00:00:00
what are you eating Freeburg is that Buffalo jerky what is that that's a red pepper it is not the bull tongue I got
00:00:06
pistachios oh wait wait look at this [Music] [Applause] look guys that are branded pistachios
00:00:13
aren't these the best pistachios they're the best salt and vinegar yeah some of the vinegar yeah yeah they're the best
00:00:19
are those unpeeled pistachios guys are so rich people peel their nuts people have been peeling my nuts since
00:00:27
the Facebook I feel [Music] [Music] hey everybody Welcome to episode 121 of the world's greatest podcast the all in
00:00:51
podcast with me again of course the dictator himself tremath polyhapatia the Sultan of science David Friedberg and
00:01:00
the Rain Man himself yeah definitely David sacks gentlemen the world's greatest genuflector ah
00:01:10
the world's greatest moderator is here oh this you guys I gotta tell you something the grift is on a lot of
00:01:16
corporate gigs for me to moderate I don't even have to prepare I just show up and moderate oh so great what is an
00:01:23
example of such a such a gig there's a lot of Corporations and conferences that pay a pretty penny to
00:01:29
have the world's greatest moderator come and interview people this is like the used car parts Association of America
00:01:36
I did one with like a thousand litigators at an attorney conference for like the SAS software they all use and
00:01:42
it was a wonderful Fireside you know it's just great this is like the grift no ads do you have to fly commercial
00:01:48
whenever they fly private it's commercial at this point yeah what is your what does your Rider say what
00:01:54
kind of book do you want do you ask for spiced salted macadamia nuts but I do not have them peel my nuts no
00:02:00
what I do is I blend the travel cost into the speaking fee and then nobody knows when I'm in or out what hotel I'm
00:02:08
staying at or whatever but basically I'm back on the road folks I'm back on the trailer do you get you know
00:02:14
no no no what he's saying is no what he's saying is he gets a 2500 travel budget and instead he comes the day of
00:02:21
and leaves the day of saving and netting himself an extra 2500. well you know uh
00:02:26
you can optimize if you're saying optimize I did use I had you know during covid I racked up a million and a half
00:02:32
two million of these United points and I have just been grinding those United points down so shout out to United
00:02:38
and the pandemic all right there's a lot of news so you're right your mouth it's even worse
00:02:43
than that it's even worse than for travel expenses when he's not even paying anything maybe it's part part of
00:02:49
the part of the grifter is using the cash app to commit fraud and murder I mean that Hindenburg report is I mean
00:02:58
it's a work of art but we got to start with the FED hiking rates by 25 basis points uh and the general
00:03:06
feeling in the country that maybe the FED doesn't know what they're doing and maybe it's time for regime change
00:03:12
the FED increased rates by 25 basis points yesterday Wednesday so the FED has increased the federal
00:03:19
funds rate from nearly zero in March of 2022 to now the range of 4.75 to 5 fastest rate hike since the 70s
00:03:28
speculation the FED might pause rate hikes or even cut do the the recent banking failures didn't
00:03:37
happen so if you bet that they were going to pause you were wrong if you bet they were going to cut you were also
00:03:42
wrong but the market has ripped a bit a day after which people are trying to figure out in
00:03:50
the group chats doesn't seem like anybody has a theory here but let's start with sax
00:03:56
maybe an explainer a little bit on how the Fed works there's a board there people serve a
00:04:03
14-year term I guess they replace somebody every two years and Jerome Powell was placed in
00:04:12
2018 by Trump and I guess there's a lot of handwringing now that they were late on
00:04:22
inflation obviously and then they went too fast and maybe now they're not slowing down enough so what's your take
00:04:28
on it objectively sex putting aside partisanship and you know for this Administration versus that
00:04:33
Administration just objectively do they know what they're doing and how could they do a better job no I don't think
00:04:39
they know what they're doing they clearly reacted way too late to the inflation we've talked about this before
00:04:43
we had that surprise inflation print in the summer of 2021 5.1 percent they said
00:04:49
it was transitory they didn't react until November they continued QE for another six months and they suddenly got
00:04:57
hawkish in November of 2021 and they didn't even start the first rate increase until March of 2022 so they
00:05:03
were really asleep at the wheel and late to react to the inflation by about nine
00:05:08
months now I think they're potentially making the opposite decision which is they are late to recognize what stress
00:05:18
and distress the economy is under right now and Powell had the there was three choices I could have made at this
00:05:25
meeting they could have raised race which is what they did they could have cut rates which they didn't or they
00:05:29
could have done nothing basically held Pat and the argument for raising rates is just that well we have this inflation
00:05:36
problem we need to keep raising interest rates until uh the rates are above inflation and that will bring inflation
00:05:42
down then you can start to lower rates that's sort of the conventional view I think the problem with that view is it
00:05:48
ignores that we've just seen a run of bank failures and there's tremendous stress building up in the banking system
00:05:54
from unrealized losses on long-dated bonds also unrealized losses on commercial real estate loans and we've
00:06:03
barely scratched the surface of seeing that problem that's I think the next shoe to drop in this whole thing so I
00:06:09
think that the right decision here was to either cut rates or to stand Pat you may have seen that Elon said listen
00:06:17
we should be cutting rates here there's way too much latency in this inflation data the economy is seizing up and we
00:06:24
don't need to be raising rates right now we actually need to be cutting them I think that probably if it were me
00:06:30
looking at the upside downside of these decisions I probably would have just stood Pat because again we've just seen
00:06:36
this banking crisis why wouldn't you just wait one month to see maybe there is latency in the installation data
00:06:42
maybe that banking crisis is not over why won't you just stand Pat for one month you can always raise rates in a
00:06:47
month I think that this move here could in hindsight be seen as the straw that breaks the camel's back chamoth would
00:06:53
you have paused and waited to see another card and then watched the hand developed or do you think they're doing
00:06:59
the right thing by raising or should they have cut I think they did the worst thing possible which is they took the
00:07:04
middle path if you think about what the Fed has the ability to do they obviously
00:07:11
have the ability to raise and lower interest rates but what we don't talk about is they have a balance sheet that
00:07:17
can absorb assets for the last 10 or 15 years we've had a phenomenon called quantitative easing
00:07:25
and for folks that have don't understand what that means that is essentially the
00:07:30
Federal Reserve buying assets out of the market and giving people money for it so
00:07:36
that that people can then go and buy other things with that money last June they started what's called
00:07:43
quantitative tightening which is essentially reversing that policy and restricting the liquidity in the system
00:07:50
so if you look at those tools and you sort of play a game Tree on what the FED could have done
00:07:59
I think that you have two choices one is you massively let inflation run amok where you have no
00:08:09
tools to fix or you have massive illiquidity in the financial system but you actually do have tools to fix
00:08:19
that which is through some combination of quantitative easing and tightening depending on how much liquidity you want
00:08:24
in the system so I think actually I disagree with Saks I think they should have done the opposite they should have
00:08:30
raised 50 bips it would have created a little bit more chaos in the short term but it would have set us up to
00:08:40
understand what was fundamentally broken and still give the Federal Reserve the ability to use their balance sheet and
00:08:47
use liquidity in the future to solve the problem they took the worst option which
00:08:51
is neither did they cut nor did they raise enough and so this problem that sax represents
00:08:58
actually is the fundamental problem now which is you won't have enough Clarity and signal to really know whether this
00:09:05
25 basis point enough look I've maintained now for nine months that rates are going to be long higher than
00:09:12
we like and longer than we want and so I think it's high time that we acknowledge that we have a sticky
00:09:18
inflation problem who's back we have to break we've known since Volker era what we
00:09:25
need to do to do that which is you need to get interest rates to be greater than
00:09:29
terminal inflation which means that if five percent fed funds rate is insufficient so we're
00:09:37
going to need to see a print of five and a half five point seven five percent and that's when you're going to have
00:09:43
enough contraction and then the FED can come back with liquidity but if they don't take these steps we're going to be
00:09:49
in this very choppy neither here neither their situation and I think that is what
00:09:55
causes the real damage because it's the corrosive effects of uncertainty and what that does to lending to risk taking
00:10:02
and I think is really bad for the economy Freeburg where do you land we have sack saying they should have stood
00:10:07
Pat which I'm not saying either go hard take the medicine I don't know I'm not like
00:10:13
an economist on judging the balance that they're trying away right now I think everyone's got a different you can hear
00:10:22
a cacophony of opinions on this one what I'm more interested in is you know we talk a lot about the banking
00:10:31
crisis underway and I know we're going to talk about this question on Commercial Real Estate in a minute but
00:10:36
if you look at the yield on the 10-year treasury I think um coming out of this past
00:10:41
two weeks you know the yield on the 10-year treasury dropped from 4.1 percent down
00:10:48
to looks like it closed at 3.4 today nearly a point seven percent decline in the past two and a half three
00:10:56
weeks and that's also off of 3.8 since the start of the year and remember when we talked about the impact on asset
00:11:05
values at Banks I think if you look holistically at the roughly seven trillion dollars of assets held at Banks
00:11:13
some you know whatever the the set of banks are that we looked at the average kind of equity ratio is
00:11:20
about 15 percent so you know a two percent or sorry a three percent adjustment over 10 years
00:11:27
on the treasury impacts the value of a chunk of that portfolio down 25 which starts to put you into dangerous
00:11:33
territory and there's obviously a distribution of what that does to certain banks that
00:11:39
are overweight you know 10-year bonds whether they're loan obligations on mortgages or treasuries or corporate
00:11:46
bonds or real estate bonds a real estate debt and so the more encouraging point that I
00:11:52
think we should pay attention to is does the market tell us that these short-term
00:11:58
rate actions are driving down the long the medium and longer term rates in a way that will improve the balance sheets
00:12:07
of all these institutions that own a lot of this debt particularly the banks and
00:12:12
and funds and so on and you know I'll do the math here real quick but just in the
00:12:16
last two weeks the impact on the 10-year treasury has probably had a pretty sizable impact you know we talk about
00:12:21
unrealized losses it's reduced those unrealized losses it's improved them so I think that that's like the more
00:12:28
important metric to be tracking is you know if you look at all the assets that we're
00:12:33
all worried about right now are they going up in value or down in value in a way that introduces more stability into
00:12:40
these kind of banking systems that we care about and I think right now it looks like maybe things are improving
00:12:45
um and that might be part of the optimism around you know Equity markets and folks buying and so on yeah and so
00:12:50
this is I guess where people have started to talk about the next shoe to drop we obviously had this time-based
00:12:58
liquidity issues with Silicon Valley bank now the Wall Street Journal is talking about commercial real estate and
00:13:04
how much debt there is uh since covid obviously people are doing more remote work a lot of the skyscrapers it's not
00:13:11
just San Francisco but in many locations remain empty or underutilized people are
00:13:16
now having their leases come up uh every year more and more of these leases will
00:13:23
become vacant and then we'll see if these buildings are worth what people paid for them smaller Banks hold around
00:13:31
2.3 trillion in commercial and real estate debt including rental apartment mortgages almost 80 percent of
00:13:36
commercial mortgages are held by Banks according to this Wall Street Journal story sax you are an owner of some
00:13:41
commercial real estate and you play in the space you have a lot of first-hand knowledge
00:13:46
what what is your putting aside your personal Holdings or exposure what is your take on what
00:13:52
you're seeing what is the game on the field right now in terms of commercial real estate in San Francisco and Beyond
00:13:59
well if you talk to the commercial real estate guys they'll tell you that the situation is dire
00:14:03
um there's two dire there's two problems first there's a credit crunch going on so there's just no credit available if
00:14:11
you're a commercial real estate developer and you have a building and you want to refinance your construction
00:14:16
loan or put long-term debt on a building you just can't do it I mean the banks are not open for business they literally
00:14:23
don't want the business and I think that comes back to the fact that Banks right
00:14:27
now are hunkered down in a defensive posture they're seeing deposits flee from their Banks unless of course you're
00:14:34
one of the top four does that does that freeze on the bank's pre-date the Silicon Valley Bank crisis and it was
00:14:40
exacerbated were people having a hard time getting loans before that it predates it but definitely what you're
00:14:46
see what you saw with svb and these other Banks including Credit Suisse is that you know Banks now are getting much
00:14:53
more paranoid and that's why you saw that if you look at the the discount window which is when the
00:15:00
banks go to the FED as lender of Last Resorts and basically post collateral to get liquidity we had the biggest spike
00:15:08
in discount window borrowing since the 2008 financial crisis yeah that line on the right side that is that is a spike
00:15:16
in one week's borrowing this exceeds anything that happened in 2008 the warning sign should be flashing red over
00:15:23
something like this now to bring it back to be clear that's Banks who have real estate exposure going to the FED going
00:15:30
to the government saying hey can we get some money to cover these it's not specifically about real estate it's more
00:15:36
about Bank liquidity the banks are saying we don't have enough liquidity right now to cover our needs which are
00:15:42
highly volatile right now because basically depositors are moving out of community and Regional and small Banks
00:15:50
into the big four so-called systemically important or sib Banks so what's happening is that again banks are
00:15:58
hunkering down they're getting very defensive they do not want to make new loans because they can't tie up assets
00:16:04
they are trying to stay liquid themselves so that's what's happening now in sort of with respect to new
00:16:11
Lending and then on the other side of it you have existing loan portfolios there's
00:16:16
something like 20 trillion dollars of commercial real estate debt and most commercial real estate lending is done
00:16:22
by small banks by Community Banks so they are sitting on these huge cre loan portfolios and I think something like
00:16:29
300 billion needs to be refinanced or is coming due in the next year normally that's rolled over and refinanced there
00:16:37
was separately there was a study showing that unrealized losses in these loan portfolios in the banking system may be
00:16:44
around two trillion dollars it was a study that was reported on by The Wall Street Journal so in the same way that
00:16:49
we had huge unrealized losses in these long-dated bonds I think we also have actually Silicon Valley Bank
00:16:55
specifically that's where we're the worst offender but it's a systemic problem I think similarly we have huge
00:17:02
unrealized losses in commercial real estate loan portfolios and this is I think even a more subtle and pernicious
00:17:09
problem because with Securities like t-bills or mortgage bonds it's very easy to know what the unrealized losses are
00:17:17
the reason why they hadn't realized the losses was not because they didn't know what they were it was because of a
00:17:21
stupid accounting rule that said they didn't have to realize the losses if they were quote unquote holding them to
00:17:26
maturity with these loan portfolios we don't know how big the exposure sure is and we won't know until you start seeing
00:17:33
some defaults and repricings of assets and really commercial real estate is a much more Dynamic market right you have
00:17:41
to have a buyer there you have leases you have leases coming off at different times you have sub leases occurring
00:17:47
and you have the owners of them flipping them right and refinancing them constantly to buy new buildings and so
00:17:53
right and those loans aren't as liquid right with a mortgage Bond those are basically a bunch of Loans mortgage
00:18:01
mortgages typically that have been packaged up and turned into a security and there's a liquid Marketplace to
00:18:06
trade them in the case of these loan portfolios there may not be a liquid Marketplace so you don't really know how
00:18:12
impaired that loan portfolio is until you actually get to a place where when will we know what because that that's
00:18:19
the thing I'm wondering we I saw a lot of headlines you know Pinterest bought themselves out of their new headquarters
00:18:25
in the Bay Area San Francisco I believe specifically I heard Facebook got rid of
00:18:29
a couple billion dollars and wrote down some expansion Amazon is selling buildings they had gotten a ton of
00:18:35
buildings and we saw last week they got rid of another nine thousand or they're planning another nine thousand in a riff
00:18:39
and they can't get people to come back to the office so how bad is the overbelt I guess is the question because that
00:18:47
will be the driver of the value of these buildings because if there's too much Supply then what are these buildings
00:18:53
actually worth are they worth 90 a square foot what if there's no what if Amazon doesn't want more space you can
00:18:58
see it in the credit default spreads of these Banks it's in the water table already so you can Nick you can just
00:19:02
throw it up if you look at any Bank that's lending and that has a portfolio this is Deutsche bank's you know Euro
00:19:09
denominated CDs but it's the same for Barclays it's the same for sock gen it's the same for a
00:19:14
bunch of American Banks there is a risk in the system that Saks articulated that
00:19:20
is now getting priced in there are all kinds of loans whose payments which the banks need
00:19:27
cannot necessarily be insured which means that then there could be illiquidity there there
00:19:32
could be a flow of deposits out from those Banks which would then make their ability to pay their debt holders lower
00:19:39
you also have this complicated issue already where it's really like the first time in a
00:19:45
long long long time where debt holders actually got wiped out in the Credit Suisse debacle before the equity holders
00:19:51
did and that's created all kinds of Ripple effects so this credit bubble is here and it's being manifested right
00:20:03
now in these very sophisticated parts of the market and eventually they'll Ripple
00:20:08
to the broader economy at large but how a person feels this is they're not going to be able to
00:20:15
get a car loan or a mortgage or the interest rates they pay will go up and then how bondholders will react to
00:20:22
all of this stuff is they'll just start to find different assets probably the front end of the curve money market Cash
00:20:29
Gold and they'll just abandon all these assets and then the other problem is that it's just really really bad for
00:20:39
risk assets so the things that we invest in startups technology companies either in
00:20:46
a world of inflation run amok because the FED isn't hiking fast enough which just destroys future cash flows
00:20:53
or in a world where the FED pivots in a moment like this and Nick you can show the second chart both result in the same
00:21:01
outcome which is that you just see these massive drawdowns in the value of risk assets
00:21:07
so we're in a really complicated moment and this is why I think again the FED needed to take leadership this past week
00:21:18
and actually do the hard work of either cutting 50 bips or raising 50 bips and this middle path
00:21:27
is the absolute worst path because trying to thread a needle in this complicated economy I think is just
00:21:33
going to be impossible and then what happens is then the markets move around them right the markets have completely
00:21:39
said we now discredit what you did and they're basically banking that the FED will be forced to cut rates
00:21:48
massively in short course because the crisis will be so severe that it'll outweigh the risk of
00:21:56
inflation think about that yeah so all of this real estate comes on the market there's no buyers for it the mortgages
00:22:05
are due does that mean a commercial real estate owner just basically gets foreclosed on and they hand the keys
00:22:10
back to the bank or the banks as this Wall Street Journal story was sort of alluding to that the FED will say you
00:22:17
know what we'll just extend we'll backstop this real estate which happened in the last bubble and we hope that over
00:22:24
time it works itself out and demand returns now of course that's different than a postcovid world so this time
00:22:31
could be different what happens in the case of 2024 2025 all of these office spaces are returned and the keys are
00:22:40
handed back yeah so okay so so Jason you asked the question like how does this problem manifest let me describe from
00:22:45
the point of view of that real estate owner there's basically two problems one is that you have a tenant who's in a
00:22:51
long-term lease five seven ten years that lease rolls so that that least comes to you now they don't need the
00:22:58
space anymore you know we know that take San Francisco which has got to be the worst market for theory in the country
00:23:03
right now that's something like 30 to 40 percent of the space is vacant so that's
00:23:08
either space for rent or space for sublease because no one's using it so they've put it back on the market well
00:23:14
all those subleases they're still paying rent because they have a contract so what happens is as those leases roll
00:23:21
now all of a sudden you don't have to pay rent anymore so you're going to stop or if you still need the space you're
00:23:25
going to negotiate a much much lower rent so now all of a sudden the real estate owner
00:23:31
can't make their Debt Service Covenant ratios the income from the building is just substantially less they can't make
00:23:38
their debt stories on that and explain that ratio to folks you have a certain amount of debt you own let's say sales
00:23:44
of course Tower in salesforce's case they're subleasing 125 000 square feet let's say they were into
00:23:51
that for 500 million what is this Debt Service ratio explain that to the audience when the bank underwrites the
00:23:56
loan they just figure out the interest that you got to pay on the loan relative to the value of the building or the
00:24:01
income that is generating but all those ratios are upside down now because the value of the buildings the rent has gone
00:24:07
down so much because there's so much vacancy I mean when these loans were underwritten San Francisco had like a
00:24:12
five percent vacancy rate and now it's like 30 to 40 percent they're just no tenants and then you know in parallel
00:24:19
with that Jason you've got all these cases where you don't only have tenants or leases
00:24:23
rolling you have loans rolling you know again if the owner of the building has either a construction loan or like a
00:24:30
long-term debt and that needs to roll they have to refinance it and if they can even get credit which they may not
00:24:35
be able to because of this crunch they're going to be paying a lot more for it so now all of a sudden the income
00:24:40
statement for that building doesn't make sense think about it your borrowing costs are higher and your revenue is
00:24:46
lower so now all of a sudden the building's underwater so where does that end up well they default on the debt and
00:24:52
the bank ends up owning the building so then what happens is you end up with you
00:24:55
know all of downtown San Francisco owned by a bunch of banks what are they going
00:24:59
to do with it they don't want to be in the real estate business so they have to fire sale those buildings in a bunch of
00:25:04
auctions at rock bottom prices Because by the way there's no cash or liquidity out there so who are the buyers
00:25:11
there are no buyers we have a 30 vacancy rate there's no uh renters so so what happens Detroit like is it just like a
00:25:18
dead City and then the tax base collapses the city because so much the tax base is dependent on you know real
00:25:23
estate so listen I think they're gonna have to work this out I don't think they can just let the free market take its
00:25:29
course here because you're going to end up with a scenario I just painted so I think what hopefully would happen maybe
00:25:35
is that the the banks do some sort of deal with the real estate owners that you know they blend and extend or
00:25:42
whatever but in order to do that they're going to need to be backstopped by somebody and that's the FED Freeburg
00:25:47
what are your thoughts just writ large as it were on the commercial real estate space because it's ninety dollars it was
00:25:52
90 a square foot right for class A Saks in the city is that the price I mean what's that
00:25:59
going to be 60 70 80 90 bucks a foot depending on what kind of building you're talking about I mean you have all
00:26:03
these empty office Towers so look I I never invest in office Towers I do small boutique kind of brick and Timber spaces
00:26:09
in Jackson Square we're doing okay because people still want to be in those spaces but these office Towers on Market
00:26:15
Street or in Soma I mean which is where all the investment went during the boom nobody wants to be
00:26:22
in those buildings anymore and it doesn't help that the city has allowed this giant you know open-air drug Market
00:26:28
to metastise right outside their door um Freeburg yeah I think it's inevitable we'll have probably two to three
00:26:34
trillion dollars of federal money you know spent uh backstop and support the asset I mean
00:26:43
that's the general theme here in case everyone isn't paying attention at home is that the
00:26:48
fed the US government will continue to print money and create programs uh to effectively support asset values such
00:26:57
that there isn't a crippling economic ripple effect and this is the dangerous depth spiral of debt and
00:27:06
it's why I always talk about how concerned I am about global debt levels and particularly debt levels in the US
00:27:11
but really Global debt levels I'll say the statistic again and over and over again 360 Global debt to Global GDP
00:27:20
but you know even within some of these asset classes a significant amount of debt has been used to fuel asset prices
00:27:25
and to fuel Equity value and then that Equity value gets levered and reinvested and so the Rippling effect in the
00:27:30
economy of declining asset value can be magnified through Leverage and it unfortunately debt in general forces
00:27:40
growth without growth uh debt fails and so when we've used debt to demand growth on a macro perspective it causes
00:27:51
you know significant stress and strain on the system when you're going through periods of like we are right now what
00:27:56
should be natural recessionary effects from covid and shutting down the economy or natural asset price declines because
00:28:01
of that and we can't let it happen because if it were to happen the Rippling effect would be crippling so
00:28:07
this is a good example you'll probably I don't know what the facility will look like maybe the government passes some
00:28:12
Congressional bill that says hey guys here's three trillion dollars to support you know all this real estate here's
00:28:19
another you know two trillion to support Banks and you know giving them liquidity
00:28:23
because the other problem as you guys know is most people's most of the population in the U.S has most of their
00:28:30
assets uh their asset value or their Equity value in their home and those home prices are supported by
00:28:36
residential loan programs and you know if you actually have a massive write down on the value of that asset class
00:28:44
that's when you know everything kind of falls apart so you know we will continue
00:28:48
to be buoyed by that that that kind of inflationary Behavior unfortunately biology I think has it right we'll talk
00:28:55
about it in a minute that there has to be money printing to get out of this hole I don't know if
00:29:01
it's necessarily In This Moment hyperinflation area as he predicts you know he uses the Deutsche Mark and
00:29:06
the Weimar Republic as this kind of storyline that this is what's about to happen in the U.S the truth is it looks
00:29:12
a little bit more like the pound sterling at the end of the uh British Empire where you know there's certainly
00:29:17
a an inflationary and devaluation effect that arises but it's not it is the reserve currency of the world today
00:29:23
let's so it's really hard to kind of just say hey it's going to be hyperinflationary and the value is going
00:29:27
to go to zero it's just not going to happen so that seems to be the the dollar of the dollar yeah so that seems
00:29:32
to be the BET Now trim off at as some folks are predicting catastrophizing hey this is the end of
00:29:40
U.S Supremacy the end of the dollar of course modern monetary Theory seems to stay you can just keep printing dollars
00:29:47
and make a couple trillion dollar coins a backstop it and by the way tarp was profitable modestly for the United
00:29:53
States and the backstop of real estate totally worked so where do you land on this do you think these backstops and
00:30:00
modern monetary Theory stating that you can just print money you you own your own fiat currency is going to work or as
00:30:05
we pivot to the billion dollar I'm sorry the million dollar biology Bitcoin bet that this is the end of days
00:30:14
I I think it's not the end of days but I think you're conflating a bunch of things together so look mmt yes I am yes
00:30:21
was in hindsight idiotic in the moment it never quite made sense but in hindsight it's clearly idiotic and
00:30:29
I think that we can properly dispense with that but the reason that we print so much
00:30:36
money is sort of what free Brook says which is that we just want a well-functioning society and the
00:30:43
simplest and shortest way to do that is to make sure that there aren't any winners and losers anymore and the most
00:30:50
effective way to do that in the markets is with money print a bunch of money and
00:30:53
there are no more winners and losers and so everybody can kind of win some people may may win more but nobody
00:31:00
really ever loses so I think that's the that's the mo that we're operating under
00:31:08
the thing is I know something unhealthy to that your mouth you're sort of alluded yeah but no losers that's a more
00:31:14
philosophical and a commentary on capitalism and a bunch of other things and you're right I don't think it makes
00:31:19
sense I do think you need winners and losers to really make Society function well
00:31:25
but the other part of it is like does it reinforce or does it decay U.S dollar hegemony and I think it actually
00:31:33
reinforces it and the reason is just very practically speaking when you look at how dependent other people other
00:31:41
countries are on the US dollar in times of stress they actually become more dependent and that has a lot to do with
00:31:47
their boring patterns the amount of dollars central banks need outside the United States and so what did you see in
00:31:53
a moment of stress actually the FED opened up swap lines to all the central banks that they work with uh their most
00:32:00
important operating partner so Europe Canada Japan Etc Switzerland and they moved the liquidity window from weekly
00:32:08
to daily and they pounded the swap lines so I don't know I think that most people
00:32:13
that that kind of like it's like a boy crying wolf maybe at some point somebody will be right but you're going to lose
00:32:18
so much money trying to take a point of view around this topic that it's more practical to just look at Dollar flows
00:32:25
and dollar flows go up in moments of stress not go down and they go up in a distributed manner across the monetary
00:32:34
Plumbing of the world all right so let's explain the biology bat since that trended and he is the boy who as you're
00:32:41
saying what cried wolf this past week cry Bitcoin yeah the boy cried Bitcoin very well said
00:32:46
so a friend of the Pod apology on March 17th predicted that Bitcoin will reach one million dollars
00:32:55
in 90 days due to U.S hyper inflation hyperinflation is defined as prices going up 50 percent month over month
00:33:04
just so we're clear on exactly how dramatic that is he made the bet on March 17th against a pseudo-anonymous
00:33:11
a Twitter user James Medlock who said they would bet one million that the U.S would not experience hyperinflation so
00:33:19
biology sort of inserted Bitcoin into that bet it wasn't a Bitcoin bet uh then and I think he's done two of these bets
00:33:26
so he's betting two million in total on bitcoin hitting 1 million by June 17th which there's probably no chance of that
00:33:33
happening or a very tiny chance unless the panel in a second Bitcoin was trading at uh 25 26 000 at
00:33:39
the time it's now trading at over 28 000. and Balaji has been on every podcast known to man in the last 72 hours
00:33:47
talking about this I've watched one or two of them and it's uh pretty out there argument I
00:33:53
think and you can just type in biology on YouTube and watch any of the 20s done uh he believes Regional banks are
00:34:00
insolvent he thinks the feds need to is going to need to print a massive amount of money
00:34:05
like we've said here do more QE and then cut rates all seems reasonable but that
00:34:11
that will lead to hyper inflation it's not reasonable wow we just printed that they're gonna cut
00:34:18
rates we just discussed they're going to eventually cut rates and there'll be more QE so that part is reasonable um
00:34:23
just that one little piece but then he believes is the part that is kind of out there that hyperinflation is going to
00:34:29
devalue the dollar and this is the time um he does not and I made a bunch of I I
00:34:36
asked him this a bunch of times and he would not be honest about it uh or didn't want to answer my question I said
00:34:41
hey what percentage are you in Bitcoin somebody says he's 99 in Bitcoin he will not confirm and so I was like well if
00:34:48
you own a thousand Bitcoins if this goes up you know a very small amount four or five percent you're gonna pay
00:34:54
for the bets and uh are you talking your own book here or not sex what do you think of this overall bet is it a stunt
00:35:02
yeah he's saying like this is the lifeboats moment and just to add to it he says you have to leave the United
00:35:07
States and get to Singapore uh or a place or if you're gonna stay in the United States you need to get to Wyoming
00:35:14
or Texas or somewhere that explicitly allows Bitcoin because the closer you are to the United States banking system
00:35:18
what happened to Silicon Valley Bank on that fateful weekend where people couldn't get their cash and we're gonna
00:35:24
have to you know Miss payroll he says that's the dry run for the entire U.S banking system sex so first of all I
00:35:32
don't think you can disparage bulgy because someone who cries wolf says this repeatedly and makes a dire prediction
00:35:39
repeatedly and is wrong and we can't say yet that biology is wrong do I think that we're gonna have a million dollar
00:35:45
Bitcoin in 90 days I personally find that very unlikely but you can't say yet he stuck his neck out making a
00:35:52
prediction that will be easily falsified if he's wrong second the last time that
00:35:58
biology made a dire prediction was coveted he was right about that one so you can't say that this is just like a
00:36:06
Doomer who throws out crazy predictions and is always wrong he's actually pretty
00:36:09
selective about his now that one predictions yeah there is a tweet from January 30th of 2020 in which he
00:36:17
basically predicted a pandemic based on a coronavirus and laid out a whole bunch
00:36:21
of sequences that mostly came true which is why we're talking about this this is
00:36:27
not just some like random person like he actually has yes a pedigree and a track
00:36:31
record but here's my view on it yes the two of our opening speakers All In Summer 2023. those would be our bookhead
00:36:42
speakers book them down anyway so so look now what do I think about it I um I I posted my own Theory today which I
00:36:50
would call sort of bulgy light um which is um okay look if you if you think about
00:36:57
this spiking interest rates that we've had and that Jama thinks Washington continued quite a bit longer there are
00:37:02
three main effects that it indisputably has number one undercuts the value of long-dated bonds number two it's made
00:37:10
lending much more expensive particularly for big purchases like real estate number three it's increased government
00:37:15
lending costs okay now play that through the financial system what does that mean
00:37:19
well if the value of long-dated bonds has sharply decreased well that's led to this banking crisis with the unrealized
00:37:27
losses that's already happened number two it's made lending more expensive the credit Crunch and cre where we aim to
00:37:32
see that and I believe that's going to play out as the second crisis of this larger financial crisis and then number
00:37:38
three is the increase in government borrowing costs that will eventually play out in terms of being a government
00:37:44
debt crisis of some kind and I think it'll involve you know a spike in borrowing costs at the federal level and
00:37:50
involve sovereign debt issues internationally I think it will involve budget deficits at states and cities so
00:37:58
I think there's three phases to this financial crisis we're in phase one and I think cre and government debt are the
00:38:05
next two phases and I think I think a lot of that lines up with what biology thinks where I disagree with him is I
00:38:11
don't think we can know what's going to happen in 90 days I think that the cre crisis is highly deflationary it's going
00:38:17
to create distress everywhere in the economy that is going to lead to a massive reduction in liquidity I think
00:38:23
that the government debt crisis assuming the government wants to inflate and monetize the debt as a way to solve that
00:38:28
problem that will be highly inflationary but when these things play out we can't know
00:38:34
I think that's what makes this really hard is I think jumping all the way to the sort of finish line
00:38:40
and saying we're gonna have a million dollar Bitcoin in 90 days because the US dollar is worthless I think that's
00:38:45
premature I think this could play out over the next couple years we have a real problem if Bitcoin is the exit ramp
00:38:53
for an inflationary crisis because it it's not accessible enough it's not easily transactable for for I'm sorry to
00:39:01
be negative to the Bitcoin maximalists I'm generally in favor of this kind of independent
00:39:08
storage system that's outside of government State control I think there's just this unfortunate reality I mean we
00:39:14
saw what the wells noticed at coinbase today they just arrested that that crypto guy
00:39:19
gokuan was arrested great country Kraken won't let you wire money in or out as of I think Monday or
00:39:26
Tuesday and so you know it's clearly becoming kind of a less accessible system of
00:39:33
storage no what's more accessible well I do think that one of the reasons we're seeing the market move the way it does
00:39:39
is because folks are shifting their risk assets around quite a bit right now to figure out where is a good place to put
00:39:44
money I was talking with a asset manager you know this morning and you know they
00:39:53
had a very strong point of view folks are are moving Capital away from what they think are going to be most impacted
00:39:59
by the risk of this kind of massive inflationary event that may arise or this massive banking crisis that may
00:40:05
arise or this massive real estate crisis that may rise and there are other places
00:40:09
to then put your Capital that's not just Bitcoin and sure maybe some of these things are dollar denominated but for
00:40:15
example there are many businesses that sell products in non-dollar denominated currencies globally and while they
00:40:21
report and trade on U.S stock exchanges you're buying a security interest in a business that generates most of its
00:40:26
income you're referring I'm referring to many different companies yeah and so there are many companies
00:40:31
that get the bulk of their revenue the bulk of their sales internationally there are also many
00:40:36
companies that will benefit in an inflationary environment businesses that are tied to other types of real estate
00:40:41
businesses that are tied to certain Capital Equipment where consumption will not go down unless there's you know
00:40:47
significant massive you know Global socioeconomic shock and so I think that that's kind of a lot
00:40:52
of what's going on right now it's less about hey bitcoin's the only place to go and be safe and it's more about let me
00:40:57
reallocate my risk assets a little bit you know to places that maybe benefit that may benefit from or may be better
00:41:04
guarded from a massive kind of inflationary shock um let me just say let me say one more thing I I think one
00:41:11
of the biggest risks that is not being talked about is the debt ceiling vote that's due in June
00:41:18
in June Congress needs to pass an increase in the debt ceiling because the amount of debt that the U.S that the
00:41:28
federal government is going to have to take on in order to meet our budget deficit and refinance our debt and pay
00:41:35
our obligations historically means that we're going to have to have more than what we're uh you know we've
00:41:41
approved to date in terms of the total amount of debt now this has historically been a last-minute vote you know crazy
00:41:47
dramatic thing that drives markets nuts the hill had a public opinion piece from
00:41:54
Peter O'Rourke and Mary Spade but I think they make a good point you know I've talked to a lot of folks
00:42:01
who are call it in the fixed income Market but also folks who are in the equities markets publicly who are pretty
00:42:07
nervous about this debt ceiling vote and if it does look like the Republican uh party takes a very hard line and says
00:42:15
because this is the current party line if you don't agree to massive deficit Cuts or spending cuts uh and and really
00:42:24
commit to that um in a bill that we can pass that Ben also approves the increase in
00:42:29
the debt limit we are not going to approve increasing the debt limit and you know what this opinion piece
00:42:35
argues I think is a very good middle of the line solution which is you know come
00:42:38
up with points of view uh and actually document those points of view on um making sure that government spending is
00:42:46
effectively accountable that there's no more wasteful spending and that there are certain programs that both parties
00:42:51
can very quickly agree to as being you know very wasteful and if you start there you maybe get enough across the
00:42:58
line that both parties kind of say this makes sense let's do this and then we can kind of increase the debt limit
00:43:03
because in the absence of that the US will have to default on debt this is always the big threats never happened
00:43:08
and if that happens or there is the looming threat of that happening combined with the banking crisis
00:43:14
combined with you know the the liquidity crisis combined with the real estate crisis that may be emerging here let me
00:43:20
ask you a question you can have things really meltdown so look because yeah I think this is the biggest like Black
00:43:26
Swan it's not a Black Swan but this is the biggest kind of elephant in the room right now is and I think that and sorry
00:43:31
I think if people in DC could get together today and if you could instead of doing the typical last minute 24 hour
00:43:37
vote a day before the debt ceiling needs to be increased if this could be addressed today it could start to put in
00:43:45
some of the layers of backstop and coverage and protection and safety that the markets I think really need
00:43:50
to manage some of the trepidation in the in the weeks and months ahead I want to
00:43:54
jump to the crypto Crackdown and get your opinion on that stack Source but I want to do a clarifying Point here with
00:43:58
Freeburg you have been in the ray dalio end of Empires Empire's collapse and that hey maybe the US is winding uh down
00:44:07
its Supremacy and apology was pretty much saying Yep this is the moment where is there any light between your
00:44:17
position of like pay dalio's correct this is the end of the Empire ambology is like it's the end of the Empire right
00:44:23
now where do you stand on that free burn so I mean I've always I've been concerned
00:44:28
I've told you guys this for like three years and I've obviously promoted this book for two and a half years
00:44:33
and dalio's points of view with lots of kind of empirical wisdom behind it I think indicate that the US is on a path
00:44:40
and the way we spend and the way behave we behave and the way markets are reacting I think indicates that a lot of
00:44:45
what has happened historically is happening now in the U.S now it doesn't I don't know if it's gonna
00:44:53
happen overnight that's where I would have light with Biology okay the notion of kind of hyperinflation again
00:44:59
I think means that so think about all the US dollar holders around the world it would be a shock for the collective
00:45:09
system it would require the collective system to collectively agree to get off the dollar very quickly for that to
00:45:15
really happen yeah in the meantime I do think there will be inflationary effects I do think
00:45:19
there will be massive kind of asset value shocks but I'm not sure there's going to be
00:45:24
this kind of like Weimar Republic Deutsche Mark I got your hyperinflation thing because it is the reserve currency
00:45:30
and it's so widely held by everyone it would require Collective giving up it also seems like there may
00:45:36
be you know we talked a lot about the Petro Yuan trade which I think is critical to see that actually happen I
00:45:41
think that's going to be the linchpin got it maybe that catalyzes this and that seems to be a little bit tightrope
00:45:46
right now too it doesn't seem super definitive that Saudis are embracing China there's obviously this Behavior
00:45:54
you know it's not as definitive right now I think that that needs to happen to kind of really catalyze that let's get
00:46:00
our tinfoil hats on here for a second in relation to the biology bet there has been a lot of action against crypto
00:46:07
obviously authoritarian countries took control of crypto long ago China Banning it
00:46:14
Etc North Korea other uh authoritarian places kind of tighten their grip on it now here in the United States coinbase
00:46:21
got a Wells notice uh that is a warning basically and giving you a last chance to kind of respond to the SEC
00:46:28
and this was based on their loaning programs and on top of that a number of other crypto crackdowns have occurred we
00:46:35
saw celebrities getting smacked down and getting fines and doing settlements this has led sax to a theory that the
00:46:46
United States government wants to break the back of crypto crypto has done a great job of breaking their own back
00:46:52
with plenty of cryptographs insider trading and all kinds of shenanigans with FTX and front running and painting
00:46:59
the tape any grift or criminal activity possible seems to have been exploited do you think that these two things are
00:47:07
in some way coordinated or there's a coordinated effort by the US government to destroy and kill crypto as an
00:47:13
off-ramp for the US dollar while the US dollar is dealing with these prices thanks
00:47:18
well there's a really interesting article that was just published on sub stack by Nick Carter who I guess a guest
00:47:24
writer on Mike Solana's sub stack called pyro wires just a follow-up piece to an
00:47:29
article he wrote six weeks ago where he laid out the an operation by the Biden Administration called operation choke
00:47:35
point which made the case that the bind Administration was quietly attempting to
00:47:39
ban crypto and now you know a month later there's all these things that are all these steps that the administration
00:47:46
is is taking to go after crypto and he you know he lays out a bunch in a bullet point list so the SEC announced a
00:47:54
lawsuit against crypto infrastructure company paxos crypto exchange Kraken settle with the SEC SEC chair Gensler
00:48:01
openly labeled every crypto asset other than Bitcoin to security senate committee on environment and
00:48:07
Public Works held a hearing land-basing Bitcoin binding Administration proposed a bill that singles out crypto miners
00:48:13
for owner's tax treatment New York attorney general declared ethereum which is the second largest crypto asset to
00:48:18
security that's a huge change by the way yep SEC continues its anti-consumer protection efforts
00:48:25
by doubling down their attempt to block a spot Bitcoin ETF OCC let crypto Bank protegos application
00:48:32
for a National Trust Charter expire and then the SEC just sent coinbase a Wells notice so I think it's hard to argue
00:48:40
that there isn't a concerted effort now to crack down on crypto buy a wide variety of
00:48:47
government agencies and authorities starting with Gensler at the SEC who seems incredibly hostile to crypto
00:48:55
so now the only question is is this correlated with the stress that the banking system is under or is it just a
00:49:02
coincidence and that I don't know but I think the argument biology would make is
00:49:06
that at the same time they're going to deflate the dollar they're going to make it harder for you to find an off-ramp
00:49:13
and he actually brought up a historical example that I wasn't aware of I think it's called executive order 6201 which
00:49:20
is FDR way back in the 1930s actually had an executive order that confiscated all the gold private gold bullion in the
00:49:28
country and They seized the gold bullion making the accusation that private citizens were hoarding too much gold so
00:49:37
in any event this is the theory I don't know whether it's true or not it could be a coincidence you think that this is
00:49:44
correlated in any way with uh the crisis or is just the fact that FTX blew up and
00:49:49
all these other things blew up and the public is really upset that they lost a lot of money on this and the SEC has got
00:49:55
to cover and be a little bit more active instead of reactive when it comes to dealing with
00:50:01
the crypto losses that consumers had that's the latter I mean I think that there was a rumor going around I don't
00:50:07
know how true it is that FTX was days away from getting a critical approval by the
00:50:15
SEC to actually even further legitimize their U.S exchange before they went out of business so
00:50:21
I think Gensler had to Pivot very hard from at a minimum being very Pro FTX and there's all kinds of stories about his
00:50:28
interrelatedness with Sam and his family to very anti-bit or anti-crypto in general that's clearly happened
00:50:37
but look I think that this is like a lot of tin hatting which I don't think is very productive if you look at the total
00:50:44
number of non-zero Bitcoin wallet addresses in the world and let's be extremely generous
00:50:52
and say it's a hundred million there's still 7 billion people in the world and so I just think everybody that tries to
00:51:01
speak about the fragility of the U.S and worldwide banking system is right but and that part I think is quite lucid
00:51:11
and unemotional but every time they try to connect it to bitcoin they sound like a crazy person
00:51:16
because they're just talking their book and that is exactly the case by the way with this kid Nick Carter yeah and the
00:51:22
best example to demonstrate this is in all of this chaos if Bitcoin or crypto Assets in general
00:51:30
were truly a legitimate off-ramp and salvation from US dollar hegemony and all of this stuff
00:51:41
why isn't Bitcoin at least at 35 000 a coin right now it's barely above 28 000 it really hasn't moved that much
00:51:48
and I think the real answer is that most people in Bitcoin are not trying to hedge their existing fiat
00:51:57
currency exposure they're just picking off people in retail and they're just day trading this thing
00:52:03
I mean I think that explains how else do you explain an asset that is not absolutely ripped in the face of all of
00:52:11
this terrible news about the financial system and I think the answer is because it's still a cul-de-sac of users
00:52:19
it's not broadly available not broadly adoptable not broadly used I I still believe that it's valuable I was the
00:52:26
earliest proponent of Bitcoin 2011. yeah 2012. so I believe that there's a place
00:52:32
for it in one's portfolio but I just think connecting these dots misses the point and I think the point is much much
00:52:39
bigger than a crypto off-ramp the point is that we have a lot of systemic shocks
00:52:45
that are building up in the system we have broken a ton of the systems that caused the financial infrastructure
00:52:54
and the world to work properly and we are just starting to uncover how they're broken so I think we need to focus our
00:52:59
energy on that and dial down a little bit of the Bitcoin Maxi stuff because it distracts from a really important set of
00:53:07
topics that are more inclusive and actually touch seven billion people we have to do the cleanup work and just to
00:53:13
be perfectly clear here Nick Carter is a career crypto he's on his third fund his 250
00:53:22
million dollar third fund according to a quick Google search he's a partner at Castle Island Ventures and I believe
00:53:27
biology believes what he's saying and at the same time is massively in Bitcoin and the two million dollars he'll
00:53:35
obviously lose in this bet or the 99.9 chance and he said that already I think he believes he's doing a service
00:53:43
just like he did believe he was doing a service with covid so I do not doubt his
00:53:47
intent but I believe it's his book is based on this and the two million dollars will be yeah
00:53:54
he's a very smart and good guy my point is put this in the who cares bucket and get back to the facts Friedberg
00:54:00
mentioned it we have a debt ceiling problem that's in the offing sax mentioned it we have a commercial real
00:54:05
estate crisis we just talked about the fact that he didn't raise rates enough nor did he cut
00:54:10
enough so we're in this weird middle path that Jay Powell we're talking about so those are the facts on the ground
00:54:16
that I think we should focus on because those will have implications to how people can borrow start businesses
00:54:23
capitalize risk assets that's a big problem I guess the moral hazard comes up sax and the critique I
00:54:31
think that people have had of you you know focusing on bank bailouts Etc has been you have been anti-bailout and
00:54:42
now hey maybe backstopping the deposits not backstopping the bank the shareholders loss you were very clear
00:54:49
about that but let's talk about moral hazard here for a minute are we started getting not for bail when did I say I
00:54:56
was either I just couldn't understand you or not I just clear stage you're not I'm saying this is the critique that
00:55:00
people have had of you so I'm giving you a chance to address why why are you giving him people's critiques of him
00:55:05
would nobody because I want him to talk about the future moral hazard people these are 76542 on Twitter
00:55:13
okay Wall Street Journal the New York Times and everything let me jump in and just
00:55:21
clarify I was really clear that sgb's shareholders should be wiped out there are bondholders to be wiped out they're
00:55:27
Management stock options should be wiped out in fact if it turns out that they should have known the thing was about to
00:55:34
go under I think their stock sales should be clawed back so I'm not in favor of bailing out svb I don't care
00:55:39
about SCB yes of course now let's do that for commercial real estate no the question is what you do with deposits
00:55:44
and depositors correct I think there is a real debate about how you treat depositors in a
00:55:52
banking crisis and I think there are two views on that there's kind of an old-fashioned View and then there's kind
00:55:57
of a more modern regulatory view the old-fashioned view is that if your money isn't a bank and that bank goes under
00:56:05
and you know you're over the FDIC amount you lose your money and we need people in the system to lose their money
00:56:12
because that creates discipline on the banks it'll make those depositors do a better job shopping for the right bank
00:56:18
that's kind of what I would call the old-fashioned Hardline view there's a more modern regulatory view which is
00:56:24
that listen the typical depositor even a fairly sophisticated depositor like a small business or even a high net worth
00:56:32
individual they're not in a position to evaluate the balance sheet of these Banks how are they going to figure out
00:56:38
if there's like toxic assets that are hidden on the balance sheet of these Regulators didn't see it oh it's talking
00:56:44
about a lot of these Banks so you don't really get that much more moral hazard by putting the depositor on the hook for
00:56:51
for that remember the management of the bank already is penalized severely by losing all of their stuff so I'm trying
00:56:57
to get to before Tremont interrupted me I'm trying to get to the bigger moral hazard picture here which is Jason [ __ ]
00:57:03
you before you're interrupting but the point each or not for a second the point I'm trying to get to is should
00:57:07
commercial real estate should that be bailed out how should Society look at that next card that you are saying is
00:57:15
going to tip over how would you handle that piece should they okay well let me just stretch the thing on on depositor
00:57:20
so the modern regulatory view is that when you open a bank account you shouldn't have to think about the bank's
00:57:25
balance sheet you just want it to be safe you don't want all the brain damage and and look I think there's a lot of
00:57:30
Merit to that argument as it turns out I've been trying to look into this how much would it cost the system to just
00:57:37
fully insure depositors it turns out that we have about 17 and a half trillion in
00:57:42
deposits in the U.S almost 8 18 trillion and one of the misnomers you'll hear as
00:57:47
well it would cost us 18 trillion to basically insure all the deposits that's not true because that's not first of all
00:57:52
10 trillion people don't even it's already insured under FDIC it's only about seven and a half to eight trillion
00:57:59
that's less than half is left okay that's right exactly it's about it's around 8 trillion so isn't it shocking
00:58:05
the enumeracy of people that make these claims this is 20 or top 10 in the world because we're
00:58:14
actually breaking down the numbers right so continue the leading proponent of this theory that we should just
00:58:19
basically not bail out but backstop the deposits as Bill Ackman and he's been making I think a pretty compelling case
00:58:27
that if you don't protect deposits at small Banks all the money is going to flow to the top four Banks that's right
00:58:33
it's happening yeah we're watching it happen right so I've been trying to figure out how much it would actually
00:58:37
cost us to do that and what I've realized is that it's not 18 trillion it's it's 8 trillion but by the way
00:58:45
that's the amount of deposits that's not the risk premium so if you look at FDIC
00:58:49
at the end of last year there was about 130 billion that have been paid in to the FDIC fund buy premiums paid by these
00:58:58
Banks so in other words the insurance premium paid by Banks was about 1.3 percent
00:59:04
so if you were to now additionally cover the whole thing all the deposits it would be another roughly 100 billion of
00:59:10
premiums paid by these banks that seems very manageable to me actually the question is is the FDIC fund adequate
00:59:18
and I think we're about to find out it may be the case that a 1.3 percent insurance premium grossly
00:59:25
you know understated the true risk of putting your deposit in a bank and we're about to find out that the FDIC is
00:59:32
inadequate I don't know the answer to that question well I think this boils down to the profitability that an equity
00:59:37
shareholder of a bank expects of them and to your point is it viable for large g-sibs to
00:59:49
guarantee a hundred percent of their deposits absolutely the implication of that will be an enormous hit to their
00:59:56
short-term profitability and their return on invested Capital it would just take a massive hit and so as a result
01:00:01
the stocks of those Banks would fall pretty precipitously which would have a real negative impact on the executives
01:00:08
and the CEOs of those Banks and the shareholders that own those Bank equities so I think ultimately it'll
01:00:15
come down to that decision which is that if you do want to protect the depositor
01:00:19
in the American banking system a hundred percent for every dollar and do it in a simple way it will come
01:00:26
at the sake of the equity holders of the banks and if you're willing to make that
01:00:29
trade-off then you can guarantee 100 of the deposits if you do not want to make that trade-off then the equity holders
01:00:36
will still retain more value than they would otherwise and Freeburg we've seen a couple of examples of the
01:00:42
market the free market looking at the situation and making new products and services
01:00:48
wealthfront Mercury Bank both talked about load balancing across 12 accounts three million dollars so that
01:00:55
would make some people who had over 250k just instantly be backstopped and insured and then
01:01:03
where you know there's discussion of um we I talked about last week hey why don't you just have a vault where you
01:01:09
pay a bank to hold your money safely I got a ton of responses from all in fans pointing out multiple Banks and services
01:01:16
that have been trying to do this and also crypto solution so is it going to be a free market solution you think or
01:01:22
when we're starting to see them emerge that maybe covers this Gap a little bit Freeburg and then what are your thoughts
01:01:27
just generally on should we backstop the banks and the deposit I'm sorry the banks the depositors to be clear so if
01:01:32
we just quickly analyze the function of a bank they loan money to either residential real estate buyers
01:01:43
like homeowners or commercial real estate buyers or businesses that need it I think the majority of the capital goes
01:01:50
to residential real estate and if they can't loan enough money they typically buy bonds right they buy
01:01:57
other people's loans in the form of bond Securities like treasuries or asset-backed Securities or
01:02:04
other things like that our mortgage-backed securities so they use the cash to make those
01:02:10
Investments to to make those loans and then they obviously earn a return on that you know I think we've talked about
01:02:15
this in the past the thing that that biology I think has misstated and it would be good to have a conversation
01:02:21
with him about this publicly because I I have listened to some of his interviews
01:02:26
in the last couple days he says the banks are they don't have the money that you the depositor thinks that you
01:02:34
have and so what he's saying kind of implies that there is no money that there is no asset
01:02:40
value there at all he uses Sam bankman freed and FTX as an example that the money that was given to Sam bankman
01:02:48
Freed's you know exchange fund was used to buy assets that then very quickly declined in value by 99 but he held them
01:02:56
on the book at 100 and then he reinvested the money in all sorts of other different stuff
01:03:01
and in the case of the loans made by Banks and the assets that they as a result hold
01:03:08
the value may have dropped by 25 in kind of the worst case which is you know the
01:03:15
Silicon Valley Bank 10-year treasury bond scenario where they bought you know all 20 billion dollars worth of Treasury
01:03:21
bonds and and you know they took a big hit on that but it doesn't mean that there's no
01:03:25
asset value it means that the value has declined and typically there's a buffer between the asset value that the banks
01:03:32
are meant to hold and the deposits that they owe back to their customers and if that buffer gets exceeded then the bank
01:03:39
is technically has negative equity and if all the you know depositors said I want my money back and they went and
01:03:45
sold those bonds into the market they wouldn't be able to make the depositors whole but it doesn't mean the depositors
01:03:50
end up with zero it means instead of getting a hundred cents on the dollar they get 93 cents on the dollar 88 cents
01:03:56
on the dollar and it would require an orderly dissolution of the bank's assets selling those bonds into the market to
01:04:02
generate the cash to pay back the depositors so the reason we've seen this kind of this fed vertical Spike number
01:04:08
is because assets are moving so quickly depositors are moving their value so quickly from One bank to another that in
01:04:14
order for the banks to make the cash available to those depositors they've had to borrow from the fed and then
01:04:19
they're going into the market and doing this kind of they should be doing this orderly asset sale of the bonds to
01:04:23
generate the cash to pay back the FED which is exchange musical chairs money causing these problems as musical chairs
01:04:30
and if the musical chairs stop then we don't have this problem correct so if people stopped moving uh deposits
01:04:37
around then you're right the banks wouldn't need to borrow money to give depositors their money and then go do
01:04:43
the work of selling the bonds in the market people free without moving their money around because I'm insured because
01:04:48
it's not insurance so here we go so you just ensure it and this whole thing stops so it costs them nothing to just
01:04:54
say that right yeah exactly here's the thing Jake how you mentioned this case that you hear a lot of people saying
01:04:59
well why don't you just take your two and a half million dollars and break it up into 10 accounts which is what people
01:05:04
are doing yeah yeah well look it's not feasible when you need to run a big payroll at the end of the month and
01:05:08
you've got payables it's administratively too complicated and by the way what have you accomplished doing
01:05:13
that if you haven't solved anything so that's an accomplished for the startups I'm just given that prediction the
01:05:19
system yeah why won't you just raise FDIC to two and a half million or have FDIC be based on the number of employees
01:05:26
in your company or allow a higher class A business class of FDIC that goes up yes exactly 10 million and in exchange
01:05:36
the quid pro quo has to be that the bank can't put that money in Risky assets not
01:05:42
this is so obviously the reason I walk through that whole explanation because I want to answer
01:05:48
your question I'm sorry it took so long but like I want to highlight that because that is what an insurance
01:05:52
underwriter put aside the FDIC and put aside Banks and put aside the government's role yes that's what an
01:05:58
insurance underwriter's job would be they would look at the volatility and the pricing on the bonds that the bank
01:06:04
holds and they would determine ultimately two things probability of loss and severity of loss and the
01:06:10
probability is How likely is it that you end up in negative equity and that you have people requesting money and you
01:06:16
have to sell those bonds and lots very quickly and then the severity is how much would you actually lose so if if
01:06:21
you know the FED raises rates by three percent and your entire book is tied up in 10-year bonds you see a 25 decline in
01:06:29
the value of your bond portfolio that's as bad as it gets if you start with a 10
01:06:32
buffer now you only we have 85 percent of the money you owe the depositors so your loss is 15 cents on the dollar so
01:06:39
the insurance company would say what's the probability of that event happening how much should we underwrite it for
01:06:44
what should we charge as a premium to do that and that's ultimately how the rates
01:06:47
would get set now the problem with most insurance models around this sort of a problem set
01:06:52
is that these are the extreme tail events that have never happened and so the insurance to Sax's point is super
01:06:59
cheap leading up to the extreme tail event and then everyone's like oh my gosh we underpaid for so many years we
01:07:06
didn't realize how severe the losses could have been we didn't realize how significant this was going to be and as
01:07:11
a result you now see this kind of multiplying effect because people are like oh my gosh if it happened to them
01:07:16
it could happen to me let's all sell and it gets worse and worse and worse and so
01:07:20
you know the real rate for the insurance going forward will now have to take into
01:07:24
account this massive risk but the game theory problem is as saxes point out if you just ensure everyone the cost of the
01:07:30
insurance actually goes way way way down because now you don't have this money movement problem
01:07:35
and so you know the the point is the more you insure at this point the cheaper the insurance will actually be
01:07:42
if you're an Actuarial or free market underwriter you know free market kind of you know underwriting process on this
01:07:47
thing because now the probability of having this Bank Run goes way way down and therefore the cost of the insurance
01:07:54
should go way down and so the the irony is if you actually did and this is getting super technical
01:08:00
but if you actually looked at the statistical model and said how much is this going to cost to insure every
01:08:06
deposit it gets much much cheaper the higher the the the deposits that you're willing to
01:08:12
ensure would be that's my sense of what the free market would do here and it's certainly what I think the federal
01:08:17
government should probably think about doing if they're going to continue to play a role in backstopping Banks the
01:08:22
net net is people startups right now are doing five to ten Banks I'm watching it happen they're
01:08:29
doing all these sweep accounts they're doing multiple accounts so the government if it doesn't raise the FDIC
01:08:34
limit is basically just creating extra work for everybody and it's going to be the same outcome so this people are
01:08:40
gonna the street will find its own use for technology and how to hack this and that's what's happening with these
01:08:45
Services yeah in real time just a steel man the the old-fashioned view or the traditional view of this they would say
01:08:52
that well you want those startups being paranoid do you want those Sharps doing the work of disciplining these banks by
01:08:58
moving their money elsewhere if they detect a problem however the problem with that is you get these Bank runs
01:09:04
that is what a bank run is in Parts is people moving their money because they're fearing that the bank is not
01:09:10
doing a good job with their loan portfolio so this is why in the let's call it the olden days before FDIC we
01:09:18
had Bank runs and panics all the time and that's why FDIC was invented so there's a hugely destruct a problem that
01:09:26
comes along with placing the depositor in charge of disciplining the banks and I would argue that the deposit is not
01:09:35
the best person to do it it's the regulator just to kind of layer on what what Friedberg was saying
01:09:39
I think there's like a fundamental market failure with banking in the sense that the depositor or the
01:09:45
consumer and the bank think they're getting two completely different things when you open a bank account or a
01:09:50
checking account you think you're getting a checkbook an ATM card a place to do payroll run you know and it's a
01:09:58
service that's a service and maybe you make a little bit of interest but it's not even your main motivation okay
01:10:03
that's what you think you're getting your money most of all is safe because you're not signing up with a service
01:10:08
provider to have any chance of losing your money you're not gambling right but now what does the bank think it's
01:10:13
getting you know what the bank thinks it's getting an unsecured loan that they can then turn around and invest in
01:10:18
whatever they want or whatever the law so there's a disconnect between the parties and the transaction exactly it's
01:10:23
a total disconnect and moreover the way the management of the bank is compensated is that they only have to
01:10:28
pay back your loan your deposit basically isn't their loan at par and anything they make
01:10:35
on a bet that they make with that money they get to keep they get to keep all the upside their stockholders and
01:10:40
management get to keep that and those incentives are driving this and that's what drove the risk in all likelihood at
01:10:45
Silicon Valley Bank they were getting 200 billion dollars whatever percentage point they got chemov
01:10:54
their incentive it's not just them but the whole banking system creates the incentive they're highly leveraged the
01:11:00
deposits from their standpoint are leveraged they're leveraged ten to one so their incentive is to go to the
01:11:06
casino and gamble it because they get to keep all the upside and if they lose it
01:11:11
it's basically someone else on the hook final work your mouth in early May the FED will
01:11:17
release their investigation into Signature Bank and svb okay Powell said that this week
01:11:24
I think it'll be really interesting to see how much honesty they both put into the report and then
01:11:31
whether the entirety of that report is made available to the rest of us to read but I think sax has very eloquently
01:11:38
summarized what's happening and it doesn't take a genius to figure out that this doesn't make sense and so the
01:11:48
question is what is the tolerance that we have for changing something that clearly is
01:11:55
mischaracterized what consumers think they're getting and what banks are then doing are two
01:12:01
totally different things and If the Fed actually is really really honest and really lays bare everything that
01:12:10
happened it'll be very hard to not legislate changes based on it and this your best
01:12:16
uh swing at a legislative change would be what chamoth what is the what is the low-hanging fruit what's the layup here
01:12:23
well I think we've seen this happening in other markets for a while which is that
01:12:28
banks have become In fairness to them much much better at risk management post Dodd-Frank post great financial crisis
01:12:35
and the result of that is that there's been a lot of emerging private credit markets because most the bank is about
01:12:41
lending right they're not really buying equities they're lending money they're a
01:12:45
debtor in possession of something right and there's been a just a massive explosion
01:12:52
of private credit and it started in the most obvious areas it started in things like Clos it started in asset-backed
01:13:00
Securities solar car loans credit cards mortgages private Equity backed deals so I think
01:13:08
the rational answer is that Banks need to protect a hundred percent of deposits and that if they want to have
01:13:19
extracurricular activities if you will they need to be able to raise money from investors put that to work in a really
01:13:28
fair and transparent way and then share in the profits between all of the related parties that are involved in
01:13:36
that transaction no different than any other risk-taking organization and I think that this is now what we've
01:13:43
probably shined a light on is in really odd loophole that just needs to get closed in 2023.
01:13:50
there's such easy uh hygienic changes here like let's put it a different way if you
01:13:57
raised money for a liquid hedge fund that had quarterly redemptions and then violated the LPA and stuffed it
01:14:05
into private companies that had 10-year illiquidity there would be hell to pay yeah and vice
01:14:11
versa if you raise money on tenure a liquid locked up capital on the presumption you were going to invest in
01:14:16
startups and then instead put it in the stock market thinking that you could flip it and make some money
01:14:22
you would have violated the LPA and there'd be held to pay similarly I think what Sox is stating is that there is a
01:14:28
mismatch of what the depositor in this case the investor expects and what the risk manager is doing
01:14:37
and I think that you have to correct that one way or the other make it abundantly clear that we're never going
01:14:41
to ensure 100 and deal with that risk or make it 100 and deal with the Fallout which is largely about uh wiping out a
01:14:51
lot of equity value in Banks LPA equals limited partnership agreement right just
01:14:57
just to clarify one thing I'm not saying that these bank managers are all going to the casino and gambling the money I
01:15:01
think that they are generally more responsible than that what I'm saying is that the incentives
01:15:06
created by this crazy system we call banking create a weird incentive for them to
01:15:12
gamble because they're so highly levered from their standpoint your deposits are
01:15:17
their leverage everybody but the gsibs because I think the g-sibs there's so much scrutiny if you look at how
01:15:23
well-run City B of A Wells and JPM are relative and contrast them to the sub-g-subs
01:15:31
it's like night and day and so the other thing that I think we've realized is who
01:15:35
thought it was a good idea to raise the bar on eligibility from 50 billion of assets to 200. clearly now that made no
01:15:43
sense it makes more sense to actually categorize every Bank as systemically important maybe not
01:15:51
globally but at a minimum to the US economy because these people play a vital function in society and they were
01:15:58
allowed to take a much more aggressive wrist posture because they were able to Lobby
01:16:03
the government to change the rules the CEO of tick tock which claims to be an American company now or an international
01:16:09
company was in front of Congress today his name is show Chu this is the first time he's
01:16:15
really I think spoken publicly in an extended period four and a half hours he was
01:16:21
grilled and it was absolutely brutal it's the first time I've seen a congressional hearing that was
01:16:28
bipartisan in a long time and he said that quote the bottom line is this is an American date this is
01:16:37
American data on American soil by an American company overseen by American personnel
01:16:41
and then was immediately squirrely when asked if Chinese employees including Engineers have
01:16:51
access to this U.S data and he said this is a complex subject over and over again
01:16:56
he was evasive and this did not look good for tick tock well the question now becomes does it
01:17:04
become divested and go public or does it get shut down sex I think his Goose was
01:17:10
cooked as soon as they asked him the question in preparation for this hearing did you consult with any member of the
01:17:15
CCP and he could not just outright say no no so that's his Goose was cooked as soon as he couldn't just say no what do
01:17:22
you think about the bipartisan nature of this and what do you think the outcome is sex well this is one of the rare
01:17:26
things where it is bipartisan I mean there's there's so much outrage and anger at this I think that they should
01:17:33
let the company divest it I think it is divestiture or shutdown for tick tock since we're not Communists here I think
01:17:41
they should be given the chance to fully divest to an American-owned company but look I just wish that there was as
01:17:49
much bipartisan consensus and outrage directed not just at Chinese spying of Americans but on the American deep State
01:17:58
spying on Americans because we just had hearings showing that the American government conducts elaborate spying
01:18:06
operation surveillance of Americans on social media this was all revealed in the Twitter files and
01:18:12
we got certainly no bipartisan consensus on that Republicans were outraged but Democrats tried to portray it as some
01:18:18
sort of spat between Trump and Chrissy Teigen I mean that's all they wanted to talk about so I would like to see this
01:18:25
problem comprehensively addressed and that means I think Tick Tock going into the hands of an American company but I
01:18:32
also would like more assurances that American companies will not be working with the Deep state to spy on us and
01:18:38
infringe Chrissy Teigen and Donald Trump who are two people you'd never invite to
01:18:42
a dinner party free park what are your thoughts is it going to divest should it be forced to
01:18:47
divest being intellectually honest about it what are your thoughts on tick tock in
01:18:54
America uh yeah I think I've shared this in the past I think they're probably going to
01:18:58
have to spin this thing out and if they hold any Equity if the Chinese parent company holds any Equity interest it'll
01:19:04
probably be non-voting shares and there'll be a mandate that the majority of the shares and some degree
01:19:10
of oversight I believe that's the right thing to do from a national security issue for
01:19:15
America to force them to do that I don't know from a national security point of view I really don't I don't have an
01:19:21
opinion from National Security and Tick Tock I don't know I I've always thought that Tick Tock was
01:19:27
a really what's the right word like it's like a firefly for you know Chinese Invasion and it
01:19:36
feels like you know it's a very easy kind of Target for I think what is generally a big kind
01:19:43
of social Consciousness right now so you know whether or not there's actually like
01:19:49
uh some National Security points if if there were I'm pretty sure that a national security person would have
01:19:55
stood up and said we need to stop this thing I'm not sure I've heard that publicly
01:19:59
uh but but I will say like my point of view from like just seeing the political behavior is that they're probably going
01:20:06
to mandate that these guys spin this thing out to U.S investors and and that they have you know don't own any that
01:20:11
the Chinese don't have any Equity or management oversight or interest in it in China
01:20:17
itself the Chinese government does not allow kids to play video games during the week
01:20:22
and only three hours on the weekend they're using apps like WeChat to dictate social score and
01:20:30
social behavior whether it's smoking on a train or not paying your bills and they are saying they will not divest but
01:20:38
anybody who is an investor in a company that had a chance to go public for tens of billions of dollars and eventually
01:20:45
take on and people believe that this is a viable competitor to Facebook and Instagram this could be a company worth
01:20:52
ultimately hundreds of billions of dollars if you were an investor in China you would want to IPO you would want to
01:20:58
get liquidity so if they are refusing to sell what does that tell you as a market
01:21:03
participated in a participant and somebody who's been a capital allocator for over a decade there's bigger
01:21:08
problems in China than even Tick-Tock U.S represents for them I think it's probably what it means so it's a pretty
01:21:15
bad tell I don't think divestiture is a real option because when you think about the
01:21:20
details of that how will the government be satisfied that the code base was separated
01:21:25
elegantly that there was no malware surreptitiously planted how will you actually prove all of this
01:21:34
to a degree that satisfies a legislator so I think the pound of Flesh that they want
01:21:42
is more easily and more salaciously satisfied by shutting the thing down so if I had to bet on what happens
01:21:49
I bet more on that I didn't think Tick Tock did a very good job and I think that there are some they were terrible
01:21:55
today and I think that there are some real issues around how much control does actually flow back
01:22:02
I don't think that it was definitive he needed to be much clearer and adamant that this was an independent
01:22:11
business that didn't have back doors to China and the CCP to appease Congress he
01:22:16
didn't do that no he was like I have to check in on that I'm not sure yeah I think it was a little bit of the exact
01:22:21
opposite actually sax is right like that first question was just the death blow right from the beginning it's like oh
01:22:26
this is not going to go in a good place because they should have been able to see that that question was going to get
01:22:31
asked and you need to have that asked and answered philosophy where the only answer is no
01:22:38
the only answer you could have given is no and the fact that he wasn't able to say that
01:22:43
it was a bit of a feta complete as soon as that was in my mind I was like this thing is getting shut down because I
01:22:48
don't think there's a shutdown yeah there's no divestiture plan that can be technically audited in a short amount of
01:22:55
time to appease these folks they want a pound of Flesh and then separately the bigger issue that I think
01:23:04
you have to deal with is what does that mean for how other governments may be pressured to act who want to be on the
01:23:12
pro-us camp and I think that that's a question because bike dance and Tick Tock have presence
01:23:20
Beyond just China and the U.S a third question is how does the golden vote get used on the
01:23:27
bike dance board and what do they do and do they even want this thing public explain golden vote essentially they'll
01:23:33
decide what happens to that company and they have that in Alibaba they have that
01:23:37
I think a 10 cent I think they have that at bike dance so the Chinese government has a very strong
01:23:43
hand in the direction of these business and then the final point is that there's a secondary app that Tick Tock
01:23:50
has called cap cut which also is enormously popular in the United States which is yet another
01:23:56
potential back door for privacy or spying violations whatever the U.S Congress wants to pin
01:24:02
on them so I think it's a very complicated moment for that business and their U.S asset
01:24:11
sex it's pretty clear the CCP is making this decision if they decide let it burn let it get
01:24:18
kicked out of the United States what does that do in terms of Game Theory between the two countries and going
01:24:25
forward because obviously they don't reciprocate we're not allowed to have Google Twitter Instagram whatever in
01:24:30
China so is this just you know reciprocity what's what decision are you saying the CCP is making well the CCP
01:24:38
has the golden vote it's their decision to divest or not divest chimately they will not divest I believe they're saying
01:24:45
that is they're not going to have the choice I don't I don't see what decision the CCP has in this
01:24:51
that's right it's not a divestor or don't divest I think it'll be shut down I think they're getting kicked out of
01:24:57
the United States okay do you but you believe they're going to divest sex I'm saying that that's what I would
01:25:03
support so what do you think is going to happen maybe you're right I'm not sure but I
01:25:09
think they should be given the chance and if you truly can't move the servers to the United States and vet the code
01:25:15
base I feel like you could I think you could have an acquirer figure it out you know vet the code base
01:25:22
move the data centers make sure there's no back doors I think it's not impossible hard but not impossible
01:25:28
okay so let's go with the scenario that it gets kicked out of the United States is shut down are there any second or
01:25:34
third order impacts yeah is this rashes up the tension between the U.S and China
01:25:38
but we're already we're already there yeah we're right there no change all right listen this
01:25:44
has been an amazing episode oh chamoth did uh your 3D rocket company make it to space I saw they had a nice uh little
01:25:53
lift off there thank you I just wanted to give a shout out this is like while all this chaos is
01:25:59
happening in the world it's amazing to see pretty incredible engineering so last night
01:26:05
we did have a successful launch so relativity has a 85 percent 3D printed rocket which over time we want
01:26:12
to try to get to 95 but it's the fuselage it's the engines it brings the cost of space flight down
01:26:21
by an order of magnitude it is a hugely disruptive idea and so what they tried to prove was that they
01:26:28
could get this thing into space and they accomplished a lot of goals they got past Max Q which is sort of the
01:26:35
point at which the atmospheric pressure is the strongest on the fuselage so we proved
01:26:39
structural Integrity we got to main engine cutoff we had stage two separation so a lot of really important technical
01:26:47
Milestones were achieved it allows them now to unlock a bunch of contracts that allow us
01:26:54
frankly just to keep going and building there's still a lot of work to do from here we're building now the Next
01:26:59
Generation rocket which is called Taran R and Rocket engines which can take instead of 1500 kilograms about 20 000
01:27:08
kilos so enormously proud to have been around this journey my partner Jay has been really
01:27:16
the key person on it but I just wanted to give a huge shout out to Tim Ellis and the team at relativity it's super
01:27:20
super cool but they pulled out just amazing how uh access to space is being democratized and the prices are being
01:27:28
lowered so dramatically what's the impact that's going to have ultimately for your Berg you think on Humanity I
01:27:33
mean obviously going to Mars is this incredible feat technologically and just mind-blowing but what do you think the
01:27:42
the net result of all this space activity is going to be for The Human Condition and the species I mean I think
01:27:48
there's a Vibrant Community of startups and money coming into this space right now I do think all these guys are going
01:27:55
to have to in order to gain wider spread Capital markets attention like Elon has had to do with SpaceX
01:28:02
they're going to have to find business models that have kind of near-term viability that don't
01:28:07
depend on government contracts like Sonic like starlink yeah and so I think that's the key question it obviously
01:28:15
these are very Capital intensive businesses they have very long Horizons to hit their milestones
01:28:21
so there's certainly Capital available in the early stages to make bets on whether or not they can
01:28:28
get these Milestones but but you know the broader kind of attention in capital markets is going to come from these
01:28:34
things building real kind of businesses that generate value for consumers and markets
01:28:39
you know one of the things that I think can unlock opportunity for this Market overall is
01:28:46
low-cost energy you know if we can get below call it one cent to three cents kilowatt hour of
01:28:54
power call it one cent a kilowatt hour power I forgot the exact relationship you can get very cheap
01:28:59
um you know hydrogen and oxygen fuel sources and so you know the it's funny if you actually play out the the scale
01:29:07
factor for space for the space industry much of it at scale will get driven by the cost of electricity so it's another
01:29:15
reason why there's going to be I think a pretty tight coupling between the cost of power and ultimately
01:29:20
the vibrancy of this Market you mentioned something important the other key thing that we proved was that this
01:29:25
is a pure methyl Ox engine so CH4 and liquid oxygen and it was not just stage one but also stage two which is unique
01:29:33
the only other folks that have tried to prove that you could have multi-stage methylocks is China and their most
01:29:39
recent launch failed but it highly simplifies the engineering problem at hand especially the ground operations and
01:29:47
whatnot and sort of like filling these rockets and making them viable so that was another really big milestone the
01:29:53
producing of that fuel Friedberg requires energy if that energy was cheap it would be cheaper to make and process
01:30:00
that fuel that's right yeah this is a pretty pretty direct tie-in particularly with
01:30:05
scale manufacturing on fuel that would be used in these rocket systems and and power prices here on
01:30:11
Earth so if and as we get power prices down either through scaled Renewables or ideal infusion or some other kind of new
01:30:18
technology yeah yeah or nuclear fission or something then the cost of you know Fuel and the
01:30:25
cost of these space programs goes down and that ultimately I think the real question everyone asks is how do you get
01:30:30
away from it just being government services businesses which you know have a low multiple uh in markets and
01:30:36
obviously you know High dependency on one or two key customers and how do you actually get private markets uh private
01:30:42
market products moving so tourism obviously makes a lot of sense travel you know around the Earth in 20 minutes
01:30:50
or something or you know some people have talked about mining or colonies and you know who would fund
01:30:56
that real estate it's unclear right now what the ultimate traveling is a wild one yeah I've talked to Elon about that
01:31:01
but the idea that you could have a rocket ship take off from Texas and then be in Tokyo
01:31:08
you know like half an hour of minutes later I can only speak for myself but uh I
01:31:14
would really like to visit Uranus Reaper all right everybody came back look at the player here he's
01:31:21
got layers are for players sexy people look at this he is he has two layers in can you get an ascot that's subtle isn't
01:31:26
it he's pulling a Steve Bannon yeah you gotta get more disheveled he needs the six pens in the pens No Shave can you
01:31:34
tell us do you have a stylist an actual person you pay for the rest of you Nick can you please put the picture of Steve
01:31:41
Bannon where he wears the multiples polo shirts again you uh need to stop for next week attacking me it's really weird
01:31:49
oh yeah Bannon he thinks you're a venture a vulture capitalist or something who's been attacking you
01:31:54
banana was one of many people attacking me on Twitter I think on his podcast I think yeah you
01:32:01
seem to have made a lot of a lot of new friends on Twitter lately when you pass around half a million followers
01:32:06
basically what happens is you become a politician you will net there will always be a fringe element of people who
01:32:13
need to manage their anxiety by venting and that's what you're feeling you'll live that now at million use uh you know
01:32:20
followers 2 million 10 million whatever there's always going to be a small percentage J Cal doesn't know this
01:32:24
because he has mostly Bots that are his followers that's true real when you have
01:32:29
real people this is what it is you'll get this one percent or less than one percent and just the number goes up so I
01:32:34
would ignore it don't care don't worry about what user 747 don't feed the brigadunes don't care what seven users
01:32:40
74786 has to say don't worry about it yeah absolutely I love you all right and I'm looking forward to seeing you on
01:32:46
Thursday for the Rain Man himself David sacks the Sultan of Science and Prince of panic attacks are PAL David Friedberg
01:32:55
and the host with the most gonna make it what about me what about me I'm going I'm calling you the host with the most
01:33:00
I'm adding something the host with the most who's making me the shiso leaf Tempura with
01:33:05
Hokkaido and you are the world's best genuflector I am the world's greatest guest greatest house guest if you need a
01:33:13
house guest to look at your house Italy Tokyo and Seco wherever you need a house
01:33:17
guest I'm ready to come and make it a good time you're the modern Kato kale and you're horrible absolutely the best
01:33:23
you keep inviting me every week you are enjoyable though love you boys [Music] somehow
01:33:38
[Music] is [Music] [Music]