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E114: Markets update: whipsaw macro picture, big tech, startup mass extinction event, VC reckoning

February 04, 2023 / 01:12:33

This episode of the All In Podcast covers market trends, job growth, Federal Reserve actions, venture capital dynamics, and the impact of short-selling reports. Guests include Chamath Palihapitiya, Jason Calacanis, David Sacks, and Erik Finman.

The hosts discuss the recent Federal Reserve rate hike and its implications for the market, noting a surprising addition of 517,000 jobs, which exceeds expectations. They analyze how this data affects inflation and the potential for a soft landing in the economy.

David Sacks shares insights on the volatility in the venture capital space, emphasizing the need for startups to adapt to changing economic conditions. He highlights the importance of understanding cash flow and profitability in light of recent market shifts.

The conversation also touches on the role of short-sellers, particularly in the context of the Adani Group, and how their reports can influence market perceptions and company valuations. The hosts debate the ethical implications of short-selling and the need for accountability.

Overall, the episode provides a comprehensive look at the current economic landscape, the challenges faced by startups, and the evolving dynamics of venture capital.

TL;DR

The episode discusses job growth, Fed actions, venture capital dynamics, and the impact of short-selling reports on market perceptions.

Episode

1:12:33

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all right everybody Welcome to the all

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in podcast we're back thanks to Freeburg

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and sax

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for moderating the show into the lowest

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ratings in its history

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hold on hold on please give the keyboard

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Warriors that are their bot armies some

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respite here they tried their best

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they just it's it's okay I think the

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ratings of the last episode must be a

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result of Google uh downranking us as a

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result of our honesty about not wanting

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to get more boosters you're on the

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Brigadoon truck somebody at Google some

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lower level functionary to push a button

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push a button to uh Shadow bit I mean

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visibility filter us it's everything

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except the moderation skills it's the

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moderator turning it into Fox Sunday

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can't be that

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[Music]

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let your winners ride

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Man David

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said we open source it to the fans and

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they've just gone crazy with them

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the reaction I got from our covid

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vaccine discussion was hey pretty fair

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and balanced like not in a in a joking

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way but like actually like yeah the

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warning on YouTube was pretty benign

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actually yeah it's like if you want

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coveted information click here thank you

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okay let's talk about the market data

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the FED raised 25 basis points the

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market obviously has ripped since then

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the jobs data

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this morning was crazy we added 517

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000 jobs more than 2x December and well

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above the estimates of 188

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000 jobs the FED I think is starting to

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realize they can

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obviously impact inflation and slow down

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speculative assets but they're having a

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very hard time with the labor market uh

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obviously labor participation actually

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is growing we've talked about that many

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times here it's bumped up to 62.4

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percent we all know it peaked at like

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maybe 69 percent during the 2000 time

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period wage growth though continuing to

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slow so that is some good news there

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and obviously risk on assets are ripping

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the last couple of days Tremont what's

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your take on where we are with the

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market and the fed's action which people

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are starting to believe will be another

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25 basis point hike and then maybe

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staying high for the rest of the year

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did you uh hear their comments you think

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dovish what's your take on the market I

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watched Powell's speech and it was

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really amazing because

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in December he was extremely hawkish and

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he was basically like listen we're going

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to keep rates higher than you like and

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longer than you want and that was pretty

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clear and the markets reacted

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and then not but

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35 40 days later he essentially said we

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have two 25 basis point hikes left to go

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and he's going to try to stick the

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landing essentially and even though the

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rest of the language in his entire

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speech and the press conference

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if you read it in the absence of his

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body language so if you just read the

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transcript would seem very hawkish as

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well but the reality was he basically

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capitulated and then the market

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essentially said okay we're at the end

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of this thing and we've talked about

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this before but markets tend to bottom

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six to nine months before it's clear

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that you could have done this

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and so we're a little bit Off to the

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Races in the short term it's compounded

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by a couple of other factors one is that

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at the end of last year so many people

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were tax loss harvesting which means if

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you had some gains somewhere else you

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sold some things that were losing money

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so that you could net the two together

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you saw a lot of stocks Tesla was

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probably the poster child for this trade

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all the way down to like 108 dollars a

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share and it's effectively doubled in

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the last 30 days right so everybody tax

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loss harvested everybody degrossed

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nobody was really owning anything and

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then when Powell basically said we're

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mostly done

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there's been so much systematic buying

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right now that

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nobody's really well positioned to me

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this is very similar and eerily

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reminiscent of the end of 2018 and

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beginning of 2019 and if you guys

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remember

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at the end of 2018 October November

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December the markets just fell

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and part of it was Powell's going to

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raise rates inflation's getting out of

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control etc etc and then we got all this

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data that said China may be entering a

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real period of malaise

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and Powell capitulated again trying to

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stick the landing and long story short

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he didn't that was a head fake and the

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markets just ripped higher

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then we went into the covet pandemic and

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all that stuff happened so

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I think we're about to replay a little

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bit of that at least in the next 30 to

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90 days

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the pain trade is to go up so that's

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probably where we're going here's the

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FED fund rates chart from 2000 and into

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the 2008 recession

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and you see just you know to jamaat's

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point in 2019 that little step up to two

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percent uh and then this dramatic step

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up uh that we've been on up uh to four

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and a half or so

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Saks is this where the FED pauses you

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think they cut and and what overall fact

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is this going to have on venture capital

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in the startup Market

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which is super important to us I think

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we're in the whipsaw economy here just a

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month ago sentiment was incredibly

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negative on the show we were predicting

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for the year that we were looking at the

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FED funds rate going from four and a

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half percent to say five and a half

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percent 250 Point

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increases

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the belief was that we were going to

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have a recession later this year I think

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that was pretty much consensus and now

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three weeks later you had a situation in

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which we got a couple of really good

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inflation reports so all of a sudden the

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consensus changed too we're not going to

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need to raise rates you know to five and

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a half percent maybe we only get one or

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two more quarter point rates and the

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market just ripped on the belief that

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inflation was in the rear view mirror

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the problem had been licked and now we

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can just kind of move forward and the

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FED seemed to confirm that just

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yesterday with the quarter point rate

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increase and now today we have this wild

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jobs report with over half a million new

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jobs the expectation was only a hundred

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thousand and so now all of a sudden

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people are wondering wait a second does

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this mean that labor costs are gonna you

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know go back up that the economy is

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overheating and now the fed's gonna have

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to raise more so I would say literally

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from week to week we're being whipsawed

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between expectations of uh whether

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inflation has been conquered or not

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whether the economy is going to have a

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recession or not and I think probably

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where we're sitting at this moment is

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you'd have to say that the risks of

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inflation returning are slightly higher

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but the risk of a recession are slightly

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lower because with this kind of jobs

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report better chance of having a soft

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Landing here it's very hard in other

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words sax to have a recession if people

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are employed if people are employed

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3.4 yeah exactly so 50-year low right so

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I just think that we're in a highly

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volatile economy and it's very hard

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predict the future

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I'd say that relative to where we were a

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month ago you'd have to say that the

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odds of us having a soft Landing this

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year are quite a bit better than they

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were just a few weeks ago all right

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Freeburg when we look at this employment

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picture does seeing people are going

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back to work seems maybe indicative of

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people blew through their savings we

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talked about this you've been harping on

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and on previous episodes I've had people

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doing personal debt buy now pay later is

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a possible thesis here that people

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yoload for so long post pandemic

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Coachella vacations Etc that maybe they

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whip through their savings it seems like

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we've burned off a trillion in savings

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or something like that and the debt's

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going up so now people maybe need to go

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back to work and they're finally

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capitulating and taking jobs do you

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think that's what's actually happening

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here

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classify that I mean there's obviously a

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lot of this stuff is on the margin

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the one challenge you know Larry Summers

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has been harping on since last spring

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all the way through the summer and the

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fall

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and

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you know in multiple kind of interviews

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and Publications he's done he's the

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ex-us treasury secretary obviously

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brilliant Economist um that the US needs

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to have a five to six percent jobless

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rate for five years in order for us to

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really get to the inflation rate target

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of two to three percent or below two

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percent

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and so you know the economists and the

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macro guys that are tracking their jobs

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report today

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are

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I think the indication is we're not

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there yet

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and that the implication of a tight job

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market is Wages go up and wages go up

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inflation goes up and because companies

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need to charge more because they have to

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pay more to get Talent

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and this obviously continues to support

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the escalatory spiral that drives

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inflation so that's the

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the you know kind of downside to the

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jobs report today that I think a lot of

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folks are watching the FED mentioned

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over and over again deflation so any

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impact there shamoth you think we're

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going to see prices start to Crater and

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what impact would that have on the

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market I think sax is right I think the

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the marginal risk here is is for this

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whip sign so we have a period now which

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is

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disinflationary

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but the problem is if the stock market

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keeps going up

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and all of a sudden we have less

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restrictive monetary conditions then

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we're going to be back at the same place

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we were before which is money sloshing

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around into all kinds of risky assets or

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more money you know there's still an

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enormous amount of money sitting on the

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sidelines that has to come into the

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market now if this thing keeps going

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higher so we're in a delicate moment and

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if we reignite inflation because all of

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a sudden more companies have more

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liquidity that they can tap right more

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money they can raise more money as a

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result that they can spend

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because we don't have this first

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inflationary cycle under control there

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could be a risk that that we reignite

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inflation and so then then they have to

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capitulate the fat has to capitulate

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again and start another hiking cycle

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so I think it's a complicated moment I

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think all of the smart money in Wall

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Street that I talked to up until this

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point they forecasted like this period

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would be choppy and the second half of

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the year would be really robust and like

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you needed to be super long and things

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were going to be incredible and when I

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talked to them this week

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they're like oh God we weren't

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positioned for this we had no risk going

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into this we're going to be forced

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buyers there's a bunch of companies that

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are Whispering that they want to go

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public now

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oh really the big banks have been

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calling around trying to book build

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quietly for some IPOs and so

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if they try to kind of crack this

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Capital markets open

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I think there's again the marginal risk

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will be that

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you mean trying to see if you'll get

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some early takers to buy equity in an

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IPO perhaps even in a company like

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stripe that's been sitting on the

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sideline so not striped they're in a

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complicated moment but when they called

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the book build they basically say Hey

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listen XYZ company

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quiet filed look at the S1 what do you

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think where's the price blah blah and

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they're trying to get an indication of

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whether you'd want to be in the IPO book

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so

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I think that there's a lot of those

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testing the waters that are now starting

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again would there be an appetite in your

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mind for an IPO in the second quarter of

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like a stripe type company putting you

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know I don't know what the other

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candidates are the lead candidates but

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stripe is one people talk about most the

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thing that we have to think about is

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like most of the market are not people

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right most of the market are computers

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and algorithms and ETFs it's an

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extremely formulaic buying model

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do you have components of an index those

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represent certain percentages you have

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to own those percentages to be relevant

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as that index and so it's this

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reinforced buying loop as well as a

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reinforced selling Loop right so when

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things start moving

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those folks have to just systematically

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move money in

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all the humans know that so the humans

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tend to front run all the computers and

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they basically are the ones that sell

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into these guys and then that's what

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inflates these prices and similarly on

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the way down humans try to front run it

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by being short into that stuff

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so we could see the capital markets open

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even if we don't it's actually the worst

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scenario because now you have all this

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money going into a fewer number of names

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that sort of explains Facebook has

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doubled in in 30 to 60 days yeah I was

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about time Tesla has doubled in 30 you

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know 30 60 days a lot of the tech stocks

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like high beta stocks that we are all

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you know helping to build those

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companies have just absolutely ripped 60

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to 100 percent

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these are not healthy and normal moves

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and so the question is what happens if

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inflation somehow all of a sudden pokes

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itself back up right now it doesn't look

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like it is and Powell was clear and it's

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true we're in a different she said

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deflation 11 times during his uh yeah

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his use of language yeah that's why the

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market reps I mean basically that was

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all part of a narrative where

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inflation's on its way out we've licked

00:13:26

that problem and that's what the market

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was pricing in and I think now the

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question is in light of today's jobs

00:13:32

report is that actually true or not

00:13:40

one way to look at this is um Jake how

00:13:43

you showed the chart of the FED funds

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rate another chart is the yield curve

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can we just pull up the yield curve for

00:13:48

a second this is the yield on U.S

00:13:50

treasuries on you know RT bills and one

00:13:55

way to look at this is as a prediction

00:13:56

Market of where the market thinks

00:13:59

interest rates are going because the FED

00:14:01

sets the rate for the fed's funds rate

00:14:04

which is the overnight rate of lending

00:14:06

to Banks but they do not set the rate of

00:14:09

you know three months six months bonds

00:14:11

10-year bonds and so on the market does

00:14:13

because the market trades those bonds

00:14:15

and it imputes a yield that the market

00:14:19

requires to want to hold those bonds so

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what's interesting is that if you view

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the yield curve as a again as a

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prediction Market it tells you at any

00:14:28

given time what the collective wisdom is

00:14:31

of the market now this thing is

00:14:32

fluctuating moving all the time so that

00:14:34

Collective wisdom is changing but where

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things are today it's pretty interesting

00:14:38

it looks like

00:14:40

what the market is saying is that within

00:14:42

the next six months the rate Peaks at

00:14:45

4.75 percent so Nick if you just want to

00:14:48

hold the mouse on the six month dot

00:14:51

um you'll see it's 4.76 percent so

00:14:54

basically the market is predicting we

00:14:56

get maybe one more quarter point roughly

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not much and then if you go to the

00:15:01

two-year

00:15:02

it's at 4.09 so a little over four

00:15:06

percent so what the market is actually

00:15:08

predicting is that over the next two

00:15:10

years we're actually going to get a 50

00:15:12

basis point decrease from the Fed

00:15:16

and then if you go to say The Five-Year

00:15:18

or the 10-year we're at three and a half

00:15:20

percent so the Market's basically saying

00:15:22

that long-term rates are going to

00:15:24

stabilize at three and a half percent

00:15:25

we're not going back to the abnormal

00:15:28

zero interest rate policy or zerp that

00:15:30

they had for 10 years three and a half

00:15:32

percent will be the long-term stable you

00:15:36

know cost of money but you can see that

00:15:39

the market the prediction Market thinks

00:15:41

that the FED has done enough to combat

00:15:44

inflation because the FED funds rate now

00:15:46

basically is where the bond market

00:15:49

thinks it should be and in fact the bond

00:15:51

market thinks it's coming down over the

00:15:53

next two years but coming down to what

00:15:56

would be three and a half in a world

00:15:58

that we've lived in for largely over the

00:16:00

over the 14 years of this bull run the

00:16:03

majority of that was at close to zero or

00:16:05

zero right and that's why we're never

00:16:06

going back to the bubble of 2021 where

00:16:09

SAS companies were trading at 100 times

00:16:11

ARR we're going to go back to an

00:16:13

environment more like a more normal one

00:16:15

where evaluation are more like the 2017

00:16:17

valuation something like that is by the

00:16:20

way it's three and a half percent is not

00:16:21

a bad it's still a great deal still a

00:16:24

great deal if you got your mortgage at

00:16:25

that if you listen to Buffett Buffett's

00:16:27

teacher this guy Ben Graham in Ben

00:16:29

Graham's book the way that he would look

00:16:31

at a stock and obviously look things

00:16:32

have changed but the way that he would

00:16:34

look at a stock is he would look at that

00:16:36

risk-free rate he would double it and

00:16:39

then the inverse of that is the maximum

00:16:41

price to earnings ratio that he would

00:16:43

pay for a stock right that's the

00:16:45

trade-off is if you can get more than

00:16:46

two times the risk-free rate then it's

00:16:48

worth owning a company what that means

00:16:50

is that

00:16:51

if if you take three and a half percent

00:16:53

as a terminal rate

00:16:55

the right p e is around 14 for the s p

00:16:58

500. right now the S P 500 trades at 22

00:17:01

times p e which would mean that we are

00:17:03

50 overvalued now that again that's a

00:17:05

Benjamin Graham model and I think the

00:17:07

world has pretty cleanly moved away from

00:17:10

it but there's probably some rooting in

00:17:12

that intellectual framework that's still

00:17:14

valuable

00:17:15

and to your point David it just

00:17:17

reinforces that man we need to start to

00:17:20

learn a new regime here because

00:17:22

when rates are not zero there's just a

00:17:24

lot of excess that you can't support

00:17:26

because the alternative trade-offs for

00:17:28

investors

00:17:30

are plentiful you know and plowing money

00:17:33

into a money losing startup becomes less

00:17:35

attractive and to just give people some

00:17:37

background that's the intelligent

00:17:38

investor was that book I believe and he

00:17:40

was talking about value investing which

00:17:42

is hey what's the earning per share

00:17:43

what's the ratio what's the PE and

00:17:47

that's something that growth and

00:17:49

momentum investing has been the opposite

00:17:50

of and this is a could be I think you

00:17:53

wrote a blog post about this jamaat

00:17:54

short of the regime change if you look

00:17:56

at the Googles the Facebooks the apples

00:17:59

Amazon's is is a little bit of an

00:18:02

exception here those companies printed

00:18:04

money they had profits they built up

00:18:06

large cash reserves if we look at the

00:18:09

next cohort of companies airbnb's

00:18:11

coinbases Ubers Etc they focus on the

00:18:14

top line growth uh much like the Amazon

00:18:17

which was a very obscure approach

00:18:19

correct your moth uh in in the history

00:18:21

of this Nick do you want to just throw

00:18:23

up this chart we did a little analysis

00:18:25

over here and it was just basically

00:18:27

looking back 60 years of company

00:18:29

formation we looked at all of the 100

00:18:31

most valuable public company startups

00:18:34

and we indexed that to the 10-year

00:18:37

interest rate so what are we looking at

00:18:38

here try math with this chart so

00:18:39

basically we went back

00:18:41

from 1960 onwards so basically you know

00:18:46

63 years and what this shows you is

00:18:51

the hundred most valuable public

00:18:53

technology companies then the size of

00:18:55

the circle here is their market cap

00:18:57

and then it's overlaid on top of the

00:19:01

10-year interest rate

00:19:03

as well as gray bars for recessions

00:19:06

so what is this graphic meant to

00:19:08

illustrate well it just was for us to

00:19:11

study

00:19:12

is there a correlation between the value

00:19:15

of companies

00:19:16

and what the interest rates were or what

00:19:19

the economy was doing at the time and to

00:19:21

your point Jason

00:19:22

the trend is pretty starkly made on this

00:19:25

chart which is that if you were a

00:19:28

company that was founded

00:19:30

in a period of austerity

00:19:32

you had the ability in general to build

00:19:35

a much larger company

00:19:37

then that which was founded in a period

00:19:40

of wealth and excess

00:19:42

right so when you look at when rates

00:19:44

were sort of approaching zero or were

00:19:46

zero

00:19:47

there was a lot of really successful

00:19:49

companies they're listed here in the in

00:19:50

the light gray on the right but none of

00:19:52

those things really represent the

00:19:54

success that these other companies had

00:19:55

that's the first interesting takeaway

00:19:57

the second interesting takeaway though

00:19:59

from this has nothing to do with rates

00:20:01

per se but it is that when rates

00:20:04

intersect

00:20:06

with the emergence of huge technology

00:20:08

Trends so in the case of the 1970s it

00:20:11

was the PC revolution in the case of the

00:20:14

late 1990s it was the internet

00:20:15

Revolution

00:20:17

those two things which required enormous

00:20:21

progress in both physical infrastructure

00:20:24

so atoms as well as software

00:20:26

infrastructure bits when you put those

00:20:27

two things together

00:20:29

those also created big companies and so

00:20:31

if you add that all up the point is that

00:20:34

whenever you see huge tectonic shifts in

00:20:37

technology combined with periods of

00:20:39

austerity that's when the gargantuan

00:20:42

dollars are made so from the 1970s

00:20:44

companies like Microsoft and Apple from

00:20:46

the get-go had to be profitable

00:20:49

right and in the absence of one very

00:20:51

important round of financing that Amazon

00:20:53

was able to close

00:20:55

the next big wad of companies were

00:20:57

founded again in Rising rates where they

00:20:59

just had to get profitable or find a way

00:21:01

to be positive free cash flow or have

00:21:02

positive working capital

00:21:05

faster than anybody else so these are

00:21:07

like really interesting trends that I

00:21:09

think just say that as rates creep back

00:21:11

up

00:21:12

and if we can intersect that with some

00:21:15

improvements in technology over the next

00:21:17

five to ten years that we've all talked

00:21:18

about it could be a real Boon for

00:21:20

startups and startup investing it would

00:21:22

mean people are a little more resilient

00:21:24

a little more hardcore to use the term

00:21:26

Freeburg what are your thoughts on this

00:21:28

analysis by Social Capital it's

00:21:30

interesting I mean I think there's

00:21:31

probably two ways you could interpret

00:21:34

this one is in an era of excess Capital

00:21:37

all the capital gets competed away

00:21:39

and so you pay more salaries you have uh

00:21:43

it's harder to get high quality Talent

00:21:45

you make a lower margin

00:21:48

Etc et cetera it's much more kind of

00:21:49

competitive on the ground and then

00:21:51

another one is just obviously kind of

00:21:53

like evolutionary Fitness

00:21:55

When there's less Capital investors are

00:21:57

more selective I think what might make

00:22:00

this era a little bit different than the

00:22:02

past is just the amount of termed dry

00:22:05

powder sitting

00:22:06

on the sidelines right now so that the

00:22:08

the the total VC Capital raised last

00:22:12

year I think was a record high

00:22:14

that means there's a lot more cash that

00:22:16

needs to kind of be deployed in the next

00:22:17

12 to 36 months than has ever been

00:22:21

deployed in in the history of venture

00:22:24

if that holds true so that may be kind

00:22:27

of a counter balancing effect here where

00:22:29

it may take three years before that

00:22:31

effect plays out where there's more of a

00:22:33

dearthy capital it's certainly the case

00:22:35

that institutional investors endowments

00:22:37

Pension funds traditional family office

00:22:39

LPS and Venture funds are

00:22:43

making far fewer commitments this year

00:22:45

to new funds as I think we all know

00:22:48

and that tightening will play out in the

00:22:51

Venture funds that'll get raised for

00:22:53

this vintage the next vintage and so on

00:22:54

and so maybe that that kind of

00:22:56

evolutionary Fitness Concept starts to

00:22:58

play out lateral sizing and sizing and

00:23:00

sizing I think there's also this like

00:23:02

you know we talked about this on our

00:23:04

text stream but the Venture business of

00:23:08

the last 15 years

00:23:11

everyone since 2008 everyone's been

00:23:13

trained

00:23:15

and all the younger people that have

00:23:16

come up and are now partners and running

00:23:18

the firms

00:23:19

on an environment of momentum investing

00:23:22

rather than fundamental investing and so

00:23:24

there is also a question of how fit the

00:23:28

investors are for a market space where

00:23:32

valuations are flat or descending or the

00:23:36

decision whether or not to invest is no

00:23:38

longer driven by who else is investing

00:23:39

and how much is the company growing and

00:23:41

how much is their valuation going up but

00:23:44

it's much more about kind of the

00:23:45

fundamental performance

00:23:47

of the the the business does this match

00:23:49

what you're seeing on the ground sacs

00:23:51

are people

00:23:53

being more dogmatic pragmatic or the

00:23:56

capital allocators really

00:23:59

sharpening the knives and looking at

00:24:01

these businesses a different way is it

00:24:03

actually hit the streets yes there's a

00:24:05

record amount of money Venture Capital

00:24:07

has raised over the last you know couple

00:24:08

of years but it's going to be deployed

00:24:11

much more slowly and carefully over the

00:24:13

next say three or four years than it was

00:24:15

over the previous few years

00:24:17

so divide that amount of money by three

00:24:20

or four because the pace

00:24:22

the deployment's going to go way down

00:24:25

and so yeah I think people are going to

00:24:27

be more careful they're going to take

00:24:28

longer to make decisions I think it's

00:24:30

going to be much much harder for new

00:24:31

funds to get started all of the you know

00:24:34

hype around you know solo capitalists

00:24:37

and you know all these you know seed

00:24:39

funds and micro VCS and all this kind of

00:24:42

stuff I think a lot of that's going to

00:24:43

get washed away I think in hindsight a

00:24:46

lot of that was a product of the bubble

00:24:48

and yeah I think you're going to be in

00:24:50

for a period of some retrenchment in VC

00:24:54

and I think that's good I mean I think

00:24:56

to the point of Chamas study that you

00:24:59

know that the counterintuitive finding

00:25:01

in his study was that

00:25:04

great companies are created during times

00:25:07

when we're not in a bubble and capital

00:25:09

is sloshing around everywhere but when

00:25:12

you're in a environment of moderate

00:25:14

Capital availability and I think the

00:25:17

point is that we all have to be under

00:25:19

some stress right that's what evolution

00:25:21

requires is you know if an ecosystem or

00:25:25

an organism is not under stress they

00:25:28

have no pressure to evolve and become

00:25:30

fitter and compete and I think that's

00:25:33

what makes our industry and our

00:25:35

ecosystem very adaptive over time is

00:25:39

that it's constantly you know it does

00:25:41

face survival pressures but over the

00:25:43

last several years all the survival

00:25:44

pressures were taken away because

00:25:46

anybody could raise money and there was

00:25:49

always another Bridge available there

00:25:51

was always some extension and there was

00:25:53

no some convertible nothing to be done

00:25:55

right there was no Reckoning you know a

00:25:57

lot of these companies just seem to you

00:25:59

know get another 12 months of Runway

00:26:01

so many bad habits during that period

00:26:04

time and so much

00:26:06

entitlement and excess built up in the

00:26:08

system during that time and I think now

00:26:11

we're we're seeing that a lot of that is

00:26:14

working its way out

00:26:16

I mean just look at the Facebook results

00:26:18

the other day so Facebook just thought

00:26:19

about Facebook is an example because

00:26:21

yeah here you have a company where the

00:26:24

stock over the past year have been

00:26:26

pounded is like down over 50 percent and

00:26:28

the market bucks a share yeah yeah the

00:26:30

market did not like its answers around

00:26:33

the capital Investments it was making

00:26:34

and then Brad gerstner our friend wrote

00:26:36

that letter encouraging them to get much

00:26:38

more efficient and then they did that

00:26:41

and they basically started doing some

00:26:44

riffs and basically just getting much

00:26:45

more efficient and what they're doing

00:26:47

and specifically taking out layers and

00:26:49

layers of middle management

00:26:51

I mean that was really the big thing so

00:26:53

they kind of took a page out of elon's

00:26:54

book

00:26:55

in terms of what Elon had done at

00:26:56

Twitter I mean not nearly to that extent

00:26:59

because I don't think they needed to but

00:27:00

they targeted this idea of we have too

00:27:03

many layers in the company too many

00:27:04

mid-level managers and the stock ripped

00:27:07

just was it like up 20 25 yeah and

00:27:11

they're up to I actually bought it based

00:27:15

the day they had the layoffs I put in a

00:27:17

buy order and it was closed at 94. and

00:27:20

now it's at 193.

00:27:23

and FedEx of all places uh is laying off

00:27:26

10 of its offers officers and directors

00:27:29

so the idea now is hey in the senior

00:27:32

ranks what is the inefficiency there how

00:27:35

do we get well more doers more people

00:27:38

who actually are building or operating

00:27:39

the companies

00:27:41

to take the reins and get rid of this as

00:27:44

you're saying middle management this

00:27:46

waste that yeah let me tell you let me

00:27:48

tell you specifically the problem that

00:27:50

builds up in these companies is that

00:27:52

everybody wants to be a manager and so

00:27:55

you can't just come at this Palm by

00:27:57

saying we're going to increase the

00:27:58

number of reports that each manager has

00:27:59

from five to ten that doesn't work

00:28:01

because let me tell you what happens is

00:28:03

that every

00:28:04

individual contributor who's a star

00:28:06

thinks that their career advancement

00:28:09

requires them to manage a team so what

00:28:11

happens is you take that star IC and

00:28:14

then you create a team around them so

00:28:15

that person then hires five people to

00:28:17

manage and those times

00:28:20

yeah they stop working they just start

00:28:22

managing well maybe you get like 20 more

00:28:25

production out of that six person unit

00:28:27

than you would have just out of the star

00:28:29

but you're spending five times more

00:28:31

money so it makes no sense and the

00:28:33

problem is it Cascades so you know that

00:28:36

IC becomes a manager they hire five

00:28:38

people then those five people one of

00:28:41

them is a star and says well I want to

00:28:42

be a manager and all the organizational

00:28:44

pressures to keep building more and more

00:28:45

teams and more and more layers here's

00:28:48

the quote from Mark Zuckerberg to

00:28:50

illustrate your point from a recent All

00:28:52

Hands meeting I don't think you want a

00:28:54

management structure that's just

00:28:56

managers managing managers managing

00:28:57

managers managing managers managing the

00:28:59

people who are doing the work yes it's

00:29:02

the problem of infinite delegation every

00:29:04

like like Star builds a team around them

00:29:06

to delegate the work but then they hire

00:29:08

a team to delegate the work to and

00:29:10

pretty soon the most Junior interns in

00:29:12

the company are doing all the work and

00:29:13

all the best people are just managing so

00:29:15

it's it's actually a huge problem and I

00:29:17

think that I'd say that a lot of CEOs

00:29:20

don't quite understand the problem

00:29:21

because they think that all they have to

00:29:23

do is increase the number of reports

00:29:25

that managers have it's not you also

00:29:27

have to reduce the number of layers in

00:29:30

the company and and just the ultimate

00:29:32

example of this just to put a point on

00:29:33

it was at Twitter what we saw is that

00:29:36

when Elon went in

00:29:38

to basically do a riff at Twitter the

00:29:42

first question he asked in the

00:29:43

engineering department is who's checked

00:29:45

in code and they looked at the code

00:29:47

repository and over 50 percent of the

00:29:49

engineering department had not checked

00:29:51

in code in months and you want to know

00:29:53

the reasons for that is because the the

00:29:55

engineers were told that if you want to

00:29:58

be a manager in this company you don't

00:29:59

code managers don't code only ICS code

00:30:03

and no one wants to be an ice no one

00:30:05

ambitious wants to be in ic they all

00:30:07

want to get promoted so it all gets

00:30:08

explain what a nice is this individual

00:30:10

contributor yeah so the whole thing

00:30:12

turned upside down because of this idea

00:30:14

that again ambitious people want to be

00:30:16

managers and managers don't do the real

00:30:18

work yeah it's a Cowboys who don't know

00:30:20

how to ride horses it's like

00:30:22

it's a dangerous precedent to set

00:30:25

what are your takeaways uh chimath from

00:30:28

what happened at Facebook when you look

00:30:30

at it and the pressure that was put on

00:30:32

The Ripping of the stock

00:30:33

even though they're down two percent

00:30:35

year over year in terms of advertising

00:30:37

Revenue there's a a guy on my team sent

00:30:40

me this chart he did a pretty detailed

00:30:42

technical analysis of Facebook Nick can

00:30:45

you please put that image up there so

00:30:48

basically this this shows this is really

00:30:50

technical this this is the first time

00:30:52

Facebook mentioned the word metaverse in

00:30:55

Q2 of 21 on the earnings call they

00:30:59

mentioned it 20 times and the gray line

00:31:02

here is the stock price so as they kept

00:31:04

mentioning it the stock price just you

00:31:05

know reacted

00:31:07

but Q Q4 of 22 was the first time that

00:31:10

the word efficiency exceeded the word

00:31:12

metaverse and you saw and you saw the

00:31:15

stock price rip up so what's happened

00:31:17

that Facebook is really interesting

00:31:18

because I think it transitioned to

00:31:20

what's generally called an X Growth

00:31:22

Company which means that

00:31:24

people are now looking at a business

00:31:26

that has essentially gotten to its peak

00:31:29

size and now what they're looking at is

00:31:32

its ability to generate cash flow the

00:31:35

cash flow generation or cash flow yield

00:31:37

of the business was like three and a

00:31:38

half percent

00:31:40

but they're making enormous Cuts both in

00:31:44

capex

00:31:46

as well as headcount over time they're

00:31:48

getting their expenses under control and

00:31:50

all of that should drive up their cash

00:31:52

free cash flow yield

00:31:53

and so I think why people got very

00:31:55

excited is there are very few X growth

00:31:58

stocks that you can own that can just

00:32:01

compound and crunch ginormous amounts of

00:32:03

money and these guys are in an

00:32:06

incredible position to do it you know

00:32:07

more than 100 plus billion dollars of

00:32:09

Revenue and if you get these costs under

00:32:11

control and get efficient get the

00:32:15

employee base down to 30 or 40 000 over

00:32:17

time

00:32:18

this is the thing that just spits out

00:32:20

just ginormous amounts of cash and so so

00:32:23

it's actually sell you investing and

00:32:25

Warren Buffett that means the earnings

00:32:27

per share go way up yeah you know like

00:32:28

like the Facebook PE is quite modest

00:32:30

actually now I actually

00:32:32

put back in stock based comp and its PE

00:32:35

is about 11. so still reasonable if you

00:32:37

go back to the to the Ben Graham

00:32:39

analysis this is a company that

00:32:41

perfectly meets that criteria of like

00:32:44

you can buy it at a PE that's basically

00:32:47

two times the risk-free rate and so I

00:32:49

think it's an incredible stock now that

00:32:51

you can own

00:32:53

because if they keep grinding out all of

00:32:55

these kind of free cash flow gains man

00:32:57

they'll just they'll just have enormous

00:32:59

amounts of money they've already

00:33:00

announced a 40 billion dollar buyback

00:33:01

you know the thing to keep in mind is

00:33:03

Apple Had A Moment Like This

00:33:06

and when Apple went X growth

00:33:09

they did the brilliant thing which is

00:33:10

they said we're gonna borrow heavily

00:33:13

and we're going to return cash I may

00:33:15

have posted this in the group chat to

00:33:16

you guys by 2025 Apple will have

00:33:19

exceeded one trillion dollars of cash

00:33:22

distributions

00:33:24

I mean that is just nuts does that

00:33:27

include Buybacks in cash distributions

00:33:30

by vaccine dividends and so Facebook now

00:33:32

you can credibly see a path where

00:33:35

Facebook could chunk out hundreds of

00:33:38

billions of dollars of of total

00:33:40

shareholder value returned over the next

00:33:42

four or five years and so you know for

00:33:44

Value investors it's somewhat of a kind

00:33:46

of a no-brainer I mean nothing's a

00:33:48

no-brainer but yeah really really

00:33:50

attractive value fundamentals right now

00:33:52

I mean you did see Warren Buffett buying

00:33:55

Apple I think it's his largest position

00:33:56

you're going to see him probably do the

00:33:57

same with Facebook there was an

00:33:59

interesting mass extinction event tweet

00:34:01

that went on that's related to all of

00:34:03

this Tom loverio a GPA General partner

00:34:05

at ivp which is a venture firm tweeted

00:34:07

the following thread there is a mass

00:34:08

extinction event coming for early and

00:34:10

mid-stage companies late 23 and 24. but

00:34:14

make the 2008 financial crisis La Quint

00:34:16

for startups below I explain when how

00:34:19

and why

00:34:20

and we'll start an offer some detailed

00:34:23

advice basically four and five four in

00:34:25

five early stage startups he claims have

00:34:27

less than 12 months of Runway according

00:34:29

to a Q4 survey of 450 Founders by

00:34:32

January Ventures

00:34:34

he sees late 23 24 when this will all

00:34:37

come home to roost mark suster from

00:34:40

upfront Ventures

00:34:42

friend of the pod

00:34:43

reply with the following precisely our

00:34:45

internal analysis 5000 seed 2.5 million

00:34:49

raised or above A and B companies those

00:34:52

are three different categories funded in

00:34:53

the last four years we estimated 50 will

00:34:55

go out of business lost ratios in the

00:34:57

last seven years have been artificially

00:34:59

low due to excess Capital as we just

00:35:01

discussed previously with the

00:35:04

never-ending Bridge we've talked about

00:35:06

this before if you look back over 40

00:35:07

years of venture capital

00:35:09

the average top quartile fund

00:35:11

distributes 1.6 or 1.7 x the capital

00:35:14

they raise

00:35:15

even though now we've gone through a

00:35:17

period where people have shown these

00:35:19

unbelievable markups right tvpis the

00:35:22

total value

00:35:23

right a paid in capital distributions

00:35:26

have not really budged that much

00:35:27

distributions are still modest they're

00:35:29

below 2X and so we have to go through

00:35:32

what's called mean reversion right we

00:35:34

have to go back to the historic

00:35:35

statistical average which means that a

00:35:39

50 to 60 percent mortality rate seems

00:35:41

pretty reasonable by the way in the.com

00:35:44

bubble that's what we went through you

00:35:45

know in 2001 to 2005 we had a 50

00:35:48

mortality rate at the seed stage I mean

00:35:50

you kind of expect 70 to go out series a

00:35:52

maybe a little bit less Freeburg what

00:35:54

are you seeing on the streets you're

00:35:55

investing in startups yeah look I I

00:35:57

think that there's is there an

00:35:59

opportunity by the way also in here so

00:36:00

what are you seeing but is there an

00:36:01

opportunity in this group of this cohort

00:36:03

of companies which seem to be um upside

00:36:06

down and or in yeah a tsunami right now

00:36:10

this cohort of companies I think

00:36:11

generally is overburdened

00:36:15

with feature orientation and

00:36:19

short-termism

00:36:20

more than you would see in an era of

00:36:24

reduced Capital rather than excess

00:36:26

capital and what I mean by that is a lot

00:36:27

of companies

00:36:29

built a business or built a product that

00:36:32

allowed them to show Traction in the

00:36:34

market faster

00:36:35

and typically those products that are

00:36:37

easier kind of paths to market end up

00:36:40

being features they don't end up being

00:36:41

platforms so it's very hard to become a

00:36:43

big business or to become a scaling

00:36:44

business or to differentiate in a

00:36:46

competitive market that's a generalized

00:36:48

that's a very general statement but I

00:36:50

think you know when you miss out on the

00:36:52

platform play you start betting as an

00:36:55

investor on a lot of the derivative

00:36:57

plays that look like the real big

00:36:59

company look like the platform I mean

00:37:01

think about how many companies try to

00:37:02

look like some iteration of stripe or

00:37:05

try to look like some iteration of Uber

00:37:06

or try to look like some iteration of

00:37:08

you know name your big kind of behemoth

00:37:11

and as a result you get all these sort

00:37:12

of feature-ish platform plays that have

00:37:15

maybe a niche or some

00:37:18

kind of you know narrow kind of Market

00:37:19

opportunity they got funded those those

00:37:22

businesses obviously aren't going to

00:37:24

have the same valuation multiples of the

00:37:25

winners in the market and now uh and

00:37:28

they burnt a lot of money to demonstrate

00:37:29

growth because so much of investing over

00:37:31

the last 15 years has been momentum

00:37:32

investing

00:37:34

and so they try to grow then they try to

00:37:36

get a higher valuation investors plot

00:37:37

more money in now the problem is that so

00:37:40

many of these series BC DNA companies

00:37:42

have a true market value they're not a

00:37:44

valueless company but the true market

00:37:46

value of them is probably less than the

00:37:49

total preference stack of the capital

00:37:50

that's gone in so let me yeah yeah so

00:37:54

just make sure people understand that

00:37:55

I'll just describe it yeah so when

00:37:56

investors invest they have preferred

00:37:58

stock so they have a right to get their

00:38:00

money back so they let's say a 1x

00:38:02

liquidation Preference they invest 100

00:38:04

million dollars the company is worth 300

00:38:06

so they own 25 of the company after they

00:38:09

invest but they have a right to that

00:38:11

hundred million dollars first before

00:38:13

Common shareholders get paid the problem

00:38:15

now is that a lot of those companies may

00:38:17

be worth less than the hundred they're

00:38:18

not worth 400 anymore they're worth a

00:38:20

hundred and you can see this play out in

00:38:22

the public markets with that that data

00:38:24

set I shared with you guys a few weeks

00:38:25

ago over two-thirds of companies now

00:38:28

that have gone public since 2020 are

00:38:30

worth less than the capital that they

00:38:32

have raised as in the venture your

00:38:34

market so if they were still private

00:38:36

they would be worth less than their

00:38:38

preference stack and that's where these

00:38:40

companies start to unravel because now

00:38:42

the investors have to totally recap the

00:38:44

company the founders don't want to have

00:38:46

all of their common wiped out now they

00:38:47

own nothing and there ends up being a

00:38:49

very ugly scenario that happens with the

00:38:51

board at that point on how do we wind

00:38:53

this thing down how do we recap it

00:38:55

what's going to happen and that's

00:38:56

usually where everyone starts to run for

00:38:58

the hills the founders one or more of

00:38:59

the founders leave and so I have a

00:39:01

question for you so you mentioned this

00:39:03

earlier which I think was a really

00:39:04

important point but we didn't really

00:39:05

touch it do you think there's going to

00:39:07

be

00:39:09

a reckoning inside Adventure firms about

00:39:12

recalibrating General Partners 100 I

00:39:15

mean look and why sorry just explain why

00:39:17

yeah so I think what's happened is over

00:39:19

the last 15 years to become a successful

00:39:21

Venture investor you've gotten into the

00:39:23

hot deals the deals were and hot deals

00:39:26

the valuations are typically climbing up

00:39:28

and you know when the valuations climb

00:39:30

up that's an indicator that the company

00:39:31

is doing well and you should invest

00:39:33

that's been the model for operating in

00:39:36

the last 15 years but the truth is that

00:39:38

maybe just because the valuations have

00:39:40

gone up and more money has gone in

00:39:41

doesn't necessarily mean that that's a

00:39:43

great business or as Jamal points out

00:39:44

that you ultimately get a positive net

00:39:46

return on that investment down the road

00:39:48

and that window is now closed so the the

00:39:51

the investors that have been trained

00:39:53

this is such a generalization and I hate

00:39:56

saying it because we have so many good

00:39:57

smart friends that work in Venture but

00:39:59

generally speaking there are a lot of

00:40:01

folks who have come up who have been

00:40:02

trained on this momentum investing model

00:40:04

and it's it's like it's like day trading

00:40:06

the stocks are going up let's all put

00:40:08

money into the stock going up and

00:40:09

instead of having a more fundamental

00:40:10

approach to is there a real cast

00:40:12

generation potential and scalability and

00:40:15

platformability of this company and as a

00:40:18

result you're going to have to see I

00:40:19

think the junior partners that have come

00:40:21

up and done well in this market

00:40:23

Canada well they're they've they've done

00:40:26

well on paper but they haven't done well

00:40:28

on distribution so maybe that shamath

00:40:30

becomes the well so you decide who's a

00:40:32

good venture capitalist which of these

00:40:33

companies actually returned Capital at a

00:40:35

peak Market well I think Freeburg is

00:40:38

really on to something and he mentioned

00:40:40

this before so I got curious about this

00:40:42

and I went into pitchbook

00:40:44

and my team and I looked at all of the

00:40:48

people the humans in our business that

00:40:50

have generated more than a billion

00:40:52

dollars in distributions on a given deal

00:40:54

and there's 20 that have done that in

00:40:56

our industry like there's people that

00:40:58

have made hundreds of millions of

00:41:00

dollars once or twice but there's 20

00:41:01

people that have made more than a

00:41:03

billion dollars more than once okay and

00:41:05

if you look not a single one came up

00:41:06

through the ranks as a pure engineer or

00:41:08

product manager right everybody to a one

00:41:11

is extremely commercial in their

00:41:14

background and their operating

00:41:17

experience very few percentages of them

00:41:19

were actually founders a huge percentage

00:41:22

of them were trained in Banks and other

00:41:24

places so non-traditional quote-unquote

00:41:27

roles for what this current crop of GPS

00:41:29

looked like because we went through a

00:41:31

phase where if you were a VP of product

00:41:34

or a VP of design or VP of engineering

00:41:36

at a well-known startup

00:41:38

that was the most obvious onboarding

00:41:40

into a venture firm but if you just look

00:41:42

back at the data that cohort of people

00:41:44

has actually never made money again

00:41:46

according to pitchbook that's

00:41:48

fascinating and that's a really

00:41:49

fascinating counter-intuitive takeaway

00:41:51

which is that and and by the way what's

00:41:54

so interesting about that is Pat Grady I

00:41:56

think had a tweet and it just sums it up

00:41:58

so cleanly because he just hired

00:41:59

somebody from CO2

00:42:01

and the Tweet was something to the

00:42:03

effect of this guy is the most

00:42:05

commercial guy we've ever seen something

00:42:08

like that and I thought that was so

00:42:10

interesting because that is exactly what

00:42:11

our heuristical analysis of this data

00:42:14

was as well commercial people in Venture

00:42:16

are the ones that make the money so you

00:42:18

look at a Fred Wilson Michael Moretz

00:42:21

Phil Gurley they were investment

00:42:23

analysts I can show you the list markets

00:42:26

before they became Venture investors or

00:42:27

Mike Moritz who was a who was a

00:42:29

journalist yeah which is a journalist is

00:42:32

just an analyst it's another if you're a

00:42:33

good journalist it's another word for

00:42:34

analysts yeah it was really really

00:42:36

interesting looking at that list so like

00:42:37

you know there are people in there like

00:42:38

Jim Getz Alfred Lynn Danny Reimer Jan

00:42:43

hammer

00:42:44

Fenton so if you look at all of these

00:42:47

folks that are just tier one people and

00:42:50

we know all of them the one common

00:42:52

thread amongst all those folks is that

00:42:54

unbelievably commercial and so Jason in

00:42:56

a moment like this where you have to

00:42:58

really hold the entrepreneur's feet to

00:43:01

the fire or be their partner to make

00:43:03

extremely hard decisions

00:43:05

you have to have the ability to be

00:43:07

respected by them in those moments where

00:43:09

you can force a very difficult decision

00:43:10

and then separately

00:43:12

if you have to basically Force liquidity

00:43:15

so that you prioritize your limited

00:43:16

partners how do you do that while still

00:43:18

managing the relationship with the

00:43:19

entrepreneur how do you know that you

00:43:20

just need to cut your losses and get out

00:43:22

these are very difficult trade-offs that

00:43:24

I think folks haven't been trained in

00:43:26

doing to

00:43:27

David's point so

00:43:29

it'll be really interesting few years to

00:43:31

see how these organizations I think this

00:43:32

goes discuss the Sax's point about hey

00:43:35

the ecosystem if it's hard if it's

00:43:38

cantankerous if there's sand in the

00:43:40

Oyster it could make the Pearl if you

00:43:43

have a con you know a congenial

00:43:44

relationship with you know your product

00:43:46

manager VC and everybody's

00:43:49

the champagne and caviar and and

00:43:51

high-fiving maybe that's not as good as

00:43:54

having a bill Gurley a Michael Moritz

00:43:56

and having a foil maybe who is putting

00:43:58

pressure on the management team hey we

00:44:00

need to hit these numbers Freeburg and

00:44:02

then sax yeah look I think one one

00:44:04

counter argument here baby that there is

00:44:08

this friggin tidal wave of AI companies

00:44:11

and there is this incredible amount of

00:44:13

lubricant in the dry powder that's

00:44:15

sitting on the side of the of the market

00:44:17

right now that all these Venture funds

00:44:19

raised in the last two years that is

00:44:21

going to lubricate all these AI

00:44:23

companies into every vertical and every

00:44:25

market so every company is wrapped up in

00:44:27

an AI cloak like a magic invisibility

00:44:29

cloak every AI company's got an AI hat

00:44:32

and a badge and a tattoo now or every

00:44:33

company is being Rewritten as an AI

00:44:35

company and the money wants to find its

00:44:38

way into Ai and it wants to rewrite

00:44:39

industry with every industry with AI so

00:44:42

I think similar to what we saw with

00:44:44

mobile and the Social Web

00:44:46

you know going back 10 or 15 years we're

00:44:49

seeing kind of this AI

00:44:50

rapper and this AI technology enabler

00:44:53

rewrite the possibility of every

00:44:55

vertical and the VCS have Capital more

00:44:58

Capital than they had 15 years ago or 10

00:44:59

years ago or even seven years ago so

00:45:02

there is this counter narrative which

00:45:03

may be that

00:45:05

the game the game goes on the band

00:45:07

continues to march on the current crop

00:45:09

dies out but there's immediately a new

00:45:11

crop waiting right behind it or what

00:45:13

happens is the herd dies and everyone

00:45:15

runs to the back of them right and gets

00:45:17

recapitalized because I can tell you

00:45:18

every startup I know that's not going

00:45:20

well everyone's talking about leaving to

00:45:21

go do an AI company an adventure friends

00:45:23

are ready to write money I think you're

00:45:25

I think you're right about that I think

00:45:26

the question is the actual person making

00:45:29

the check

00:45:30

will they be more or less likely and

00:45:33

at least what history would tell you is

00:45:36

that we've hired an entire generation of

00:45:40

people that and this is clear do not map

00:45:43

to the people in our industry that have

00:45:45

actually generated returns

00:45:48

so you're right they may take this money

00:45:49

and misallocate it into these companies

00:45:51

that are just you know rebranding

00:45:52

themselves but that just goes and

00:45:54

further proves that there is a type of

00:45:57

person

00:45:58

that hasn't been recruited into these

00:46:00

Venture firms yet that was the first

00:46:02

generation that made all the money I

00:46:03

think it's always been the case that

00:46:05

there is some difference between the

00:46:08

background of the VCS and the

00:46:09

backgrounds of the founders I mean you

00:46:11

guys mentioned Gurley and Moritz like we

00:46:14

said Moritz was a journalist who had

00:46:16

written a book about Apple he wasn't

00:46:19

technical per se

00:46:21

and Gurley was a

00:46:23

investment analyst on Wall Street before

00:46:25

he then made the transition into VC

00:46:29

is it you know as we both know they're

00:46:30

like legendary VCS

00:46:33

you know I think the

00:46:35

what you want to see in a VC I think the

00:46:37

background matters a little bit less

00:46:39

than you know like how curious are they

00:46:42

how good are they about learning a new

00:46:45

area how good are they at being like a

00:46:46

heat-seeking missile I mean basically

00:46:48

just like zeroing in on like what is the

00:46:52

hot space and specifically what is the

00:46:54

best company within that space and

00:46:56

somehow figuring that out being able to

00:46:58

assess a Founder you know that's like a

00:47:00

very subjective thing so I think there's

00:47:03

lots of qualifications that you want to

00:47:05

see in a VC now at the same time I do

00:47:08

think that if AI is the next wave

00:47:11

and the next sort of platform

00:47:13

opportunity as we all think it is I do

00:47:16

think that place is more of an emphasis

00:47:18

on technical skills and I was I was

00:47:20

literally just having this conversation

00:47:22

at craft that gee maybe the next hire we

00:47:25

should make at craft should be someone

00:47:26

who's really deep technically

00:47:29

so they can you know help go deeper on

00:47:32

technical due diligence of AI companies

00:47:34

they've never made money

00:47:36

what's that they've never made money in

00:47:38

the history of our business who those

00:47:39

people that archetype of hire has never

00:47:42

done it on behalf of Wellies biotech and

00:47:45

Life Sciences they have usually what

00:47:47

kind of highest investors usually people

00:47:49

saying he's saying a technical hire who

00:47:51

worked in the trenches at a company is

00:47:53

not as fit no has not in the past has

00:47:55

not in the past gotten DPI whereas

00:47:58

somebody who is more commercial able to

00:48:00

analyze a business the ideal person is

00:48:03

going to be able to get returns right

00:48:05

right so so look I think you know the

00:48:06

ideal person would be someone who's

00:48:08

funnily a great investor but also has

00:48:10

some technical background and some

00:48:11

technical chops we also have a team

00:48:13

Approach at craft so if you have someone

00:48:15

who's very technical they can just

00:48:17

diligence the technical aspects of the

00:48:18

deal somebody else can be responsible

00:48:20

for you know making an assessment of the

00:48:22

founders how we've solved this is we

00:48:24

have a group of third-party individuals

00:48:27

that we work with that we keep on

00:48:29

retainer that we compensate and whenever

00:48:32

we need to do deep technical diligence

00:48:33

we partner with them to do that work

00:48:36

with us and what it allows us to do is

00:48:38

get the best of their technical thinking

00:48:40

without also putting them in a position

00:48:42

of trying to adjudicate whether this

00:48:44

company is good or not what I'm trying

00:48:47

to understand is what is this Technical

00:48:49

Edge and can I understand the boundaries

00:48:51

of that but I I still keep the

00:48:53

investment decision to myself and my

00:48:55

partners because otherwise the

00:48:57

difficulty is in my experience deeply

00:49:00

deeply technical people are extremely

00:49:03

good at diligence but generally are poor

00:49:05

at making investment decisions because

00:49:07

there's a part of their brain that flips

00:49:09

on which is like I could do it better or

00:49:11

I could do it this way or I could do it

00:49:12

that way and I think like that anchoring

00:49:15

bias

00:49:16

can be very dangerous and you you almost

00:49:19

want to be a little dumbed down from

00:49:21

that depth of knowledge because you

00:49:23

either find everything that is like not

00:49:25

worth doing and then you can miss a

00:49:27

market

00:49:28

or you miss the thing that is good

00:49:31

enough because you're like oh well I

00:49:32

would have done X Y and Z in a different

00:49:34

way so we kind of like use them but we

00:49:37

keep them at arm's length so that they

00:49:38

never feel the pressure of having to

00:49:39

actually decide on our behalf how the

00:49:41

money should be spent yeah I mean that's

00:49:43

interesting yeah the number one thing

00:49:44

we're doing at this early stage is

00:49:45

training our Founders I know this sounds

00:49:47

crazy on accounting best practices and

00:49:50

pricing best practices and we literally

00:49:52

have Founders who have never made a plan

00:49:55

I'm talking about at the seed stage who

00:49:57

don't know accounting and so we are

00:49:59

running four seed stage startups and I'm

00:50:02

kicking myself that we didn't do it two

00:50:03

years ago or three years ago but better

00:50:06

late than never on how to just maintain

00:50:08

their books and understand

00:50:10

operations and the the operational lack

00:50:13

of discipline in the market I'm seeing

00:50:15

series a and series B companies that

00:50:18

literally don't understand their own

00:50:19

accounting and so when we start talking

00:50:21

to their accountants there is a huge gap

00:50:24

between what the accountants think of

00:50:25

this business and what the founders

00:50:26

think of these businesses and Founders

00:50:29

think they have more Revenue than they

00:50:30

have or less Revenue they're really

00:50:32

don't even know how to calculate their

00:50:34

runway in an honest way and so there is

00:50:36

back to your point chamoth about on the

00:50:39

on the Venture side of the business a

00:50:41

lot of product focus a lot of

00:50:42

operational Focus there's not enough

00:50:44

focus on just the bottom line the reason

00:50:46

that happened is is what Friedberg said

00:50:48

before which is like somebody would

00:50:50

build something there was a little bit

00:50:52

of momentum and you'd have to go and

00:50:54

present these Bona fides to these

00:50:56

entrepreneurs to get into the deal and

00:50:58

so what Venture firms thought was the

00:51:00

right bona fide to present is oh I built

00:51:02

XYZ product at this other company right

00:51:04

and they thought that that edge could

00:51:06

get you into a deal maybe but it could

00:51:09

turn out that that was the Raw one

00:51:10

company to be in in the first place

00:51:12

and so you just missed an entire

00:51:14

generation of value creation because it

00:51:17

happened sort of off-piste off the trial

00:51:19

like yeah you really do need to

00:51:21

understand fundamentally because we're

00:51:23

talking about public markets here the

00:51:25

Facebook analogy what is the ultimate

00:51:28

earnings what is the ultimate cash that

00:51:31

is going to get thrown off this business

00:51:33

and that's what the whole industry needs

00:51:34

to I think pivot to and just that needs

00:51:37

to be the operating principle do you

00:51:40

guys know how much money Facebook Amazon

00:51:41

Google and Microsoft raised combined

00:51:44

total before they went public that's

00:51:46

very small I mean Google is minuscule

00:51:49

less than a quarter billion dollars

00:51:50

unbelievable yeah all the inefficiency

00:51:52

is extraordinary and then on top of this

00:51:54

inefficiency I don't know if you're

00:51:55

seeing this they were all profitable

00:51:56

when they went public

00:51:58

on top of all this inefficiency is a

00:52:01

dependence on Venture debt I don't know

00:52:02

if you're seeing this sax but the amount

00:52:05

of focus on adding debt to unprofitable

00:52:08

companies over the last five years has

00:52:10

been

00:52:11

just extraordinary I don't understand

00:52:13

what I've never understood the Venture

00:52:15

debt model or really how it works I feel

00:52:16

like it's a category that doesn't make

00:52:18

any sense

00:52:19

say more I mean well I mean explain it

00:52:23

to people what's happening I don't

00:52:24

really understand how it makes sense for

00:52:25

lenders or for Founders to be honest I

00:52:28

think the whole industry doesn't make

00:52:29

any sense for Founders I don't like it

00:52:31

because the money has to be paid back

00:52:33

right it's debt so Founders take in this

00:52:36

Venture debt thinking like it's an

00:52:38

equity round but without dilution with

00:52:40

some warrants and they don't realize

00:52:42

well wait a second we got to pay this

00:52:44

back in a year or a year and a half out

00:52:46

of the next round they do but that

00:52:48

creates an overhang on the next round

00:52:49

because the new VC is coming in they

00:52:52

want their money to go into the company

00:52:53

not paying off a bank so it actually

00:52:57

makes the next round less attractive the

00:52:59

other thing about it is that the lender

00:53:02

is not getting an equity reward so they

00:53:06

don't want to take Equity risk they may

00:53:08

be getting a nice

00:53:10

you know coupon might be getting nine

00:53:12

percent or something like that which

00:53:13

sounds high for debt but they're not

00:53:15

taking True Equity risk in the company

00:53:17

so the last thing they want to do is be

00:53:19

your last six months of Runway right

00:53:21

they want to be your first six months of

00:53:23

Runway and then and then get paid off on

00:53:26

the back end and I think a lot of

00:53:28

Founders think oh well I'll take this

00:53:30

money and it'll extend my Runway from 18

00:53:33

months to two years but what will happen

00:53:35

in that last six months is all of a

00:53:37

sudden the bank will come to you and say

00:53:39

no no no like you have this or that

00:53:42

material adverse Condition it's called a

00:53:45

Mac out and there's all these like terms

00:53:48

that Founders don't understand because

00:53:50

it's highly legal covenants and so all

00:53:54

of a sudden the founders find themselves

00:53:56

with a lot less flexibility in that last

00:53:59

six months to a year either a covenant

00:54:01

gets triggered that makes them pay back

00:54:03

the money immediately or their business

00:54:05

flexibility goes way down because

00:54:07

they're Consulting with their Bank about

00:54:09

everything all this is coming home to

00:54:11

roost right now I think it's a terrible

00:54:13

deal for Founders and I think that even

00:54:15

for the lenders I mean I guess I assume

00:54:18

that these Banks know their business

00:54:20

better than I do but

00:54:22

but I I think that the reason I don't

00:54:25

trust it as a category from you know

00:54:29

from A lender point of view from like an

00:54:30

investor point of view is that all the

00:54:33

data about defaults over the last five

00:54:36

to ten years happened in this

00:54:38

free-flowing zero interest rate

00:54:40

environment and so the startup mortality

00:54:43

rates were artificially low because it

00:54:46

was so easy to raise so yeah Venture

00:54:48

debt makes sense in an environment in

00:54:50

which Founders are generally able to

00:54:52

raise the next round and then pay back

00:54:53

the Venture debt but let's say that that

00:54:56

that tweet storm you you mentioned Jason

00:54:58

can you bring that back on the screen I

00:55:00

actually think this tweet storm is

00:55:01

basically correct is

00:55:03

you know I've referred to on this show

00:55:04

before that I think one of the things

00:55:06

that built up during this bubble is

00:55:08

latent startup mortality so many

00:55:11

startups that should have died from not

00:55:13

being able to raise next round live

00:55:15

because they're able to raise money and

00:55:17

what this tweet storm is predicting is

00:55:19

that in the second half of 2023 and then

00:55:22

24 you're going to have a huge crunch

00:55:24

where all these companies have to go out

00:55:26

and raise they've been waiting so

00:55:29

they're all going to get to the point

00:55:30

where their cash is so low they have to

00:55:32

go out and raise and now all of a sudden

00:55:34

they're going to be confronted with the

00:55:35

new market conditions I wonder how many

00:55:37

of them have Venture debt as an overhang

00:55:38

and that's those ones yeah and they're

00:55:41

going to find they have less Runway than

00:55:43

they thought because again those Banks

00:55:46

you know they are going to try and

00:55:48

collect the debt before the start runs

00:55:51

out of money not you know when it runs

00:55:53

out that's two falling knives exactly so

00:55:56

so look I just wonder what I what I

00:55:59

don't trust is whether the the return

00:56:02

models on Venture debt that were created

00:56:04

over the last five to ten years will be

00:56:07

a good predictor of what the returns

00:56:09

will be in the next five ten years when

00:56:11

a lot of the mortality that should have

00:56:12

happened in the past now happens in the

00:56:15

future well I mean then and sax correct

00:56:17

me if I'm wrong here but I'm also

00:56:19

starting to see really gnarly term

00:56:21

sheets people foreclosing on businesses

00:56:23

people offering like literally had a

00:56:25

term sheet come in like we're gonna

00:56:27

forgive the last note and take this

00:56:29

business over for a dollar and everybody

00:56:31

gets wiped out the amount of bad

00:56:33

feelings that you have to go through

00:56:35

even if the there is a Core Business to

00:56:37

free Breakfast Point earlier hey they

00:56:39

raised 100 million but there's a 50

00:56:40

million dollar business in here that

00:56:42

people would love to invest in who wants

00:56:44

to go through the hand-wringing the

00:56:46

negotiation the toxicity of a recap it's

00:56:49

an extremely hard process to go through

00:56:52

you going through any Recaps right now

00:56:53

sax and what is the what is the approach

00:56:56

of the firm in terms of dealing with

00:56:58

these kind of situations do you even

00:56:59

want to start that discussion up or is

00:57:02

it too painful

00:57:06

I don't think for most of our companies

00:57:08

we're at the recap or restructuring

00:57:09

stage I mean I'm talking about the ones

00:57:10

that aren't going well people still have

00:57:11

a fair amount of cash in the bank

00:57:14

and we've been beating the drums for

00:57:16

literally what about your opportunities

00:57:18

a new opportunity comes to you it's one

00:57:19

of these overhang companies that wants

00:57:21

to restructure would you even engage

00:57:22

that or is it just too hard I looked at

00:57:24

seven at the end of last year and I

00:57:26

tried to reprice three of them

00:57:29

and every single one was able to get a

00:57:31

convert done away from us

00:57:33

yeah so I mean yeah I mean we tried to

00:57:36

find a market clearing price for this

00:57:37

Equity but nobody wants it to David's

00:57:39

point because there's too much money on

00:57:40

the sideline and people are willing to

00:57:42

give them a Lifeline that doesn't force

00:57:45

them to come to hard terms with what the

00:57:48

reality of the moment is yeah I agree

00:57:50

with that we're not quite there yet and

00:57:52

and I think the the reason why that that

00:57:54

tweet you posted got some traction is

00:57:57

it's saying listen the crunch is going

00:57:59

to happen second half of 2023 and 2024

00:58:02

that's where you're going to see the

00:58:03

down rounds that's where you're going to

00:58:05

see the restructuring the Recaps and all

00:58:08

the rest of it and um look I'm sure like

00:58:10

every VC firm is going to be a player in

00:58:13

that

00:58:14

but yeah it's going to be a lot of

00:58:15

miserable work this is for Founders you

00:58:18

see people's true colors when when when

00:58:20

you have to recap a company and yeah

00:58:22

this way you can really start to see how

00:58:25

crappy it was in 2003 to be here

00:58:28

remember 2003 Penfield oh my God oh my

00:58:32

God I found some yeah there was are you

00:58:34

lucky to raise 500k on a three million

00:58:36

dollar oh my God like 2004. like what a

00:58:39

brutal year yeah there's gonna be a lot

00:58:41

of that I think the next 18 months

00:58:44

or let's say the next two years it's

00:58:46

going to be pretty rough for a lot of

00:58:47

companies and it's just that they didn't

00:58:50

cut enough I mean we've been beating on

00:58:52

the drums for a year for companies to

00:58:54

lengthen their Runway and some did to

00:58:57

some extent but money didn't do enough

00:58:58

and they're going to get caught in this

00:59:00

crunch can we just go to that chart that

00:59:03

Brad put out I think that what a lot of

00:59:06

founders

00:59:07

don't quite understand still

00:59:10

is that things are just never going back

00:59:12

to 2021. I think a lot of Founders

00:59:15

listening to the top of the show where

00:59:16

we're talking about inflation is under

00:59:18

control they see the market rally

00:59:19

Facebook's up 25 percent they may be

00:59:22

thinking okay we just have to weather

00:59:24

the storm for six months or a year and

00:59:26

then everything's back to normal and I

00:59:28

think what's important to understand is

00:59:30

that the market did bottom out about a

00:59:33

month ago and is up pretty nicely if you

00:59:34

see here this is the SAS index it's the

00:59:37

median Enterprise Value divided by next

00:59:40

12 months revenue and it was really

00:59:43

beaten down about at the end of the year

00:59:44

at the end of last year coming into this

00:59:46

year you were yeah it was like it was

00:59:49

like four to five x multiples of of next

00:59:53

12 months revenue for SAS companies

00:59:54

that's all the way up to 6.1 now so

00:59:57

you're talking about

00:59:59

20 to 50 rally for a lot of companies

01:00:01

which is huge we're still below the

01:00:04

long-term median which is just under

01:00:06

eight okay but what people need to

01:00:09

understand is that even if we revert all

01:00:11

the way to the mean of a which I think

01:00:13

at some point we will that's still well

01:00:16

below the bubble of 21 where they got to

01:00:18

16.

01:00:19

so even if things continue to inflate

01:00:22

valuations will still never quite be

01:00:25

where they were in 2021 and if you think

01:00:27

it's getting back to 12 or 16.

01:00:31

for high growth companies

01:00:34

for high growth companies in 2021 you

01:00:37

were in the public markets you were

01:00:39

seeing multiples of 30 to 35 times now

01:00:41

those companies are maybe at eight to

01:00:43

ten yeah or 12. I think the reliable way

01:00:47

that we can look at this for the future

01:00:49

is that

01:00:50

we're never going to see these kinds of

01:00:52

multiples again unless rates are zero

01:00:55

and all kinds of tourist capital

01:00:58

need to find a home to escape zero

01:01:02

percent returns in every other asset

01:01:04

class but if even the safest asset class

01:01:06

now will give you three and a half four

01:01:08

percent

01:01:10

this is probably the new normal for

01:01:13

quite a long time and we're going to be

01:01:14

back in that early 2000s kind of mindset

01:01:17

which takes

01:01:19

a lot of hard work to build value around

01:01:22

we talked about the sort of whipsaw

01:01:23

economy

01:01:25

and and there's a lot of mixed inflation

01:01:27

data I think Founders need to understand

01:01:29

that there's a bifurcation what's

01:01:31

happening in the tech ecosystem is not

01:01:34

necessarily what's happening in the

01:01:35

overall economy the tech ecosystem is

01:01:37

clearly going through a reset and a

01:01:40

recession job cuts are now the rule

01:01:43

valuations are much lower whereas in the

01:01:46

overall economy we saw a job support

01:01:47

today of over 500 000 new jobs so the

01:01:51

fact of the matter is that even if the

01:01:53

overall economy avoids a recession that

01:01:57

doesn't mean that things are just going

01:01:58

to bounce back

01:01:59

depression slash recession best cases

01:02:02

that is a boom bust cycle and we have a

01:02:05

phenomenal yeah 10 years of Boom now

01:02:07

we're in a bust and so I would just like

01:02:09

tell Founders you know look it's good if

01:02:12

we have a soft Landing in the economy I

01:02:14

wouldn't assume that that's going to

01:02:16

happen I still think there's a really

01:02:17

good chance of recession later this year

01:02:19

but it almost doesn't matter for you

01:02:21

what matters is your business and the

01:02:26

capital availability for startups

01:02:28

which is fundamentally different and

01:02:30

will remain different than it was in

01:02:32

2021. Freeburg you were talking in the

01:02:34

chat about a Donny Enterprises and

01:02:37

Hindenburg doing this short research and

01:02:39

Publishing it stock is just absolutely

01:02:42

gotten clobbered they were trading at uh

01:02:44

gosh

01:02:46

4100 was the

01:02:50

52-week high and this thing has just

01:02:52

cratered in the last five days I mean I

01:02:55

think to explain what's going on here

01:02:57

well I mean the story that

01:03:00

the conversation I thought it would be

01:03:02

interesting for us to have is the role

01:03:05

that these short seller research

01:03:07

analysts play

01:03:09

in driving efficient markets by

01:03:12

identifying perhaps things that the

01:03:15

market broadly is missing

01:03:18

particularly given that a few weeks ago

01:03:20

we were all kind of talking about the

01:03:22

FTX debacle and how no one was doing

01:03:25

their diligence and no one was digging

01:03:26

in and no one was kind of revealing

01:03:28

publicly what was going on inside of

01:03:30

that business that ultimately caused

01:03:32

significant losses you know the claims

01:03:34

made by Hindenburg is that this company

01:03:37

adani which is founded and run by a guy

01:03:39

named Gautam adani

01:03:41

you started the company like I think 30

01:03:43

35 years ago and he's built this thing

01:03:46

into this you know the sprawling Empire

01:03:49

as people would say where he owns ports

01:03:51

he owns mining companies he owns energy

01:03:55

transmission businesses he's got a whole

01:03:56

green energy business and he's taken a

01:03:59

bunch of these companies and he's

01:04:00

floated them publicly so they're all

01:04:01

kind of publicly traded there's some

01:04:03

degree of interrelatedness between all

01:04:05

these businesses

01:04:07

it reminds me a lot of I don't know if

01:04:09

uh if any of you guys remember aiki

01:04:11

Batista out of Brazil you guys remember

01:04:13

this guy where you know he kind of built

01:04:15

this sprawling Empire very kind of

01:04:17

broadly Diversified industrial

01:04:19

conglomerate with you know lots of

01:04:22

different kind of segments and used a

01:04:23

lot of Leverage a lot of debt to grow

01:04:25

the business and a lot of interrelated

01:04:27

inter-party transactions and ultimately

01:04:29

the whole thing kind of came crashing

01:04:30

down and that the sadani business it's

01:04:33

super technical and super complicated

01:04:35

all the kind of accounting shenanigans

01:04:37

that Hindenburg is claiming has been

01:04:39

going on and Capital Market shenanigans

01:04:41

that they're claiming have been going on

01:04:42

with this business but their kind of

01:04:44

report which I think is like 400 pages

01:04:46

long has caused the responses 400 pages

01:04:49

long too yeah and then the Market's

01:04:52

Shrugged off the response that he put

01:04:53

out didn't really care and they kept

01:04:55

selling the stocks off so there's like

01:04:56

seven or eight publicly traded companies

01:04:58

all of which are just getting decimated

01:05:00

look I don't have any strong opinion on

01:05:02

this business I you know I kind of skim

01:05:04

through the thing but you know it really

01:05:05

made me question like how such a big

01:05:08

call it accounting or Capital markets

01:05:11

fraud if it really is that can go on and

01:05:15

how much

01:05:16

of a role these sorts of players play in

01:05:18

the market whether you guys think that

01:05:20

this is a good thing in the market to

01:05:22

have these short seller reporters out

01:05:23

there you know doing this analysis

01:05:25

publishing it Jason by the way you

01:05:27

called out Nick Nicola Nicola the the

01:05:30

electric car company as you know

01:05:31

Hindenburg put out that Nikola report

01:05:33

stock tanked right they claimed it was

01:05:35

all fraud Etc and then the thing got

01:05:37

done it was Trevor Milton got convicted

01:05:39

yeah right and so I mean I guess do you

01:05:40

guys think that these guys have have a

01:05:42

positive role net net in the market in

01:05:44

kind of identifying and calling out this

01:05:46

stuff because we all have friends that

01:05:47

are on the wrong side of short Sellers

01:05:48

and they complain about it and it can be

01:05:51

really difficult to grow and build a

01:05:53

business when people Elon had these guys

01:05:55

literally claiming he was running a

01:05:56

fraud for years and years and it was an

01:06:00

intense amount of scrutiny because when

01:06:01

the Trap when the stock was less

01:06:02

trafficked when we were in it in 2015

01:06:05

and 16 and 17 that was the constant

01:06:07

refrainment Elon was constantly batting

01:06:09

back folks like this who would make

01:06:12

claims

01:06:13

and the way that these guys are allowed

01:06:15

to operate is because they use the First

01:06:17

Amendment and say we have the right to

01:06:18

say this stuff

01:06:20

I think that shorting falls into two

01:06:21

buckets one is you use it as a hedging

01:06:24

instrument so when we talk about spread

01:06:26

trades like long Google short Facebook

01:06:28

or long Facebook short Google

01:06:30

you should be allowed to short I think

01:06:32

that that's a very reasonable thing to

01:06:33

do

01:06:34

I think the the question is if you were

01:06:37

on the inside of a company and you say

01:06:39

XYZ is happening

01:06:41

for example Trevor Milton and it causes

01:06:43

the stock to go up and it turns out to

01:06:45

be fraudulent he's held accountable the

01:06:48

question is should there be the same

01:06:49

responsibility for people on the outside

01:06:51

who if they have enough distribution can

01:06:54

say the exact opposite of XYZ is

01:06:56

happening in this case XYZ is not

01:06:58

happening which then causes the stock to

01:07:00

go down because what the business model

01:07:02

of these short sellers is

01:07:05

write a document

01:07:07

it looks very polished and very credible

01:07:09

put on some positions then put the

01:07:12

document out if the stock goes down you

01:07:14

close it out in my opinion

01:07:16

I think that short sellers are a really

01:07:18

important part of a well-functioning

01:07:20

market or the ability to short but what

01:07:23

I would like to do is take an extra step

01:07:24

which is

01:07:25

you should hold these folks accountable

01:07:27

the same way you'd hold an Insider

01:07:29

accountable which is almost to the

01:07:30

effect of like when you put out the

01:07:32

screed

01:07:33

if you make money from it it should sit

01:07:35

in escrow and the SEC should actually

01:07:37

adjudicate whether it's true or not so

01:07:38

in the case of Hindenburg and Nicola

01:07:41

they shorted the stock they put out a

01:07:44

report it turned out they were right all

01:07:46

that money is completely well earned now

01:07:48

what if this adani thing turns out to be

01:07:50

not true or true nobody knows right now

01:07:52

except 50 of the market cap has already

01:07:55

been wiped out

01:07:56

so that's where things I think are are

01:07:58

in a bit of a gray area the last thing

01:07:59

I'll say is that

01:08:01

if you look at in the developing world

01:08:04

there's a very gray line between some of

01:08:06

the leading entrepreneurs in these

01:08:07

governments because these entrepreneurs

01:08:09

are doing the work of some of these

01:08:11

governments whether it's IQ Batista in

01:08:13

Brazil in one moment right around

01:08:14

natural resources or adani and Ambani in

01:08:17

India or a lot of the people that made a

01:08:20

lot of money in China or the people that

01:08:21

are making money and in developing

01:08:23

markets turkey Russia Etc

01:08:26

the government uses very talented

01:08:29

entrepreneurs to go and concentrate

01:08:31

Capital to develop infrastructure

01:08:33

progress we did that in America in the

01:08:34

1800s as well so that's where I think

01:08:37

you know you have to also balance it

01:08:38

because his response was basically like

01:08:40

this is an attack on India

01:08:41

and in a way you can see where he's

01:08:44

coming from right because he's building

01:08:46

ports and roads and bridges and he's

01:08:47

like without this stuff how is India

01:08:49

supposed to even exist in the 21st

01:08:51

century that's a reasonable claim so I

01:08:54

agree with you Freeburg I don't know

01:08:55

whether the report is right or not but

01:08:58

this extra step of actually having the

01:09:00

SEC actually tell us what the answer is

01:09:02

I think would be a very important

01:09:03

Improvement to how this kind of stuff

01:09:06

works the other Improvement that the SEC

01:09:08

has been proposing

01:09:11

in rule 13f-2 is that

01:09:17

people would need to disclose their

01:09:19

short positions right this proposed rule

01:09:21

would require institutional investment

01:09:23

managers I'm reading from the SEC

01:09:24

website managers exercising investment

01:09:25

discretion over short positions meaning

01:09:27

specific specified thresholds to report

01:09:29

on the proposed form Sho information

01:09:32

related to end of month short positions

01:09:34

and certain days

01:09:35

[Music]

01:09:37

that should absolutely pass right the

01:09:39

commission would aggregate the resulting

01:09:42

data by security their board maintain

01:09:44

thereby maintaining confidentially of

01:09:45

the reporting managers yeah and publicly

01:09:48

to sending the data to all investors

01:09:49

this new data would supplement the short

01:09:51

sale data I think this is

01:09:53

right I mean this is less about like

01:09:56

who's doing what and it's much more

01:09:57

about are we kind of creating critical

01:09:59

fail points in the system by seeing over

01:10:02

leverage and over lending in certain

01:10:03

well there should also be some animals

01:10:05

about the spreading of fear uncertainty

01:10:07

and doubt that fud that happened with

01:10:09

Tesla Q I mean

01:10:11

paradoxically you know thousands of no

01:10:15

but people that but that's Anonymous

01:10:16

accounts you know that's that's an

01:10:18

example of people essentially lying in

01:10:20

public yes try to get the stock to move

01:10:23

and Tesla's not a fraud that's a real

01:10:25

company but there was any car of the

01:10:27

year while this was going on but there

01:10:28

was a real human rights to that company

01:10:30

right to employees that got spooked to

01:10:32

Partners that may have gotten spoon the

01:10:35

pressure you know we saw this the

01:10:36

pressure on Elon in those periods of

01:10:38

time and he was he was like on the

01:10:40

knife's edge where there was the

01:10:42

potential where the company may not have

01:10:43

been able to finance its cash flow needs

01:10:46

because of those Tesla Q guys and so

01:10:48

it's not to say that the Tesla Q guys

01:10:50

can't say it but they should be forced

01:10:52

at some level to prove it if you can

01:10:54

create crazy stuff I posted a link by

01:10:56

the way for anybody that's interested in

01:10:57

reading this there's a person uh called

01:10:59

Carson block who's being investigated

01:11:01

yes because he may have pushed the

01:11:03

boundaries of how short sellers do this

01:11:05

it's a really fascinating read in the

01:11:07

Atlantic for anybody

01:11:09

who wants to read it but this is sort of

01:11:11

where the short selling thing can a

01:11:13

little bit go awry and it's the title of

01:11:16

this is the man who moves markets and

01:11:17

it's it's quite a quite a really

01:11:19

interesting read if you're interested in

01:11:20

in how all of this stuff works all right

01:11:22

everybody that's the all in podcast for

01:11:25

February third and fourth for Saks free

01:11:28

bargain chamoth I'm Jake how the world's

01:11:30

greatest monitoring we'll see you next

01:11:31

week love you boys bye-bye

01:11:33

[Music]

01:11:50

besties

01:11:53

[Music]

01:12:08

it's like this like sexual tension that

01:12:10

they just need to release

01:12:16

[Music]

01:12:23

[Music]

01:12:27

I'm going all in

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Episode Highlights

Market Reactions to Fed Actions
The Fed raised rates, and the market reacted positively, indicating a potential end to hikes.
“Markets tend to bottom six to nine months before it's clear that you could have done this.”
@ 03m 16s
February 04, 2023
Job Market Surprises
517,000 jobs added, significantly above estimates, raising questions about inflation and economic stability.
“The expectation was only a hundred thousand, and now people are wondering...”
@ 06m 17s
February 04, 2023
Volatile Economic Predictions
Experts discuss the unpredictable nature of the current economy and inflation risks.
“We're in a highly volatile economy and it's very hard to predict the future.”
@ 07m 14s
February 04, 2023
The Intersection of Technology and Austerity
Periods of austerity combined with technological shifts create opportunities for massive profits.
“Whenever you see huge tectonic shifts in technology combined with periods of austerity, that's when the gargantuan dollars are made.”
@ 20m 34s
February 04, 2023
The Evolution of Venture Capital
Investors are becoming more selective as capital tightens, leading to a potential shift in startup dynamics.
“In an era of excess capital, all the capital gets competed away.”
@ 21m 31s
February 04, 2023
The Rise of Efficiency at Facebook
Facebook's shift towards efficiency led to a significant stock price increase after management changes.
“They targeted this idea of we have too many layers in the company.”
@ 26m 51s
February 04, 2023
The Reckoning of Venture Capital
A discussion on the need for recalibrating General Partners in venture firms as the market shifts.
“Do you think there's going to be a reckoning inside Adventure firms?”
@ 39m 09s
February 04, 2023
The Rise of AI Companies
Venture funds are ready to invest in AI companies, rewriting industries with new technology.
“Every company is wrapped up in an AI cloak.”
@ 44m 27s
February 04, 2023
The Dangers of Venture Debt
Exploring the pitfalls of venture debt for founders and its impact on future funding rounds.
“Venture debt makes sense in an environment where founders can raise the next round.”
@ 54m 53s
February 04, 2023
The Crunch Ahead
Expect down rounds and restructurings in the second half of 2023 and 2024.
“You're going to see the down rounds, the restructuring, the recaps.”
@ 58m 02s
February 04, 2023
True Colors Revealed
Recapping a company reveals the true character of those involved.
“You see people's true colors when you have to recap a company.”
@ 58m 18s
February 04, 2023
The New Normal
Valuations will never quite be where they were in 2021, signaling a shift in the market.
“This is probably the new normal for quite a long time.”
@ 01h 01m 13s
February 04, 2023

Episode Quotes

It's very hard to predict the future.
E114: Markets update: whipsaw macro picture, big tech, startup mass extinction event, VC reckoning
Great companies are created during times when we're not in a bubble.
E114: Markets update: whipsaw macro picture, big tech, startup mass extinction event, VC reckoning
Ambitious people want to be managers and managers don't do the real work.
E114: Markets update: whipsaw macro picture, big tech, startup mass extinction event, VC reckoning
Every AI company's got an AI hat and a badge.
E114: Markets update: whipsaw macro picture, big tech, startup mass extinction event, VC reckoning
You're going to see the down rounds, the restructuring, the recaps.
E114: Markets update: whipsaw macro picture, big tech, startup mass extinction event, VC reckoning
The market's shrugged off the response that he put out.
E114: Markets update: whipsaw macro picture, big tech, startup mass extinction event, VC reckoning

Key Moments

Job Growth06:17
Economic Volatility07:14
Tech Shifts20:34
Venture Capital Trends21:31
Ugly Scenarios38:49
New Normal1:01:13
Market Reset1:01:31
Soft Landing1:02:12

Words per Minute Over Time

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01:47:33

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Yen Carry Trade, Recession odds grow, Buffett cash pile, Google ruled monopoly, Kamala picks Walz

August 09, 2024

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Yen Carry Trade, Recession odds grow, Buffett cash pile, Google ruled monopoly, Kamala picks Walz

E90: Twitter subpoenas, market overview, Pelosi's Taiwan visit & more

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50:52

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Fed Hesitates on Tariffs, The New Mag 7, Death of VC, Google's Value in a Post-Search World

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Fed Hesitates on Tariffs, The New Mag 7, Death of VC, Google's Value in a Post-Search World

E104: FTX collapse with Coinbase CEO Brian Armstrong + election results, macro update & more

November 12, 2022

01:25:18

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E76.5: Food shortage, China's grand plan, inflation, French election plus an All-In Summit preview

April 16, 2022

37:59

E76.5: Food shortage, China's grand plan, inflation, French election plus an All-In Summit preview

E156: Ivy League antisemitism, macro, SaaS recovery, Gemini, Figma deal delay + big Friedberg update

December 08, 2023

01:32:29

E156: Ivy League antisemitism, macro, SaaS recovery, Gemini, Figma deal delay + big Friedberg update

E146: Did the Fed break the VC model? Plus IPOs, M&A, revaluing unicorns & more

September 22, 2023

01:42:43

E146: Did the Fed break the VC model? Plus IPOs, M&A, revaluing unicorns & more

Trump vs Powell, Solving the Debt Crisis, The $10T AGI Prize, GENIUS Act Becomes Law

July 19, 2025

01:19:29

Trump vs Powell, Solving the Debt Crisis, The $10T AGI Prize, GENIUS Act Becomes Law

Biden chaos, Soft landing secured? AI sentiment turns bearish, French elections

July 12, 2024

01:25:38

Biden chaos, Soft landing secured? AI sentiment turns bearish, French elections

Trump's market impact: Bitcoin, M&A, IPOs + transition picks; Polymarket CEO raided by FBI

November 16, 2024

01:23:23

Trump's market impact: Bitcoin, M&A, IPOs + transition picks; Polymarket CEO raided by FBI

Epstein Files Flop, State of the Market, Autonomous Robots, Trump's Gold Card, Friedberg on Jeopardy

March 01, 2025

01:15:15

Epstein Files Flop, State of the Market, Autonomous Robots, Trump's Gold Card, Friedberg on Jeopardy