that sell product in non dollar-denominated, currencies globally. And while they report and trade on u.s. stock exchanges, you're buying a security interest in a business that generates most of its income you're afraid of people. I'm referring to many different companies. And so, there are many companies that get the bulk of their revenue, the bulk of their sales internationally. There are also many companies that will benefit in an inflationary environment businesses that are tied to other types of real estate businesses that are tied to certain Capital Equipment, where consumption will not go down.
And unless there's, you know, significant massive, you know, Global socio-economic shocked. And so I think that that's kind of a lot of what's going on right now. It's less about hate Bitcoins. The only place to go and be safe and it's more about, let me reallocate my risk assets a little bit, you know, to places that maybe benefit benefit May benefit from, or maybe better guarded from a massive kind of inflationary shock. And let me just say, let me say one more thing. I think one of the biggest risks that is not being talked about, is the debt ceiling vote? That's doing.
June.
In June Congress needs to pass.
An increase in the debt ceiling because the amount of debt that the u.s. that the federal government is going to have to take on in order to meet our budget deficit and refinance our debt and pay our obligations historically means that we're going to have to have more than what were you know. We've approved to date in terms of the total amount of debt. Now this has historically been a last-minute vote, you know, crazy, dramatic thing, that drives markets nuts.
The hill. Had a public opinion piece from Peter Warrick and Mary space. But I think they make a good point, you know, I've talked to a lot of folks who are call it in the fixed income Market. But also folks are in the equities markets, publicly who are pretty nervous about this debt ceiling vote. And if it does look like the Republican Party takes a very hard line and says, because this is the current party line. If you don't agree to massive deficit Cuts or spending
Cards are in and really commit to that in a bill that we can pass. That been also approves the increase in the debt limit. We are not going to approve, increasing the debt limit and you know what, this opinion piece argues I think is a very good middle of the line solution, which is, you know, come up with points of view. And actually document, those points of view on making sure that government spending is effectively accountable, that there's no more wasteful spending. And that there are certain programs that both parties
These can very quickly agree to as being, you know, very wasteful. And if you start their, you, maybe get enough across the line that both parties kind of say, this makes sense. Let's do this. And then we can kind of increase the debt limit because in the absence of that, the US will have to default on debt. This is always the big threats, never happened. And if that happens or there is the looming threat of that happening, combined with the banking crisis combined with you know the liquidity crisis combined with the real estate crisis that may be emerging here. Let me ask you a question.
And that's been happening for really meltdown. So look how cuz? Yeah, I just want to keep it. I think this is the biggest, like Black Swan. It's not a Black Swan. But this is the biggest kind of elephant, the room right now is, and I think that. And so, I live. I think, if people in d.c. could get together today, and if you could, instead of doing the typical last-minute 24-hour vote a day before the debt ceiling needs to be increased before this go and do it. Now, this could be addressed today, they could start to put in some of the layers of backstop and coverage and protection, and safety that the markets, I think, really need.
To manage some of the trepidation and in the weeks and months ahead. I want to jump to the crypto crack down and get your opinion on that sax first but I want to do a clarifying Point here with Freiburg. You have been in the raid ollio and of Empires Empire's collapse and that hey maybe the u.s. is winding down its Supremacy and
Balaji was pretty much saying. Yep. This is the moment. Where is there any light between your position of like, hey, Dahlia is correct. This is the end of the Empire. And biology is like, it's the end of the Empire right now. Where do you stand on that pre-burn? So, I mean, I've always I've been concerned. I told you guys this for like three years and I've obviously promoted this book for two and a half years.
When dahlias points of view with lots of kind of empirical wisdom behind it. I think indicate that the u.s. is on a path and the way we spend on the way behave, we behave and the way markets are reacting. I think indicates that a lot of what has happened. Historically, is happening now in the US.
Now.
It doesn't I don't know if it's going to happen overnight that's where I would have light with Balaji, okay the notion of kind of hyperinflation again I think means that. So think about all the US dollar holders around the world, it would be a shock for the collective system. It would require the collective system to collectively agree to get off the dollar very quickly for that to Really Happen. Yeah. In the meantime, I do think there will be a flash in area effects. I do think there will be
Massive kind of asset value shocks.
But I'm not sure there's going to be this kind of like Weimar Republic. Deutsche Mark, I got you hyperinflation thing because it is the reserve currency and it's so widely held by everyone, it would require Collective giving up. It also seems like there may be, you know, we talked a lot about the petrol you on trade which I think is critical to see that actually happen. I think that's going to be the linchpin, got it. Maybe that catalyzes this and that seems to be a little bit tight rope right now. To it doesn't seem super definitive that Saudis are embracing China. There's obviously this Behavior with. So anyway saber on
Modeling. But you know it's not as definitive right now. I think that'll that looks to happen to kind of really catalyze that let's get our tin foil hats on here for a second.
In relation to the biology that there has been a lot of action against crypto. Obviously, authoritarian countries, took control of crypto long ago. China Banning it Etc. North Korea. Other authoritarian places, kind of tighten their grip on it. Now, here, in the United States coinbase, got a Wells notice that is a warning. Basically, and giving you a last chance to kind of respond to the SEC, and this was based on their loaning programs. And on top of that,
A number of other crypto crackdowns of occurred. We saw celebrities getting Smackdown and getting fines and doing settlements. This is Led sacks to a theory that the United States government wants to break the back of crypto cryptos. Done, a great job of breaking their own back with plenty of crypto, Griff's insider trading and all kinds of shenanigans with ft acts and front-running and painting the tape any grift or criminal activity possible. Seems to
Been exploited. Do you think that these two things are in some way coordinated? Or there's a coordinated effort by the US government to destroy until crypto as an off ramp for the US dollar while the u.s. dollar is dealing with these crises X.
Well there's a really interesting article that was published on sub stack by Nick Carter. Who I guess a guest writer on Mike's Alana's sub stack called pyro wires. This a follow-up piece to an article. He wrote six weeks ago, where he laid out
Out the an operation by the by demonstration called operation choke point, which made the case that the bottom istration was quietly attempting to band crypto and now, you know, a month later or there's all these things that are all these steps that the administration is taking to go after crypto. And he, you know, he lays out a bunch in a bullet point list. So the SEC announced a lawsuit against crypto infrastructure company, paxos crypto exchange Kraken. So with the SEC SEC, chair Gensler, openly labeled
Do asset other than Bitcoin to security.
Senate committee on environment and Public Works held a hearing lambasting Bitcoin by an Administration proposed. A bill that singles out crypto miners for owners tax treatment, New York attorney general declared a theorem, which is the second largest crypto acid is security. That's a huge change by the way. Yep, SEC continue to say, Angie consumer protection efforts by doubling down their attempt to block a spot. Bitcoin, T TF, o sec. Let crypto Bank, protect goes application for a notch, National Trust, Charter expire. And then the
See, just sent coinbase. So Wells, notice. So I think it's hard to argue that. There isn't a concerted effort now to crack down
On crypto by a wide variety of government agencies and authorities starting with Gensler at the SEC who seems incredibly hostile to crypto. So now the only question is is this correlated with the stress that the banking system is under? Or is it just a coincidence and that I don't know. But I think the argument biology would make is that at the same time they're going to deflate the dollar, they're going to make it harder for you to find an off-ramp and
He actually brought up a historical example that wasn't aware of. I think it's called executive order 6, 2001, which is FDR way back in the 1930s actually had an executive order that confiscated, all the gold private gold bullion in the country and they seize, the gold bullion, making the accusation that private citizens were hoarding too much gold. So in any event this is the theory I don't know whether it's true or not it could be a coincidence
shabbath. You think that this is
Correlated in any way with the crisis or is just the fact that FDX blew up and all these other things blew up and the public is really upset that they lost a lot of money on this and the SEC as got a cover and be a little bit more active instead of reactive when it comes to dealing with the crypto losses that consumers had, that's the latter. I mean, I think that there is a rumor going around. I don't know how true it is that FTX was days away from getting a
Article approval by the SEC, to actually even further legitimize their u.s. exchange before they went out of business. So I think Gensler had to Pivot very hard from at a minimum being very Pro ft x. And there's all kinds of stories about his interrelatedness with Sam and his family.
Very anti b or anti crypto in general, that's clearly happened.
But look I think that this is like a lot of tin hatting which I don't think is very productive. If you look at the total number of nonzero, Bitcoin wallet, addresses in the world. And let's be extremely generous and say it's 100 million, there are still seven billion people in the world and so I just think everybody that tries to speak about the fragility of the US and worldwide banking system is right.
Right. But, and that part, I think is quite lucid and unemotional but every time they try to connect it to bitcoin, they sound like a crazy person because they're just talking their book. And that is exactly the case. By the way, with this kid, Nick Carter and the best example to demonstrate, this is in all of this chaos. If Bitcoin or crypto Assets in general, were truly a legitimate off-ramp and
Salvation from US dollar hegemony and all of this stuff. Why isn't Bitcoin at least at 35,000 a coin right now? It's barely above 28,000 in really hasn't moved that much and I think the real answer is that most people in Bitcoin are not trying to hedge their existing fiat, currency exposure, they're just picking off people in retail, they're just yeah, trading this thing. I well, the whole thing's fast
Plain. How else do you explain an asset that is not absolutely ripped in the face of all of this terrible news about the financial system and I think the answer is because it's still a cul-de-sac of users. It's not broadly available, not broadly, adoptable, not broadly, used. I still believe that it's valuable, I was the earliest proponent of Bitcoin 2011. Yeah, 2012. So I believe that there's a place for it in one's portfolio, but I just think connecting these dots.
It, misses the point. And I think the point is much, much bigger than a crypto off-ramp. The point is that we have a lot of systemic shocks that are building up in the system. We have broken a ton of the systems that caused the financial infrastructure in the world to work properly and we are just starting to uncover how they're broken. So I think we need to focus our energy on that and dial down a little bit of the Bitcoin Maxi stuff, because it distracts from
Um a really important set of topics that are more inclusive and actually touch 7 billion. People, we have to do the cleanup work and just to be perfectly. Clear here. No, Carter is a career crypto, he's on his third fund is 250 million dollar third fund, according to a quick Google search. He's a partner at Castle Island Ventures and I believe, Balaji believes what he's saying and at the same time is massively in Bitcoin and the two million dollars Hill.
Basically losing this bad or the 99.9% chance and he said that already I think he believes he's doing a service just like he did believe he was doing a service with covid so I do not doubt his intent but I believe it's his book is based on this and the two million dollars will be as hard. He's a very smart and good guy. My point is put this in the who cares bucket and get back to the facts. Freiburg mentioned it we have a debt ceiling problem. That's in the offing sacks mentioned it. We have a commercial riddle.
Estate crisis. We just talked about the fact that he didn't raise rates enough, nor did he cut enough? So we're in this weird middle path that Jay Powell were talking about. So those are the facts on the ground that I think we should focus on because those will have implications to how people can borrow start businesses. Capitalize risk assets. That's a big problem. I guess the moral hazard comes up sacks and the critique I think that people have had a view.
You know, focusing on bank. Bailouts Etc has been you have been anti-bailout and now hey, maybe back stopping the deposits, not backstopping, the bank, the shareholders lost, you were very clear about that but let's talk about moral hazard here for a minute. Are we start of
getting up for bail? When I say I was either I just
did you or not I just played a stage or not. I'm saying this is the critique that people have had of you so I'm giving you a chance to address. Why, why are you giving him people's critiques?
Him wouldn't nobody because I want him to talk about the future moral hazard more measure. 76542 on Twitter, who care for some fish. Okay, I was also thinking about the
Wall
Street Journal, the New York Times and
let me jump in and just clarify, I was really clear that SCB shareholders should be wiped out there. Bondholders be wiped out. There are Management stock options should be wiped out. In fact, if it turns out that they should have known, the thing was about to go under, I think their stocks
sales should be clawed back, so I'm not in favor of bailing out. SV B. I don't care about sgb.
Yes, of course. Now, let's do that for commercial real estate.
No, the question is what you do with deposits and depositors, correct. I think there is a real debate about how you treat depositors in a banking crisis and I think there are two views on that. There is kind of an old-fashioned View and then there's kind of a more modern regulatory of you. The old-fashioned view is that if your money is in a bank and that bank goes under
And, you know, you're over the FDIC amount, you lose your money. And we need people in the system to lose their money because that creates discipline on the banks, it'll make those depositors do a better job shopping for the right bank. That's kind of what I would call the old fashioned hard line view. There's a more modern regulatory view which is that listen the typical depositor, even a fairly sophisticated apology like a small business or even a high, net worth individual. They're not in a position to evaluate.
You eat the balance sheet of these Banks. How are they going to figure out if there's like toxic assets that are hidden on the Bounty of these
games didn't see it. It's looking right back at a lot of these Banks
so you don't really get that much more moral hazard by putting the depositor on the hook for that. Remember, the management of the bank already is penalized severely by losing all of their
stockings trying to get to before. Tremont interrupted me, I'm trying to get to the bigger moral hazard picture here, which is Jason. Fuck you before, you're dropping, but the point each
Not for a second. The point I'm trying to get to is should commercial real estate. Should that be bailed out how should Society look at that next card? That you are saying is going to tip over. How would you handle that? Peace. Should
they, let me just finish the down on deposit or so, the modern regulatory review is I, when you open a bank, Al you shouldn't have to think about the bank's balance sheet, you just want it to be safe. You don't want all the brain damage and and look, I think there's a lot of Merit to that argument. As it turns out, I've been trying to look into this, how much would it cost the system?
System to just fully insured depositors. It turns out that we have about 17 and a half trillion in deposits in the u.s. almost 18 trillion. And one of the misnomers you'll hear as well as the cost is 18 trillion to basically ensure all the depositors that's not true because it's not first of all 10 trillion people don't even deserve to be insured under FDIC. It's only about seven and a half to eight trillion
that's less than half is left. Okay?
Yes, right. Exactly about, it's around a trillion. So
is it?
Shocking. The innumeracy of people that make these
claims I know it's reasonable. Then this
is what were this is why only podcast or top 10 in the world because we're breaking down the numbers,
right? So can't really the leading proponent of this theory that we should just basically not bail out. But backstop, the deposits is Bill, Ackman. And he's been making, I think a pretty compelling case that if you don't protect deposits of small Banks, all the money is going to flow to the top four Banks. That's right. Equals right-wing
Japanese happening. Yeah, we're
Watching it
happen, right? So I've been trying to figure out how much it would actually cost us to do that. And what I realized is that it's not 18 trillion, it's it's eight trillion but by the way, that's the amount of deposits, that's not the risk premium. So if you look at FDIC at the end of last year, there was about 130 billion that have been paid into the FDIC fund by premiums paid by these Banks. So in other words, the insurance premium paid by Banks was about one point three percent. So if you were to now
Additionally, cover the whole thing, all the deposits. It would be another roughly 100 billion of premiums paid by these banks that seems very manageable to me. Actually, the question is, is the FDIC fund adequate? And I think we're about to find out. It may be the case that a 1.3 percent insurance premium grossly, you know, understated. The true risk of putting your deposit in a bank and we're about to find out that the FDIC is inadequate. I don't know the answer to that
question. I think this boils down to
the profitability that an equity share holder of a bank expects of them and to your point, is it viable for large g-sibs to
Guarantee 100% of their deposits. Absolutely. The implication of that will be an enormous hit to their short-term, profitability and their return on invested Capital. It would just take a massive hit. And so as a result, the stocks of those Banks would fall pretty precipitously, which would have a real negative impact on the executives, and the CEOs of those Banks and the shareholders that own those Bank equities. So I think ultimately, it will come down to that decision which is that if you do want to protect the depositors
In the American banking system, a hundred percent for every dollar and do it in a simple way. It will come at the sake of the equity holders of the banks. And, and you're willing to make that trade-off, then you can guarantee 100% of the deposits. If you do not want to make that trade-off, then the equity holders will still retain more value than they would otherwise, and Freiburg, we've seen a couple of examples of the market, the free market looking at the situation and making new products and services, well front Mercury.
And both talked about load balancing across 12 accounts, three million dollars. So that would make some people who had over 250 K just instantly be back stopped and insured. And then where you know there's discussion of we talked about last week. Hey why don't you just have a vault where you pay a bank to hold your money safely? I got a ton of responses from all infants pointing out multiple Banks and services that have been trying to do this and also crypto
and so is it going to be a free market solution? You think? Or when we're starting to see them emerge, that maybe covers this Gap a little bit Freiburg. And then, what are your thoughts? Just generally on, should we backstop the banks and the deposit I've tried the bags. The depositors to be clear. So if we just quickly,
Analyze the function of a bank. They loan money to
either residential real estate buyers like homeowners or commercial real estate buyers or businesses that need it. I think the majority of the capital goes to residential real estate and if they can't loan enough money
They typically buy bonds, right? They buy other people's loans in the form of bonds Securities, like, treasuries, or asset-backed Securities or other things like that.
On mortgage-backed Securities. So they use the cash to make those Investments to make those loans and then they obviously earn a return on that. You know, I think we've talked about this in the past, the thing that Balaji I think has Miss stated and it would be good to have a conversation with him about this publicly because I have listened to some of his interviews in the last couple days.
He says the banks are they don't have the money that you the depositor thinks that you have. And so what he's saying kind of implies that there is no money that there is no asset value there at all. He uses Sam Venkman freed and FTX as an example that the money that was given to Sam Venkman free. You know, exchange fund was used to buy assets that then very quickly declined in value by 99%, but he held them on the book at 100% And
Reinvested, the money and all sorts of other different stuff.
And in the case of the loans made by Banks and the assets that they as a result, hold the value may have dropped by 25% in kind of the worst case, which is, you know, the Silicon Valley Bank tenure treasury bond scenario where they bought, you know, all 20 billion dollars worth of Treasury bonds. And, you know, they took a big hit on that but it doesn't mean that there's no assets value. It means that the value has declined and typically there's a buffer between the asset value.
At the banks are meant to hold and the deposits that they owe back to their customers. And if that buffer get succeeded, then the bank is technically has negative equity. And if all the, you know, depositor said, I want my money back and they went and sold those bonds into the market. They wouldn't be able to make the depositors hole but it doesn't mean the depositors end up with 0. It means instead of getting 100 cents on the dollar they get 93 cents on the dollar, eighty eight cents on the dollar and it would require an orderly dissolution of the bank's asset selling those bonds into the
It to generate the cash to pay back the depositors. So the reason we've seen this kind of this fed vertical Spike number is because assets are moving so quickly depositors are moving their value. So quickly from One bank to another that in order for the banks to make the cash available to those depositors, they've had to borrow from the fed and then they're going into the market and doing this kind of they should be doing this orderly asset sale of the bonds to generate the cash to pay back. The FED which is basically when a circle chairs money, they borrow money causing these problems is music chance. And if the musical chair stop,
And then we don't have this problem. Correct. So if people stopped moving deposits around, then you're right. The bank's wouldn't need to borrow money to give depositors their money and then go do the work of selling the Bonsai Market, people frequent moving their money around because
of the other side Sam bird because it's on each other.
So here we go. So you just ensure it and this whole thing stops
so we'll possibly not here to just say that, right? Yes. Actually here's the thing. Jake. How you mentioned this case that you hear a lot of people saying, well why don't you just take your two and a half million dollars and
Get up into 10 accounts which is what people are doing. Yeah, yeah. Well look, it's not feasible when you need to run a big payroll at the end of the month and you got payables. It's administratively, too complicated. And by the way, what have you accomplished doing that? Haven't solved anything. So,
at a minimum, as an accomplishment, for the startup, it has accomplished, I'm just giving them protection system. Yeah. Why
won't you just raised FDIC to two and a half million or have FDIC be based on the number of employees in your company, or allow a higher class, A business class of FDIC
See that goes up Test Pro. Yes exactly. Those 10 million and in exchange the quid pro quo has to be that the bank can't put that money in Risky assets.
What size is this not? This is so obvious. That's the reason I walk through that whole explanation because I want to answer your question. I'm sorry it took so long but like I don't highlight that because that is what an insurance underwriter. Put aside the FDIC and put aside Banks and put aside the government's role. Yes, that's what an insurance underwriter is job, would be, they would look at the
Volatility in the pricing on the bonds that the bank holds and they would determine ultimately two, things, probability of loss and severity of loss. And the probability is How likely is it, that you end up in negative equity and that you have people requesting money and you have to sell those bonds and lost very quickly. And then it's a Verity, is, how much would you actually lose? So if if you know, the FED raises rates by 3% and your entire book is tied up in 10-year bonds. You see a 25% decline in the value of your bond portfolio. That's as bad as it gets.
It's if you start with a 10% buffer, now you only have 85% of the money, you owe the depositors. So your loss is 15 cents on the dollar. So the insurance company would say, what's the probability of that event happening? How much should we underwrite it for? What should we charge as a premium to do that? And that's ultimately how the rates would get set. Now the problem with most insurance
Models around this sort of a problem set is that these are the extreme tail events that have never happened. And so, the insurance to Sax's point is super cheap, leading up to the in extreme tale event. And then everyone's like, oh my gosh, we underpaid for so many years we didn't realize how severe the losses could have been. We didn't realize how significant this was going to be. And as a result, you now see this kind of multiplying effect because people are like, oh my gosh, if it happened to them, it could happen to me. Let's all cell and it gets worse and worse, and worse. And so, you know, the
Rate for the insurance going forward, will now have to take into account this massive risk. But the game theory problem is as access point out, if you just ensure everyone, the cost of the insurance actually goes way, way way, way down because now you don't have this money movement problem. And so you know the point is the more you ensure at this point the cheaper, the insurance will actually be if you're an Actuarial or free market underwriter, you know, free market kind of, you know, underwriting process on this thing. Because now, the probability of having
This Bank Run goes way, way down and therefore, the cost of the insurance should go way down. And so the the irony is, if you actually did and this is getting super technical, but if you actually looked at the statistical model and said, how much is this, going to cost to insure every deposit? It gets much much cheaper? The higher? The, the deposits that you're willing to ensure would be that's my sense of what the free market would do here. And it's certainly what I think the federal government should probably think about doing if they're going to continue to play a role.
In backstopping Banks, the net-net is people.
Startups right now are doing five to ten Banks. I'm watching it happen. They're doing all these sweep accounts, they're doing multiple accounts. So the government, if it doesn't raise, the FDIC limit is basically just creating extra work for everybody and it's going to be the same outcome. So this people are going to the street will find its own use for technology and how to hack this. And that's what's happening with these Services. Yeah. But I'm just a
steel man. The the old-fashioned view or the traditional view of this, they would say that. Will you want those startups being paranoid? Do you want?
Those starts doing the work of disciplining these banks by moving their money elsewhere, if they detect a problem. However the problem with that is you get these Bank runs. That is what a bank run is in Parts is people moving their money because they're fearing that the bank is not doing a good job with their loan portfolio. So this is why in the let's call it the olden days before. FDIC we had Bank runs and panics all the time and that's why FDIC was invented. So there's a huge lead.
Active problem that comes along with placing the depositor in charge of disciplining the banks. And I would argue that the depositors not the best person to do it. It's the regulator just to kind of layer on what Freiburg was saying. I think there's like a phenomenal market failure with banking in the sense that the depositor or the consumer and the bank think they're getting two completely different things. When you open a bank account or a checking account, you think you're getting a checkbook and ATM card.
And a place to do payroll run, you know, and table service. It's a service and maybe you make a little bit of interest, but Simon your main motivation. Okay. That's what you think. You're getting your money. Most of all is safe because you're not signing up with a service provider, definitely chance of losing your money. You're not going. Right? But now what is the bank think it's getting? You know what the bank thinks is getting an unsecured loan that they can then turn around and invest in whatever they want or whatever the law. So, there's
a disconnect between the parties in the transaction.
Exactly is a total disconnect. And moreover,
The way the management of the bank is compensated is that they only have to pay back your loan, your deposit. Basically is there alone at par and anything, they make on a bet that they make with that money, they get to keep. They get to keep all the upside. Their stockholders or management, get to keep that.
And those incentives are white, are driving this. And that's what drove the risk in all likelihood at Silicon Valley Bank, they were getting 200 billion dollars, whatever percentage point they got shimoff.
Somehow the exactly is their incentive, it's not just them, but the whole banking system creates the incentive, they're highly leveraged the deposits from their standpoint, our leverage, their leverage, 10 to 1. So their incentive is to go to the casino and gamble it because I get to keep all the upside and if they lose it is basically someone else on the hook
final Works month in early May. The FED will release their investigation into Signature Bank and SBB.
Be okay. Powell said that this week
I think it'll be really interesting to see how much honesty, they both put into the report. And then whether the entirety of that report is made available to the rest of us to read.
But I think Sachs has very elegantly summarized, what's happening. And it doesn't take a genius to figure out that this doesn't make sense. So the question is, what is the tolerance that we have for changing something that clearly is
Mischaracterized? What consumers think they're getting and what banks are then, doing are two totally different things. And
If the Fed actually is really really honest.
And really lays bare everything that happened, it will be very hard to not legislate changes based on it and the, your best swing at a legislative change would be whatcha mouth? What is the, what is the low-hanging fruit? What's the lay up here? Well, I think we've seen this happening in other markets for a while which is that banks have become In fairness to them much, much better at risk management, post Dodd-Frank post, great financial crisis. And the result of that is that there's been a lot of emerging
Being private credit markets, because most of bank is about lending, right? They're not really buying equities. They're lending money. There are debtor in possession of something, right? And
There's been a just a massive explosion of private credit and it started in the most obvious areas it started in things like Cielos it started in asset-backed Securities. Solar car loans, credit cards, mortgages private Equity back deals. So I think the rational answer is that Banks need to protect 100% of deposits.
and that if they want to have extracurricular activities, if you will
They need to be able to raise money from investors, put that to work in a really fair and transparent way. And then share in the profits between all of the related parties that are involved in that transaction. No different than any other risk-taking organization. And I think that this is now what we've probably shined a light on is in really odd loophole that just needs to get closed in 2023. There's such easy.
The hygienic changes here, let me put it a different way. If you raised money for a liquid hedge fund that had quarterly redemptions, and then violated the LPA and stuffed it into private companies that had tenure illiquidity.
There would be hell to pay uhand vice versa. If you raise money on tenure illiquid locked up capital on the presumption. You were going to invest in startups. And then instead put it in the stock market thinking that you could flip it and make some money, you would have violated the LPA in there. Be hell to pay? Similarly, I think what socks is saying is that there is a mismatch of what the depositor in this case, the investor expects, and what the risk manager is doing and I think that you have
Correct that one way or the other make it abundantly clear that we're never going to ensure 100% and deal with that risk.
Or make it 100% and deal with the Fallout which is largely about wiping out a lot of equity value in Banks. LPA equals limited partnership
agreement is wondering just to just to clarify one thing. I'm not saying that these bank managers are all going to the casino and gambling, the money. I think they are generally more responsible than that. What I'm saying is that the incentives created by this crazy system. We call banking create a weird incentive for them to gamble because they're so highly levered from there.
Standpoint, your deposits are their
leverage everybody. But the g-sibs because I think the g-sibs there's so much scrutiny. If you look at how well runs City be of a Wells and JPM are relative and contrast them to the sub. G Subs, it's like night and day and so the other thing that I think we've realized is who thought it was a good idea to raise the bar on eligibility from 50 billion of assets to 200. Clearly now that made no sense, it makes more sense.
To actually categorize every Bank as systemically important, maybe not globally, but at a minimum to the US economy because these people play a vital function in society, and they were allowed to take a much more aggressive risk posture because they were able to Lobby the government to change the rules, the CEO of tick-tock, which claims to be an American company now or an international company was in front of Congress. Today, his name is show to, this is the first time,
he's really, I think spoken publicly in an extended period, four and a half hours, he was grilled and it was absolutely brutal. Is the first time I've seen a congressional hearing that was bipartisan in a long time. And he said, that quote, the bottom line is, this is an American day. This is American data on American soil, by an American company, overseen by American personnel,
And then was immediately.
Squirrelly when asked if Chinese employees including Engineers have access to this us data and he said this is a complex subject over and over again. He was evasive and this did not look good for Tick-Tock. Well actually now becomes does it become divested and go public or does it gets shut down sacks?
I think his Goose was cooked as soon as they asked him, the question in preparation for this hearing.
Did you consult with any member of the CCP? And he could not dis out, right? Say, no, nope. So, that's the, his Goose was cooked. As soon as he couldn't just say, no
what do you think about the bipartisan nature of this? And what you think the outcome is
sex? Well, this is one of the rare things where it is bipartisan. I mean, there's there's so much outrage and anger at this, I think that they should let the company divest it. I think it is divestiture or shut down for Tick-Tock since we're not Communists here. I think they should be given the chance to fully divest.
An American owned company. But look, I just wish that there was as much bipartisan consensus and outrage directed, not just at Chinese spying of Americans. But on the American deep State spying on Americans because we just had hearings showing that the American government conducts, elaborate spying operation surveillance of Americans on social media. This was all revealed in the Twitter files and we got certainly no.
Ours and consensus on that Republicans were outraged, but Democrats tried to portray it as some sort of spat between Trump and Chrissy, Teigen. I mean, that's all they wanted to talk about. So I would like to see this problem, comprehensively addressed, and that means, I think Tick-Tock going into the hands of an American company, but I also would like more assurances. That American companies will not be working with the Deep state to spy on us and infringement of
secrecy T's and Donald Trump who are two people you'd never invite to a dinner party free parking
Urgh, what are your thoughts? Is it going to divest? Should it be forced to divest being intellectually honest about it. What are your thoughts on Tick-Tock in America?
II. Think I've showed this in the past, I think they're probably going to have to spin this thing out and if they hold any Equity, if the Chinese parent company holds any Equity interest, it'll probably be non-voting, shares. And they'll be a mandate that the majority of the shares and some degree of oversight believe that's the right thing to do.
From a national security issue for America, to force them to do that. I don't know if I'm a national security point of view, I really don't. I don't have an opinion from National Security and Tick, Tock, I don't know.
I've always thought that Tik-Tok was a really,
What's the right word? Like it's like a firefly for you know Chinese Invasion and it feels like you know it's a very easy kind of Target.
For I think, what is generally a big kind of social Consciousness right now?
So you know whether or not there's actually like some National Security points. If there were I'm pretty sure that National Security person would have stood up and said we need to stop this thing. I'm not sure I've heard that publicly shabbath but I can but I will say like the my point of view from like just seeing the political behavior is that they're probably going to mandate that these guys spend this thing out to us investors and and that they have, you know, don't own any that the Chinese don't have any Equity or management oversight or interest in it.
In China itself, the Chinese government does not allow kids to play video games during the week and only three hours on the weekend. They're using apps like WeChat to dictate social score and social behavior. Whether it's smoking on a train or not paying your bills and
they are saying they will not divest but any buddy who is an investor in a company that had a chance to go public for tens of billions of dollars in eventually take on. And people believe that this is a viable competitor to Facebook and Instagram. This could be a company worth ultimately hundreds of billions of dollars. If you were an investor in China, you would want to IPO. You would want to get liquidity. So if they are refusing to sell, what does that tell you? As a market participated in?
Repent, and somebody who's been a capital allocator for over a decade there's bigger problems in China than even. Tick-Tock US represents for them. I think that's probably what it means. So, it's a pretty bad tell.
I don't think divestiture is a real option because when you think about the details of that, how will the government be satisfied? That the code base was separated elegantly that there was no malware.
Surreptitiously planted. How will you actually prove all of this to a degree that satisfies a legislator? So I think the pound of Flesh that they want is more easily and more salaciously satisfied by shutting the thing down. So if I had to bet on what happens, I bet more on that, I didn't think Tick-Tock did a very good job and I think that there are some they were terrible today. Turn and I think that there are some real issues around
How much control does actually flow back?
I don't think that it was definitive he needed to be much clearer. And adamant that, this was an independent business that didn't have back doors to China in the CCP to appease Congress. He didn't do that know. He was like, I have to check in on that. I'm not sure. I think it was a little bit of the exact opposite actually Sachs is right. Like that first question was just a death blow right from the beginning. It's like oh this is not going to go in a good place because they should have been able to see that that question was going to get asked.
And you need to have that asked and answered philosophy where the only answer is no. The only answer you could have given is no. And the fact that he wasn't able to say that it was a bit of a fad that complete as soon as soon as I was in my mind I was like this thing is getting shut down because I don't think there is a shutdown. Yeah there's no divestiture plan. That can be technically audited in a short amount of time to appease these folks, they want a pound of Flesh and then separately the bigger issue.
That I think.
You have to deal with is what does that mean? For how other governments may be pressured to act who want to be on the pro u.s. camp? And I think that that's a question because
Bike dance and Tick-Tock have presence Beyond just China in the u.s.a. Third question is, how does the golden vote get used on the bike dance board and what do they do? And do they even want this thing? Public explain, golden vote, essentially they'll decide what happens to that company, and they have that in Alibaba. They have that, I think a 10-cent I think they have that it B dance. So the Chinese government has a very strong hand in the direction of these business. And then the final point is that
There's a secondary app that Tik-Tok has called cap cut.
Which also is enormously popular in the United States, which is yet another potential backdoor for privacy or spying violations, whatever the US Congress wants to pin on them. So I think it's a very complicated moment for that business and their us assets acts. It's pretty clear. The CCP is making this decision. If they decide let it burn, let it get kicked out of the United States. What does that do in terms of game?
Vary between the two countries and going forward because obviously they don't reciprocate. We're not allowed to have Google Twitter, Instagram, whatever in China. So is this just you know what, putting Russia,
what's he saying? The CCP is making
well, the CCP has two golden vote. It's their decision to divest or not divest Shema police I'm not divest, I believe they will
not bother saying is they're not going to have the choice. I don't I don't see what decision the CCP has in. This
is going to be
It's not a divestiture don't divest. I think it'll be shut down. I think they're getting kicked out of the United States. Okay, do you? But you believe they're going to divest
sex. I'm saying that that's what I would support does actually give you the chance because
think's going to happen. I
tried maybe right? I'm not sure, but I think they should be given the chance and if you truly can't move the servers to the United States, and vet the codebase, I feel like you could
I think you could have an acquirer figure it out, you know, that the codebase move the data centers. Make sure there's no back doors. I think it's not impossible hard, but not
impossible.
Okay, so let's go with the scenario that it gets. Kicked out of the United States. Is shut down. Are there any second or third order
impacts. Yeah, it says ratchets up the tension between the US and China but we're ready. We're ready there. Yeah, we're so there.
No chance. All right. Listen, this has been an amazing episode. A trough did. Your 3D rocket company make it to space? I saw they had a nice little lift off there. Thank you! Jason! I just wanted to give a shout out. This is like while
All this chaos is happening in the world. It's amazing to see pretty incredible engineering. So last night we did have a successful launch. So relativity has a 85% 3D printed rocket which over time we want to try to get to 95% but it's the fuselage. It's the engines.
It brings the cost of space flight down by an order of magnitude. It is a hugely disruptive idea. And so what they try to prove was that they could get this thing into space and they accomplished a lot of goals. They got past Max Q, which is sort of the point at which the atmospheric pressure is the strongest on the fuselage. So we proved structural Integrity, we got two main engine cutoff, we had stage two separation,
So a lot of really important technical Milestones were achieved it allows them now to unlock.
A bunch of contracts that allow us frankly just to keep going and building. There's still a lot of work to do from here. We're building now the Next Generation rocket, which is called Terran are and Rocket engines, which can take instead of 1500 kg about twenty thousand kilos. So,
Enormously proud to have been around this journey. My partner Jay has been really the key person on it, but I just wanted to give a huge shout out to Tim Ellison, the team at relativity, it's super super, super cool, but they pulled off. Just amazing how access to space is being democratized in the prices are being lowered. So dramatically. What's the impact that's going to have ultimately Freiburg thing on Humanity? I mean, obviously going to Mars has this incredible feat technologically and just mind-blowing.
Young. But what do you think the the net result of all this space activity is going to be for The Human Condition and the species? I mean I think there's a Vibrant Community of startups and money coming into this space right now. I do think all these guys are going to have to in order to gain wider spread Capital markets attention, like Ilan has that to do with SpaceX are going to have to find business models that have kind of near term. Viability that don't depend on government contracts. Like
Sonic like Star like yeah. And so I think that's the key question it. Obviously, these are very Capital intensive businesses, they have very long Horizons to hit their Milestones. So there are certainly Capital available in the early stages.
To make bets on whether or not they can get these Milestones. But but, you know, the broader kind of attention and capital markets is going to come from these things. Building real kind of businesses, that generate value for consumers and markets,
you know, one of the things that I think can unlock
Opportunity for this Market. Overall is low cost energy. You know if we can get below call it.
One cent 23 cents, a kilowatt hour of power cut, one cent, a kilowatt hour power. I forgot the exact relationship you can get very cheap, you know, hydrogen and oxygen fuel sources. And so you know the it's funny if you actually play out the scale factor for a space for the space industry, much of it at scale, will get driven by the cost of electricity. So it's another reason why there's going to be, I think a pretty tight coupling between the cost of power and ultimately
The vibrancy of the market, you mentioned something important that the other key thing that we proved was that this is a pure metal oxygen, so CH4 and liquid oxygen, and it was not just stage one. But also stage 2, which is unique. The only other folks that have tried to prove that you could have multistage methyl, ox's China. And their most recent launch failed, but it highly simplifies the engineering problem at hand.
Especially the ground operations and whatnot, and sort of like feeling these rockets and making them viable. So that was another really big milestone of just the producing of that fuel, Friedberg requires energy, if that energy was cheap, it would be cheaper to make and process that fuel, that's right. Yes, is a pretty pretty direct tie-in particular scale, manufacturing on fuel. That would be used in these rocket systems and power prices here on Earth. So, if and as we get power prices down either through,
Caleb Renewables or ideally Fusion or some other kind of new technology here. Yeah. Yeah. Or you Clear Vision or something.
Then the cost of fuel and the cost of these space programs goes down. And that ultimately I think the real question everyone asks is how do you get away from it? Just being government services businesses which you know, have a low multiple in markets and obviously you know, High dependency on one or two key customers and how do you actually get private markets, private market products moving? So tourism obviously, makes a lot of sense.
Travel.
You know around the Earth in 20 minutes or something or you know some people have talked about mining or colonies and you know who would fund that real estate. It's unclear. Right now, what the open of traveling is a wild one. Yeah, I've talked to you on about that but the idea that you could have a rocket ship, take off from Texas and then be in Tokyo you know like half an hour of minutes later is I can while I can only speak for myself but I would really like to visit. Uranus Reaper. All right, everybody.
He's got layers are four players can you get asked God? It's subtle, isn't it? He's pulling a Steve Banning to get more disheveled. He needs the six pens in the collar pens. No. Shave. Can you tell me, honestly, do you have a stylist, an actual person you pay to dress you? Nick can you please put the picture of Steve Banning where he wears the multiply
this again
stop talking me.
It's really weird. Oh yeah, bad and he thinks you're a venture of vulture capitalists or sometimes I see that he's been
attacking. You Bannon was one of many people attacking
me on Twitter
they on his podcast I think yeah you
seem to have made a lot of a lot of new friends on Twitter lately. When you pass around half a million followers basically what happens is you become a politician you will net. There will always be a fringe element of people who need to manage their anxiety by venting.
And that's what you're feeling. You'll live that now at million use you know, followers to million 10 million, whatever. There's always going to be a small percentage, a cal doesn't know this because he has mostly Bots that are his followers. It's true. I haven't only real when you have real people, this is what it is. You'll get this 1% or less than 1% and just the number goes up. So, I would ignore it. Don't care. Don't worry about what users 747 feed. The Brigadoon don't care what 7 user 747 86 has to say, don't worry about. Yeah, absolutely. I love you. All right, and I'm looking forward.
To seeing you on Thursday for the Rain Man himself. David Sachs. The Sultan of Science and Prince of panic. Attacks are PAL. David Friedberg. And the host with the most gonna make, what about me? Going them, call you the host with the most. I'm adding something. The host with the hose who's making the shiso leaf, Tempura with Huck. I do and you are tonight's best genuflect. ER, I am the world's greatest. Yes. Greatest house guest, if you need a house guest to look at your house. Oh my God.
Ali Tokyo and the Seco. Wherever you need a houseguest. I'm ready to come and make it a good time here. The modern Kato Kaelin. You're horribly. Absolutely the best. Yeah, you keep inviting me every week. You are enjoyable though. Love you, boys. So let's have fun. Bye everybody. Bye.
Let your winners ride
Rain Man gave its eyes
open source, it to the fans and they've just gone crazy with
love. U.s. ice, queen of quinoa.
Besties are bad.
