SPEAKER_00: what are you eating freeburg is that buffalo jerky what is that it's a red pepper it is not the

SPEAKER_01: bull tongue i didn't have time for lunch i got i got pistachios and i got a red pepper oh wait wait

SPEAKER_03: look at this is that our branded pistachios aren't these the best pistachios they're the best

SPEAKER_07: salt and vinegar yeah salt and vinegar yeah yeah they're the best are those unpeeled pistachios

David Friedberg: these guys are so rich people peel their nuts people have been peeling my nuts since the facebook

SPEAKER_19: ipo hey everybody welcome to episode 121 of the world's greatest podcast the all-in podcast with

SPEAKER_24: me again of course the dictator himself chamath polyhapitiya the sultan of science david friedberg and the rain man himself yeah definitely david sachs gentlemen how are we doing the world's greatest genuflector the world's greatest moderator is here oh this you guys i gotta 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

SPEAKER_26: up and moderate oh so great what is an example of such a such a gig there's a lot of corporations and conferences that pay a pretty penny to have the world's greatest moderator come and interview people

SPEAKER_30: this is like the used car parts association of america having a convention i did one with like

SPEAKER_31: a thousand litigators at an attorney conference for like the sas software they all use and it was a wonderful fire side you know it's just great this is like the grift is on do you have to fly commercial

SPEAKER_36: where they fly private it's commercial at this point yeah what is your what does your rider say what

SPEAKER_37: kind of do you want do you ask for spice salted macadamia nuts what do you ask for i do not have

SPEAKER_24: them feel my nuts no what i do is i blend the travel costs into the speaking fee and then nobody

SPEAKER_33: knows when i'm in or out what hotel i'm staying at or whatever but basically i'm back on the road folks

SPEAKER_40: i'm back like a trailer or do you get you know no no no what he's saying is no what he's saying is he

SPEAKER_41: gets a 2500 travel budget and instead he comes the day of and leaves the day of saving and netting

SPEAKER_24: himself an extra 2500. well you know uh you can optimize if you're saying optimize i did use i had you know during covet i racked up a million and a half two million of these united points

SPEAKER_33: and i have just been grinding those united points down so shout out to united and the pandemic all

SPEAKER_47: right there's a lot of news so you're right jermott's even worse than that it's even more charging them for travel expenses when he's not even paying anything maybe jason's part that's not optimizing

SPEAKER_49: part part of the part of the grifter is using the cash app to commit fraud and murder

SPEAKER_26: lord i mean that hindenburg report is i mean it's a work of art but we got to start with the fed hiking rates by 25 basis points uh and the general feeling in the country that maybe the fed doesn't

SPEAKER_33: know what they're doing and maybe it's time for regime change the fed increased rates by 25 basis points

SPEAKER_24: yesterday wednesday so the fed has increased the federal funds rate from nearly zero in march of

SPEAKER_33: 2022 to now the range of 4.75 to 5 percent fastest rate hike since the 70s speculation the fed might

SPEAKER_31: pause rate hikes or even cut do the the recent banking failures didn't happen so if you bet that they were going to pause you were wrong if you bet they were going to cut you were 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

David Sacks: 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

SPEAKER_55: in the summer of 2021 5.1 they said it was transitory they didn't react until november they continued qe for another six months and they suddenly got hawkish in november of 2021 and they 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 there was 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 held pat and the argument for raising rates is just that well we have this inflation problem we need to keep raising interest rates until uh the rates are above inflation and that will bring inflation down then you can start to lower rates that's 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 stress 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 shooter 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 elon 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

SPEAKER_56: 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

SPEAKER_59: breaks the camel's back chamath 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

Chamath Palihapitiya: 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 what 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 the 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 you want in the system so i think actually i disagree with sacks i think they should have done the opposite they should have raised 50 bips 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 which is neither did they cut nor did they raise enough and so this problem that sacks 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 whose 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 a five percent fed funds rate is insufficient so we're going to need to see a print of five and a half 5.75 percent 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 there situation and i think that is what causes the real damage because it's the corrosive effects of

SPEAKER_25: uncertainty and what that does to lending to risk taking and that i think is really bad for the

SPEAKER_26: economy freeberg where do you land we have sacks saying they should have stood pat which not saying

SPEAKER_69: either go hard take the medicine i don't know i'm not like an economist on judging the balance that

SPEAKER_70: 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 talk 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 um coming out of this past two weeks you know the yield on the 10-year treasury dropped from 4.1 percent down to it looks like it closed at 3.4 percent today nearly a point seven percent decline in the past two and a half three weeks and that's also off of 3.8 percent since the start of the year and remember when we talked about the impact on asset values at banks i think if you look holistically at the roughly seven trillion dollars of assets held at banks some you know whatever the the set of banks are that we looked at the average kind of equity ratio is about 15 percent so you know a two percent or sorry three percent adjustment over 10 years on the treasury impacts 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 they're loan obligations on mortgages or treasuries or corporate bonds or real estate bonds a real estate debt 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 long 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 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-year treasury has probably had a pretty sizable impact you know we talk about unrealized losses it's reduced those unrealized losses it's 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

SPEAKER_71: think right now it looks like maybe things are improving um and that might be part of the optimism

SPEAKER_72: 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-based liquidity

SPEAKER_31: issues with silicon valley bank now the wall street journal is talking about commercial real estate and how much debt there is uh since covid obviously people are doing more remote work a lot of the skyscrapers it's not just san francisco but in many locations remain empty or underutilized people are now having their leases come up uh every year more and more of these leases will

SPEAKER_59: become vacant and then we'll see if these buildings are worth what people paid for them smaller

SPEAKER_31: banks hold around 2.3 trillion in commercial and real estate debt including rental apartment mortgages almost 80 percent of commercial mortgages are held by banks according to this will street journal story sacks you are an owner of some commercial real estate and uh you play in the space you have a lot of first-hand knowledge what what is your 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

SPEAKER_76: in san francisco and beyond well if you talk to the commercial real estate guys they'll tell you

SPEAKER_32: that the situation is dire um 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 literally don't want the

SPEAKER_55: business and i think that comes back to the fact that banks right now are hunkered down in a defensive

SPEAKER_32: posture they're seeing deposits flee from their banks unless of course you're one of the top four

SPEAKER_59: does that does that freeze on the banks predate the silicon valley bank crisis and it was exacerbated

SPEAKER_31: were people having a hard time getting loans before that it predates it but definitely what you're see

SPEAKER_55: what you saw with svb and these other banks including credit suisse is that you know banks now are getting much more paranoid and that's why you saw that if you look at the the discount window which is when the banks go to the fed as lender of last resorts and 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's borrowing this exceeds anything that happened in 2008 the warning sign should be flashing red over something like this now to bring it back

SPEAKER_59: and to be 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 it's more

SPEAKER_55: 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 systemically important or sib banks so what's happening is that again banks are hunkering down they're 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 20 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 cre loan portfolios and i think something like 300 billion needs to be refinanced or is coming due in the next year normally that's rolled over and refinanced there was separately there was a study showing that unrealized losses in 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 bonds i think we also have at silicon valley bank specifically that's where we were the worst offender but it's a 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 it's very easy to know what the unrealized losses are the reason why they hadn't realized the losses was not because they didn't know what they were it was because of a stupid accounting rule that said they didn't have to realize the losses if they 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 repricings of assets and commercial real estate is a much more dynamic

SPEAKER_59: market right you have to have a buyer there you have leases you have leases coming off at different

SPEAKER_58: times you have sub-leases occurring and you have the owners of them flipping them right and refinancing

SPEAKER_55: them constantly to buy new buildings and so right and and those loans aren't as liquid right with a mortgage bond those are basically a bunch of loans mortgage home mortgages typically that have been packaged up and turned into a security and there's a liquid marketplace to trade them in the case of these loan portfolios there may not be a liquid marketplace so you don't really know how impaired that loan portfolio is until you actually get to a place where when will we know

SPEAKER_31: what because that that's the thing i'm wondering we i saw a lot of headlines you know pinterest bought themselves out of their new headquarters in the bay area san francisco i believe specifically i heard facebook got rid of a couple billion dollars and 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 or they're planning another 9 000 and they can't get people to come back to the office so

SPEAKER_24: right how bad is the overbuild i guess is the question because that will be the driver of the value of these buildings because if there's too much supply then what are these buildings actually

SPEAKER_89: worth are they worth 90 a square foot what if there's no what if amazon doesn't want more space you

SPEAKER_90: can see it in the credit default spreads of these banks it's in the water table already so you can nick you

Chamath Palihapitiya: can just throw it up if you look at any bank that's lending and that has a portfolio this is deutsche banks you know euro denominated cds but it's the same for barclays it's the same for socgen it's the same for a bunch of american banks there is a risk in the system that sacks articulated that is now getting priced in there are all kinds of loans whose 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 effects 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 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 drawdowns in the value of risk assets 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 bips or raising 50 bips and this middle path is the absolute worst 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

SPEAKER_31: think about that 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 this wall street journal story was sort of alluding to that the fed will say you know what we'll just extend we'll backstop this real estate which happened in the last bubble and we hope 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 these office spaces are returned and the keys are handed back

SPEAKER_56: yeah so okay so so jason you asked a question like how does this problem manifest let me describe from

SPEAKER_55: the point of view of that real estate owner uh there's basically two problems one is that you have a tenant who's in a long-term lease five seven ten years that lease rolls so that that lease comes to you now they don't need the space anymore you know we know that take san francisco which has got to be the worst market for siri in the country right now that something 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 all those 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 pay rent anymore so you're going to stop or 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

SPEAKER_76: from the building is just substantially less they can't make their debts on that and explain that

SPEAKER_31: ratio to folks you have a certain amount of debt you own let's say salesforce tower in salesforce's case they're subleasing 125 000 square feet let's say they were into that for 500 million what is this

SPEAKER_55: debt service ratio explain 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 five percent vacancy rate and now it's like 30 to 40 percent there are just no tenants and then you know in parallel with that jason you've got all these cases where you don't only have tenants or leases rolling you have loans rolling you know again if the owner of the building has either a construction loan or 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 gonna 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 your borrowing costs are higher and your revenue is lower so now all of a sudden the building's underwater 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 so who are the buyers the buyer that was nobody there are no buyers we have a 30 vacancy rate there's no uh renters 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 base 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 take its course here because you're gonna end up with the scenario i just painted so i think what hopefully would happen maybe is that the the banks do some sort of deal with the real estate owners that you know they they blend and extend or whatever but in order to do that they're gonna need to be backstopped by somebody and that's the fed freeberg what are your

SPEAKER_112: thoughts just writ large as it were on the commercial because it's 90 it was 90 a square

SPEAKER_115: foot right for class a sacks in the city is that the price i mean what's that going to be 60 70 80

SPEAKER_55: 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 i never invest in office towers i do small boutique kind of brick and timber spaces in um 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 metastise right outside their door

SPEAKER_70: freeberg yeah i think it's inevitable we'll have probably two to three trillion dollars of federal money you know spent to 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 uh to effectively support asset values such that there isn't a crippling economic ripple effect and this is the dangerous debt 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 360 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 that equity value gets levered and reinvested and so the rippling effect in the economy of declining asset value can be magnified through leverage and it unfortunately debt in general forces growth without growth uh debt fails and so when we've used debt to demand growth on a macro perspective uh it causes you know significant stress and strain on the system when you're going through periods of like we are right now which should be natural recessionary effects from covet 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 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 here's another you know two trillion to support banks and you know giving them liquidity because the other problem as you guys know is most people's most of the population in the u.s has most of their assets uh their asset value or their 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 of 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 that kind of inflationary behavior unfortunately balaji i think has it right we'll talk about his debt 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 deutschmark and the weimar republic as this kind of storyline that this is what's about to happen in the u.s the truth is it looks a little bit more like the pound sterling at the end of the uh british empire where you know there's certainly a an inflationary and devaluation 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 and the value is going to go to zero it's just not going to happen so that seems to be the of the dollar of the dollar yeah so that

SPEAKER_128: seems to be the bet now chamoff that some folks are predicting catastrophizing hey this is the end of

SPEAKER_131: u.s supremacy the end of the dollar of course modern monetary theory seems to stay you can just keep

SPEAKER_31: printing dollars and make a couple trillion dollar coins and backstop it and by the way tarp was profitable modestly for the united states and the backstop of real estate totally worked so where do you land on this do you think these backstops and modern monetary theory stating that you can just

SPEAKER_131: print money you you own your own fiat currency is going to work or as we pivot to the billion dollar i'm sorry the million dollar biology bitcoin bet that this is the end of days i i think it's not

SPEAKER_41: the end of days but i think you're conflating a bunch of things together so look mmt yes i am yes was in hindsight idiotic in the moment it never quite made sense but in hindsight it's clearly idiotic and

Chamath Palihapitiya: i think that we can properly dispense with that but the reason that we print so much money is sort of what freebrook 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

SPEAKER_41: way to do that in the markets is with money print a bunch of money and there are no more winners and

Chamath Palihapitiya: 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 we're operating under the thing is there's something unhealthy to that chamath you're sort of alluding to 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 is 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 partners so europe canada japan etc switzerland and they moved 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 distributed manner across the monetary plumbing of

SPEAKER_128: the world all right so let's explain the apology about since that trended and he is the boy boob as you're saying what cried wolf this past week cry bitcoin yeah the boy cried very well said

SPEAKER_31: so a friend of the pod apology on march 17 predicted that bitcoin will reach 1 million dollars in 90 days due to us hyperinflation hyperinflation is defined as prices going up 50 percent month over

SPEAKER_59: 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 u.s would not experience hyperinflation so balaji sort of inserted bitcoin into that bet it wasn't a bitcoin bet then

SPEAKER_31: and i think he's done two of these bets so he's betting 2 million in total on bitcoin hitting 1 million

SPEAKER_143: by june 17th which there's probably no chance of that happening or a very tiny chance i'll ask the panel

SPEAKER_31: in a second bitcoin was trading at uh 25 26 000 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

SPEAKER_131: watched one or two of them and it's a pretty out there argument i think and you can just type in balaji on youtube and watch any of the 20 he's done uh he believes regional banks are insolvent he thinks the feds need to is going to need to print a massive amount of money like we've said here

SPEAKER_31: do more qe and then cut rates all seems reasonable but that that will lead to hyper

SPEAKER_95: inflation it's not reasonable wow no no it's not that it's reasonable we just print we just printed

SPEAKER_31: that they're going to cut rates we just discussed they're going to eventually cut rates and there'll be more qe so that part is reasonable um just that one little piece but then he believes is the part that is kind of out there that hyperinflation is going to devalue the dollar and this is the time um

SPEAKER_131: he does not and i made a bunch of i i asked him this a bunch of times and he would not be honest about it uh or didn't want to answer my question i said hey what percentage are you in bitcoin somebody says he's 99 in bitcoin he will not confirm and so i was like well if you own a thousand bitcoins if this goes up you know a very small amount four or five percent you're going to pay for the bets and uh are you talking your own book here or not sax what do you think of this overall

SPEAKER_31: bet is it a stunt yeah 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 uh or a place or if you're gonna stay in the 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 gonna have to

SPEAKER_59: you know miss payroll he says that's the dry run for the entire u.s banking system sacks so first of

SPEAKER_56: all i don't think you can disparage balji because someone who cries wolf says this repeatedly and

SPEAKER_55: makes a dire prediction repeatedly and is wrong and we can't say yet that balji is wrong do i think that we're gonna have a million dollar bitcoin in 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 balji made a dire prediction was covet and he was 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 there 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 a pedigree and a track record but here's my view on it is in

SPEAKER_161: doom and gloom yeah he is him and the scene to lab the two of our opening speakers at all in summer 2023

SPEAKER_47: those would be our book head speakers book them down anyway so so so look now what do i think about it i

SPEAKER_55: um i i posted my own theory today which i would call sort of balji light um which is um okay look if you if you think about this spike in interest rates that we've had and that jama thinks why should continue quite a bit longer there are three main effects that it indisputably has number one 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 it's 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 we're beginning to see that and i believe that's going to play out as 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 of being a government debt crisis of some kind and i think it'll involve you know a spike in borrowing costs at the federal level and involve sovereign debt issues internationally i think it'll involve budget deficits at states 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 are the next two phases and i think i think a lot of that lines up with what balaji thinks where i disagree with him is i don't think we can know what's going to happen in 90 days i think that the cre crisis is highly deflationary it's going to create distress everywhere in the economy that is going to lead to a massive reduction in 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

David Sacks: finish line and saying we're gonna have million dollar bitcoin in 90 days because the us dollar is worthless i think that's premature i think this could play out over the next couple years we have

SPEAKER_70: a real problem if bitcoin is the exit ramp for an inflationary crisis because it it's not accessible enough it's not easily transactable for for i'm sorry to be negative to the bitcoin maximalists i'm generally in favor of this kind of independent storage system uh that's outside of government and state control i think there's just this unfortunate reality i mean we saw what the wells noticed at coinbase today they just uh arrested that that crypto guy doh kwan was arrested in montenegro of great country kraken won't 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 no 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

SPEAKER_71: place to put money i was talking with a asset manager you know this morning and you know they had a very

SPEAKER_70: strong point of view folks are 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 there are many businesses that sell products 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 referring i'm referring to many different companies yep 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 unless there's you know significant massive you know global socioeconomic shock and so i think that that's kind of a lot of what's going on right now it's less about hey bitcoin's 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 may be benefit benefit may benefit from or may be better guarded from a massive kind of inflationary shock um and let me 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 due in 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 we're uh 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 warwick 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 who are in the equities markets publicly who are pretty nervous about this debt ceiling vote and if it does look like the republican uh party takes a very hard line

SPEAKER_166: and says because this is the current party line if you don't agree to massive deficit cuts or spending cuts um and and and really commit to that um in a bill that we can pass that then also approves the

SPEAKER_70: 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 uh and actually document those points of view on um making sure that government spending is effectively accountable that there's no more wasteful spending and that there are certain programs that both parties can very quickly agree to as being you know very wasteful and if you start there you maybe get enough across the line that both parties kind of say this makes sense let's do this

SPEAKER_166: 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

SPEAKER_70: looming threat of that happening combined with the banking crisis combined with you know the the liquidity crisis combined with the real estate crisis that may be emerging here let me ask you a question that's you can have things really meltdown so look because yeah i think this is the

SPEAKER_166: biggest like black swan it's not a black swan but this is the biggest kind of elephant in the room right now is and i think that and sorry i think if people in dc 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 be thoughtful and do it if this could be addressed today it could start to put in some of

SPEAKER_70: the layers of backstop and coverage and protection and safety that the markets i think really need to manage some of the trepidation in the in the weeks and months ahead i want to jump to the crypto

SPEAKER_111: crackdown and get your opinion on that sax first but i want to do a clarifying point here with freeberg

SPEAKER_131: you have been in the ray dalio end of empires empires collapse and that hey maybe the u.s is winding

SPEAKER_59: uh down its supremacy and apology was pretty much saying yep this is the moment where is there any light between your position of like hey dalio's correct this is the end of the empire and bology is like it's the end of the empire right now where do you stand on that freeberg so i mean i've always

SPEAKER_166: i've been concerned i've told you guys this for like three years and i've obviously promoted this

SPEAKER_70: book for two and a half years and dalio's 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 and the way we 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 u.s now it doesn't i don't know if it's going to happen overnight that that's where i would have light with bology okay the notion of kind of hyperinflation again i think

SPEAKER_166: means that so think about all the u.s 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 inflationary 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 your hyperinflation thing because it is the reserve currency and it is 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 petro yuan 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 tightrope right now too it doesn't seem super definitive that saudis are embracing china there's obviously this behavior with it's a little saber

SPEAKER_70: rattling you know it's not as definitive right now i think that that needs to happen to kind of

SPEAKER_188: really catalyze that let's get our tinfoil hats on here for a second in relation to the biology bet

SPEAKER_131: 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 uh 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 have occurred we saw celebrities getting smacked down and getting fines and doing settlements this has led sacks to a theory that the united states government wants to break the back of crypto crypto has done a great job of breaking their own back with plenty of crypto grifts insider trading and all kinds of shenanigans with ftx and front running and painting the tape any grift or criminal activity possible seems to have 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 and kill crypto as an off-ramp for the us dollar while the us dollar is

SPEAKER_32: dealing with these crises sex well there's a really interesting article that was just published on substack by nick carter who i guess a guest writer on mike solano's substack called pirate wires

SPEAKER_55: this is a follow-up piece to an article he wrote six weeks ago where he laid out the an operation by the biden administration called operation choke point which made the case that the biden administration was quietly attempting to ban crypto and now you know a month later there's all these things that are all these steps that the administration is 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 settle with the sec sec chair gensler openly labeled every crypto asset other than bitcoin to security senate committee on environment and public work works held a hearing lambasting bitcoin biden administration proposed a bill that singles out crypto miners for owners tax treatment new york attorney general declared ethereum which is the second largest crypto asset of security that's a huge change by the way yep sec continued to say anti-consumer protection efforts by doubling down their attempt to block a spot bitcoin etf occ let crypto bank protego's application for a national trust charter expire and then the sec just sent coinbase a 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 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 i wasn't aware of i think it's called executive order 6201 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 seized the gold bullion making the accusation that private citizens were hoarding too much gold so in any event this is the theory

David Sacks: i don't know whether it's true or not it could be a coincidence shabat do you think that this is

SPEAKER_31: correlated in any way with uh the crisis or is just the fact that ftx 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

SPEAKER_114: has got to 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

Chamath Palihapitiya: don't know how true it is that ftx was days away from getting a critical 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 ftx and

SPEAKER_41: there's all kinds of stories about his interrelatedness with sam and his family

Chamath Palihapitiya: to very anti-bit 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 non-zero bitcoin wallet addresses in the world and let's be extremely generous and say it's a hundred million there's still seven billion people in the world and so i just think everybody that tries to speak about the fragility of the u.s and worldwide banking system is right but and that part i think is quite

SPEAKER_193: lucid and unemotional but every time they try to connect it to bitcoin they sound like a crazy person

SPEAKER_60: because they're just talking their book and that is exactly the case by the way with this kid nick

Chamath Palihapitiya: carter yeah 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 u.s 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 it 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 and they're just day trading this thing i mean how else do you explain 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 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 in one's portfolio but i just think connecting these dots 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 a really important set of topics that are more inclusive and actually touch seven billion people we have to do the cleanup work and just to

SPEAKER_114: perfectly clear here nick carter is a career crypto he's on his third fund his 250 million dollar third fund according to a quick google search he's a partner at castle island ventures and

SPEAKER_59: i believe bology believes what he's saying and at the same time is massively in bitcoin and the two

SPEAKER_131: million dollars he'll obviously lose in this bad or the 99.9 chance and he said that already

SPEAKER_59: i think he believes he's doing a service just like he did believe he was doing a service with

SPEAKER_131: covid so i do not doubt his intent but i believe it's his book is based on this and the two million

Chamath Palihapitiya: dollars will be easily paid off by his increase he's a very smart and good guy my point is put this in the who cares bucket and get back to the facts friedberg mentioned it we have a debt ceiling problem that's in the offing sacks mentioned it we have a commercial real 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 we're 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

SPEAKER_59: businesses capitalize risk assets that's a big problem i guess the moral hazard comes up sax

SPEAKER_131: and the critique i think uh that people have had uh of you you know focusing on bank bailouts etc

SPEAKER_31: has been you have been anti-bailout and now hey maybe backstopping the deposits not backstopping the bank the shareholders lost you were very clear about that but let's talk about moral hazard here

David Sacks: for a minute are we sort of getting i'm not for bail when did i say i was either i just clearly stated

SPEAKER_26: you or not i just clearly stated you're 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 of him

SPEAKER_37: wouldn't nobody because i want him to talk about the future moral hazard people more of that user seven six five four two on twitter who cares what that person thinks okay i was also thinking about

David Sacks: journal the new york times and everything let me jump in and just clarify i was really clear that svb

SPEAKER_55: shareholders should be wiped out their bondholders should be wiped out their 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 stock sales should be clawed back so i'm not in favor of bailing out svb i don't

SPEAKER_110: care about svb yes of course now let's do that for commercial real estate no the question is what

SPEAKER_55: 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's kind of an old-fashioned view and then there's kind of a more modern regulatory view 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 hardline view there's a more modern regulatory view which is that listen the typical depositor even a fairly sophisticated deposit or like a small business or even a high net worth individual they're not in a position to evaluate the balance sheet of these banks how are they going to figure out if there's like toxic assets that are hidden on the balance

SPEAKER_128: sheet of these regulators didn't see it with silicon valley bank and a lot of these banks so you don't

SPEAKER_55: really get that much more moral hazard by putting the depositor on the hook for for that remember

SPEAKER_216: the management of the bank already is penalized severely by losing all of their stock i'm trying

SPEAKER_128: to get to before tramath interrupted me i'm trying to get to the bigger moral hazard picture here which

SPEAKER_31: is jason you before you're interrupting but the point eat your nuts 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

SPEAKER_59: next card that you are saying is going to tip over how would you handle that piece should they okay

SPEAKER_55: well let me just finish the thought on on depositors so the modern regulatory view is that when you open a bank account 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 to just fully insure depositors it turns out that we have about 17 and a half trillion in deposits in the us almost 18 trillion and one of the misnomers you'll hear is well it would cost us 18 trillion to basically insure all the depositors that's not true because that's not first of all 10 trillion people don't even know already insured under fdic it's only about seven and a half to eight trillion that's less

SPEAKER_56: than half is left okay that's right exactly it's about it's around eight trillion so

SPEAKER_225: isn't it shocking the innumeracy of people that make these claims i know it's unbelievable this is

SPEAKER_227: why the podcast is basic 20 or top 10 in the world because we're actually breaking down the numbers

SPEAKER_55: right so by the way the leading proponent of this theory that we should just basically not bail out but backstop the deposits is bill and he's been making i think a pretty compelling case that if you don't protect deposits at small banks all the money is going to flow to the top four

SPEAKER_160: banks that's already 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've realized is that it's not 18 trillion it's

SPEAKER_55: 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 in to the fdic fund by premiums paid by these banks so in other words the insurance premium paid by banks was about 1.3 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 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

Chamath Palihapitiya: well i think this boils down to the profitability that an equity shareholder of a bank expects of them and to your point is it viable for large g-sibs to guarantee a hundred percent of their deposits absolutely the implication of that will be an

SPEAKER_41: enormous hit to their short-term profitability and their return on invested capital it would

Chamath Palihapitiya: 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'll come down to that decision which is that if you do want to protect the depositor 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 if you're willing to make that trade-off then you can guarantee a hundred percent of the deposits if you do not want to make that trade-off then the equity holders will still retain

SPEAKER_26: more value than they would otherwise and freeberg we've seen a couple of examples of the market the free market looking at the situation and making new products and services wealthfront mercury bank

SPEAKER_131: both talked about load balancing across 12 accounts three million dollars so that would

SPEAKER_59: make some people who had over 250k just instantly be back stopped and insured and then

SPEAKER_31: where you know there's discussion of um we i talked about last week hey why don't you just have a vault

SPEAKER_59: where you pay a bank to hold your money safely i got a ton of responses from all in fans pointing out multiple banks and services that have been trying to do this and also crypto solutions so is it going to be a free market solution you think or when we're starting to see them emerge that maybe covers

SPEAKER_31: this gap a little bit freeberg and then what are your thoughts just generally on should we backstop the banks and the deposit i'm sorry the banks the depositors to be clear so if we just quickly

SPEAKER_70: 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 bond securities like treasuries or asset-backed securities or other things like that or 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 that biology i think has misstated and 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

SPEAKER_166: money that you the depositor thinks that you have and so what he's saying kind of implies that there

SPEAKER_70: is no money that there is no asset value there at all he uses sam bankman freed and ftx as an example that the money that was given to sam bankman freed's you know exchange fund was used to buy assets that

SPEAKER_166: then very quickly declined in value by 99 but he held them on the book at 100 and then he 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 percent in kind of the worst case

SPEAKER_70: 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 and you know they took a big hit on that but it doesn't mean that there's no asset value it means that the value has declined and typically there's a buffer between the asset value that the banks are meant to hold and the deposits that they owe back to their customers and if that buffer gets exceeded then the bank is technically has negative equity and if all the you know depositors 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 whole but it doesn't mean the depositors end up with zero it means instead of getting 100 cents on the dollar they get 93 cents on the dollar 88 cents on the dollar and it would require an orderly dissolution of the bank's assets selling those bonds into the market 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

SPEAKER_166: 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

SPEAKER_26: to pay back the fed which is so it's just musical chairs money's moving around causing these problems it's musical chairs and if the musical chairs stop then we don't have this problem correct

SPEAKER_166: so if people stopped moving uh deposits around then you're right the banks wouldn't need to borrow money to give depositors their money and then go do the work of selling the bonds in the market

SPEAKER_59: people free moving their money around because of the fbi sims because it's not insured so here we

SPEAKER_242: go so you just insure it and this whole thing stops so it costs them nothing to just say that right yeah

SPEAKER_55: so 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 break it 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 you haven't solved anything so who hasn't accomplished for the startup it has accomplished i'm just giving them prediction the system yeah why won't you just raise 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 that goes up to say pro yes exactly there's 10 million and in exchange

SPEAKER_113: the quid pro quo has to be that the bank can't put that money in risky assets

SPEAKER_248: why is this not this is so obvious also sorry sorry just hold on the reason i walked through that

SPEAKER_70: whole explanation is because i want to answer your question i'm sorry it took so long but like i want to 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's job would be they would look at the volatility and 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

SPEAKER_166: have to sell those bonds at a loss very quickly and then the severity is how much would you actually lose so if if you know the fed raises rates by three percent 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 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 saxe's point is super cheap leading up to the extreme tail 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 sell and it gets worse and worse and worse and so you know the real rate for the insurance going forward will now have to take into account this massive risk but the game theory problem is as saxe's point out if you just insure 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 insure 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

SPEAKER_70: insure 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

SPEAKER_31: 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 just to steal man the

David Sacks: the old-fashioned view or the traditional view of this they would say that well you want those

SPEAKER_55: startups being paranoid do you want those startups 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

SPEAKER_113: 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

SPEAKER_55: 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 hugely destructive problem that comes along with placing the depositor in charge of disciplining the banks and i would argue that the deposit is not the best person to do it it's the regulator just to kind of layer on what what freeberg was saying i think there's like a fundamental 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 an atm card a place to do payroll run you know it's a service it's a service and maybe you make a little bit of interest but it's not even your main motivation

SPEAKER_113: 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 to have any chance of losing your money you're not gambling right but now what does 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 and the transaction exactly it's a total disconnect and moreover the

SPEAKER_55: way the management of the bank is compensated is that they only have to pay back your loan your deposit basically is their loan at par and anything they make on a bet that they make with that

SPEAKER_113: money they get to keep they get to keep all the upside their stockholders and management get

SPEAKER_59: to keep that and those incentives are what 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

David Sacks: they got chamath somehow the executive team was compensated for their incentive it's not just

SPEAKER_55: them but the whole banking system creates the incentive they're highly leveraged the deposits from their standpoint are leveraged they're leveraged 10 to 1. so their incentive is to go to the casino and gamble it because they get to keep all the upside and if they lose it it's basically someone

Chamath Palihapitiya: else on the hook final workshop in early may the fed will release their investigation into signature bank and svb 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 sax 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

SPEAKER_41: 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

Chamath Palihapitiya: and really lays bare everything that happened it'll be very hard to not legislate changes based on it

SPEAKER_131: and this your best uh swing at a legislative change would be what chamath what is the what is

SPEAKER_60: the low-hanging fruit what's the layup here well i think we've seen this happening in other markets for a while

Chamath Palihapitiya: which is that banks have become in fairness to them much much better at risk management post dot frank post great financial crisis and the result of that is that there's been a lot of emerging private credit markets because most of the bank is about lending right they're not really buying equities they're lending money they're a 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 clo's it started in asset-backed securities solar car loans credit cards mortgages private equity-backed deals so i think the rational answer is that banks need to protect a hundred percent 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

SPEAKER_272: just needs to get closed in 2023 there's such easy uh hygienic changes here like let's put it a different

Chamath Palihapitiya: 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 10-year illiquidity they would be held to pay yeah and vice versa if you raise money on 10-year 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 and there'd be held to pay similarly i think what sax is stating 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 to correct that one way or the other make it

SPEAKER_67: abundantly clear that we're never going to ensure 100 and deal with that risk

Chamath Palihapitiya: or make it 100 and deal with the fallout which is largely about uh wiping out a lot of equity value in

SPEAKER_55: banks lpa equals limited partnership agreement right 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 that 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 their standpoint your deposits are their leverage everybody but the g-sibs because i think the g-sibs

Chamath Palihapitiya: there's so much scrutiny if you look at how well run city b of a wells and jpm are relative and contrast them to the sub g-sibs 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 u.s economy because these people play a vital function in society and they were allowed to take a much more aggressive risk posture because they

SPEAKER_115: were able to lobby the government to change the rules the ceo of tick tock which claims to be an

SPEAKER_131: american company now or an international company was in front of congress today his name is show chew this is the first time he's really i think spoken publicly in an extended uh period four and a half hours he was grilled and it was absolutely brutal it's the first time i've seen a congressional hearing that was bipartisan in a long time and he said that quote uh the bottom line is this is an american date this is american data on american soil by an american company overseen by

SPEAKER_59: american personnel and then was immediately squirrelly when asked if chinese employees including

SPEAKER_131: engineers have access to this u.s 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 the question now becomes does it become divested and go

SPEAKER_55: public or does it get 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 just outright say no nope so that's his goose was cooked as soon as he couldn't just say no what do you think

SPEAKER_59: about the bipartisan nature of this and what do you think the outcome is sex well this is one of the rare

David Sacks: things where it is bipartisan i mean there's there's so much uh outrage and anger at this

SPEAKER_55: i think that they should let the company divest it i think it is divestiture or shutdown for tick tock since we're not communists here i think they should be given the chance to fully divest to 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 operations surveillance of americans on social media this was all revealed in the twitter files and we got certainly no bipartisan 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 infringe on christy teigen and donald trump who are two people you'd never invite

SPEAKER_59: to a dinner party freeberg what are your thoughts is it going to divest should it be forced to divest

SPEAKER_131: being intellectually honest about it what are your thoughts on tick tock in america uh yeah i think

SPEAKER_71: i've shared 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 there'll be a mandate that the majority of the shares and some degree of oversight i believe

SPEAKER_102: that's the right thing to do from a national security issue for america to force them to do that

SPEAKER_71: i don't know from a national security point of view i really don't i don't have an opinion from

SPEAKER_70: national security and tick tock i don't know i i've always thought that tick tock was a really

SPEAKER_71: 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 uh some national security points if 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 uh but but i but i will say like my point of view from like just seeing the political behavior is that they're probably going to mandate that these guys spin 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 jama in china itself the chinese

SPEAKER_131: 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

SPEAKER_59: train or not paying your bills and they are saying they will not divest but anybody who is an investor in a company that had a chance to go public for tens of billions of dollars and 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

SPEAKER_31: participating participant and somebody who's been a capital allocator for over a decade there's bigger

SPEAKER_25: problems in china than even tick tock us represents for them i think it's probably what it means so

SPEAKER_41: 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

Chamath Palihapitiya: 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 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 and the ccp to appease

SPEAKER_128: congress he didn't do that no he was like i have to check in on that i'm not sure yeah i think it was

SPEAKER_25: a little bit of the exact opposite actually sax is right like that first question was just the death blow right from the beginning it's like oh this is not going to go in a good place because they

Chamath Palihapitiya: 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 fait accompli as soon as that was in my mind i was like this thing is getting shut down because i don't think there's 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-us camp and i think that that's a question because bike dance and tick tock have presence beyond just china and the u.s a third question is how does the golden vote get used on the byte 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 at tencent i think they have that at byte 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 tick tock 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 u.s congress wants to pin on them so i think it's a very complicated moment for that business and their u.s asset sax it's pretty clear the ccp is making this decision if they decide let it burn let

SPEAKER_131: it get kicked out of the united states what does that do in terms of game theory 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 what's what decision you're saying

SPEAKER_59: the ccp is making well the ccp has the golden vote it's their decision to divest or not divest

David Sacks: chamat believes they will not divest i believe they will not be saying is they're not going to have the choice i don't i don't see what decision the ccp has in this it's going to be that's right

SPEAKER_25: it's not a divest or don't divest i think it'll be shut down i think they're getting kicked out of

SPEAKER_68: the united states okay do you but you believe they're going to divest sacks i'm saying that

SPEAKER_303: that's what i would support just to give them the chance so what do you think is going to happen

SPEAKER_55: chamath might be 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 code base i feel like you could i think you could have an acquirer figure it out you know vet the code base 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

SPEAKER_131: go with the scenario that it gets kicked out of the united states to shut down are there any second

David Sacks: or third order impacts yeah it just ratchets up the tension between the us and china but we're already

SPEAKER_143: we're already there yeah we're already there no change all right listen this has been an amazing

SPEAKER_02: episode oh chamath did uh your 3d rocket company make it to space i saw they had a nice uh little lift

Chamath Palihapitiya: 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 tried 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 to 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 r and rocket engines which can take instead of 1500 kilograms about 20 000 kilos so enormously proud to have been around this journey my partner jay has been really

SPEAKER_268: the key person on it but i just wanted to give a huge shout out to tim ellis and the team at

SPEAKER_114: relativity it's super super super cool what they pulled out just amazing how uh access to space is being democratized and the prices are being lowered so dramatically what's the impact that's going to have ultimately freeberg you think on humanity i mean obviously going to mars is this incredible feat

SPEAKER_33: technologically and just mind-blowing 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

SPEAKER_70: community of startups and money coming into this space right now i do think all these guys are going

SPEAKER_71: to have to in order to gain wider spread capital markets attention like elon has had to do with spacex they're going to have to find business models that have kind of near-term viability that don't depend on government contracts like starlink like starlink 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's 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 to three cents kilowatt hour of power call it one cent a kilowatt hour power i forgot the exact relationship you can get very cheap um you know hydrogen and oxygen fuel sources and so you know the it's funny if you actually play out the the scale factor for space

SPEAKER_70: for the space industry much of it at scale will get driven by the cost of electricity so it's another

SPEAKER_71: reason why there's going to be i think a pretty tight coupling between the cost of power and ultimately

SPEAKER_25: the vibrancy of this market you mentioned something important the other key thing that we proved

Chamath Palihapitiya: was that this is a pure methylox engine so ch4 and liquid oxygen and it was not just stage one but also stage two which is unique the only other folks that have tried to prove that you could have multi-stage methylox is 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 filling these rockets and making them viable so that was another really big milestone so the producing of that

SPEAKER_131: fuel friedberg requires energy if that energy was cheap it would be cheaper to make and process that fuel

SPEAKER_71: that's right yeah there's a pretty pretty direct tie-in particularly with scale manufacturing on fuel that would be used in these rocket systems and and power prices here on earth so if and as we get power prices down either through scaled renewables or ideally fusion or some other kind of new technology yeah or nuclear fission or something then the cost of you know 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 uh in markets and obviously you know high dependency on one or two key customers and how do you actually get private markets uh 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 earth traveling is

SPEAKER_112: a wild one yeah i've talked to you a lot about that but the idea that you could have a rocket ship take

SPEAKER_137: off from texas and then be in tokyo you know like half an hour minutes later is i can only speak for myself but uh i would really like to visit uranus reaper all right everybody for the rain man look at

SPEAKER_324: the look at the player here he's got layers are for players sexy look at this he is he is two layers in can you get an ascot it's subtle isn't it he's pulling a steve bannon yeah you gotta get more

SPEAKER_327: disheveled he needs the six pens in the color of pens no shave can you tell us honestly do you have a

SPEAKER_330: stylist an actual person you pay to dress you nick can you please put the picture of steve bannon

SPEAKER_47: where he wears the multiple oh my god no i'm gonna do this again you uh need to stop for next

SPEAKER_327: attacking me it's really weird oh yeah bannon he thinks you're a venture a vulture capitalist or

SPEAKER_47: something who's been attacking you bannon is one of many people attacking me on twitter i think

SPEAKER_334: on his podcast i think yeah you seem to have made a lot of a lot of new friends on twitter

Chamath Palihapitiya: lately when you pass around half a million followers basically what happens is you become a politician you will ne 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 uh you know followers two million ten million whatever there's always going to be a small percentage jcal doesn't know this

SPEAKER_41: because he has mostly bots that are his followers it's true i have an old account real when you have

Chamath Palihapitiya: real people this is what it is you'll get this one percent or less than one percent and just the number goes up so i would ignore it don't care don't worry about what user seven four seven don't feed the brigadoons don't care what seven user seven four seven eight six has to say don't worry about it yeah

SPEAKER_337: absolutely i love you all right and i'm looking forward to seeing you on thursday for the rain man

SPEAKER_339: himself david sacks the sultan of science and prince of panic attacks our pal david friedberg and the

SPEAKER_58: host with the most gonna make me what about me what about me i'm going them calling you the host with

SPEAKER_24: the most i'm adding something the host with the most who's making me the shiso leaf tempura with

SPEAKER_347: hokkaido and you are the world's best genuplector i am the world's greatest guest greatest house guest

SPEAKER_95: if you need a house guest to look at your house oh my god italy tokyo niseko wherever you need a house guest i'm ready to come and make it a good time you're the modern kato kailyn you're horrible

SPEAKER_354: absolutely the best you keep inviting me every week you are enjoyable though love you boys let's have fun bye everybody