00:00:00
is there going to be an open mic night in we were going to have you speak friedberg but we realized you're not
00:00:06
capable so we want the show to be entertaining yeah it's not that's not personal freak
00:00:12
you guys are missing out i'll tell you guys what makes my stand-up comedy so good oh god here we go oh my god we're back on this jesus christ it's my
00:00:18
creative sensibility so if i have some time to prep and write my script and
00:00:23
read my own creative insights yeah okay bring one joke next week jkl for all the
00:00:29
time we've spent together on this podcast you know so little about me it's so it's so depressing i gotta be honest
00:00:35
well you know here's the thing about friendship it's a two-way street you gotta open up a little bit we gotta go out and get drunk one night
00:00:41
[Music] your winners absolutely rain man david sacks
00:00:53
[Music] just want to give a shout out to this
00:00:59
guy andrew lacy okay okay shout out he is the ceo of a company called prenuvo oh yeah can
00:01:06
you just flash it on the screen prenuvo i went to pre-nuvo and what they do is they do a head to toe mri scan in 45
00:01:14
minutes and they use a bunch of machine learning and image recognition to help
00:01:20
a radiologist interpret these mris in real time beside you it's a service that you have to pay a
00:01:26
few thousand dollars for there's a location in silicon valley in redwood city and a couple of others and we
00:01:32
mentioned it but the reason i'm bringing this up is he sent me an email yesterday and he said i just want to thank you and
00:01:38
the besties for mentioning prenuvo because we had a bunch of people come
00:01:44
and he said we found no less than 11 life-saving diagnoses 11. 11 people 11
00:01:51
individuals listening to the pod pot saves lives went to pre-nuvo after hearing about it
00:01:57
had a head-to-toe mri found you know all kinds of issues from
00:02:02
a brain tumor and brain cancer to stomach cancer and other things and uh
00:02:08
was able to get the care that they needed amazing anyways i just want to give a shout out to him for for doing a
00:02:13
lot of really important work and for the folks that are listening that have some money set aside and can afford
00:02:18
to do this i would just really encourage you we have no financial stake in it nothing other than we are users of it
00:02:24
but uh check out prenuvo.com and uh shout out to andrew and his team there okay here we go three two let's start
00:02:30
the show the war in ukraine has him insane in the membrane and biden's new
00:02:35
disinformation council is gonna have him detained to calm him down from tanking solana he started smoking that marijuana
00:02:43
you know him as the rain man he's here again david sacks how you doing have a good week yeah not bad
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all right uh well big energy this week huh okay in high school he had no friends but
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thanks to the pod undergrads are in his dms all forms of steak he's a persian
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he's the vanguard of all the virgins the keane the sultan of science david friedberg
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wait i missed like half of that because chamomile is laughing so hard i can do it again do it again do it again let me
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try from the top now in high school he had no friends but thanks to the pod undergrads are in his
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dms all forms of steak he's a persian he's the vanguard of all the virgins the queen of quinoa the sultan of science
00:03:28
david just for the record there's no undergrads in my dms but i appreciate
00:03:33
the intro all right we'll check all right in three two he's right before freakburg is tweaked and the show
00:03:40
hasn't started i think i'm taking over intros next week okay i'm at least gonna do j-cal yeah please by all means next
00:03:46
week you do mine you're a comedian who has a chance to prepare in advance and think your thoughts go ahead big boy give me a week you got it okay yours
00:03:53
next week let's see these latent stand-up skills in action yeah absolutely he's been hiding them from us
00:03:59
yeah i don't know a lot of stand-ups who hide their ability you know the funny thing about hiding something and not having something from the outside end
00:04:05
they look the same you can't tell a difference sorry jake i'll go over to you okay he's
00:04:12
dropping annual letters in luxurious sweaters as far as respects go well it can only get better the dictator himself
00:04:19
jamal polly can i i cannot comment on the spell
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oh my god i mean this is getting brutal who's writing these oh my lord all right
00:04:30
everybody it's been a big week uh did you did you read my annual letter any of you three i i saw your
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no that's a no i get it i get it i reviewed the table where you listed all your results and i actually sent it to my
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team i was like this is a really nice way of summarizing you know a firm's results over you know a long period of time because
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you had every fund and your totals and uh and all the key metrics well can
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i talk about that for a second yes you know what's what's incredible about what you're saying saks is i i was interested in a bunch of other
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funds that i'm invested in and their returns and then i've also seen a bunch of leaked fundraising decks of all kinds of
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other firms from growth stage to crossover to pe and it's incredible that they are not
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standardized right some people only show gross irr some people show net irr some people
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don't show the total value of the paid in capital which means you know if you have a hundred dollar
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fund what is the total value of all of its holdings some people don't show dpi which is
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distributions of paid in capital which means okay for every dollar you've taken in how many dollars have you sent up if
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you don't show all of them what was shocking to me is how much you can kind of
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hide and play and manipulate the numbers and one of the most crazy things that i
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saw is that there are these late stage funds that write into their fundraising decks
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that what they actually use are lines of credit to juice irr so what they do is if they're about to
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do a deal they'll actually get a loan from a bank put that money into a company wait until
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it's about to get marked up and then what they do is they actually call that original money from their
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elbows and pay back their capital call line of credit so what does it do it inflates irr
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but this is why if you do if you see the other numbers it still shows that it's kind of like you know not doing much of anything so
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if you ever see multi-hundred percent irrs or high huge irrs with zero dpi
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and a marginal tvpi it's folks that are playing games to trick lps just a heads
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up that is so weird so what you're saying is just to summarize for people in the world to understand hey we get judged on the rate of return
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each year so if the stock market does seven or eight percent we're expected to do triple that so we've got to hit 20 25
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each year now the clock starts ticking when the money gets called from the lps the partners correct and gets put into
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the company so if you invest in your tour of your fund you pull the money down from the lps you put it into
00:07:02
youtube whatever it is what you're saying is they will take a loan against that future money from a bank at an
00:07:07
absurdly low interest rate let's say one percent or two percent correct they make the youtube investment then two years
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later youtube has a price round that marks it up 20 x then they put your cash in in year three
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of the fun year and pay back the loan now they've paid two percent two years in a row but the
00:07:25
thing's gone up 20 x correct what a that's that's dirty well so it's
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it's dirty enough that the sec has actually now introduced legislation it was in february
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that basically is going to try to uncover all of this nonsense and so you'll have to be much more transparent
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so the format that i used in my opinion is the most transparent way of not being able to hide the cheese you show all the
00:07:48
critical elements together in a simple table that will make it very obvious who's playing games and who can actually
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make money so there is a um semi-legitimate version of the the loan thing which is um you
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know where this comes from is a capital call loan so you know we're making a bunch of investments throughout the quarter a million dollars here for a c
00:08:08
deal 10 million for a series a you know it's happening all the time you don't necessarily want to hit your lps with capital calls for every single little
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small investment so we do is you get a capital call line from svb or something like that
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and then you do one capital call per quarter and so they will loan you the
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money for you know one two three months but it's not for a year but the but the reality is if you have a reasonably well
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developed infrastructure you have a cash forecast of what deals you may or may not close with probabilities and so you
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know what the weighted amount of capital you need to have on your balance sheet is so i agree with you to have a small amount at the edges to pay for
00:08:45
expenses to pay for salaries while you clean up at the end of a quarter completely reasonable but if you're
00:08:51
making you know five or ten percent commitments into a company and you're using this as a way to basically create subterfuge and hide
00:08:59
i i think that that should not be allowed yeah yeah the number of capital calls is annoying for people yeah yeah
00:09:05
anyway i did share that table with our team to because i did like the format quite a bit i i think we'll start
00:09:10
reading it this weekend it's very hard for funds who are not performant to use that format now yours you're you're you
00:09:16
are very highly performant so you can use that format but i don't think people that have not returned money or or have
00:09:21
fake paper markups can use that format because it is too simple yeah yeah i i at the end of the day what
00:09:28
metric do we all look at when we are lps in a fund well this is what i put down i
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put down the ones that i look at for everybody else that i'm an lp in you know so what one is that for you i i
00:09:41
love multiple on cash invest no i i i need to look at the totality of it i need to understand
00:09:46
what is your gross and your net irrs those are important things to understand because it shows how efficiently you put
00:09:52
the money to work of course but then but then ultimately then the other two things that really matter is what is the
00:09:57
total value you've created and then what percentage of that have you given back to me because
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that allows you to understand how much paper value this so for example if today
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let's just say you had a fund that had a tv pi total value of paid in capital of a 5x a 5x on a fund is incredible
00:10:17
but if you've distributed none of that well guess what if we're sitting here in may of 2023 or 2022 rather
00:10:25
the total value of your paid in capital is not really 5x it may be only 3x and it may be actually two and a half x
00:10:30
considering what the markets have done to these companies right and so it allows me to really
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understand how performant funds are in not just being a part of the game
00:10:44
but actually generating realizations and this is the hardest part as i told you jason like this past quarter
00:10:50
i think i passed 2x across my funds when i was managing outside capital
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and i think my gosh it took me 11 years it's hard to return 2x the money and
00:11:00
that means i've returned two and a half billion dollars you know how hard that was
00:11:06
yeah i mean you got to time the exits you have to have the ability to add you know you can't even time the exit you have to you have to be constantly
00:11:12
managing and working your portfolio sometimes you're selling in secondary transactions sometimes you're actually
00:11:18
trading up in private markets where you help this company merge with another private company other times you know if
00:11:23
i think about it the number of ipos i've had is relatively diminished so how do you make two billion dollars where i've only had one ipo which has been slack
00:11:31
yeah so this is a really really hard business and it was just a reminder that you know
00:11:36
in the last four or five years managing capital has seemed relatively easy but in these next few years you're going
00:11:43
to see who's really really good it's kind of like old warren buffet you know you really you know you can see who's naked when
00:11:48
the tide goes up i mean said another way the last five years raising a fund has been really easy uh and writing checks
00:11:54
has been really easy and now comes you know act three which is returning a multiple on the money you easily
00:12:01
collected and boy is that hard and i you know i all of these um new lps the other
00:12:06
thing that i wanted to say is one thing all these lps send me even though i'm not an lp and a potential they send
00:12:11
potential lps their performance because they're so proud of it like quarterly i'm like not even in this fund and they
00:12:16
have these crazy markups crypto investments this whatever but they've returned no capital and so
00:12:22
just to give you just to give you a sense of it if you if you look at the most fantastic organization in the world if
00:12:28
it were an investment manager which is berkshire their long-run 50-year track record is you know around 20
00:12:36
right gross if you look at the most successful asset manager in the world and i would put blackstone at that just
00:12:42
incredibly good and best in class in probably three enormous parts of the
00:12:47
worldwide economy real estate credit um and private equity you know
00:12:53
their long-run track record is that on 200 and some odd billion dollars of private equity and another 100 billion
00:12:59
dollars of of um [Music] of real estate they've returned 2x so
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that's what the upper bound is you know doubling people's money and generating 15 to 20
00:13:11
is the best you can expect if you are really excellent and long-lived
00:13:16
that's the best what do you look at freeburg when you're an lp what number do you care about because you lp other funds and and i think all of us do at
00:13:23
times i made my first venture fund investment in 2006
00:13:30
and i i am still getting distributions from that fund
00:13:35
and i'm looking at it i'm like this is a 2.4 x over that period of time i'm like what the hell why did i even put this
00:13:42
money into this fund i guess this makes sense for pension funds and you know very large balance sheet long-range
00:13:49
investors that need to kind of diversify but as an individual i should have put my money and have had
00:13:55
liquidity on it for 16 years rather than have it locked up and a bunch of private companies sloshing around and you know
00:14:01
kind of dribble out and at the end of all this i only get two and a half times my money back two and a half times your money in 16 years what's that irr it's
00:14:08
like low teens yeah not a great deal no no it's slower you would have been better owning the s
00:14:14
p 500 that's right and so for me i think the the the key the metric the only metric that matters which i think you're
00:14:20
saying chamath is how much cash i got out relative to cash i put in and so
00:14:26
initially my my irr is negative 97 and then it goes up to negative 80 and
00:14:31
then your negative 60 and negative 30 and negative 20 and now it's 14 because i finally got more money out
00:14:37
than i put in and so it doesn't feel to me like uh you know the the just generally
00:14:43
private investing everyone gets excited because we all get sold stories and individuals all gets old stories of you
00:14:48
put a dollar in you get 100 bucks in i mean j cal wrote a book called how i made 100 million bucks from whatever you invested um in uber yep and
00:14:56
um and that story i think gets everyone kind of excited but the reality is the vast majority of the time and if you
00:15:02
diversify your bets like this you're going to end up waiting a long time to get your money back you're going to be
00:15:08
locked up and a top performing fund is returning two and a half x after 15 years which is
00:15:15
not much better than kind of investing in the s p where you could sell that any time you want and use that cash for any purpose you want
00:15:21
well if you did a hundred thousand dollar investment and you returned 260 000 in 15 years i'm on an irr calculator
00:15:28
right now internal rate of return it's six point five eight percent yeah better off from the s p
00:15:33
uh yeah i mean and if you did qqq depending on yeah how hot the market was then yeah
00:15:40
and you get really it's really really really hard to actually make money there are always going to be periods where
00:15:46
people look like geniuses and have markups but you can really see when people have skill after a decade and a couple of up
00:15:52
and down cycles same with hedge funds by the way right hedge funds put up a score every year and
00:15:58
in certain macro cycles that can last many many years
00:16:03
everyone looks like they're doing well and then all of a sudden tides go out and you lose more than you made over
00:16:10
that period of time and then you realize holy crap i was actually in an insurance business where you get paid some small
00:16:16
premium every year and then you have some massive loss one year and that massive loss it turns out your
00:16:21
underwriting wasn't good because you lose more than the um sum of all of the premium you collected over that period
00:16:26
of time and unfortunately a lot of investing looks like this which is you have small returns for a long period of
00:16:33
time and then some massive loss and and the whole business makes you look like
00:16:38
you know along the way a genius but the reality is over any any long cycle um most folks end up kind of in a bad
00:16:44
position um and amanda you know the icc by the way has um has solved this for mutual funds right
00:16:51
and etfs you know there's there's very strict there's very strict standard reporting and i do think that as
00:16:58
um you know for example like if you go to the big banks sorry sex interrupt i just want to finish this last thought if you go to the big banks and you have if
00:17:04
you're an individual like a doctor or dentist or somebody and then and they will aggregate and pool capital and
00:17:10
put it into these funds on your behalf as an example so you know it looks like jpmorgan or goldman sachs is a you know
00:17:17
50 or 100 million dollar lp in one of these big funds but in fact it's just the sum of a bunch of folks on their
00:17:22
platform it stands to reason that if the sec can actually mandate standardized reporting
00:17:28
for private investing it would actually be a really good thing because all of these games will and probably currently
00:17:34
are as far as i've seen in these presentations tricking a lot of folks to put their hard-earned money into things
00:17:40
that actually will never make money and it's because if you selectively cherry pick how you present this data
00:17:46
you you can tell a partial truth so you know i would really i would love i'm happy to be compared to to any
00:17:52
organization but every time i hear somebody chirping about how good they are my only comment is i just want to see
00:17:57
your table in the same format as my table and we can compare it because it allows me to really understand yeah
00:18:02
liquid returns and by the way the point i made earlier about when markets are generally good
00:18:08
hedge fund public market investors generally can look like they're doing well by having a good marginal return
00:18:14
above the the benchmark every year and then one year have a big drawdown and suddenly they realize that their
00:18:19
underwriting wasn't that good the same can be true in in private investing in the opposite way in the sense that
00:18:25
you'll put in small checks small checks and lose money and lose money and lose money and then have one big banger and
00:18:31
you get 100 x return and you look like a genius because your whole portfolio looks good but you fast forward and you
00:18:36
keep doing that for another 10 years all those small checks may not even add up to the banger and that's um that's the
00:18:42
flip reality that you realize and by the way i think that's a good analogy for the difference between public and private investing you have similar cash
00:18:48
flow economics where you can have small returns and then a big loss in public and you can have small losses and then a big return in private and the timing of
00:18:55
when you present your data can make anyone look good if you catch a good hit at the right time or you don't have a
00:19:01
bad hit at the wrong time and then the framing over a long enough period of time i think really becomes
00:19:06
the key measure and the reality is most people don't make it long enough in their career to actually to actually
00:19:12
present true results in how they really do underwrite and by the way to the extent anybody's listening is able to
00:19:17
invest in these private funds i think jason mentioned this uh superficially so let me just dig into it
00:19:23
because i think it's really really thoughtful what he said which you should understand
00:19:29
if you have the option to invest in a private fund you have to understand that that private fund has two
00:19:35
huge negative things working against it relative to investing in the s p 500
00:19:40
so you could put your money into a vanguard etf or if you could put your money into a private fund you need to realize two
00:19:46
things number one is it is illiquid not just for 10 years but it could be a liquid for 12 or 14 or in you know
00:19:54
friedrich's case 16 years so you need to get paid a premium for owning that
00:19:59
and then the second is depending on the business model you may have very high failure rates which means that you need
00:20:05
to really hit these outsized grand slam home runs and if you don't then you're going to be
00:20:12
worse off than if you invested in the s p 500 so that deserves a premium and so
00:20:17
jason's right which is the s p is between seven and eight percent over long periods of time
00:20:22
predictable compounding that's you have to add another seven to eight percent for this illiquidity
00:20:29
premium and another seven to eight percent for the business model viability
00:20:34
of for example being in venture when you add those three things together you do need to get paid basically in the
00:20:40
low to mid 20s returns to be justified otherwise you are much better off just
00:20:46
owning the s p 500 much much much better off sex uh do you what do you look for when you're
00:20:52
lping and now that you have many large funds what do you think lps are looking for
00:20:58
now and what do you advise them to stay focused on the number one metric that matters is dpi which is the ratio of
00:21:04
distributions to paid in capital and it's basically money in versus money out right at the end of the day that's all
00:21:09
that matters is how much money did you put in the fund how much money did you get out the issue is that to jamaa's
00:21:15
point these are 10 to 12-year funds and it takes a long time to get distributions so all the other metrics
00:21:21
are basically triangulations or approximations of what you think the fund's going to do until you actually get to distributions so
00:21:28
i would say in the long term it's all dpi in the short term you look at tvpi the total value to paid in capitals is
00:21:34
basically what's the marked up value of all the positions in the portfolio versus how
00:21:40
much cash has gone in and then the big question is does the tvi tv pi turn into
00:21:47
dpi does the total value explain that to people if chamoth had invested in
00:21:53
slack but there hadn't been an outcome it could be on the books for a billion dollar position so the tvpi is looking
00:21:59
really great but until that company goes public and the shares are distributed
00:22:06
you know the lps haven't realized it so it's it could be ephemeral or it could go down significantly as we've seen with
00:22:12
public markets yeah so in the last four months we just returned our fund one
00:22:18
uh in terms of like real distribution so i think we have like a dpi of like 1.1 or 1.2 on that fund now
00:22:23
the tvpi is like four to five so but it feels great just to distribute
00:22:28
the entire fund out literally in my first two funds i think we we did that as well and it's a really
00:22:34
great feeling and and you know sometimes you know selling 10 or 20 of a position
00:22:39
early and getting over that hurdle and just getting into the one to 2x that's a
00:22:45
pretty great feeling by the way just to talk about how difficult it is to convert paper gains into real gains let's just
00:22:52
say jason in your example you had a fund that had these huge paper gains but haven't distributed anything as coming
00:22:57
into this year okay here's a little interesting data about the ultimate buyer of all of these tech
00:23:03
stocks which is the nasdaq right people that buy stocks in the nasdaq listen to this as of yesterday
00:23:11
more than 45 percent of stocks on the nasdaq are now down 50 percent
00:23:16
so basically one in two more than 22 percent of stocks on the nasdaq are down 75
00:23:24
so almost one in four and more than uh one in five and then more than five percent of
00:23:30
stocks so one and twenty on the nasdaq are down ninety percent so
00:23:36
you can use this to actually get a blended average but what it means is that the ultimate buyers of tech stocks
00:23:44
are taking a 60 discount to what they were able to buy even just
00:23:50
four months ago 60 so there is no public mark
00:23:57
that will support a private mark unless it's also discounted by at least 60 percent
00:24:04
now think about that when you talk about this entire panoply of companies that have been over funded
00:24:11
many who are under executing and burning enormous amounts of money who now have to come back out to the market
00:24:17
as any sophisticated buyer will have to tell them the truth which is i'm sorry guys but the data says there's a 60
00:24:23
discount to this mark are you willing to accept it or not otherwise the lights are going to go off yeah and these marks
00:24:29
only happen uh at least in the private markets and venture funds when a transaction occurs so if somebody
00:24:35
raised a bunch of money as we talked about in previous episodes at a billion dollars you know uh and they're now worth 500
00:24:41
million well that's only going to uh work itself out in fun documents and reports for a year
00:24:48
or two later when the next transaction occurs so the the there's a lagging effect
00:24:53
one thing i just want to bring up before we go into um maybe gdp or the bill uh hawaiian
00:25:00
situation is what we talked about on this pod last year about what was going to happen in
00:25:06
private markets uh i've been seeing the last two or three weeks and i don't know sax and freeberg what you're seeing in
00:25:12
private markets but really acutely people who are going out and skipping rounds this like i'm gonna
00:25:18
you know just skip my seat round and just do a series a i don't have product market fit i'm gonna get credit for work
00:25:24
that hasn't been done i'm gonna raise 10 million without product market fit oh my lord has this
00:25:30
uh that has the dialogue changed i've been on many calls with founders who've met with 50 vcs
00:25:36
and the conversations are moving to you know how many months to break even and uh you know how many customers do
00:25:44
you have and how they increase them let's talk about the churn it is getting uh super pragmatic out there if you're a
00:25:49
founder and we said this a year ago but it's worth stating here this is not the moment i would try to
00:25:54
over optimize if you have a term sheet or money on the table i would i would close it uh just you know founder to
00:26:00
founder what are you seeing sax yeah i mean it's gotten a lot harder i think especially at the growth rounds we
00:26:06
actually have signed two growth term sheets recently and it was
00:26:12
much harder for us to do growth rounds last year just because you had these huge mega funds come in at crazy
00:26:17
valuations but now they're kind of licking their wounds and we're starting to see some really attractive growth opportunities everyone else is backed
00:26:23
off so it's interesting yeah it's changed quickly yeah now one thing to i you know toronto raise a good
00:26:30
point about you know private not only are private valuations sort of sticky but private marks are sticky
00:26:37
and you know companies only get remarked every couple of years and so whereas the public markets get remarked every day
00:26:42
so it is hard to know like what is the proper valuation of a company that raised money last year
00:26:49
because yes valuation multiples have come way down but then also they may have grown and their performance is
00:26:55
better so the analysis that i saw jason lemkin do in his lp newsletter
00:27:00
and we're basically repeating it for our entire portfolio is to calculate what was the ar multiple that you paid
00:27:08
basically valuation divided by arr what was that entry multiple and what is it today
00:27:13
and so we're doing that across our whole portfolio so what you see is sorry sorry stocks clarification ltm arr or you know
00:27:20
uh ntm arr which one basically you last 12 months next 12 months yeah no you
00:27:25
just look at their current error which is you know run rate rate their current run rate revenue yeah exactly january
00:27:32
you times it by 12. yeah basically yes you take the current month
00:27:38
and multiply by 12. but they have to be annual commitments right so if it's not it has to be annually recurring revenue
00:27:44
if they're not in if it's not an annual commitment with an expectation that's recurring you can't count it so for example you don't count professional
00:27:50
services revenue in that in any event so the point is you
00:27:55
you basically calculate what was the multiple that you paid at you know entry
00:28:01
in the company and what is it today as a function of the current valuation and what we see is yeah there's a lot of
00:28:07
companies that we got into i don't know two years ago at evaluation multiple that you couldn't defend today
00:28:14
60 times 80 times 100 times but the multiple today is more like 10 or 20 times because it's actually grown really
00:28:20
fast so you need to look at both sides of the equation and that's the analysis we're running
00:28:25
for every company in our portfolio and then you know lps can decide how to how to market
00:28:30
i mean the most important thing is what's the next investor if they need more capital going to market at well the
00:28:35
question is are you growing faster than valuation multiples are falling correct and then
00:28:41
can you that means you could have a down round a neutral round or possibly an upround but it doesn't so are you
00:28:47
starting to see people just or people discussing on the board level or in your firm hey maybe we take a
00:28:53
sideways round a neutral round we just go to last year's price and top off another 10 million are you seeing that
00:28:59
i've told some of the boards i'm on just keep fundraising just keep the round open top off if there's money available because you know especially if you
00:29:07
raised around eight months ago six months ago those prices like if people are still
00:29:12
willing to invest in those terms that's a good deal i literally had this conversation with the founder this week where they had
00:29:18
raised that in a great valuation and they turned money away because they were like yeah that was a
00:29:23
mistake we're still growing so yeah why would we take the money now if our valuation is going to be you know double in nine
00:29:30
months and now it looks like yeah maybe you know that extra one to five million dollars would have been good to lock up
00:29:36
okay so adding to these headwinds i think we um we've been talking about the possibility of a recession for those uh
00:29:44
uh new to the to the concept of recession if you're under the age of 30 and haven't really lived through one as an adult
00:29:50
it's two quarters the official definition two quarters of negative growth of the gdp
00:29:56
well it turns out uh us gdp fell 1.4 percent in q1 uh and uh q4 we had a 6.9 growth rate q1
00:30:05
was the weakest since the spring of 2020 when covet hit nick cue the clip where sax and i uh basically said this may
00:30:12
happen in january of this year so the concern is that
00:30:17
you know with the losses we're seeing and i mean every day it just keeps like keeping more red that this could turn
00:30:23
into a recession you know popping of bubbles is usually followed by uh by
00:30:28
recessions or so i think you know the fortunes of the economy could turn really quickly here
00:30:33
and that is that is the marginal risk the marginal risk is actually for a recession david is saying something really important the risk in my opinion
00:30:40
is not of runaway inflation anymore the fed is
00:30:45
now in this really delicate situation where china cut rates last week we have an fomc meeting the open markets
00:30:51
committee that sets rates on wednesday i think of this coming week what is he supposed to do the risk is to
00:30:57
a recession because if we over correct yes and the leading indicators all around the world tell us that their
00:31:03
economies are weak then inflation may have actually been much more transitory than we thought and
00:31:08
right now we have to decide because if we over correct we're going to plunge the united states economy into a
00:31:14
recession there's a lot of data here and obviously uh this is
00:31:20
when this data is always in the review mirror so obviously we're talking about q1 it takes a while to collect this data
00:31:26
and there's a lot of different factors going on at the same time obviously kovid and obviously supply chains
00:31:32
consumer spending rose at a 2.7 annual rate in q1 a slight acceleration from q4 there was also a 9.2
00:31:39
rise in business spending so we have a lot of spending going on who knows if that is spending that actually occurred
00:31:45
in the previous quarters and because of supply chains like people's cars are being delivered people's machines and
00:31:51
manufacturing equipment is being delivered now we had negative gdp in q1 for a whole host of reasons
00:31:57
that can effectively be summarized by the fact that we are still trying to
00:32:03
restart an economy at the tail end of a pandemic and we're doing it in fits and starts and so we have these small bursts
00:32:09
of incredible gdp which we had last year and then contractions in the economy right
00:32:14
the thing that's always been true about the united states is that we are a consumer driven
00:32:20
economic engine which means that as long as people feel confident and they're buying things
00:32:26
the economy tends to do well and we tend to move forward as a society when consumer confidence ebbs
00:32:33
and people contract their spending we are in a world of hurt
00:32:38
the last couple of years we've had a lot of consumer savings right we've had a lot of money that's been pent up in the
00:32:43
system whether it's stimulus checks or you know loan forgiveness or all of this
00:32:49
stuff has allowed people to feel much richer and as a result they've started to spend
00:32:55
in dribs and drabs the problem now is that because prices are so high all of those savings
00:33:01
have largely been depleted i just sent you guys a text in the group chat of what consumer
00:33:06
spending looks like in consumer savings rather and it tells a really really scary story
00:33:12
which is that the savings boom is largely over personal savings rate fell to 6.2
00:33:17
percent in march the lowest since 2013. and so what does that mean well it means that the setup is there for
00:33:25
us to sort of really contract what we are able to spend as a society so i think now the odds
00:33:32
even push further in this direction that we could have more quarters of negative gdp and all of a sudden we're back to
00:33:39
what we talked about before which is a 2019 like scenario where the government or the fed specifically
00:33:47
races forward to tackle inflation and in 2018 and 19 it turned out to be a
00:33:52
head fake and by the way in 2019 the stock market ended up more than 30 up 32 or something like that
00:33:59
crazy numbers here and by the way back then in 2019 china
00:34:04
turned over it looked like it was going to be a fast-moving economic recovery for china and instead they sort of
00:34:11
slowed down we have the same thing here we have a quarter of negative gdp we have china in lockdowns we have every
00:34:18
company that's that's in the manufacturing supply chain ecosystem telling the world that we don't really know what this is
00:34:23
going to look like intel today actually said there's going to be shortages and ships through 2024
00:34:28
so i think uh i think it could be a very difficult
00:34:34
path ahead for the fed how do you raise rates 400 basis points into uh into a slowing
00:34:41
economy you could raise basis points 75 you know 75 bips maybe 100 bips but it
00:34:48
gives them very little freedom to operate without really tanking the economy there's also another point to
00:34:54
highlight here which is in some of this data that was released
00:34:59
there was a strong indication that there are real in issues right now with inventories i don't know if you
00:35:05
guys have tried to buy an appliance or a car lately
00:35:10
or a piece of furniture but like i tried in the q4 to buy a car and it was absurd i mean right now there's like one-year
00:35:17
delays to get a freaking couch i mean like everything in this in the global supply chain somewhat related to
00:35:23
the kind of big inflationary pressure that hit us at the end of last year and then everyone placed orders all the
00:35:29
factories kind of had to produce a lot they all couldn't keep up through to what's going on in china right now where there's lockdowns and
00:35:35
factories are shut down i have several businesses in the hardware space that are
00:35:42
actively searching and frantically trying to find components suppliers specific parts even basic raw materials
00:35:49
like aluminum are very hard to get a hold of um and so there's also a very challenging inventory and supply chain
00:35:55
problem when that happens i can't actually wire money and buy aluminum because i'm waiting for aluminum to show
00:36:01
up i can't wire and buy the the microchips i want i can't wire money to my car dealership and buy money so that
00:36:07
doesn't get credited on the gdp counter because those sales didn't close that quarter and as we saw with amazon
00:36:12
recently and others and apples just said that they're expecting i think close to a 10 billion hit this quarter because of supply chain
00:36:20
issues a lot of folks want to spend the spending interest is there the capital flows are there it's just that the
00:36:26
supply chain is clogged up and we're so dependent on getting atoms and molecules moved around and they're all kind of
00:36:32
held up in different places that folks simply can't get their purchases in and so the revenue triggers don't get hit
00:36:38
and so the numbers don't look good from a growth perspective but it doesn't necessarily mean that the demand isn't
00:36:44
there this is a significant inventory problem and supply chain problem that's that's driving a lot of this uh um this
00:36:51
adversity right now in the market it seems and interestingly by the way that doesn't that doesn't mean sorry that doesn't mean that we're not going to
00:36:57
have a recession because you know when i when i'm not able to spend money on apple apple's spending less on their suppliers they're spending less on their
00:37:03
suppliers so there is a trickling effect of capital flows and the recessionary effect may be hit but you know there is
00:37:09
capital and there is demand uh for consumption uh it's just that we're really clogged up right now well and
00:37:15
the consumer confidence index has been on a bit of a roller coaster we were at 130 before the pandemic for the year of
00:37:22
the pandemic we were down in the high 80s 87 88 89 we rocketed back up um you know in 2021
00:37:30
people started to feel like oh we've got these uh vaccines things are gonna go back to normal rock it back up to 128.
00:37:37
and it's been a slow tick down uh to where we're now at 107. and so i think consumers don't know what
00:37:43
to think they don't know if you know inflation is transitory they don't know if gas is going to be seven dollars or
00:37:49
four dollars they don't know if they should spend a big uh do spend on a big vacation or not and so
00:37:55
this i think in terms of people's planning i don't know if people can plan
00:38:00
how their own personal budgets right and i think that's on the confidence thing to chamot's point
00:38:07
we need to have a predictable economy you know it can't be this um
00:38:13
schizophrenic uh to use the term sacks what do you what do you think about what we're seeing here
00:38:18
in terms of we're obviously either in a recession
00:38:23
or dip you know dancing around it we're basically you know on the edge of the cliff right now i think it's probably the most
00:38:29
accurate i tweeted in february hey anyone noticed that we've just entered a recession and i got dunked on by all the
00:38:35
professional economists and you know all these people but the actual experts the yes exactly
00:38:41
correct and now it's like the data just came out negative 1.5 economic growth in
00:38:46
q1 so what i wrote at the time was exactly right and you know i don't know how the threat the
00:38:52
fed threads this needle i mean we've got a slowing economy with negative gdp growth you've got inflation is still
00:38:59
rampant um it's not as i don't think it's gonna be as high as last year just because we're lapping
00:39:04
a much bigger number from last year so on a year-over-year basis the comps are are you start at a higher price level
00:39:11
but inflation's still there so you know i don't know what you do about that um it's it's a really tough
00:39:17
situation and when you have this kind of wealth destruction in the stock market i mean
00:39:23
you know and we uh there was a good tweet that um jamath you shared we should put up on the screen i mean so
00:39:28
much like wealth has been destroyed you don't necessarily see it if you just look at the big cap indices but you look
00:39:35
at all the engines of sort of growth and prosperity the small
00:39:40
caps the recent ipos the growth stocks they've been absolutely hammered it really hasn't been this bad
00:39:45
since the dot-com crash of 2000 like and and not just the like april period but
00:39:51
like all the way in october where it kept going and then uh the two thousand recession
00:39:56
yeah the 2008 real estate crash so we're already like top three worst situations for growth stocks in
00:40:03
the last 20 years and when you have that kind of like wealth destruction it eventually
00:40:09
trickles down into the economy because people just feel you know companies start cutting budgets people have less money
00:40:15
the spending goes down that dynamic that that we're referring to in this tweet in that image is called
00:40:20
dispersion which means you know people may be being be confused when you hear why are all these stocks
00:40:27
down so much but the the indices are not down as much and it's exactly for the reason that david just said which is
00:40:32
that um underneath the surface the mega cap text
00:40:38
consume so much of the market cap of these indices so you know the googles the microsoft's the apples and the
00:40:44
teslas those four just clog up an enormous percentage i think it's approaching 40 of these of these indices
00:40:52
and so underneath the surface you have dispersion which means you have these tail of two kinds of stocks you have
00:40:57
these four big mega caps and then you have everybody else and the mega caps are generating so much
00:41:04
cash that they're just basically keeping the market afloat so at this point maybe there's a small silver lining and
00:41:11
that silver lining is that to be bearish right now is effectively not being bearish these
00:41:17
growth stocks because as we said they've been just decimated at this point to be bearish the indices means very
00:41:23
specifically to be bearish those four names and only those four names
00:41:28
and so that may actually mean that the market has effectively crashed already yeah but by
00:41:34
the way i'm not necessarily bearish on growth stocks from here because like you said they've already been beat up so
00:41:39
badly the stock market's usually a leading indicator what i'm a what i'm a bearish about is just the state of the
00:41:45
economy because the stock market's traded down it trades down on expectations so it was already trading
00:41:51
down months ahead of the slowdown in the real economy so now new in december the
00:41:56
market knew in november the market recession was coming and like around november 6th of last year and they knew it was coming in yes mark knew when we
00:42:03
talked about the sales that bezos and musk did the you know when we were when we sold equities we were saying like
00:42:09
it's like you can't keep all of your money on the table all the time unless you have the
00:42:17
durational wherewithal meaning you're just not time bounded and you can just be there forever and not everybody's in
00:42:22
that position an endowment could be in that position but individuals with no an endowment is not because they have to
00:42:27
create distributions every year right there's i'm talking about the mega endowments where they you know for sure you know you know ford or harvard may
00:42:34
not need to do this but yeah smaller ones might actually be operating you know memorial sloan kettering might actually be operating their budget from
00:42:40
it yeah but just to go back to david's point like it's a really difficult spot like what is the fed supposed to do so they're probably going to tighten 50
00:42:45
basis points in may that's relatively well expected we'll be we'll be able to digest that reasonably well but what do
00:42:52
they say to david's point you know if they all of a sudden go on a crazy program of quantitative
00:42:57
tightening right and what is that again that's when you know we were spend they were spending they were printing
00:43:03
you know money billions and billions of dollars going into the market buying securities and giving people the
00:43:10
money right that's called quantitative easing now we're doing the opposite right
00:43:15
they're selling and they want the money back now the problem is what that does is that removes liquidity from the
00:43:20
market and when you remove liquidity from a market you actually make it a little bit
00:43:26
more fragile a little bit more precarious a little bit more price sensitive and so
00:43:31
it puts us in a very tough situation when the economy is slowing
00:43:36
when these guys may be raising rates and then at the same time removing money from the system
00:43:42
it may be a lot for all of us to handle and so i think that they're under a really difficult
00:43:48
well and if you started decisions there is a business cycle and you know there are always recess recessions
00:43:53
periodically every seven to ten years but they have really magnified this because you had the fed for years
00:43:59
maintain interest rates really too low and doing quantitative easing during a boom and then the federal government was
00:44:06
printing trillions and trillions of dollars and they didn't stop it was one thing to do it during that sort of covid
00:44:13
recession but then last year they printed that last two trillion and that's what set off this wave of inflation so you know when i was like in
00:44:19
school learning about economics and they would tell us that all these government programs and actions are like automatic stabilizers or what have you like the
00:44:26
government helps balance out the business cycle no the government like magnifies the business cycle they've
00:44:32
made this so much worse well they're putting their hand on the steering wheel right it's like let the economy drive let the free market do this and if you
00:44:38
start you know you might oversee her into the federal government is great at setting incentives right and creating
00:44:43
like tax credit programs and incentives for private enterprise to invest money but when they act as a direct market
00:44:49
participant and start to actually direct capital flows and make decisions about how the capital market should work it
00:44:54
never ends well because this is not what they're good at well i think there's also another i mean just to counter that
00:44:59
there's there's also this other issue of not just incentives but when they create a free capital that then allows a market
00:45:08
to find a way to take advantage of that free capital and that's effectively what we've seen happen with medicare medicaid
00:45:15
as well as with the student loan program and um you know i i don't know if we're going to get to the student loan program
00:45:20
today but i think you know to your point chimoff one of the things that's happened with the cost of education in
00:45:26
this country is that the federal program which was uh you know and i i took a
00:45:31
bunch of notes here to talk about this today but the federal government began guaranteeing student loans in 1965 it's
00:45:37
called the federal family education loan program and that program made capital available
00:45:43
for students to borrow to spend on universities or
00:45:48
whatever education they want to go go get of their own choice and the idea being that that will give
00:45:54
them the ability to go make more income and extend their careers and educate the workforce and the problem is that when that
00:46:00
capital was made available a lot of private universities started to emerge and private for-profit colleges started
00:46:06
to emerge and in the years since that that program was introduced i just want to give you guys some crazy statistics
00:46:12
so in the 1969-70 era the cost for a public four-year college was 1200 bucks
00:46:18
a year that's room board tuition and fees and in 2020
00:46:23
that cost rose to 21 000 and here's the the uh the other crazy stat for private four-year college in
00:46:31
1970 2500 a year 2019 2020 46 000 a year
00:46:37
and so that capital basically allowed these for-profit organizations of these organizations
00:46:43
that try and grow their endowments which are effectively like for-profits to charge any price they wanted and the
00:46:49
consumer the student would be able to get free capital to fund that quote-unquote education
00:46:55
because it was available to them for free from the federal government and so the federal government created a bubble
00:47:01
in education cost and that bubble in education cost has now overburdened 15
00:47:06
percent of american adults with student loans that many of which would they would never be able to pay back and now
00:47:13
we're in this really awkward situation of saying hey maybe we should forgive those loans because it's unfair that people are burdened by this
00:47:19
and um and doing so obviously doesn't solve the fundamental problem which is that making those loans available in the
00:47:25
first place creates an inflationary bubble effect in the end asset and the end asset in this case is education but
00:47:32
we've seen the same thing with housing and we've seen the same thing with pharmaceutical drugs and medical care
00:47:37
and other services so any place where the federal government steps in and says i will provide a backstop i will provide
00:47:43
free capital to support and create a quote-unquote incentive for this market to accelerate you end up with these
00:47:49
inflationary bubbles you're gonna have people game the system right you get whatever university of phoenix types and
00:47:54
and you even the large uh jacob university is raising uh tuition to
00:48:00
observe things and people take these loans chemoth before their frontal lobes are even fully developed and they have long-term
00:48:07
uh understanding of the ramifications of this so where do you stand on this champion so there's a there's an
00:48:13
interesting article in the atlantic about who really wins when you forgive student loan debt and i
00:48:19
and i just pulled out some facts so i'm just going to look down here and read them just so i get them right
00:48:24
it said in the article 13 of the u.s population carries federal
00:48:29
student loan debt grad students account for 37 of that federal student loan dollars currently
00:48:36
it's 1.6 trillion of total total student debt versus about 10 trillion of mortgage
00:48:42
debt so the average debt has gone from about 25k in 2012 to 37k in 2022 so you
00:48:49
know almost a 50 increase in a decade the majority of student debt is held by
00:48:55
white borrowers only 23 of black americans age 24 or
00:49:00
greater have a college degree in 2019 so the majority of the black population
00:49:05
would not be directly benefited by student loan forgiveness in 2020 the median weekly earnings
00:49:12
for someone without a high school diploma was 619 dollars
00:49:18
for those with some college but no degree that number was 877 dollars for those
00:49:25
with a bachelor's degree it was 1 305 dollars and that number continues to grow for masters and professional
00:49:31
degrees and and phds interestingly the last two points
00:49:36
the gallup organization who ran a poll is unable
00:49:41
to report the percentage of americans who have mentioned student debt or student debt cancellation
00:49:47
because it hasn't garnered enough mentions to do so in 2022 according to the article across
00:49:53
four gallup polls quote just one respondent mentioned student debt as the most
00:49:58
important problem facing the nation unquote and then last thing is here is that 43 percent
00:50:04
of the 2020 biden electorate graduated from a four-year college or
00:50:10
university versus 36 percent of democrats in 2012. so you know one of the takeaways is that
00:50:17
this may be an issue that affects a certain percentage of the dems who
00:50:23
went to college but it may not represent a plurality of all democrats and it doesn't really represent you know a
00:50:29
majority of all they sure are vocal though to your point i think yeah i mean look that this is i i think that there
00:50:34
are two motivations uh political motivations for doing this now they're pretty obvious
00:50:40
um and then i just want to say three things on on kind of the concern about this
00:50:45
and why i feel very strongly that if we don't fix the underlying
00:50:50
system you cannot forgive student loans you have to fix the system before forgiving
00:50:55
students fix it first what's the number one fix freedom well so let me just say the two motivations the two motivations number one this is a stimulus so this
00:51:02
morning the biden administration said that they were thinking about taking executive action to make the first ten thousand dollars
00:51:08
of student loans forgiven so if you do the math across 43 million people that's a roughly half trillion dollar
00:51:15
forgiveness what happens that half trillion dollars much like we saw last year becomes a
00:51:20
stimulus payment it is money that people now have that they didn't have before it is capital that they or freedom from
00:51:26
debt that they didn't have before and it will stimulate the economy so there is a very um important economic incentive
00:51:32
here to do this which is if we do it it will be stimulating to the economy and um people will spend more and the
00:51:39
economy will grow by the way that's a that's a two and a half percent boost to gdp right so half a trillion dollars of
00:51:44
free money just flushes into the system the second thing is that it will help in the midterms is their point of view
00:51:50
right so they've obviously done they've done the polling here right and and it's like hey when i was in junior
00:51:55
high the kid that ran for class president was like i'm gonna make everything in a vending machine free guess what that kid got voted in so you
00:52:01
know the idea that you're just gonna give everyone free give your your loans back to you for free everyone's like my gosh this is the best thing ever
00:52:07
elizabeth warren your genius you know bernie sanders your genius joe biden your genius let's say yes um and so they
00:52:12
believe through polling that this is going to help um help them in the midterms but the challenge is
00:52:18
if we don't solve the problem if there's no standard of value of an education if there's no standard around whether or
00:52:25
not a specific accredited university increases your income and earning potential as an individual or increases
00:52:32
the opportunity for you as an individual you are wasting money you are giving
00:52:37
federal dollars to private companies who are profiteering from that and the individuals are not going to benefit
00:52:43
from it and i think that that we're seeing this sorry and we're seeing this structurally continue in a lot of other
00:52:48
places where the federal government doesn't hold itself accountable to the standards of how their stimulus is meant
00:52:54
to benefit the individuals that is being funded for the individuals are not getting a good education in many cases
00:52:59
they're not earning more by getting this education chamf's data speaks to the average but a large percentage of people
00:53:06
go to crappy universities that don't improve their earnings potential and then the federal government says here's
00:53:12
this free money that private university just made a bunch of money and no one's better off and guess who's end up paying
00:53:17
for it taxpayers are gonna end up paying that private company a bunch of money because we're gonna forgive all the loans and so we have to have a standard
00:53:24
around whether or not a dollar should be loaned to pay for education at a specific university by having that
00:53:30
university prove that it improves the potential and by the way if you stop the federal student loan program today
00:53:36
fewer people would go to college and if your people went to college guess what would happen colleges would drop their
00:53:41
tuition the reason they're able to raise demand supply and demand and the reason they're able to raise their tuition is because
00:53:46
there's so much demand because there's free money and so if we actually saw the federal loan program cut back or put
00:53:51
these standards in place the cost of tuition would actually decline and profiteering would decline people would
00:53:57
get a better education and the taxpayers would be better off end of diatribe sorry no no i i think it's completely
00:54:02
legitimate saks we talked on a previous episode about how people make things like immigration uh you know such a
00:54:08
charged philosophical debate when there are point-based systems being used in canada australia and other places that
00:54:14
make it much more logical do you think the the solution here is to freeberg's point of just and i'm
00:54:20
interpreting free brooke's point as what is the value of this degree nursing great nurses can take out a hundred
00:54:26
percent of their loans because we know there's a nursing shortage uh you know philosophy
00:54:31
graduate students maybe can't take out more than five thousand dollars in debt because we don't see a bunch of job openings for that
00:54:38
getting a history degree trump university is a lot different than getting a nursing degree so sax what's the solution here uh and then we'll let
00:54:46
give you your um your uh swing at bat in terms of buying votes yeah let's go
00:54:52
solution first before we go partisan look i think that a loan only makes sense when it generates roi right it
00:55:00
makes you're going to generate more income on the other side of that loan to make that loan worthwhile and the problem here in too many cases is these
00:55:07
kids go to these schools they spend five years there they get a degree in some woke nonsense and of course it
00:55:13
doesn't help their earnings power i mean that's a bit that's the fundamental issue here is that these degrees are worthless right i mean
00:55:20
if you go if you go to if you go to college to get you know to become a doctor or maybe a computer program or
00:55:26
something where the skills have value then of course you can pay back the loan because you get a gainful job but
00:55:33
you know otherwise if you just major in fine arts at harvard or something like that i mean you basically graduate you get a job at
00:55:40
what the new york times is your dream you can't pay back your loan you're saddled with this enormous debt and
00:55:45
think about the cultural impact that has you you have this young generation who believes in socialism and i think that's a big part of the reason why is they
00:55:52
have no capital and they have no ability to accumulate capital because they're so saddled with debt so to interpret what
00:55:58
you said sex hard to believe in capitalism if you got no capital right if you start if you start the race at
00:56:04
negative 250 thousand dollars in debt to get a degree that was basically worthless for you yeah so the system is
00:56:10
cool so look i think maybe what we do is we reform the the debt i had actually okay with forgiving the debt in some
00:56:17
instances if you got a reform of the system in other words right if we stop funding these worthless degrees but if
00:56:24
you're basically going to acknowledge that hey we need debt forgiveness because these degrees are worthless why would you keep funding those degrees so
00:56:30
you know we need to have a like a more honest comprehensive solution here the other thing we should do actually is
00:56:37
one really crazy part of bankruptcy law is that student debt is one of the only types of debt
00:56:43
that's not dischargeable in bankruptcy i don't know if you guys know that but right under george w bush's presidency
00:56:48
explain it to everybody yeah basically look when when if if you ever get to the point where you have too much debt and
00:56:54
you can never pay it back you declare bankruptcy and then this the court starts you over from zero so you can at
00:56:59
least start building some wealth right but you lose credit but you lose yeah exactly no one's going to want to give
00:57:04
you credit after that but at least you're not so deep in the hole you can never recover so that's the point of of
00:57:09
a personal bankruptcy but the crazy thing is that in bankruptcy you cannot get your college
00:57:15
debt your student debt cancelled you can get your credit card debt cancelled you can get other types of debt cancer you
00:57:21
can't get your student loans canceled it's crazy so that's one thing they should fix immediately
00:57:27
is make these debts just with private market sacks you wouldn't need to do that right the reason that's the case is
00:57:32
because it's federal dollars that are funding those loans but if it was private market dollars people actually
00:57:38
if banks and and lenders took a loss when people couldn't pay back the loans
00:57:43
then the market would work itself out the problem is it's the federal government stepping in and trying to be a market maker right and it creates this
00:57:49
this totally crazy incentive right it creates it creates double distortions on the one hand like you said it basically
00:57:55
means that because government money is funding everything the tuition goes up because colleges take advantage of it but then also nobody's really making a
00:58:01
smart roi decision about whether a smart underwriting decision about whether this loan is worth making
00:58:08
whether it actually stands a reasonable shot of being paid back there is such an easy free market solution here it's
00:58:14
called a an isa it stands for income sharing agreement this is where you give
00:58:19
a loan to somebody and you get a percentage of their income uh over a period of time capped at a
00:58:26
certain multiple say 2x and what this does is it aligns the person giving the loan
00:58:32
with the job that's expected to come from the education you already have that you already have that it's called taxes
00:58:38
yeah but here's the problem nobody's watching the store so nobody's looking at it saying i will give an isa
00:58:44
at this percentage return for nursing nursing i gotta pay 50 of my income every year to the federal government to
00:58:49
the government like i pay taxes the thing we have to remember is like if the federal government tries to do this it really is just about buying votes going
00:58:55
into a midterm election and here's why if you arbitrarily give
00:59:00
a bailout of one sliver of the population unless that sliver is really really
00:59:06
large which we know it is not it's going to really anger everybody else think of all the people that are
00:59:12
trades people working class people who don't have a college degree yeah what are they gonna think what about all the
00:59:18
people that just finished paying off their debt what are they gonna think it's going to upset so many people and
00:59:24
ultimately what this is is a bunch of coastal elites who are miscast in jobs
00:59:30
and saddled with debt is pushing pro for a program that isn't a broad-based mechanism to create a
00:59:37
quality at all it's just a get out of jail free card for a small people so for a small group
00:59:42
of people who unfortunately were taken advantage of and this is the thing that we're not losing sight we're losing
00:59:47
sight of you can only pay back a loan if you're making more money than you owe
00:59:53
and the fact that this exists shows that these loans were really poorly constructed and they
01:00:00
were given in instances where they should not have been in the private markets we've seen that happen but we go
01:00:06
through a cleansing mechanism to sort it out right we've gone that's literally what happened during the 2008 real
01:00:11
estate bubble people gave mortgages to people who could not exactly pay them if i as a lender think that you're not
01:00:17
going to be able to pay back the loan i don't give you the loan that's the simple mechanism that exists
01:00:23
in free markets and part of the issue is a lot of people got loans thinking without doing the calculation will i
01:00:30
ever be able to pay this back and they took the loan to get an education the other the other binary concept that i will just make money but let me ask one
01:00:36
other question of you guys at what age and at what level do you think
01:00:42
individuals should take responsibility for the decisions that they're making when they take on personal debt because
01:00:48
we see ourselves getting in the cycle where consumers are given debt they don't think about the consequences of that debt down
01:00:55
the road or do the analysis themselves and maybe they're not equipped to and they'll take out a loan on a car
01:01:01
on a house on a no but the problem is and on education but car but here's the
01:01:07
thing like the education is a very dangerous thing because we put so much societal credit and external signaling
01:01:14
to it and we give everyone effectively the same quantum of risk but that's not true for a credit card nor is it true
01:01:20
for a car loan so the private markets are efficient in that when you first try to get a credit card sure you don't get
01:01:26
an mx centurion or platinum card you're given a chase sapphire card with a 500 limit and you earn the right to borrow
01:01:33
more same if you applied for a car loan the same with a mortgage it's based on a down payment so there's differential
01:01:39
risk pricing and if you don't have differential risk pricing you're getting a lot of people how would you add it to
01:01:45
education the market would figure it out the market would because you would differentially price the risk as as you guys literally a brainstorm it right now
01:01:51
like what are your grades well no what courses did you take whatever whatever it is skills we're not gonna get it
01:01:57
right the market will get it right but the market would figure it out the problem is and and sorry the incentive
01:02:02
was and this is a really important point you know if you guys read ray dalio's book which we've talked about a number
01:02:08
of times he's identified and highlighted that a growing economy and a successful um
01:02:14
uh country improves by improving education and having more people get higher education
01:02:21
generally speaking and so the initial incentive the initial intention behind
01:02:26
the federal student loan program was a good one which was to give people access to capital that the private markets were
01:02:32
not providing at the time so that they could go out and get a higher education we could improve the education of our
01:02:37
workforce and we could um grow our economy nowadays the question that we always forget remember we always get one step
01:02:43
away and then two steps away and five steps away and we miss the point we're in that moment now where the question
01:02:49
really is is the federal student loan program doing more harm than good well that's actually
01:02:55
are we actually creating value from our higher education system in this country or not no and no most importantly is the
01:03:00
private market there because you look at the total debt outstanding 1.7 trillion dollars there would be a private market yeah
01:03:07
freeberg don't sell beyond the close the answer is no we have a massive employment gap okay the data tells you
01:03:13
in every single which way possible that we are not educating our young people to
01:03:19
take the jobs that are needed for a high growth functionally moving economy we
01:03:24
know that so we are miseducating these folks and then we are giving them
01:03:29
access to enormous amounts of debt that they have no reasonable chance to pay back and i think that that should be
01:03:35
fixed by fixing the incentives of the universities you are right universities today are for-profit asset management
01:03:41
businesses wrapped by this philanthropic do-gooder nonsense that they try to tell people to
01:03:46
get you to go there and pay fifty thousand dollars a year in tuition it's a joke and they're compelling people to
01:03:51
think that these degrees are actually going to make them successful humans they come out miseducated and
01:03:57
undereducated and incapable of servicing the economy's needs separately
01:04:03
the other thing if you take a step back and take student loan off the table for a second and just say any
01:04:10
consumer handout that touches less than you know 40 or 50 percent of the economy or of
01:04:17
the population of a country is very precarious so students student debt in
01:04:22
this case 15 of the u.s population so a lot of people but it also means that there's 85
01:04:27
who don't benefit what will those 85 percent of the people say when they have to foot the bill for the first 15
01:04:34
and then what do you think happens with other kinds of debt what happens when the oil lobby says
01:04:39
forgive our debt because we're in a national energy crisis what what what will all the climate fraud
01:04:46
there's no accountability well it creates a slippery slope and and and my last point on this is to
01:04:51
the extent that we actually want to forgive student debt i'm fine if that's the law of the land
01:04:57
that's great it should go to the floor energy to be debated in congress and it's a law that
01:05:03
should be passed but it should not be by executive edict trying to back in to buying votes in a midterm election it's
01:05:09
gross uh sacks oh by the way just on the politics of that i think this could potentially hurt them because jamaat to
01:05:15
your point this is basically a bailout of the woke professional class it's the it's the underemployed
01:05:22
graduates of these universities who again are members of the professional class they majored in things that didn't
01:05:28
increase their earnings potential meanwhile the majority of the country is working class something like two-thirds
01:05:33
of the country is still working class meeting non-college educated and they're gonna have to pay pay for this bailout
01:05:39
in one way or another either through higher taxes or more uh deficit spending or more debt the burden of this bailout
01:05:46
is going to fall on them and why should they have to pay stability like somebody
01:05:51
working in retail is paying for somebody's graduate school degree in creative writing or something is
01:05:56
completely profoundly unfair to the answer to freiburg's question we actually know
01:06:01
when executive function fully matures in adults it's 25 years old and that's when
01:06:07
you can actually make long-term thinking so there is an argument that people should not be allowed to
01:06:12
take these loans uh that are not even that you can't get out of
01:06:18
or there should be some cap on the amount of loans you can take because people at the age of 17 18 19 20 are
01:06:24
absolutely not able to make these decisions there are other programs as well that work so in canada i went to a
01:06:29
school called the university of waterloo and fantastic engineering school the reason i went there and i did electrical
01:06:35
engineering there is that they had a program where after the first year so the first year looks like every other year at
01:06:40
every other school okay but you're there for you know two semesters from september to may but after that you
01:06:47
start working and you alternate four months of work with four months of school and you get paid for that work
01:06:54
and what it allowed me to do was graduate with meaningfully less debt but it also allowed me to graduate with a
01:07:01
commercial skill set and i was able to get a job and in that moment actually i
01:07:06
was working at a bank and i got profoundly lucky which is i worked for an individual
01:07:11
and i was trading interest rate derivatives and i was learning to trade technology
01:07:17
stocks on the side and this guy mike fisher incredible human being and uh i made in one year
01:07:23
like 25 or 30 thousand dollars for he wrote me a check and he said here you
01:07:29
have twenty five thousand dollars of student debt go pay it off right now i'll like how much cash out this whole book i graduated with about twenty eight
01:07:35
thousand of debt i had about eight thousand i think i had a um somewhere between ten and fifteen 10 and 20 000
01:07:42
and then i got my first bonus check after my first year of work after undergrad
01:07:47
and i paid off all my debt and it felt incredible incredible it was amazing when i paid off my debt i've never been
01:07:53
in debt since i walked downstairs to the bank and i paid i gave them the check and i endorsed it and i said here's my
01:08:00
student loan number and i was like oh my god i was free for the it's like it was
01:08:05
an enormous sense of relief for me it was credit card debt i had accumulated all the credit card because i went to cal it was like four grand a year to go
01:08:11
but but if i were back then if i didn't go to waterloo i would have had double the debt because i wouldn't have had
01:08:16
work but then also like i think about all these scenarios i wouldn't have had two years of work experience i may not
01:08:22
have gotten the job that i did at bank of montreal at the time that may not have been able to give me a chance to
01:08:27
meet mike fisher hey all these things could have happened so you can't rely on the luck of the butterfly effect so that
01:08:33
you have a reasonable shot of building a good life yeah right so there are all these things in universities that i
01:08:38
think are really mismanaged today and they go and work against what is right
01:08:43
in society so i'll give you another example the the dean uh of the engineering school and the president of university of waterloo was here this
01:08:50
week with me and i asked them tell me about these global rankings and they said you know it's just a
01:08:56
really difficult game they said if we wanted to compete to try to get high on the list
01:09:01
we would have to do the things that would undo all the things that made us great and unique in the first place
01:09:09
and i was like you know what i am such a huge supporter of this school please just continue to do what you're doing
01:09:14
and i'm so proud that they have the strength to just stand on their own two feet but every other school is running
01:09:19
this shell game of you know gerrymandering all of these statistics trying to get high on the list to trick
01:09:26
some parent to force their kid to go to some school to then graduate with 200
01:09:31
000 of debt to get a job that that doesn't then give give them any line of sight to paying it off
01:09:37
it is i don't think it's their kids fault but you have to reform the system and i think the first thing you need to
01:09:44
do is look inside these universities and hold these folks accountable i mean the these incentive systems are
01:09:51
just crazy um speaking about crazy uh we talked about bill wang uh and his that's
01:09:57
your transition to transition sorry they can't
01:10:04
he's looking at the agenda for today and he sees bill huang and he's like okay how do i do this how do i
01:10:09
get the wang right yeah okay crazy the linkage is craziness okay go i
01:10:14
mean no no no no no hold on the the linkages uh trillions and billions link speaking of trillions and billions
01:10:21
trillion dollar mistakes we got a bill lang and his cfo were arrested on wednesday and charged with
01:10:26
racketeering wire fraud and conspiracy uh we talked about this when it happened
01:10:32
uh his uh firm archway ghost i think it's hard [Music]
01:10:38
his poorly named firm uh and family office we covered this in real time back on episode 28 they famously lost 20
01:10:46
billion dollars over two days uh when they were margin called uh back in march of 2021
01:10:52
uh he worked at tiger management yada yada and it was at the time reported that
01:10:58
they were trading billions of dollars at over 5x leverage according to the sec complaint at its
01:11:04
peak the firm was managing 36 billion with 160 billion of exposure which is
01:11:09
4.5 times leverage but archaegos or whatever it's pronounced started with only 1.5 billion in assets
01:11:17
in march of 2020. so wang flipped 1.5 billion in capital into 160 billion of
01:11:23
exposure in 12 months essentially trading somewhere in the neighborhood of 100 to one at its peak according to this
01:11:29
complaint um a bunch of banks have lost money because they were supporting this credit
01:11:35
suisse lost 5.5 billion morgan stanley lost a billion ubs 774 million the new
01:11:41
york times described it as quote orchestrating a stock manipulation scheme that relied on them masking and concealing
01:11:48
the enormous risk they had taken off you had some thoughts on this i think so first i think we should probably explain
01:11:56
how he did this right yeah so that's that's everybody's question is how did the banks let this happen so
01:12:01
well i think first it's what's the mechanism so you know there are ways in capital
01:12:06
markets to take really extreme bets this way is called what's called a total
01:12:14
return swap and so the basic way that this works is you have two people on on each side of a
01:12:20
trade and what you basically say is let's agree
01:12:25
on what's called the reference asset so i'll just use an example let's just say it's
01:12:32
i think discovery was one of the companies that they were trading so discovery communications let's look at let's that's the reference asset that
01:12:37
stock and what i'm going to do is buy protection and what you're going
01:12:44
to do is um sell protection and essentially what happens is
01:12:51
as the stock goes up and down you're going to net the difference between these two people
01:12:58
and when you do it that way via a derivative so what it what it forces the person to do
01:13:03
the bank in this case is to go out and buy the stock okay
01:13:08
so that they are hedged in case the price goes up a lot because they have to pay that difference
01:13:14
in this case to uh bill huang and if the price goes down bill huang has to pay
01:13:19
that difference back to the bank so what happened is
01:13:24
that he went to three different banks morgan stanley goldman sachs and credit
01:13:29
suisse and effectively what he did was he bought
01:13:34
he made these bets across a handful of names but he did it with so much leverage that
01:13:41
he ended up owning 60 or 70 percent of some of these companies and in march of last year when the stock
01:13:47
market turned over um he owed them enormous amounts of money
01:13:52
so much so that these banks had to unwind these trades which caused further downdrafts in the stock and almost
01:13:57
spilled over to the broader stock market jason that the numbers from the sec complaint are pretty crazy as of march
01:14:04
31st of 2020 they had 1.6 billion invested
01:14:10
on a gross exposure of 10.2 billion which that what that means is they were able to go and lever up this 1.6 billion
01:14:18
to behave in the market as if they had 10.2 billion by january 1st of 2021 so nine months
01:14:25
later they had 7.7 billion dollars of invested capital so they'd done really well right
01:14:31
they'd made 70 on this 10 billion but they levered that up again and so they had gross exposure of 54 billion
01:14:39
dollars and then just uh i think three months later by march 22nd
01:14:45
they had 36 billion dollars of investor capital meaning they had 36 billion dollars of cash this guy had taken 1.6
01:14:52
and spun it up to 36 billion in bitcoin this guy went like 20 in a year
01:14:59
but then he had uh levered that up again and he had 160 billion dollars of gross
01:15:04
exposure and then the market turned and he owed all this money and so all these folks had to get out of it but they also
01:15:10
allege that he was trying to do short squeezes on the stocks to try to make them goose even more so there was a
01:15:15
massive manipulation because of his position size correct yes so this is what happened but then here's how it is
01:15:20
allowed to happen so if you try to do the same thing in interest rates in the interest rates
01:15:26
market versus the equities market it's not possible why if i wanted to go and buy a credit default swap effectively
01:15:32
think of that as the same kind of thing he did but on the debt of a company on the debt of discovery
01:15:38
what i would do is i would be able to enter into that trade with a bank but it goes into a clearinghouse
01:15:44
and that clearinghouse is able to tell all the banks how much risk is building up in the
01:15:50
system and the reason we implemented this clearinghouse was to make sure coming out of the great financial crisis none
01:15:56
of that chaos ever happened again but we did not include the equity markets in that clearinghouse and in the
01:16:03
laws that regulate it and so what this is is a very shadowy gray part of the of the market that is
01:16:08
poorly regulated that has very little oversight so what do the banks do the banks say to you
01:16:15
if you want to put this thing on give me a balance sheet so i understand what the risk is a piece of paper a report and i
01:16:21
think what what they're alleging is that these guys lied so that any individual bank in this case
01:16:28
goldman morgan and credit suisse had no idea because they kind of doctored these reports to each other and that's why
01:16:34
that's why all this risk built up in the system it would be solved if you had a clearinghouse for equity derivatives the
01:16:40
same way you have for interest rate derivatives it is crazy to think that somebody was doing this and
01:16:46
thought they would get away with it and had been up 20 acts and the psychology of these people the madoffs of the world
01:16:52
i just find fascinating why wouldn't he if he just by the way we we talked about how the three the four
01:16:58
of us we talked about how the four of us are grinding to return 2x of our money in 10 years
01:17:04
and this guy's like yolo he's 7x or 10x 2 you know 1.6 billion
01:17:09
dollars and it was not enough it's not enough i mean people have i mean what do
01:17:14
you think the psychology of this is like i have no idea that's what i'm trying to figure out sex what's the
01:17:20
psychology of somebody who tries to do this they're already a billionaire they've already got their jet they could go
01:17:26
anywhere they could have anything they could buy any home they could go on any vacation that's the thing i never understand
01:17:32
about these people is like this has got to be some crazy sociopathic behavior jake hill did you
01:17:38
always want a jet by the way the guy i just got some business select on southwest when you
01:17:44
started your career what did you want the knicks and that's what i still want well when you started you wanted a house
01:17:50
right and then you got the house and you wanted the home in tahoe and then you or the home you know the vacation home and
01:17:55
then and then you want the jet and then i mean i don't know why this is confusing well no but i don't want it enough to
01:18:01
put my entire freedom at risk or to cheat apparently this dude was a christian i'll put that
01:18:07
in quotes because i don't i mean it doesn't sound like christian behavior ran bible study and stuff in the mornings he lived in some modest house
01:18:13
in jersey blah blah blah but you know he was a bit of a freaky deak what does that mean so weird i mean
01:18:19
the guy couldn't kill her by the way the the dude was pinched in 2012 for insider trading and had to pay a settlement and
01:18:25
like get back everybody's money he got pinched it's crazy and wait is what it is you know you never wrote that on your
01:18:30
friends i got pinched they got pitched yeah when you grew up in the streets you know that is what happened to this guy i got
01:18:36
pinched he got pissed when you grew up in the streets the guy ate cheese he didn't run out he ratted on his friends
01:18:41
he ran out of the manchego he tried to steal some magic and he ratted on his friends now the cfo got pinched too they
01:18:47
said they flipped them this is super deranged uh speaking of deranged
01:18:57
[Applause] someone needs to take all of j cal's transitions from the last couple of
01:19:02
shows and just put them together in a row yeah just a second of crazy
01:19:08
yeah on wednesday the department of homeland security speaking of billions announced a disinformation governance
01:19:15
board disinformation governance board according to the announcement the board will immediately immediately begin
01:19:21
focusing on misinformation aimed at migrants at the u.s mexican border the board will be led by disinformation
01:19:27
expert nina jank owets jankowitz he has researched russian misinformation
01:19:33
tactics and online harassment this is also the woman who sings show tunes on tick tock jkl fighting this information
01:19:39
should be running you should be running our disinformation board you always have such a strong opinion you have such a nose for what's bs and
01:19:46
what's not here's what's going on here so first of all this woman claims to be an expert in disinformation let's
01:19:52
evaluate that claim she was an active pusher of the steele dossier which turns
01:19:57
out is disinformation for which people are now under indictment she also
01:20:02
was active in trying to censor the hunter by the laptop story which as it now turns out was not disinformation it
01:20:07
was absolutely true as acknowledged by the new york times the washington post you would think that these blemishes on
01:20:13
her record might disqualify her from being an expert on disinformation but actually in the view that people are hiring her
01:20:20
these are actually qualifications because they are not interested in the truth the reason this department is set up and
01:20:26
what they mean by disinformation is they have hired her to push partisan political points that's what's going on
01:20:33
here that's what this information is now it used to be that if you disagreed with somebody you just say listen i disagree
01:20:39
with you or maybe you're an idiot whatever you're wrong but now the way that these debates are set up and the
01:20:44
way they work is they don't just say you're wrong or that's not true they try to label you as disformation so you can get you censored
01:20:51
and the point of hiring this disinformation czar is is basically to censor this basically
01:20:58
shut down the debate that that is basically the whole point of this do you think there's any timing here with elon
01:21:04
musk yes of course it's it's um well it's it's there was a great tweet about
01:21:09
this i mean i love conspiracy sacks by the way i don't think it's conspiracy theory it's there was a great tweet about this that um that we live in a
01:21:16
future where it's like a mash-up of george orwell and iran because here you
01:21:21
have you know elon musk the heroic loan entrepreneur trying to rescue freedom of
01:21:26
speech at the same time you have this orwellian ministry of truth being created by the federal government so i
01:21:32
mean no awareness of naming yeah it's just bizarre but but the disturbing thing about it is this
01:21:37
information governance board is such a dystopian name the um the thing about it that's a little bit
01:21:43
scary here i know you play the video of of her doing show tunes and it seems sort of silly but
01:21:48
the thing that's scary is that this is under the homeland security department that's this is the worst wrinkle why is
01:21:54
that there it's it's the most militarized department in our government so it's really scary to put the ministry
01:21:59
of truth under the department that has all the soldiers history of truth it's not the name of it but it's close pretty darn
01:22:06
close now now why is it there i'll tell you why because this was built up to there was a
01:22:11
truth shout out george orwell a couple of months ago is a news story that we might have covered on this pod
01:22:17
where the homeland security department redefined disinformation to comprise uh they said
01:22:25
it represented an escalation of the terror threat level so in other words they basically said that discrimination
01:22:30
was tantamount to terrorism remember that didn't we talk about that this is the payoff to that first they
01:22:36
define they basically define the other side as being disinformative of the debate as being disinformation then they
01:22:42
define disinformation as basically terrorism then they have the homeland uh security department which is supposed
01:22:49
to be responsible for terrorism create this ministry of truth this is what's going on here it's really weird just to
01:22:54
remind everyone there was concern in the last election i i'm gonna play devil's advocate as i often find myself doing
01:23:00
here that uh just just to try and explain the world that's the reason i often play this role because i'm trying to
01:23:06
understand the world but um you know there was a real concern
01:23:11
that you know the russian government was using uh you know information warfare and propaganda through social media
01:23:18
to influence voting and um and that that is considered a security threat to the integrity of our
01:23:25
elections therefore this is a homeland security issue and there is a question mark of course
01:23:31
that everyone has on how far are they going to go once you set this precedent when would they ever stop in terms of
01:23:38
quote-unquote policing information and policing what's true and managing internal propaganda and internal media
01:23:44
delivered to us by the government that's the other side of the coin but the primary side of the coin the initial side the initial representation that i
01:23:51
think folks do have concerns around is how do we keep foreign actors from creating
01:23:57
misinformation campaigns that go viral and influence elections and sex i don't know if you think that that's a concern
01:24:02
we should or shouldn't have but how would you address it if you were the president and that was the the challenge you know to like how do we stop that
01:24:08
from happening the foreign actors interfering in our elections is certainly a concern we should have if it
01:24:14
was actually happening on a big scale or in a meaningful way i mean this is basically look this is basically a hoax
01:24:21
okay john durham is basically out there making indictments right now proving the extent of this oaks it started with the
01:24:27
whole steel dossier which was a piece of campaign opposition research that was manufactured by hillary clinton's
01:24:33
campaign the lawyers who basically produced it are under indictment and that's where this whole thing of russian
01:24:39
disinformation came from and the only proof for that thesis is that supposedly
01:24:44
the russians bought a hundred thousand dollars of facebook ads on facebook so i'm not denying that that occurred but
01:24:50
it was relatively minor it was a drop in the bucket of all the activity going on around now wait to be clear to be clear
01:24:57
that was just the ads that were bought with with like credit cards that said like fsb on it like but
01:25:02
way to go facebook security you probably you know didn't count all the number of credit cards that were stolen i'm pretty
01:25:08
sure the russians are capable of stealing john smith's credit card and using that to buy ads as well well i looked at those ads you've seen those
01:25:14
ads they were ludicrous they weren't going to convince anybody of anything i mean they had like jesus and the devil arm wrestling each
01:25:21
other and the jesus figure was basically set and you know it was just absurd i mean the
01:25:28
jesus figure was saying that but to be clear it happened and you've now stepped back your position on like it just
01:25:33
wasn't at scale to your opinion i think i think look the the scale interference in the
01:25:39
election was committed by big tech i mean they censored the hunter biden's story two weeks before the election it
01:25:45
turns out that's a completely true story that hunter biden has extensive business dealings in ukraine the country we are now yes
01:25:52
but we are now deeply involved in a war there and that story the electorate had the
01:25:58
right to take that into account big tech censored that story so well there's a reason for that couldn't may i respond
01:26:03
to that just to give people like making a very difficult decision you have to remember trump asked putin on
01:26:10
stage to hack hillary's emails and they did then he asked the ukraine um to take action against the bidens or
01:26:17
he wouldn't give them uh support he was impeached for that so if you put yourself in the and i'm not
01:26:22
saying twitter made the right decision here but there was and there was also sexual material you know people's nudes
01:26:28
which and hacked material and nudes are against the terms of service so i think two things happened concurrently
01:26:34
one listen the people working at twitter are 98 liberal they don't want trump they start as an existential threat and
01:26:40
then two they don't want to link to hacked material oh really hold on a second hold on
01:26:45
during the whole canadian trucker let me finish this point during no i have to finish my point the third point and then i'll let you go is that in it in
01:26:52
addition to all that hunter biden is completely a grifter go okay i agree with you on that one yeah so look during
01:26:58
the whole canadian trucker thing remember when all the people who contributed to those canadian truckers
01:27:04
they got docs i mean basically there was a hacker who leaked all the people who had donated and social networks were
01:27:09
happy to print all that information so this idea that they censor hacked information is nonsense
01:27:16
the libsiv tiktok account just got doxxed by taylor lorenz look whether you think that was a good idea or not the
01:27:21
point is these principles are invoked very selectively when there's a story they want to suppress and the new york
01:27:27
times and the washington post have both not come out and said that the laptop was real it's been authenticated the
01:27:32
story was real and this whole idea that it was disinformation that was just invented i mean it was just invented
01:27:39
well no hacked it wasn't that it was just a racist that it was potentially hacked and you and trump nothing was happening
01:27:44
here's the thing trump set the stage for that and the uh the the people at twitter and facebook who also made these
01:27:51
decisions they were informed by three later agencies department of justice and fbi et cetera hey this is potentially
01:27:57
hack material designed to interfere with the election listen it would also be true
01:28:02
and other democratic party operatives just made up out a whole cloth that the hunter biden's story was disinformation
01:28:09
it was true it's been a knowledge is true the washington post is
01:28:19
i think this is where social media can improve which is if they had to explain every one of these decisions they make
01:28:25
in full in transparency i think that's something elon could bring to this party which is if you're gonna block something we need
01:28:31
to know why and they'd never explain why and who made the decision and i
01:28:37
think that that transparency would benefit situations like this if the ioj or fbi told them
01:28:44
listen this is hacked material then they've got to go to the doj and say you got to give us cover here if this is in fact hack material you told us not to
01:28:50
print it we're not going to print it but it was just bizarre that one publication got dinged like the new york post it didn't
01:28:57
the oldest the oldest newspaper in america the oldest youtuber in america i'm not the bastion of like it doesn't
01:29:02
matter that's not for you to decide it's not for twitter to decide it's a legitimate publication that had a true story and i don't disagree it was
01:29:08
relevant to the election and the american people should have been able to take that into account and people like nina jenkins whatever our new
01:29:14
czar of the ministry of truth she was out in the forefront basically calling that story disinformation
01:29:20
meanwhile she's pushing the steel dossier which really if that story was confirmed would biden have one
01:29:25
i don't know i don't know the answer to that but the point is that it shouldn't have been suppressed that was that was election interference now
01:29:33
elon came out this week and specifically tweeted that that that was basically a mistake
01:29:39
that jack also said it was about jackman said it was a mistake too and elon repeated the same thing that they shouldn't have done that i think
01:29:45
everything was agreed to that call in hindsight yeah of course but in hindsight right but what was the
01:29:50
reaction to what elon said he was accused by virtue of criticizing the policy
01:29:57
decision that twitter made that that was supposedly targeted harassment of the legal counsel at twitter who made
01:30:03
the decision who gets paid 17 million dollars a year to make those decisions do you guys see this debate this happened last year this last week so the
01:30:10
point is that if you criticize somebody who's on a certain side of the debate
01:30:17
that's harassment he could even mention her by name this is how absurd this discourse has gotten
01:30:23
can i make a prediction yes prediction is great um [Music]
01:30:28
i think people misunderstand elon's incentives for buying twitter so and i haven't talked about this so i'm just
01:30:34
making a complete um subjective prediction i think he's going to buy twitter
01:30:41
i think he's going to clean it up i think he's probably going to generate
01:30:46
something like a 2x on this you know we talked about how yep you know that's like a good terminal valuation in six or seven years that basically you know puts
01:30:54
that asset worth at around 100 billion dollars in the meantime he's going to open
01:30:59
source as much as possible i think he's going to make it very difficult for misinformation and disinformation to get
01:31:04
very far he said he's going to authenticate every human being that uses the platform he said all of these things publicly
01:31:11
already and then here's the master stroke and again this is just me speculating i think he's going to donate it into a
01:31:17
foundation and a trust and i think it'll be an incredibly powerful competitive alternative to all
01:31:23
these other for-profit businesses because everything you guys are talking about is the incentives that get perverted
01:31:29
when you have to layer economics inside the new york post inside the washington post inside the new york times the wall
01:31:37
street journal everything eventually devolves to click bait to hearsay to doxxing to whatever can get you more
01:31:44
revenue but if you can take it off the table and run these things as a public trust you can
01:31:50
actually win back a bunch of confidence and a lot of these edge cases go away now you would say why would anybody do that well
01:31:56
i think the real answer is because then if he if he were to donate it into a foundation he'd get 100 billion dollar
01:32:02
credit that he could use you know to offset the gains when uh spacex or starlink go public interesting
01:32:07
theory interesting theory there you go well i agree with everything except for the donation part because he's raising
01:32:13
20 something billion from private equity and then he'll pay the debt off he'll own it 100
01:32:19
and he'll pay people a very fair living wage and it'll attract people that want to seek out the truth that want to work
01:32:26
in an apolitical environment he's already said the 10 of the extremes you know are are both equally crazy he's
01:32:33
going to force this thing to be rational and predictable it's interesting it's an interesting prediction i think it goes
01:32:39
public again at and it goes to five times evaluated are we going to be able to ask him these questions in miami sure
01:32:45
why not so let me ask you guys a question what would you do because a lot of people have pointed out in response to what has obviously become
01:32:52
a very polarizing set of discussions this week around what should be censored what should be banned what shouldn't etc
01:32:59
elon's gonna let bullying and hate speech kind of proliferate other people have said we need to release
01:33:05
you know the restrictions and let people say what they want to say freedom of speech has no bounds etc what do you
01:33:10
guys think about the um the argument that there there does need to be constraints and boundaries set around
01:33:17
things related to health and safety meaning if someone is making calls to violent action should that be
01:33:24
censored sex and how do you make that interpretation because it becomes a fuzzy gray interpretation and then
01:33:30
separately like when there are scientific papers that say one thing and someone says that's not true and says something else how do you kind of decide
01:33:37
whether or not that should be uh allowed or censored on the platform because i think those are two very key
01:33:42
issues that we got to take them separately let's do violence first sax there's plenty of precedent in law yeah
01:33:48
just explain the violence look the biggest straw man around because this was the whole trump argument right it
01:33:53
was like he was inciting violence with the argument that was being made but like generally speaking is that an appropriate form of censorship on this
01:34:00
private platform and if so how do you set that standard let's start here with you hear this argument a lot which is
01:34:06
that if elon brings free speech back to twitter then we're gonna have all this horrible content on there you're gonna
01:34:12
have violence you're gonna have racism you're gonna have harassment you're gonna have all you know all these bad things on fraud
01:34:18
the truth of the matter is that it's really a straw man argument because what it's basically arguing is that free
01:34:23
speech means anything goes but free speech does not mean anything goes there's we have 230 years a supreme
01:34:29
court case law basically um discussing this question of what speech
01:34:34
is protected and what's not and their the supreme court has ruled that there's nine major categories of speech that are
01:34:40
not protected by the first amendment why because that speech is considered to be dangerous in one degree or another so
01:34:45
for example you can't commit fraud like you know the um
01:34:50
archigas guy or whatever and then say well that speech was protected by the first amendment first amendment doesn't protect fraud first amendment doesn't
01:34:56
protect incitement to commit violence or a crime you know it doesn't uh protect
01:35:02
fighting words so you could ban you know all ethnic or racial slurs on
01:35:07
these social networks under the concept of fighting words so i think if you actually look at supreme
01:35:13
cool yeah well what i would do is i instead of just making up the content moderation
01:35:18
policies as i went along i would look at the peop at the cases where people been wrestling with these decisions for
01:35:24
decades and i would create a content moderation policy inspired by first amendment case law
01:35:30
where i would take these nine categories of sort of dangerous speech or harmful
01:35:36
speech and i would operationalize those so for example you can't defame people right def you know uh the first moment
01:35:42
doesn't protect you against claims of defamation would you make people go to court though in order to take it down
01:35:49
right so this is where the word operationalize really comes in it's not practical for a social network to require
01:35:56
a court level burden of proof to prove defamation right so what i would do is i would say that if you are a
01:36:02
person who claims to be defamed you could file a report on twitter and provide the tweet and provide
01:36:08
you know some explanation and as long as it looks like a colorful claim of defamation
01:36:14
meaning the person is attacking you in a way that seems out of bounds then potentially that can be taken down you
01:36:19
don't have to subject it to a jury trial or something like that so what i would do is i wouldn't you can't literally
01:36:27
impose first amendment case law but i would use it as the basis for defining a content moderation policy can i just say
01:36:33
something i think one of the best things about being your friend is sometimes you say stuff that is so powerfully smart
01:36:38
and elegant uh because it's so simple basically what sac said for everybody else because this
01:36:44
is how i he's like the prd for content moderation has existed it's called the constitution it's just that nobody in
01:36:51
any of these companies has taken an effort to actually try to write code that maps to this prd where the prt is
01:36:58
the constitution whose rights have been established for hundreds of years by prd you mean product requirements documents
01:37:03
yeah sorry yeah yeah that's what a product manager would use yeah yeah exactly instead of them making this up all as they go along i would look to the
01:37:10
categories of speech the stream court has already ruled out right let's just do the health one sec so
01:37:17
there's a scientific paper that says this drug doesn't cure covid and then
01:37:23
someone goes on twitter and says take this drug it cures covet what's the what's your and i know you're not
01:37:28
obviously a a constitutional lawyer at this point in your career but how would you kind of think about
01:37:34
um about that and how how do you think that that would ultimately resolve uh in this regulatory framework that's a
01:37:40
debate that should exist i mean i don't know why we need to suppress that debate so if someone says declaratively on
01:37:46
twitter this drug will cure covid which by the way trends and just to be clear by the way you know the fda actually
01:37:53
regulates claims like that on boxes and material in a commercial setting and if you're making money off twitter you're
01:37:59
getting a lot of followers and then you make more money by putting out a tweet that says yeah but you're not you're not making money off the drug yeah right
01:38:04
exactly look if the person is selling the drug should never say that right so if someone went on twitter and they said
01:38:11
take this drug it cures kovid but there's a sign you're confusing facts and authority twitter is riddled with
01:38:16
people that have zero authority that spit out what they think are facts right so i i think i think what you're
01:38:21
speaking to is something very different which is if you're gonna design a social network i've been part of helping to design one so let me just give you my
01:38:27
two cents on this topic there are layers of of decision making that need to go into an algorithm to get to a sense of
01:38:34
rank okay rank means do we believe with some reasonable probability distribution
01:38:40
in some probability distribution that this thing is worth showing to somebody else and the way that you get there is
01:38:45
through multiple layers so there's obviously a layer where you can get signal relative to the authenticity of
01:38:51
the person and individual making the claim is it a bot is it a real person then there's a separate layer which is how
01:38:58
you know roughly accurate do we think this is then there is another layer which is is this person believable in
01:39:03
making all of those statements and my point is there are different subsystems you build for those things he's already
01:39:08
said all these algorithms are going to be open sourced and what you're talking about is authority you should allow
01:39:14
people to say stupid things it's not illegal right yes a person can be on a street quarter saying jesus is the son
01:39:20
of god and he will save your soul sex doesn't have to believe him and somebody can say that on twitter the issue here
01:39:26
is does it trend and do you show to people the algorithm and if you fix those problems then who cares if a
01:39:32
person says hey listen twitter has an authority problem and a ranking problem and the authority problem comes from the
01:39:38
fact that there's all kinds of long tail non-human individuals in the system so solve for identity and this problem can
01:39:45
get easier solved and solve for trending and so if you guys were running twitter you would not put on these covid19
01:39:51
warnings this is misinformation and rely solely on cdc guidance and
01:39:56
recommendations and fda approvals when it comes to treatments and vaccines and risks and so on i would i would you
01:40:01
would let anyone say whatever they wanted how much was the cdc wrong yeah
01:40:09
i'm just trying to get clarity here yeah he's just asking the question i what i would do is and then i'm going to use taxes i would label it
01:40:14
and i would i wouldn't label it right or wrong i'd say ivermectin is a drug here's the wikipedia hold on yeah
01:40:22
here's the wikipedia page on ivermectin let's say there's a lot of confusion about iverbacter which there was you
01:40:28
could just put anytime anybody says the word of avermectin i here's a sentence of what ivermectin
01:40:33
is here's the wikipedia page the cdc page the uk government's page dhs whatever
01:40:38
uh for more information about this topic so i just wanted this warning yeah i just wanted to learn more jkl i want to
01:40:44
disagree with what you're proposing okay because it is the topic du jour it was the one off that then triggered the
01:40:51
ability for everyone to bifurcate on their point of view on what should or shouldn't be done as opposed to having a
01:40:58
universal standard that is universally applied that doesn't speak specifically to just the kovid 19 pandemic or just
01:41:04
ivermectin or just what trump said or didn't say but each one of these things can and should be universally
01:41:11
standardized and then universally communicated and then treated with universal
01:41:16
standards across every one and every topic rather than have each of these breakouts where you've got someone at
01:41:21
twitter scratching their head saying this seems to be an important topic let's come in and annotate it let's
01:41:26
create a classification for this and that's where everyone gets riled up in my opinion i think if there was a
01:41:31
universal standard that was universally applied without giving another example a topic give an example
01:41:36
go ahead can i address this well vaccine is another good example but yeah first of all nobody contradicted the cdc more
01:41:43
than the cd8c itself it constantly it constantly put out revisions of its
01:41:49
old opinions first it said that kovid was not spread human to human then it obviously said that it was it basically
01:41:55
was against mass then it was for them and on and on and on it went okay the idea that you cannot criticize your
01:42:02
government or an agency of the government is absurd but that is the type of censorship that was being
01:42:07
uh leveled in these social networks is that basically they are preventing us from criticizing the so-called experts
01:42:14
that is precisely the kind of censorship that should not exist on these networks that's pretty much the kind of debate
01:42:19
what about labeling in the way i talked about it like the problem with here's more information the problem with labeling is once again it's done
01:42:25
selectively and the people at twitter basically decide who they think is right in a debate and they basically want to
01:42:30
act as a referee to raise the hand of one of the participants of the debate raise their hand over their head and
01:42:36
declare them the victor now it's a lot better to label than to just censor the other side's point of view but still it
01:42:42
is a form of softness the labeling i described where and which happens on our podcast on spotify where it says here's
01:42:48
the covet information center you know for more information and they give a range of so if it's executed in that way
01:42:53
do you oppose it if there's like a very confusing public interest going on if if you were to algorithmically post related
01:43:01
stories or something like that and it was done in a completely fair and speech neutral way and it was just as a feature
01:43:06
of twitter fine but if you have employees at twitter sitting around discussing issues and deciding who the
01:43:12
winner is in various debates and then putting their their thumb on the scale to tilt the debate towards those people
01:43:18
that's not what they should be doing now you know and that is basically what they're doing with censorship if you
01:43:24
look again let's go back to this this topic of misinformation because this is really the crux of the debate okay once
01:43:30
again on the basis of first amendment case all you could remove offensive material on twitter on the
01:43:36
basis that it is you know fighting words it's a slur it's harassment incitement
01:43:41
to violence you could it's fraud okay inauthentic that the the account is not
01:43:47
who they purport to be you remove all the bots so all that content can get removed so what is really left then it
01:43:53
is basically this idea of misinformation this idea that
01:43:58
we are going to declare one party the victor in this debate and i think that is what is so offensive about this
01:44:03
mystery of truth that homeland security is setting up it's what's so offensive about the censorship that twitter has
01:44:09
been practicing which is they are trying to end the debate they're trying to say look this is the person with the on the
01:44:14
side of truth and that is not what they should be doing it's up to the marketplace to decide what the truth is
01:44:22
all right there you have it folks do you disagree with that i i agree with you
01:44:27
to your point david um i i do think in a situation where the
01:44:32
public good and there's confusion in a situation sending people to more information isn't
01:44:38
a bad idea i do think a lot of this uh there were thumbs on the scales and it wasn't transparent what was happening i
01:44:44
think if you add transparency so i think every time there's an action that's taken it should say agent number
01:44:51
and what their agent number is took this action on this tweet for this reason and
01:44:56
then data scientists can look at all the actions that occur and then say look we're looking at this
01:45:01
agent number and here's their manager's agent number and here's why they took down this post you know then at least
01:45:07
you could have a starting point to figure out what's going on we don't even have enough information to know
01:45:13
what what thumbs are on what scales if at all or to what extent and i would like to see transparency first so we
01:45:18
could have a more informed decision and then sending people to trusted information sources a group of them isn't a bad idea i think
01:45:24
what's trusted yeah i mean and so to your point you don't need to look to a podcaster a social network or
01:45:32
the government to find truth in the world you have to have a process yourself that's part of what this podcast is it's for people to develop
01:45:39
being in a part of being an adult yes you have to come up with your own process of coming to the truth
01:45:44
you could trust some people trust the government agencies some people trust a joe rogan or a podcast or this podcast
01:45:50
some people trust a folk singer trust yourself that's the number one thing you have to learn how to do as an adult in life take
01:45:57
in all this information and make a reasonable decision to take ivermectin or to not take ivermectin is a perfect
01:46:03
example people said there's no downside to it people have been taking this drug forever and it's cheap and
01:46:09
then another group of people said well you're taking horse medicine it's like no that's something completely different
01:46:14
and the whole conversation became i felt very easy to parse when you think about it do your research do
01:46:21
your own research right and and talk to your doctor do your own research but you can't do your own research if you're not
01:46:26
permitted to see everything and um and you think about like with drugs think about how many drugs over the last 30 40
01:46:33
years have become the basis for product liability lawsuits because they had unintended side effects or consequences
01:46:39
and they revised the use of those drugs or drugs were taken off the market if people weren't allowed to question
01:46:45
those things because supposedly the experts had ruled on the issue and ended the debate how would we have gotten a
01:46:52
correction on that how we've gotten to the truth so just because the experts say something doesn't mean
01:46:59
there's pros and cons to this we have kids getting tons of kids taking all kinds of sris and antidepressants and
01:47:05
all kinds of drugs parents have to make difficult decisions adult need to make difficult decisions do they do this do they not and by the way there's no we
01:47:12
don't know we're doing large-scale experimentations on the population in real time with drugs it is a decision
01:47:19
you have to do the pros and cons for the medical establishment the medical establishment at one point in time
01:47:24
thought it was a good idea to lobotomize people like they were doing that as like a medical procedure so these people can be wrong you know
01:47:31
and this idea that we've arrived at the the end of history and we know the truth here's all the truth
01:47:36
no new facts are being or no new knowledge is being created for sake i mean it's dangerous
01:47:41
is red wine good for you or bad for you because every three or four years coffee and red wine are good for you or bad for you depending on the year
01:47:48
well i saw i saw a longitudinal study that just came out that said there are no caloric benefits of intermittent
01:47:54
fasting now there's a lot of people that would be up in arms with that what are you supposed to do if you know maybe
01:47:59
there's some value to organ health maybe there's some value to managing your glycemic index but again the point is
01:48:05
there are study upon study there's work going on all the time all these things are in an area of gray
01:48:12
and so if all of a sudden you jump down one person's throat and basically become very judgy because you think that the
01:48:18
total bounded body of knowledge has already been created you are making an enormous mistake i mean steve jobs
01:48:24
thought he could cure his own cancer i mean intelligent people are free to make bad decisions with one of the most
01:48:30
intelligent talented people in the world who by all accounts might have survived longer
01:48:36
if he had treated to this very specific method of juicing um you know there's a there's a certain sliver of folks
01:48:41
there's a really incredible documentary actually on netflix if you want to understand it of people that went down this path of juicing their uh trying to
01:48:49
eliminate their micronutrients the irony is that the people who
01:48:55
are i think some of the stupidest people like that woman singing show tunes that you like these are the people who are
01:49:00
making these determinations over what is true and what is false and what is labeled as information and what we get
01:49:06
to discuss it's great it's biased it's riddled with bias you have to make your own decisions in these cases and you
01:49:11
know like it's great to have smart friends to have a dialogue with beautiful dialogue it's the beautiful
01:49:17
thing about being an american and working so hard to get to this country is the independence and the freedom to
01:49:22
be your own self i mean why is that such a bad thing and why would anybody want to give that up to a nameless faceless
01:49:28
blob in an organization well and the response you get back from people is i'm not
01:49:34
abdicating my ability to think for myself to this rando woman singing show tunes and then people say like oh well
01:49:39
the response i got when i said just trust yourself is like well what about all these bros who are listening to joe rogan and they're making decisions on
01:49:46
their health according to joe rogan i'm like i'm like yeah it's called personal responsibility like i'm not responsible
01:49:51
for joe rogan's listeners if joe you know the same person that told you that is probably micro dosing and thinking
01:49:56
ayahuasca is a solution to everything they have intermittent fasting and micro juicing and from the childhood trauma
01:50:02
they had when they didn't win their you know soccer medal and nobody knows they didn't get into harvard so they're on ayahuasca every day i mean give me a
01:50:08
break yeah nobody knows no we we we all know so little so here's what we know you live you die
01:50:15
the end and we're all just trying to do our best and so why don't we all just try to have a reasonably decent time and
01:50:21
be nice to each other all right everybody it's been an amazing episode we will see you in miami which will be
01:50:28
absolutely fun and thrilling sold out our first all in simon and last uh
01:50:33
because i don't know who the gonna do this work next time you will you doing an amazing job continue it
01:50:38
bye-bye boys
01:50:43
[Music]
01:50:52
and they've just gone crazy with it [Music]
01:51:13
we should all just get a room and just have one big huge orgy because they're all just useless it's like this like sexual tension but they just need to
01:51:19
release [Music] your feet
01:51:31
[Music] i'm going on
01:51:38
[Music]
