Is there going to be an open mic night in…
We were going to have you speak, Friedberg, but we realized you’re not capable, so…
We want the show to be entertaining.
That’s not personable, Friedberg.
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 creative sensibility. So if I have some time to prep
and write my script and read my own creative insights…
Yeah, okay, bring one joke next week.
J. Cal, for all the time we’ve spent together on this podcast,
you know so little about me. It’s so depressing, I got to be honest.
Well, you know, here’s the thing about friendship.
It’s a two-way street, you got to open up a little bit.
We got to go out and get drunk one night.
Absolutely.
I just want to give a shout out to this guy, Andrew Lacey.
Okay.
Okay.
Shout out.
He is the CEO of a company called PreNuvo.
Oh yeah.
Can you just flash it on the screen?
PreNuvo.
I went to PreNuvo and what they do is they do a head-to-toe MRI scan in 45 minutes
and they use a bunch of machine learning and image recognition
to help a radiologist interpret these MRIs in real time beside you.
It’s a service that you have to pay a few thousand dollars for.
There’s a location in Silicon Valley in Redwood City and a couple of others
and we 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 the besties for mentioning PreNuvo
because we had a bunch of people come and he said,
we found no less than 11 life-saving diagnoses.
11.
11 people.
11 individuals listening to the pod.
Pod saves lives.
Went to PreNuvo after hearing about it, had a head-to-toe MRI,
found all kinds of issues from a brain tumor and brain cancer
to stomach cancer and other things and was able to get the care that they needed.
Amazing.
Anyways, I just want to give a shout out to him for doing a lot of really important work
and for the folks that are listening that have some money set aside and can afford to do this,
I would just really encourage you.
We have no financial stake in it, nothing other than we are users of it.
But check out PreNuvo.com and shout out to Andrew and his team there.
Okay, here we go.
Three, two, let’s start the show.
The war in Ukraine has him insane in the membrane and Biden’s new disinformation council
is going to have him detained.
To calm him down from tanking Solana, he started smoking that marijuana.
You know him as the rain man.
He’s here again.
David Sachs.
How you doing?
Have a good week?
Yeah, not bad.
All right.
Big energy this week, huh?
Okay.
In high school, he had no friends, but thanks to the pod, undergrads are in his 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, David Friedberg.
Wait, I missed like half of that because Tremont was laughing so hard.
I can do it again.
Do it again.
Do it again.
Let me try from the top.
In high school, he had no friends, but thanks to the pod, undergrads are in his 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, David Friedberg.
Just for the record, there’s no undergrads in my DMs, but I appreciate the intro.
All right.
We’ll check.
All right.
In three, two, he’s trying.
Mark Friedberg is tweaked and the show hasn’t started.
I think I’m taking over intros next week.
Okay, do it.
I’m at least going to do J-Cal.
Please, by all means, next 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.
Cheers next week.
Let’s see these latent stand-up skills in action.
Yeah, absolutely.
He’s been hiding them from us.
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 in, they look the same.
You can’t tell the difference.
Sorry, J-Cal, I’ll go over to you.
Okay.
He’s dropping annual letters in luxurious sweaters.
As far as the specs go, well, it can only get better.
The dictator himself, Jamaal Falihafetih.
Ouch.
I cannot comment on the specs.
Oh my God.
I mean, this is getting brutal.
Who’s writing these?
Oh my Lord.
All right, everybody.
It’s been a big week.
Did you read my annual letter, any of you three assholes?
I saw your commentary.
No, that’s a 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 team.
I was like, this is a really nice way of summarizing a firm’s results over a long period of time.
Because you had every fund, and your totals, and all the key metrics.
Well, can I talk about that for a second?
Yes, please.
What’s incredible about what you’re saying, Sax, is I was interested in a bunch of other
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 other firms,
from Growth Stage to Crossover to PE.
And it’s incredible that they are not standardized, right?
Some people only show gross IRR.
Some people show net IRR.
Some people don’t show the total value of the paid-in capital, which means if you have
a $100 fund, what is the total value of all of its holdings?
Some people don’t show DPI, which is distributions of paid-in capital, which means, okay, for
every dollar you’ve taken in, how many dollars have you sent out?
If you don’t show all of them, what was shocking to me is how much you can kind of hide, and
play, and manipulate the numbers.
And one of the most crazy things that I saw is that there are these late-stage funds that
write into their fundraising decks that what they actually use are lines of credit to juice
IRR.
So what they do is, if they’re about to do a deal, they’ll actually get a loan from a
bank, put that money into a company, wait until it’s about to get marked up, and then
what they do is they actually call that original money from their LPs and pay back their capital
call line of credit.
So what does it do?
It inflates IRR.
But this is why, if you see the other numbers, it still shows that it’s kind of like not
doing much of anything.
So if you ever see multi-hundred percent IRRs or high, huge IRRs with zero DPI and a marginal
TVPI, it’s folks that are playing games to trick LPs.
Just a heads-up to everybody.
That is so weird.
So what you’re saying is, just to summarize for people in the audience who don’t understand,
hey, we get judged on the rate of return each year.
So if the stock market does 7% or 8%, we’re expected to do triple that.
So we got to hit 20%, 25% each year.
Now, the clock starts ticking when the money gets called from the LPs, the partners, and
gets put into the company.
So if you invest in your tour of your fund, you pull the money down from the LPs, you
put it into YouTube, whatever it is.
What you’re saying is, they will take a loan against that future money from a bank at an
absurdly low interest rate, let’s say 1% or 2%.
Correct.
They make the YouTube investment.
Then two years later, YouTube has a price round that marks it up 20x.
Then they put your cash in, in year three of the fund, year two, and pay back the loan.
Now they’ve paid 2% two years in a row, but the thing’s gone up 20x.
Correct.
What a…
That’s dirty.
Well, so it’s dirty enough that the SEC has actually now introduced legislation, it was
in February, that basically is going to try to uncover all of this nonsense.
And so you’ll have to be much more transparent.
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 critical elements together in a simple table that will make it very obvious
who’s playing games and who can actually make money.
So there is a semi-legitimate version of the loan thing, which is, where this comes from
is a capital call loan.
So we’re making a bunch of investments throughout the quarter, a million dollars here for a
C deal, 10 million for a series A. That’s happening all the time.
You don’t necessarily want to hit your LPs with capital calls for every single little
small investment.
So what we do is you get a capital call line from SVB or something like that, and then
you do one capital call per quarter.
And so they will loan you the money for one, two, three months, but it’s not for a year.
But the reality is if you have a reasonably well-developed infrastructure, you have a
cash forecast of what deals you may or may not close with probabilities.
And so you 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 expenses, to pay for
salaries while you clean up at the end of a quarter.
Completely reasonable.
But if you’re making, you know, five or 10% commitments into a company and you’re using
this as a way to basically create subterfuge and hide, I think that that should not be
allowed.
Yeah.
The number of capital calls is annoying for people, yeah.
Yeah.
Anyway, I did share that table with our team too, because I did like the format quite a
bit.
I bookmarked it.
I think we’ll start using it.
I’m reading it this weekend.
It’s very hard for funds who are not performant to use that format.
Now yours, you are very highly performant, so you can use that format.
But I don’t think people that have not returned money or have fake paper markups can use that
format because it is too simple.
Yeah.
Yeah.
At the end of the day, what metric do we all look at when we are LPs in a fund?
Well, this is what I put down.
I 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?
Multiple on cash investment?
No, I need to look at the totality of it.
I need to understand what is your gross and your net IRRs.
Those are important things to understand because it shows how efficiently you put the money
to work.
Of course.
But then ultimately, then the other two things that really matter is what is the total value
you’ve created and then what percentage of that have you given back to me?
Because that allows you to understand how much paper value this.
So for example, today, let’s just say you had a fund that had a TVPI, total value of
paid-in capital of a 5x.
A 5x on a fund is incredible.
But if you’ve distributed none of that, well, guess what?
If we’re sitting here in May of 2023 or 2022, rather, the total value of your paid-in capital
is not really 5x.
It may be only 3x and it may be actually 2.5x considering what the markets have done
to these companies, right?
And so it allows me to really understand how performant funds are in not just being a part
of the game, but actually generating realizations.
And this is the hardest part.
As I told you, Jason, this past quarter, I think I passed 2x across my funds when I was
managing outside capital.
And I think, my gosh, it took me 11 years.
It’s hard.
To return 2x the money.
And that means I’ve returned $2.5 billion.
You know how hard that was?
Yeah.
I mean, you got to time the exit.
You have to have the ability to exit.
You can’t even time the exit.
You have to be constantly managing and working your portfolio.
Sometimes you’re selling in secondary transactions.
Sometimes you’re actually trading up in private markets where you help this company merge
with another private company.
Other times, if I think about it, the number of IPOs I’ve had is relatively diminutive.
So how do you make $2 billion where I’ve only had one IPO, which has been Slack?
Yeah.
So this is a really, really hard business.
And it was just a reminder that in the last four or five years, managing capital has seemed
relatively easy.
But in these next few years, you’re going to see who’s really, really good.
It’s kind of that old Warren Buffett quote.
You can see who’s naked when the tide goes up.
I mean, said another way, the last five years, raising a fund has been really easy.
And writing checks has been really easy.
And now comes, you know, Act III, which is returning a multiple on the money you easily
collect it.
And boy, is that hard.
And I, you know, I, all of these new LPs.
The other thing that I want to tell you is one thing, though, all these LPs send me,
even though I’m not an LP and a potential, they send potential LPs their performance
because they’re so proud of it, like quarterly.
I’m like, not even in this fund.
And they have these crazy markups, crypto investments, this, whatever.
But they’ve returned no capital.
And so it’s like, just to give you a sense of it, if you look at the most fantastic organization
in the world, if it were an investment manager, which is Berkshire, their long run 50 year
track record is, you know, around 20%, right?
Gross.
If you look at the most successful asset manager in the world, and I would put Blackstone at
that just incredibly good and best in class and probably three enormous parts of the worldwide
economy, real estate, credit, and private equity.
You know, their long run track record is that on 200 and some odd billion dollars of private
equity and another hundred billion dollars of, of, of real estate, they’ve returned
two X.
So that’s what the upper bound is, you know, doubling people’s money and generating 15
to 20% is the best you can expect if you are really excellent and long lived.
That’s the best.
What do you look at Freeberg when you’re an LP?
What number do you care about?
Because you LP other funds and I think all of us do at times.
I made my first venture fund investment in 2006.
And I, I am still getting distributions from that fund.
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 money into this fund?
I guess this makes sense for pension funds and, you know, very large balance sheet,
long range investors that need to kind of diversify.
But as an individual, I should have put my money and have had liquidity on it for 16
years rather than have it locked up and a bunch of private companies sloshing around
and, you know, 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 like low teens.
Yeah.
Not a great deal.
No, it’s lower.
You would have been better owning the S&P 500.
That’s right.
And so for me, I think the key, the metric, the only metric that matters, which I think
you’re saying Chamath, is how much cash I got out relative to cash I put in.
And so initially my IRR is negative 97%.
And then it goes up to negative 80 and then negative 60 and negative 30 and negative 20.
And now it’s 14% because I finally got more money out than I put in.
And so it doesn’t feel to me like, you know, just generally private investing,
everyone gets excited because we all get sold stories and individuals all get sold stories of
you put $1 in, you get $100 in.
I mean, J. Cal wrote a book called How I Made $100 Million from whatever you invested in Uber.
Yep.
And that story, I think, gets everyone kind of excited.
But the reality is, the vast majority of the time, and if you 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 locked up.
And a top performing fund is returning two and a half x after 15 years, which is not much better
than kind of investing in the S&P where you could sell that anytime you want and use that cash for
any purpose you want.
Well, if you did $100,000 investment, and you return 260,000 in 15 years,
I’m on an IRR calculator right now, internal rate of return at 6.58%.
Yeah, better off than the S&P.
Um, yeah.
I mean, and if you did QQQQ, depending on, yeah, how hot the market was then, yeah.
And you get to sell-
It’s really, really, really hard to actually make money.
There are always going to be periods where people look like geniuses and have markups.
But you can really see when people have skill after a decade and a couple of up and down cycles.
Same with hedge funds, by the way, right?
Hedge funds put up a score every year.
And in certain macro cycles that can last many, many years,
everyone looks like they’re doing well.
And then all of a sudden, tides go out and you lose more than you made over that period of time.
And then you realize, holy crap, I was actually in an insurance business,
where you get paid some small premium every year.
And then you have some massive loss one year.
And that massive loss, it turns out your underwriting wasn’t good because you lose more
than the sum of all of the premium you collected over that period of time.
And unfortunately, a lot of investing looks like this, which is
you have small returns for a long period of time, and then some massive loss.
And the whole business makes you look like, along the way, a genius.
But the reality is over any long cycle, most folks end up in a bad position.
And they end up-
You know, the SEC, by the way, has solved this for mutual funds, right?
And ETFs.
There’s very strict standard reporting.
And I do think that as, for example, if you go to the big banks,
sorry, Sachs, interrupt.
I just want to finish the last thought.
If you go to the big banks and you have, if you’re an individual,
like a doctor or a dentist or somebody, and they will aggregate and pool capital
and put it into these funds on your behalf, as an example.
So it looks like JP Morgan or Goldman Sachs is a 50 or $100 million LP in one of these big funds.
But in fact, it’s just the sum of a bunch of folks on their platform.
It stands to reason that if the SEC can actually mandate standardized reporting
for private investing, it would actually be a really good thing because all of these games
will, and probably currently are, as far as I’ve seen in these presentations,
tricking a lot of folks to put their hard-earned money into things that
actually will never make money.
And it’s because if you selectively cherry pick how you present this data,
you can tell a partial truth.
So, you know, I would really, I would love, I’m happy to be compared to any organization,
but every time I hear somebody chirping about how good they are,
my only comment is, I just want to see your table in the same format as my table,
and we can compare it because it allows me to really understand.
Yeah, liquid returns.
And by the way, the point I made earlier about when markets are generally good,
hedge fund, public market investors generally can look like they’re doing well by
having a good marginal return above the benchmark every year,
and then one year have a big drawdown,
and suddenly they realize that their underwriting wasn’t that good.
The same can be true in private investing in the opposite way,
in the sense that you’ll put in small checks, small checks,
and lose money and lose money and lose money and then have one big banger,
and you get 100x return, and you look like a genius,
because your whole portfolio looks good.
But you fast forward and you keep doing that for another 10 years,
all those small checks may not even add up to the banger.
And that’s the 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 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 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 bad hit at the wrong time.
And then the framing over a long enough period of time,
I think really becomes the key measure.
And the reality is most people don’t make it long enough in their career
to actually present true results in how they really do underwrite.
And by the way, to the extent anybody’s listening
is able to invest in these private funds.
I think Jason mentioned this superficially.
So let me just dig into it,
because I think it’s really, really thoughtful what he said,
which you should understand.
If you have the option to invest in a private fund,
you have to understand that that private fund
has two huge negative things working against it
relative to investing in the S&P 500.
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 things.
Number one is it is illiquid, not just for 10 years,
but it could be illiquid for 12 or 14 or in,
you know, Friedberg’s case, 16 years.
So you need to get paid a premium for owning that.
And then the second is depending on the business model,
you may have very high failure rates,
which means that you need to really hit
these outsized Grand Slam home runs.
And if you don’t, then you’re going to be worse off
than if you had invested in the S&P 500.
So that deserves a premium.
And so Jason’s right, which is the S&P is between 7% and 8%
over long periods of time, predictable compounding.
You have to add another 7% to 8% for this illiquidity premium,
and another 7% to 8% for the business model viability of,
for example, being in venture.
When you add those three things together,
you do need to get paid, basically,
in the low to mid 20s returns to be justified.
Otherwise, you are much better off just owning the S&P 500.
Much, much, much better off.
Sachs, what do you look for when you’re LPing?
And now that you have many large funds,
what do you think LPs are looking for now?
And what do you advise them to stay focused on?
The number one metric that matters is DPI,
which is the ratio of distributions to paid-in capital.
And it’s basically money in versus money out, right?
At the end of the day, that’s all that matters is
how much money did you put in the fund?
How much money did you get out?
The issue is that to Chamath’s point,
these are 10 to 12-year funds,
and it takes a long time to get distributions.
So all the other metrics are basically triangulations
or approximations of what you think the fund’s going to do
until you actually get to distributions.
So 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 capital.
So it’s basically what’s the marked-up value
of all the positions in the portfolio
versus how much cash has gone in.
And then the big question is,
does the TVPI turn into DPI?
Does the total value turn to distributions?
To explain that to people,
if Chamath had invested in Slack,
but there hadn’t been an outcome,
it could be on the books for a billion-dollar position.
So the TVPI is looking really great.
But until that company goes public
and the shares are distributed,
the LPs haven’t realized it.
So it could be ephemeral,
or it could go down significantly,
as we’ve seen with public markets.
Yeah.
So in the last four months,
we just returned our fund one
in terms of real distributions.
I think we have a DPI of 1.1 or 1.2 on that fund now.
The TVPI is four to five.
But it feels great just to distribute the entire fund out.
I literally, in my first two funds,
I think we did that as well.
And it’s a really great feeling.
And sometimes selling 10% or 20% of a position early
and getting over that hurdle
and just getting into the one to two X,
that’s a pretty great feeling.
By the way, just to talk about how difficult it is
to convert paper gains into real gains.
Let’s just say, Jason, in your example,
you had a fund that had these huge paper gains,
but haven’t distributed anything coming into this year.
Okay?
Here’s a little interesting data
about the ultimate buyer of all of these tech stocks,
which is the NASDAQ, right?
People that buy stocks in the NASDAQ.
Listen to this as of yesterday.
More than 45% of stocks on the NASDAQ are now down 50%.
So basically one in two.
More than 22% of stocks on the NASDAQ are down 75%.
So almost one in four and more than one in five.
And then more than 5% of stocks, so one in 20,
on the NASDAQ are down 90%.
So you can use this to actually get a blended average.
But what it means is that the ultimate buyers of tech stocks
are taking a 60% discount to what they were able to buy
even just four months ago.
60%.
So there is no public mark
that will support a private mark
unless it’s also discounted by at least 60%.
Now think about that when you talk about
this entire panoply of companies that have been overfunded,
many who are under executing
and burning enormous amounts of money,
who now have to come back out to the market.
Any sophisticated buyer will have to tell them the truth,
which is, I’m sorry guys, but the data says
there’s a 60% discount to this mark.
Are you willing to accept it or not?
Otherwise the lights are going to go off.
Yeah.
And these marks only happen,
at least in the private markets and venture funds,
when a transaction occurs.
So if somebody raised a bunch of money,
as we talked about in previous episodes,
at a billion dollars,
and they’re now worth 500 million,
that’s only going to work itself out in fund documents
and reports for a year or two later
when the next transaction occurs.
So there is a lagging effect.
One thing I just want to bring up
before we go into maybe GDP
or the Bill Hwang situation
is what we talked about on this pod last year
about what was going to happen in private markets.
I’ve been seeing the last two or three weeks,
and I don’t know, Sax and Freeberg,
what you’re seeing in private markets,
but really acutely,
people who are going out and skipping rounds,
this like,
I’m going to just skip my seed round
and just do a series A.
I don’t have product market fit.
I’m going to get credit for work that hasn’t been done.
I’m going to raise 10 million without product market fit.
Oh, my Lord, has this,
has the dialogue changed?
I’ve been on many calls with founders
who’ve met with 50 VCs,
and the conversations are moving to,
you know, how many months to break even?
And, you know,
how many customers do you have?
And how have they increased?
And let’s talk about the churn.
It is getting super pragmatic out there.
If you’re a founder,
and we said this a year ago,
but it’s worth stating here,
this is not the moment I would try to over-optimize.
If you have a term sheet or money on the table,
I would close it.
Just, you know, founder to founder.
What are you seeing, Saxe?
Yeah, I mean, it’s gotten a lot harder,
I think, especially at the growth rounds.
We actually have signed
two growth term sheets recently,
and it was much harder for us
to do growth rounds last year,
just because you had these huge mega funds
come in at crazy valuations.
But now they’re kind of licking their wounds,
and we’re starting to see
some really attractive growth opportunities.
Everyone else has backed off.
So it’s interesting.
Yeah, it’s changed quickly.
Yeah. Now, one thing,
so, you know, Travath raised a good point about,
you know, private,
not only are private valuations sort of sticky,
but private marks are sticky.
And, you know, companies only get remarked
every couple of years.
And so whereas the public markets
get remarked every day.
So it is hard to know,
like, what is the proper valuation
of a company that raised money last year?
Because, yes, valuation multiples
have come way down,
but then also they may have grown,
and their performance is better.
So the analysis that I saw Jason Lemkin do
in his LP newsletter,
and we’re basically repeating it
for our entire portfolio,
is to calculate,
what was the ARR multiple that you paid?
Basically, valuation divided by ARR.
What was that entry multiple?
And what is it today?
And so we’re doing that
across our whole portfolio.
So what you see is…
Sorry, sorry, Sax.
Sorry, sorry, Sax, clarification.
LTM ARR, or, you know,
NTM ARR, which one?
Basically, you look…
Last 12 months, next 12 months?
Yeah, no, you just look at
their current ARR, which is,
you know, run rate,
their current run rate revenue.
Yeah, exactly.
So take January, you times it by 12?
Or in this case, April.
Yeah, basically, yes.
You take the current month
and multiply by 12.
But they have to be annual commitments, right?
So if it’s not,
it has to be annually recurring revenue.
If they’re not,
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
services revenue in that, in any event.
So the point is,
you basically calculate
what was the multiple
that you paid at,
you know, entry 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 companies
that we got into,
I don’t know, two years ago
at a valuation multiple
that you couldn’t defend today.
60 times, 80 times, 100 times.
But the multiple today
is more like 10 or 20 times,
because it’s actually grown really fast.
So you need to look at
both sides of the equation.
And that’s the analysis
we’re running for every company
in our portfolio.
And then, you know,
LPs can decide how to market.
I mean, the most important thing is
what’s the next investor,
if they need more capital,
going to market at?
Well, the question is,
are you growing faster
than valuation multiples are falling?
Correct.
And then can you,
that means you could have a down round,
a neutral round,
or possibly an up round,
but it doesn’t.
So are you starting to see people
or people discussing on the board level
or in your firm?
Hey, maybe we take a sideways round,
a neutral round.
We just go to last year’s price
and top off another 10 million.
Are you seeing that?
I’ve told some of the boards I’m on,
just keep fundraising,
just keep the round open
and top off if there’s money available.
Because, you know,
especially if you raised around
eight months ago, six months ago,
those prices,
like if people are still willing
to invest in those terms,
that’s a good deal.
I literally had this conversation
with the founder this week
where they had raised that
in a great valuation
and they turned money away.
Because they were like,
Yeah, that was a mistake.
We’re still growing.
So why would we take the money now
if our valuation is going to be,
you know, double in nine months?
And now it looks like,
yeah, maybe, you know,
that extra one to $5 million
would have been good to lock up.
Okay.
So adding to these headwinds,
I think we’ve been talking
about the possibility
of a recession
for those new to the concept
of recession
if you’re under the age of 30
and haven’t really lived through one
as an adult.
It’s two quarters,
the official definition,
two quarters of negative growth
of the GDP.
Well, it turns out US GDP
fell 1.4% in Q1.
And Q4, we had a 6.9% growth rate.
Q1 was the weakest
since the spring of 2020
when COVID hit.
Nick, cue the clip
where Sachs and I basically said,
this may happen in January of this year.
So the concern is that,
you know, with the losses we’re seeing,
and I mean, every day,
it just keeps like you see more red
that this could turn into a recession.
You know, popping of bubbles
is usually followed by a recession.
So I think, you know,
the fortunes of the economy
could turn really quickly here.
And that is the marginal risk.
The marginal risk
is actually for recession.
David is saying something
really important.
The risk, in my opinion,
is not of runaway inflation anymore.
The Fed is now in this
really delicate situation
where China cut rates last week.
We have an FOMC meeting,
the Open Markets Committee
that sets rates on Wednesday,
I think of this coming week.
What is he supposed to do?
The risk is to a recession
because if we overcorrect.
Yes.
And the leading indicators
all around the world
tell us that their economies are weak,
then inflation may have actually been
much more transitory than we thought.
And right now we have to decide
because if we overcorrect,
we’re going to plunge
the United States economy
into a recession.
There’s a lot of data here.
And obviously this is.
When this data is always
in the review mirror,
so obviously we’re talking about Q1,
it takes a while to collect this data.
And there’s a lot of different factors
going on at the same time,
obviously COVID and obviously supply chains.
Consumer spending rose at a 2.7%
annual rate in Q1,
a slight acceleration from Q4.
There was also a 9.2%
rise in business spending.
So we have a lot of spending going on.
Who knows if that is spending
that actually occurred
in the previous quarters
and because of supply chains,
like people’s cars are being delivered,
people’s machines and manufacturing equipment
is being delivered now.
We had negative GDP in Q1
for a whole host of reasons
that can effectively be summarized
by the fact that we are still trying to
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
of incredible GDP,
which we had last year,
and then contractions in the economy.
The thing that’s always been true
about the United States
is that we are a consumer-driven
economic engine,
which means that as long
as people feel confident
and they’re buying things,
the economy tends to do well
and we tend to move forward as a society.
When consumer confidence ebbs
and people contract their spending,
we are in a world of hurt.
The last couple of years,
we’ve had a lot of consumer savings.
We’ve had a lot of money
that’s been pent up in the system,
whether it’s stimulus checks
or loan forgiveness,
or all of this stuff
has allowed people to feel much richer.
And as a result,
they’ve started to spend in drips and drabs.
The problem now is that
because prices are so high,
all of those savings
have largely been depleted.
I just sent you guys a text
in the group chat
of what consumer spending looks like
in consumer savings, rather.
And it tells a really, really scary story,
which is that
the savings boom is largely over.
Personal savings rate fell to 6.2% in March,
the lowest since 2013.
And so what does that mean?
Well, it means that the setup is there
for us to sort of really contract
what we are able to spend as a society.
So I think now the odds
even push further in this direction
that we could have more quarters
of negative GDP.
And all of a sudden,
we’re back to what we talked about before,
which is a 2019-like scenario
where the government,
or the Fed specifically,
races forward to tackle inflation.
And in 2018 and 19,
it turned out to be a head fake.
And by the way,
in 2019, the stock market ended up
more than 30%,
up 32% or something like that.
Crazy numbers.
Here, and by the way,
back then in 2019,
China turned over.
It looked like it was going to be
a fast-moving economic recovery for China.
And instead, they sort of slowed down.
We have the same thing here.
We have a quarter of negative GDP.
We have China in lockdowns.
We have every company
that’s in the manufacturing
supply chain ecosystem
telling the world
that we don’t really know
what this is going to look like.
Intel today actually said
there’s going to be shortages
in chips through 2024.
So I think it could be
a very difficult path ahead for the Fed.
How do you raise rates
400 basis points
into a slowing economy?
You could raise basis points 75,
you know, 75 bps,
maybe 100 bps,
but it gives them
very little freedom to operate
without really tanking the economy.
There’s also another point
to highlight here,
which is in some of this data,
that was released,
there was a strong indication
that there are real issues
right now with inventories.
I don’t know if you guys
have tried to buy an appliance
or a car lately,
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 delays
to get a frigging couch.
I mean, like everything
in the global supply chain,
somewhat related to the kind of
big inflationary pressure
that hit us at the end of last year.
And then everyone placed orders.
All the 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 factories are shut down.
I have several businesses
in the hardware space
that are actively searching
and frantically trying to find
components, suppliers,
specific parts,
even basic raw materials
like aluminum
are very hard to get ahold of.
And so there’s also
a very challenging inventory
and supply chain problem.
When that happens,
I can’t actually wire money
and buy aluminum
because I’m waiting
for aluminum to show up.
I can’t wire and buy
the microchips I want.
I can’t wire money
to my car dealership
and buy money.
So that doesn’t get credited
on the GDP counter
because those sales
didn’t close that quarter.
And as we saw with Amazon
recently and others,
and Apple just said
that they’re expecting,
I think, close to a $10 billion
hit this quarter
because of supply chain issues.
A lot of folks want to spend
the spending interest is there.
The capital flows are there.
It’s just that the supply chain
is clogged up
and we’re so dependent
on getting atoms
and molecules moved around,
and they’re all kind of held up
in different places
that folks simply
can’t get their purchases in.
And so the revenue
triggers don’t get hit.
And so the numbers
don’t look good
from a growth perspective,
but it doesn’t necessarily mean
that the demand isn’t there.
This is a significant
inventory problem
and supply chain problem
that’s driving a lot of this
adversity right now
in the market, it seems.
And interestingly,
by the way,
that doesn’t mean,
that doesn’t mean
that we’re not going
to have a recession
because when I’m not able
to spend money on Apple,
Apple spending less
on their suppliers,
they’re spending less
on their suppliers.
So there is a trickling effect
of capital flows
and the recessionary effect
may be hit.
But there is capital
and there is demand
for consumption.
It’s just that we’re really
clogged up right now.
Well, and the consumer
confidence index
has been on a bit
of a roller coaster.
We were at 130
before the pandemic.
For the year of the pandemic,
we were down in the high 80s,
87, 88, 89.
We rocketed back up,
you know, in 2021,
people started to feel like,
oh, we’ve got these vaccines,
things are going to go
back to normal,
rocket back up to 128.
And it’s been a slow tick down
to where we’re now at 107.
And so I think consumers
don’t know what to think.
They don’t know if,
you know, inflation
is transitory.
They don’t know if gas
is going to be $7 or $4.
They don’t know
if they should spend a big,
spend on a big vacation or not.
And so this, I think,
in terms of people’s planning,
I don’t know if people can plan
how their own personal budgets,
right? And I think that’s
on the confidence thing
to Chamath’s point.
We need to have
a predictable economy,
you know, and it can’t be this
schizophrenic,
to use a term.
Sax, what do you,
what do you think about
what we’re seeing here
in terms of,
we’re obviously
either in a recession
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 accurate.
I tweeted in February.
Hey, anyone noticed
that we’ve just entered
a recession and I got dunked
on by all the professional
economists and, you know,
all these people,
but the experts,
the experts,
the experts,
correct.
And now it’s like
the data just came out
negative 1.5%
economic growth in Q1.
So what I wrote at the time
was exactly right.
And, you know,
I don’t know how the threat,
the Fed threads this needle.
I mean, we’ve got
a slowing economy
with negative GDP growth.
You’ve got inflation
is still rampant.
It’s not as,
I don’t think it’s gonna be
as high as last year,
just because we’re lapping
a much bigger number
from last year.
So on a year over year basis,
the comps are,
you know, you start
at a higher price level,
but inflation is still there.
So, you know,
I don’t know what
you do about that.
It’s, it’s a really
tough situation.
And when you have this
kind of wealth destruction
in the stock market,
I mean, you know,
there was a good tweet
that Jamal, you shared,
but you put it up on the screen.
I mean, so much like wealth
has been destroyed.
You don’t necessarily see it
if you just look at
the big cap indices,
but you look at all the engines of
sort of growth and prosperity,
the small caps,
the recent IPOs,
the growth stocks,
they’ve been absolutely hammered.
It really hasn’t been this bad
since the dot-com crash of 2000,
like, and not just the,
like April period,
but like all the way in October
where it kept going.
And then the 2008,
yeah, the 2008 real estate crash.
So we’re already,
like top three worst situations
for growth stocks
in the last 20 years.
And when you have
that kind of like wealth destruction,
it eventually trickles down
into the economy
because people just feel,
you know, companies
start cutting budgets.
People have less money.
The spending goes down.
That dynamic that,
that we’re referring to
in this tweet in that image
is called dispersion,
which means,
you know, people may be confused
when you hear
why are all these stocks down so much,
but the indices are not down as much.
And it’s exactly for the reason
that David just said,
which is that
underneath the surface,
the mega cap techs
consume so much of the market cap
of these indices.
So, you know, the Googles,
the Microsofts,
the Apples,
and the Teslas.
Those four just clog up
an enormous percentage.
I think it’s approaching
40% of these,
of these indices.
And so underneath the surface,
you have dispersion,
which means you have
these tail of two kinds of stocks.
You have these four big mega caps,
and then you have everybody else.
And the mega caps
are generating so much cash
that they’re just basically
keeping the market afloat.
So at this point,
maybe there’s a small silver lining.
And that silver lining is that
to be bearish right now
is effectively not being bearish
these growth stocks,
because as we said,
they’ve been just decimated.
At this point,
to be bearish the indices
means very specifically
to be bearish those four names
and only those four names.
And so that may actually mean
that the market
has effectively crashed already.
–Yeah, but by the way,
I’m not necessarily bearish
on growth stocks from here,
because like you said,
they’ve already been beat up so badly.
The stock market’s
usually a leading indicator.
What I’m bearish about
is just the state of the economy,
because the stock market
trades down on expectations.
So it was already trading down
months ahead of the slowdown
in the real economy.
–The market knew in December.
The market knew in November.
The recession was coming.
–In like around November 6th of last year.
–They knew it was coming in.
–The market knew
when we talked about the sales
that Bezos and Musk did,
when we sold equities,
we were saying,
like, it’s like,
you can’t keep all of your money
on the table all the time
unless you have
the durational wherewithal,
meaning you’re just not time-bounded
and you can just be there forever.
And not everybody’s in that position.
–An endowment could be in that position,
but individuals with…
–No, an endowment is not
because they have to create
distributions every year, right?
–Well, I’m talking about the mega-endowments
where they, you know,
Ford or Harvard may 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 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 basis points in May.
That’s relatively well expected.
We’ll be able to digest that reasonably well.
But what do they say to David’s point?
You know, if they all of a sudden go on
a crazy program of quantitative tightening,
right, and what is that again?
That’s when, you know,
we were spending,
they were spending,
they were printing,
you know… –Money.
–…billions and billions of dollars
going into the market,
buying securities
and giving people the money, right?
That’s called quantitative easing.
Now we’re doing the opposite,
right, where they’re selling
and they want the money back.
Now, the problem is what that does
is that removes liquidity from the market.
And when you remove liquidity
from a market,
you actually make it
a little bit more fragile,
a little bit more precarious,
a little bit more price sensitive.
And so it puts us
in a very tough situation
when the economy is slowing,
when these guys may be raising rates,
and then at the same time
removing money from the system,
it may be a lot for all of us to handle.
And so I think that they’re under
a really difficult set of decisions.
There is a business cycle,
and, you know,
there are always recessions periodically
every seven to 10 years,
but they have really magnified this
because you had the Fed for years
maintaining interest rates really too low
and doing quantitative easing during a boom.
And then the federal government
was printing trillions
and trillions of dollars,
and they didn’t stop.
It was one thing to do it
during that sort of COVID 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 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 government helps
balance out the business cycle.
No, the government
like magnifies the business cycle.
They’ve 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 start,
you know, you might oversteer
The federal government is great
at setting incentives, right?
And creating like tax credit programs
and incentives for private enterprise
to invest money.
But when they act
as a direct market participant
and start to actually direct capital flows
and make decisions
about how the capital market should work,
it 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,
there’s also this other issue
of not just incentives,
but when they create a free capital
that then allows a market
to find a way to take advantage
of that free capital.
And that’s effectively
what we’ve seen happen
with Medicare, Medicaid,
as well as with the student loan program.
And, you know, I don’t know
if we’re going to get
to the student loan program today.
But I think, you know,
to your point, Chamath,
one of the things that’s happened
with the cost of education
in this country
is that the federal program,
which was, you know,
and I took a bunch of notes here
to talk about this today.
But the federal government
began guaranteeing student loans in 1965.
It’s called the Federal Family Education
Loan Program.
And that program made capital available
for students to borrow,
to spend on universities
or whatever education
they want to go get
of their own choice.
And the idea being that
that will give them the ability
to go make more income
and extend their careers
and educate the workforce.
And the problem is that
when that capital was made available,
a lot of private universities
started to emerge
and private for-profit colleges
started to emerge.
And in the years
since that program was introduced,
I just want to give you guys
some crazy statistics.
So in the 1969-70 era,
the cost for a public four-year college
was 1200 bucks a year.
That’s room, board, tuition and fees.
And in 2020,
that cost rose to $21,000.
And here’s the other crazy stat
for private four-year college
in 1970, 2500 a year.
2019-2020, $46,000 a year.
And so that capital basically allowed
these for-profit organizations
or these organizations
that are trying to grow their endowments,
which are effectively like for-profits,
to charge any price they wanted.
And the consumer, the student,
would be able to get free capital
to fund that quote-unquote education
because it was available to them for free
from the federal government.
And so the federal government
created a bubble in education cost.
And that bubble in education cost
has now overburdened 15%
of American adults with student loans,
that many of which would,
they would never be able to pay back.
And now 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.
And doing so obviously
doesn’t solve the fundamental problem,
which is that making those loans available
in the first place
creates an inflationary bubble effect
in the end asset.
And the end asset in this case is education.
But we’ve seen the same thing with housing.
And we’ve seen the same thing
with pharmaceutical drugs
and medical care and other services.
So any place where the federal government
steps in and says,
I will provide a backstop,
I will provide free capital
to support and create a quote-unquote
incentive for this market to accelerate,
you end up with these inflationary bubble.
You’re going to have people game the system,
right?
You get whatever University of Phoenix types
and even the large universities
raising tuition to observe things.
And people take these loans, Chamath,
before their frontal lobes
are even fully developed.
And they have long-term understanding
of the ramifications of this.
So where do you stand on this, Chamath?
So there’s an interesting article
in The Atlantic about who really wins
when you forgive student loan debt.
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.
It said in the article,
13% of the US population
carries federal student loan debt.
Grad students account for 37%
of that federal student loan dollars.
Currently, it’s $1.6 trillion
of total student debt
versus about $10 trillion
of mortgage debt.
So the average debt has gone
from about $25k in 2012
to $37k in 2022.
So, you know,
almost a 50% increase in a decade.
The majority of student debt
is held by white borrowers.
Only 23% of Black Americans
age 24 or greater
have a college degree in 2019.
So the majority of the Black population
would not be directly benefited
by student loan forgiveness.
In 2020, the median weekly earnings
for someone without a high school diploma
was $619.
For those with some college
but no degree,
that number was $877.
For those with a bachelor’s degree,
it was $1,305.
And that number continues to grow
for master’s and professional degrees
and PhDs.
Interestingly, the last two points,
the Gallup organization
who ran a poll
is unable
to report the percentage of Americans
who have mentioned student debt
or student debt cancellation
because it hasn’t garnered
enough mentions to do so.
In 2022, according to the article,
across four Gallup polls,
just one respondent
mentioned student debt
as the most important problem
facing the nation, unquote.
And then last thing is here
is that 43%
of the 2020 Biden electorate
graduated from a four-year college
or university
versus 36% of Democrats in 2012.
So, you know,
one of the takeaways is that
this may be an issue
that affects
a certain percentage of the Dems
who went to college,
but it may not represent
a plurality of all Democrats
and it doesn’t represent,
you know, a majority of all Americans.
They sure are vocal though
to your point, I think.
Yeah.
I mean, look, this is,
I think that there are two motivations,
political motivations
for doing this now.
They’re pretty obvious.
And then I just want to say three things
on kind of the concern about this
and why I feel very strongly
that if we don’t fix
the underlying system,
you cannot forgive student loans.
You have to fix the system
before forgiving student loans.
Fix it first.
What’s the number one fix, Friedman?
Well, so let me just say
the two motivations.
The two motivations, number one,
this is a stimulus.
So this morning,
the Biden administration said
that they were thinking
about taking executive action
to make the first $10,000
of student loans forgiven.
So if you do the math
across 43 million people,
that’s a roughly half trillion dollar
forgiveness.
What happens?
That half trillion dollars,
much like we saw last year,
becomes a stimulus payment.
It is money that people now have
that they didn’t have before.
It is capital that they
or freedom from debt
that they didn’t have before.
And it will stimulate the economy.
So there is a very
important economic incentive
here to do this,
which is if we do it,
it will be stimulating to the economy.
And people will spend more
and the economy will grow.
By the way, that’s it.
That’s a two and a half percent
boost to GDP, right?
So half a trillion dollars
of free money just flushes
into the system.
The second thing is
that it will help in the midterms
is their point of view, right?
So they’ve obviously done
they’ve done the polling here,
and it’s like, hey,
when I was in junior high,
the kid that ran for class president
was like, I’m going to make everything
in a vending machine free.
Guess what?
That kid got voted in.
So, you know, the idea that
you’re just going to give everyone free,
give your loans back to you for free.
Everyone’s like, my gosh,
this is the best thing ever.
Elizabeth Warren, you’re a genius.
You know, Bernie Sanders,
you’re a genius.
Joe Biden, you’re a genius.
Let’s say yes.
And so they believe through polling
that this is going to help
them in the midterms.
But the challenge is,
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 not a specific
accredited university
increases your income
and earning potential as an individual,
or increases the opportunity
for you as an individual,
you are wasting money.
You are giving federal dollars
to private companies
who are profiteering from that,
and the individuals
are not going to benefit from it.
And I think that we’re seeing this,
sorry, and we’re seeing this
structurally continue
in a lot of other places
where the federal government
doesn’t hold itself accountable
to the standards of how their stimulus
is meant to benefit the individuals
that it is being funded for.
The individuals are not getting
a good education in many cases.
They’re not earning more
by getting this education.
Chamath’s data speaks to the average,
but a large percentage of people
go to crappy universities
that don’t improve
their earnings potential.
And then the federal government says,
here’s this free money,
that private university
just made a bunch of money,
and no one’s better off.
And guess who’s ended up paying for it?
Taxpayers are going to end up paying
that private company a bunch of money
because we’re going to forgive
all the loans.
And so we have to have a standard around
whether or not a dollar
should be loaned to pay for education
at a specific university
by having that university prove
that it improves the potential.
And by the way, if you stop
the federal student loan program today,
fewer people would go to college.
And if fewer people went to college,
guess what would happen?
Colleges would drop their tuition.
The reason they’re able to raise demand,
supply and demand,
and the reason they’re able
to raise their tuition
is because there’s so much demand
because there’s free money.
And so if we actually saw
the federal loan program cut back
or put these standards in place,
the cost of tuition
would actually decline.
And profiteering would decline.
People would get a better education
and the taxpayers would be better off.
End of diatribe.
Sorry.
No, no, I think it’s completely legitimate,
Saks.
We talked on a previous episode
about how people make
things like immigration,
you know,
such a charged philosophical debate
when there are point based systems
being used in Canada,
Australia and other places
that make it much more logical.
Do you think the solution here
is to Freeberg’s point
of just,
and I’m interpreting Freeberg’s point as
what is the value of this degree?
Nursing?
Great.
Nurses can take out 100% of their loans
because we know there’s a nursing shortage.
You know, philosophy,
graduate students
maybe can’t take out
more than $5,000 in debt
because we don’t
see a bunch of job openings for that.
Getting a history degree
at Trump University
is a lot different
than getting a nursing degree.
So Saks,
what’s the solution here?
And then we’ll give you
your swing at bat
in terms of buying votes.
Yeah.
Let’s go solution first
before we go partisan.
Look, I think that a loan
only makes sense
when it generates ROI, right?
It 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 kids go to these schools,
they spend five years there,
they get a degree
in some woke nonsense.
And of course,
it doesn’t help their earnings power.
I mean, that’s a fundamental issue here
is that these degrees
are worthless, right?
I mean, if you go to college
to get, you know,
to become a doctor
or maybe a computer programmer
or something
where the skills have value,
then of course,
you can pay back the loan
because you get a gainful job.
But otherwise,
if you just major in fine arts at Harvard
or something like that,
I mean, you basically graduate,
you get a job at what?
The New York Times is your dream.
You can’t pay back your loan.
You’re saddled with this enormous debt.
And think about
the cultural impact that has.
You have this young generation
who believes in socialism.
And I think this is a big part
of the reason why
is they have no capital
and they have no ability
to accumulate capital
because they’re so saddled with debt.
So to interpret what you said,
Saks, hard to believe in capitalism
if you got no capital,
right?
If you start,
if you start the race
at negative $250,000 in debt
to get a degree
that was basically worthless for you.
Yeah, so the system is cool.
I think maybe what we do
is we reform the debt.
I’d actually be OK with
forgiving the debt in some instances
if you got a reform of the system.
In other words,
if we stop funding
these worthless degrees,
but if 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, you know, we need to have
like a more honest,
comprehensive solution here.
The other thing we should do actually
is one really crazy
part of bankruptcy law
is that student debt
is one of the only types of debt
that’s not dischargeable in bankruptcy.
I don’t know if you guys know that,
but under George W. Bush’s presidency-
Yeah, explain it to everybody.
Yeah, basically, look,
if you ever get to the point
where you have too much debt
and you can never pay it back,
you declare bankruptcy
and then the court starts you over from zero.
So you can at least
start building some wealth, right?
But you lose credit, but you lose credit.
Exactly.
No one’s going to want to
give 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
personal bankruptcy.
But the crazy thing is that
in bankruptcy,
you cannot get your college debt,
your student debt canceled.
You can get your credit card debt canceled.
You can get other types of debt canceled.
You can’t get your student loans canceled.
It’s crazy.
So that’s one thing
they should fix immediately
is make these debts dischargeable-
If it was private market sacks,
you wouldn’t need to do that, right?
The reason that’s the case
is because it’s federal dollars
that are funding those loans.
But if it was private market dollars,
people actually,
if banks and lenders took a loss
when people couldn’t pay back the loans,
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 totally crazy incentive.
Right. It creates double distortions.
On the one hand, like you said,
it basically 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 smart ROI decision
about whether-
a smart underwriting decision
about whether this loan is worth making,
whether it actually stands
a reasonable shot of being paid back.
There is such an easy free market solution here.
It’s called an ISA.
It stands for Income Sharing Agreement.
This is where you give a loan to somebody
and you get a percentage of their income
over a period of time
capped at a certain multiple,
say 2x.
And what this does is
it aligns the person giving the loan
with the job that’s expected to come
from the education.
You already have that.
You already have that.
It’s called taxes.
Yeah, but here’s the problem.
Nobody’s watching the store.
So nobody’s looking at it saying,
I will give an ISA
at this percentage return for nursing.
Nursing happens to-
I gotta pay 50% of my income every year
to the federal go-
to 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 into a midterm election.
And here’s why.
If you arbitrarily give a bailout
of one sliver of the population,
unless that sliver is really, really large,
which we know it is not,
it’s going to really anger everybody else.
Think of all the people
that are tradespeople,
working class people
who don’t have a college degree.
Yeah.
What are they going to think?
What about all the people
that just finished paying off their debt?
What are they going to think?
It’s going to upset so many people.
And ultimately what this is
is a bunch of coastal elites
who are miscast in jobs
and saddled with debt
is pushing for a program
that isn’t a broad-based mechanism
to create equality at all.
It’s just a get-out-of-jail-free card
for a small group of people
who unfortunately
were taken advantage of.
And this is the thing
that we’re losing sight of.
You can only pay back a loan
if you’re making more money than you owe.
And the fact that this exists
shows that these loans
were really poorly constructed
and they were given in instances
where they should not have been.
In the private markets,
we’ve seen that happen,
but we go through a cleansing mechanism
to sort it out.
That’s literally what happened
during the 2008 real estate bubble.
People gave mortgages to people
who could not pay them back.
If I, as a lender,
think that you’re not going to be able
to pay back the loan,
I don’t give you the loan.
That’s the simple mechanism
that exists in free markets.
And part of the issue
is a lot of people got loans
thinking without doing the calculation,
will I ever be able to pay this back?
And they took the loan
to get an education.
The other binary concept
that I will just make money,
but let me ask one other question of you guys.
At what age and at what level
do you think individuals
should take responsibility
for the decisions that they’re making
when they take on personal debt?
Because we see ourselves
getting in the cycle
where consumers are given debt.
They don’t think about
the consequences of that debt down the road
or do the analysis themselves.
And maybe they’re not equipped to.
And they’ll take out a loan on a car,
on a house,
on a…
No, but the problem is…
And on a loan, on an education.
But here’s the thing,
like education is a very dangerous thing
because we put so much societal credit
and external signaling 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 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 an Amex,
Centurion or Platinum card.
You’re given a Chase Sapphire card
with a $500 limit.
And you earn the right to borrow 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 risk pricing.
And if you don’t have
differential risk pricing,
you’re getting a lot of people…
How would you add it to education?
The market would figure it out.
The market would
because you would
differentially price the risk.
As you guys…
You’re literally a brainstormer right now.
Like, what are your grades?
Well, no…
What courses did you take?
Whatever it is.
We’re not going to get it right.
The market will get it right.
But the market would figure it out.
The problem is…
Sorry, the incentive was…
And this is a really important point.
If you guys read Ray Dalio’s book,
which we’ve talked about a number of times,
he’s identified and highlighted
that a growing economy
in a successful country
improves by improving education
and having more people
get higher education,
generally speaking.
And so the initial incentive,
the initial intention
behind the Federal Student Loan Program
was a good one,
which was to give people
access to capital
that the private markets
were not providing at the time
so that they could go out
and get a higher education.
We could improve
the education of our workforce
and we could grow our economy.
Nowadays, the question
that we always forget…
Remember, we always get one step away
and then two steps away
and five steps away
and we miss the point.
We’re in that moment now
where the question really is,
is the Federal Student Loan Program
doing more harm than good?
Are we actually creating value
from our higher education system
in this country or not?
No.
No, but most importantly,
is the private market there?
Because you look at the total debt outstanding,
$1.7 trillion.
There would be a private debt market.
Freeberg, don’t sell beyond the clothes.
The answer is no.
We have a massive employment gap, okay?
The data tells you
in every single which way possible
that we are not educating
our young people
to take the jobs that are needed
for a high growth,
functionally moving economy.
We know that.
So we are miseducating these folks
and then we are giving them
access to enormous amounts of debt
that they have no reasonable chance
to pay back.
And I think that that should be fixed
by fixing the incentives
of the universities.
You are right.
Universities today
are for profit,
asset management businesses
wrapped by this philanthropic
do good or nonsense
that they try to tell people
to get you to go there
and pay $50,000 a year in tuition.
It’s a joke.
And they’re compelling people
to think that these degrees
are actually going to make them
successful humans.
They come out miseducated
and undereducated
and incapable of servicing
the economy’s needs separately.
The other thing,
if you take a step back
and take student loan
off the table for a second
and just say
any consumer handout
that touches less than,
you know,
40 or 50% of the economy
or of the population of a country
is very precarious.
So student debt,
in this case,
15% of the US population.
It’s a lot of people.
But it also means that
there’s 85% who don’t benefit.
What will those 85% of the people
say when they have to foot the bill
for the first 15%?
And then what do you think happens
with other kinds of debt?
What happens when the oil lobby says,
forgive our debt
because we’re in a national energy crisis?
What will all the climate folks
think about that?
It’s no accountability.
Well, it creates a slippery slope.
And my last point on this is,
to the extent that we actually want
to forgive student debt,
I’m fine if that’s the law of the land.
That’s great.
It should go to the floor,
and it should be debated in Congress,
and it’s a law that should be passed.
But it should not be by executive edict
trying to back in to buying votes
in a midterm election.
It’s gross.
Saxe.
Well, by the way,
just on the politics of that,
I think this could potentially hurt them
because, Jamal, to your point,
this is basically a bailout
of the woke professional class.
It’s the underemployed graduates
of these universities who, again,
are members of the professional class.
They majored in things
that didn’t increase their earnings potential.
Meanwhile, the majority of the country
is working class.
Something like two-thirds of the country
is still working class,
meaning non-college educated.
And they’re going to have to pay
for this bailout.
And one way or another,
either through higher taxes
or more deficit spending or more debt,
the burden of this bailout
is going to fall on them.
And why should they have to pay
to bail out the professional class?
Clearly, somebody working in retail
is paying for somebody’s graduate school degree
in creative writing or something.
It’s completely and profoundly unfair.
To the answer to Freiburg’s question,
we actually know when executive function
fully matures in adults,
it’s 25 years old.
And that’s when you can actually
make long-term thinking.
So there is an argument
that people should not be allowed
to take these loans
that are not even,
that you can’t get out of.
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 absolutely not able
to make these decisions.
There are other programs as well that work.
So in Canada,
I went to a school called
the University of Waterloo.
Fantastic engineering school.
The reason I went there
and I did electrical engineering there
is that they had a program
where after the first year,
so the first year looks like every other year
at every other school, okay?
But you’re there for two semesters
from September to May.
But after that, you start working
and you alternate four months of work
with four months of school.
And you get paid for that work.
And what it allowed me to do
was graduate with meaningfully less debt,
but it also allowed me to graduate
with a commercial skill set.
And I was able to get a job.
And in that moment, actually,
I was working at a bank
and I got profoundly lucky,
which is I worked for an individual
and I was trading interest rate derivatives
and I was learning to trade
technology stocks on the side.
And this guy, Mike Fisher,
incredible human being.
And I made in one year,
like $25,000 or $30,000 for him.
Yum, yum. Zip, zip.
He wrote me a check and he said,
here, you have $25,000 of student debt.
Go pay it off right now.
I’ll let you cash out this whole book.
I graduated with about $28,000 of debt.
I had about $8,000, I think.
I had somewhere between $10,000 and $15,000,
$10,000 and $20,000.
And then I got my first bonus check
after my first year of work after undergrad.
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 in debt since.
I walked downstairs to the bank
and I gave them the check and I endorsed it.
And I said, here’s my student loan number.
And I was like, oh my God, I was free.
It’s like, it was 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 to college.
It was a lot cheaper back then.
If I didn’t go to Waterloo,
I would have had double the debt
because I wouldn’t have had work.
But then also, like I think about all these scenarios,
I wouldn’t have had two years of work experience.
I may not 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 meet Mike Fisher.
Hey, all these things could have happened.
So you can’t rely on the luck of the butterfly effect
so that you have a reasonable shot
of building a good life, right?
So there are all these things in universities
that I think are really mismanaged today.
And they go and work against
what is right in society.
So I’ll give you another example.
The dean of the engineering school
and the president of University of Waterloo
was here this week with me.
And I asked them,
tell me about these global rankings.
And they said, you know,
it’s just a really difficult game.
They said, if we wanted to compete
to try to get high on the list,
we would have to do the things
that would undo all the things
that made us great and unique in the first place.
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.
And I’m so proud that they have the strength
to just stand on their own two feet.
But every other school is running this shell game
of, you know, gerrymandering all of these statistics,
trying to get high on the list,
to trick some parent,
to force their kid to go to some school,
to then graduate with $200,000 of debt,
to get a job that doesn’t then give them
any line of sight to paying it off.
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 do
is look inside these universities
and hold these folks accountable.
I mean, these incentive systems are just crazy.
Speaking about crazy,
we talked about Bill Hwang and his-
That’s your transition?
That’s your transition?
Sorry.
They can’t all be as elegant and smooth.
Here’s Jekyll.
He’s looking at the agenda for today
and he sees Bill Hwang and he’s like,
okay, how do I do this?
How do I do this?
The Hwang-er.
The Hwang-er.
Yeah.
I mean, he pulled the Hwang.
Crazy, the linkage is craziness.
Okay, go.
I mean-
No, no, no, hold on.
The linkage is trillions and billions.
Trillions and billions.
Speaking of trillions and billions-
Speaking of trillion dollar mistakes,
we got a-
Hwang and his CFO were arrested on Wednesday
and charged with racketeering,
wire fraud, and conspiracy.
We talked about this when it happened.
His firm, Archegos,
I think it’s Archegos.
Archegos, Archegos.
Archegos.
His poorly named firm and family office,
we covered this in real time
back on episode 28,
they famously lost $20 billion over two days
when they were margin called
back in March of 2021.
He worked at Tiger Management, yada, yada.
And it was at the time reported
that they were trading billions of dollars
at over 5x leverage.
According to the SEC complaint,
at its peak, the firm was managing $36 billion
with $160 billion of exposure,
which is 4.5x leverage.
But Archegos, or however it’s pronounced,
started with only $1.5 billion in assets
in March of 2020.
So Hwang flipped $1.5 billion in capital
into $160 billion of exposure in 12 months,
essentially trading somewhere
in the neighborhood of $100 to $1 at its peak,
according to this complaint.
A bunch of banks have lost money
because they were supporting this.
Credit Suisse lost $5.5 billion,
Morgan Stanley lost $1 billion,
UBS, $774 million.
The New York Times described it as,
quote,
orchestrating a stock manipulation scheme
that relied on them masking
and concealing the enormous risk they had taken.
Chamath, you had some thoughts on this, I think.
So first, I think we should probably explain
how he did this, right?
So that’s everybody’s question is,
how did the banks let this happen?
Well, I think first, it’s what’s the mechanism.
So there are ways in capital markets
to take really extreme bets.
This way is what’s called a total return swap.
And so the basic way that this works
is you have two people on each side of a trade.
And what you basically say is,
let’s agree on what’s called a reference asset.
So I’ll just use an example.
Let’s just say it’s,
I think Discovery was one of the companies
that they were trading.
So Discovery Communications.
Let’s look at, that’s the reference asset, that stock.
And what I’m going to do is buy protection.
And what you’re going to do is sell protection.
And essentially what happens is,
as the stock goes up and down,
you’re going to net the difference
between these two people.
And when you do it that way via a derivative,
so what it forces the person to do,
the bank in this case,
is to go out and buy the stock, okay?
So that they are hedged in case the price goes up a lot
because they have to pay that difference,
in this case, to Bill Huang.
And if the price goes down,
Bill Huang has to pay that difference back to the bank.
So what happened is that he went to three different banks,
Morgan Stanley, Goldman Sachs, and Credit Suisse,
and effectively what he did was he bought,
he made these bets across a handful of names,
but he did it with so much leverage
that he ended up owning 60 or 70% of some of these companies.
And in March of last year,
when the stock market turned over,
he owed them enormous amounts of money,
so much so that these banks had to unwind these trades,
which caused further downdrafts in the stock
and almost spilled over to the broader stock market.
Jason, the numbers from the SEC complaint are pretty crazy.
As of March 31st of 2020,
they had $1.6 billion invested
on a gross exposure of $10.2 billion,
which what that means is they were able to go
and lever up this $1.6 billion
to behave in the market as if they had $10.2 billion.
By January 1st of 2021, so nine months later,
they had $7.7 billion of invested capital,
so they’d done really well, right?
They’d made 70% on this 10 billion,
but they levered that up again,
and so they had gross exposure of $54 billion.
And then just, I think, three months later,
by March 22nd,
they had $36 billion of invested capital,
meaning they had $36 billion of cash.
This guy had taken 1.6 and spun it up
to $36 billion in basically-
Yum, yum, this guy went like 20x.
In a year, but then he had levered that up again,
and he had $160 billion of gross exposure.
And then the market turned, and he owed all this money,
and so all these folks had to get out of it.
But basically-
They also alleged that he was trying to do short squeezes
on the stocks to try to make them goose even more.
So there was massive manipulation
because of his position size, correct?
Yes, so this is what happened.
But then here’s how it is allowed to happen.
So if you try to do the same thing in interest rates,
in the interest rates market versus the equities market,
it’s not possible.
Why?
If I wanted to go and buy a credit default swap,
effectively think of that as the same kind of thing he did,
but on the debt of a company,
on the debt of discovery.
What I would do is I would be able to enter
into that trade with a bank,
but it goes into a clearinghouse.
And that clearinghouse is able to tell all the banks
how much risk is building up in the system.
And the reason we implemented this clearinghouse
was to make sure coming out of the great financial crisis,
none of that chaos ever happened again.
But we did not include the equity markets
in that clearinghouse and in the laws that regulate it.
And so what this is,
is a very shadowy gray part of the market
that is poorly regulated,
that has very little oversight.
So what do the banks do?
The banks say to you,
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 think what they’re alleging
is that these guys lied
so that any individual bank,
in this case, Goldman, Morgan, and Credit Suisse,
had no idea because they kind of doctored
these reports to each other.
And that’s why all this risk built up in the system.
It would be solved if you had a clearinghouse
for equity derivatives,
the same way you have for interest rate derivatives.
It is crazy to think that somebody was doing this
and thought they would get away with it
and had been up 20x.
The psychology of these people,
the Madoffs of the world,
I just find fascinating.
Why wouldn’t he if he’d 20x?
We just talked, by the way,
we talked about how the four of us,
we talked about how the four of us are grinding
to return 2x of our money in 10 years.
Yes, and this guy’s like, YOLO.
He’s 7x or 10x, you know, $1.6 billion.
And it was not enough.
It’s not enough.
I mean, people have,
but what do you think the psychology of this is?
I have no idea.
That’s what I’m trying to figure out, Sax.
What’s the psychology of somebody who tries to do this?
They’re already a billionaire.
They’ve already got their jet.
They could go anywhere.
They could have anything.
They could buy any home.
They could go on any vacation.
That’s the thing I never understand about these people
is like, this has got to be
some crazy sociopathic behavior.
Jekyll, did you always want a jet?
By the way, the guy-
I just got a business select on Southwest.
When you started your career,
what did you want?
The Knicks.
That’s what I still want.
Well, when you started, you wanted a house, 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 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 put my entire freedom at risk or to cheat.
Apparently this dude was a Christian.
I’ll put that in quotes.
Cause I don’t, I mean, I don’t know.
Doesn’t sound like Christian behavior.
Ran, ran Bible study and stuff in the mornings.
He lived in some modest house in Jersey, blah, blah, blah.
But you know, he was a bit of a freaky deke.
What does that mean?
So weird.
I mean, the guy couldn’t get enough.
By the way, the dude was pinched in 2012 for insider trading
and had to pay a settlement
and like give back everybody’s money.
He got pinched.
It’s crazy.
It is what it is.
You know, you never rat on your friends.
The guy got pinched.
He got pinched.
Yeah, he got pinched.
When you grow up in the streets, you know that.
What happened to this guy?
I got pinched.
He got pinched.
When you grew up in the streets.
The guy ate cheese.
He didn’t rat on, he ratted on his friends.
Manchego, he ran out of the Manchego.
He tried to steal some Manchego and he ratted on his friends.
Now the CFO got pinched, too.
They flipped him.
This is super deranged.
Speaking of deranged.
Transitions tonight.
Where are we going?
Where are we going?
You know what someone needs to do?
Someone needs to take all of Jekyll’s transitions
from the last couple of shows
and just put them together in a row.
Yeah, just a super crazy.
Speaking of deranged.
Okay, speaking of deranged.
Yeah.
On Wednesday, the Department of Homeland Security.
Speaking of billions.
Announced a disinformation governance board.
Disinformation governance board.
According to the announcement,
the board will immediately, immediately
begin focusing on misinformation aimed at
migrants at the US Mexican border.
The board will be led by disinformation expert
Nina Jankowicz.
Jankowicz.
He has researched Russian misinformation tactics
and online harassment.
This is also the woman who sings
show tunes on TikTok.
Jekyll, I feel like you should be running.
You should be running our disinformation board.
You always have such a strong opinion.
And you have such a nose for
what’s BS and 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 evaluate that claim.
She was an active pusher of the Steele dossier,
which turns out is disinformation
for which people are now under indictment.
She also was active in trying to censor
the Hunter Biden laptop story,
which as it now turns out was not disinformation.
It was absolutely true,
as acknowledged by the New York Times,
the Washington Post.
You would think that these blemishes on her record
might disqualify her
from being an expert on disinformation,
but actually in the view
that people are hiring her,
these are actually qualifications
because they are not interested in the truth.
The reason this department is set up
and what they mean by disinformation
is they have hired her
to push partisan political points.
That’s what’s going on here.
That’s what disinformation is.
Now, it used to be
that if you disagreed with somebody,
you would just say,
listen, I disagree with you,
or maybe you’re an idiot,
whatever, you’re wrong.
But now the way that these debates
are set up and the way they work
is they don’t just say you’re wrong,
or that’s not true.
They try to label you as disinformation
so you can get you censored.
And the point of hiring
this disinformation czar
is basically to censor the,
basically to shut down the debate.
That is basically the whole point
of the censorship.
Do you think there’s any timing here
with Elon Biden?
Yes, of course.
It’s, well, there was
a great tweet about this.
I mean, I love conspiracy sacks, by the way.
I don’t think it’s conspiracy theory.
There was a great tweet about this
that we live in a future
where it’s like a mashup
of George Orwell and Ayn Rand.
Because here you have Elon Musk,
the heroic lone entrepreneur
trying to rescue freedom of speech.
At the same time,
you have this Orwellian ministry
of truth being created
by the federal government.
I mean, no awareness of naming.
Yeah.
It’s just bizarre.
But the disturbing thing about it is-
Disinformation governance board
is such a dystopian name.
The thing about it
that’s a little bit scary here.
I know you play the video
of her doing show tunes
and it seems sort of silly.
But the thing that’s scary is
that this is under
the Homeland Security Department.
That’s another weird wrinkle.
Why is that there?
It’s the most militarized department
in our government.
So it’s really scary
to put the ministry of truth
under the department
that has all the soldiers
and all the weapons.
It’s not the name of it,
but it’s close.
Pretty darn close.
Now, why is it there?
I’ll tell you why.
Because this was built up to,
there was a-
The ministry of truth.
Shout out George Orwell.
A couple of months ago,
there’s a news story
that we might’ve covered on this pod
where the Homeland Security Department
redefined disinformation to comprise,
they said it represented
an escalation of the terror threat level.
So in other words,
they basically said that disinformation
was tantamount to terrorism.
Remember that?
Didn’t we talk about that?
This is the payoff to that.
First, they define,
they basically define the other side
as being disinformation,
of the debate,
as being disinformation.
Then they define disinformation
as basically terrorism.
Then they have the Homeland
Security Department,
which is supposed to be
responsible for terrorism,
create this ministry of truth.
This is what’s going on here.
It’s really weird.
Just to remind everyone,
there was concern in the last election.
I’m going to play devil’s advocate
as I often find myself doing here.
Okay.
Just to try and explain the world,
that’s the reason
I often play this role,
because I’m trying to understand the world.
But, you know,
there was a real concern
that, you know,
the Russian government was using,
you know, information warfare
and propaganda through social media
to influence voting.
And that that is considered
a security threat
to the integrity of our elections.
Therefore, this is a homeland security issue.
And there is a question mark,
of course, that everyone has
on how far are they going to go
once you set this precedent?
When would they ever stop
in terms of quote, unquote,
policing information
and policing what’s true
and managing internal propaganda
and internal media
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 think folks do have concerns around
is how do we keep foreign actors
from creating misinformation campaigns
that go viral and influence elections?
And Saks, I don’t know if you think
that that’s a concern
we should or shouldn’t have,
but how would you address it
if you were the president?
And that was the challenge,
you know, to like,
how do we stop that from happening?
The foreign actors
interfering in our elections
is certainly a concern
we should have
if it was actually happening
on a big scale
or in a meaningful way.
I mean, this is basically,
look, this is basically a hoax, okay?
John Durham is basically out there
making indictments right now,
proving the extent of this hoax.
It started with the whole steel dossier,
which was a piece of campaign
opposition research
that was manufactured
by Hillary Clinton’s campaign.
The lawyers who basically produced it
are under indictment,
and that’s where this whole thing
of Russian disinformation came from.
And the only proof for that thesis
is that supposedly the Russians
bought $100,000 of Facebook ads
on Facebook.
So I’m not denying that that occurred,
but it was relatively minor.
It was a drop in the bucket
of all the activity going on
around the last election.
Wait, to be clear, to be clear,
that was just the ads
that were bought with,
with like credit cards
that said like FSB on it.
Way to go, Facebook security team.
You probably, you know,
didn’t count all the number of credit cards
that were stolen.
I’m pretty sure the Russians
are capable of stealing
John Smith’s credit card
and using that to buy ads as well.
Well, I saw, I looked at those ads.
Are you seeing those 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 other,
and the Jesus figure was basically saying,
and you know, it was just absurd.
I mean, the Jesus figure was saying that-
Okay, wait, to be clear, it happened,
and you’ve now stepped back
your position on like,
it just wasn’t at scale to your opinion.
I think, I think, look,
the scale interference in the election
was committed by big tech.
I mean, they censored
the Hunter Biden story
two weeks before the election.
It turns out that’s a completely true story
that Hunter Biden has extensive
business dealings in Ukraine,
the country we are now-
Yes.
But we are now deeply involved
in a war there.
And that story,
the electorate had the right
to take that into account.
Big tech censored that story.
So look-
There was a reason for that.
May I respond to that?
Just to give people like
making a very difficult decision,
you have to remember,
Trump asked Putin on stage
to hack Hillary’s emails, and they did.
Then he asked the Ukraine
to take action against the Bidens,
or he wouldn’t give them support.
He was impeached for that.
So if you put yourself in the,
and I’m not saying Twitter
made the right decision here,
but there was,
and there was also sexual material,
you know, people’s nudes,
and hacked material,
and nudes are against
the terms of service.
So I think two things
happened concurrently.
One, listen,
the people working at Twitter
are 98% liberal.
They don’t want Trump.
They saw it as an existential threat.
And then two,
they don’t want to link
to hacked material.
Oh, really?
Well, hold on a second.
Hold on.
During the whole Canadian-
Hold on, let me finish, let me finish.
Let me finish this point.
No, I have to finish my point.
The third point,
and then I’ll let you go,
is that in addition to all that,
Hunter Biden is completely a grifter.
Go.
Okay.
I agree with you on that one.
So look,
during the whole Canadian trucker thing,
remember when all the people
who contributed to those Canadian truckers,
they got doxed.
I mean, basically there was a hacker
who leaked all the people
who had donated,
and social networks were happy
to print all that information.
So this idea that they censor
hacked information is nonsense.
The Libs of TikTok account
just got doxed by Taylor Lorenz.
Look, whether you think
that was a good idea or not,
the point is these principles
are invoked very selectively
when there’s a story
they want to suppress.
And the New York Times
and the Washington Post
have both not come out
and said that the laptop was real,
it’s been authenticated,
the story was real,
and this whole idea
that it was disinformation,
that was just invented.
I mean, it was just invented.
Well, no, hacked.
It wasn’t that it was disinformation,
it was that it was potentially hacked.
And you and Trump,
Nothing was hacked.
Here’s the thing,
Trump set the stage for that.
And the people at Twitter and Facebook
who also made these decisions,
they were informed
by three later agencies,
Department of Justice
and FBI, etc.
Hey, this is potentially
hacked material
designed to interfere
with the election.
Listen, Nina Jankovic
and other Democratic
Party operatives
just made up out of whole cloth
that the Hunter Biden story
was disinformation.
It was true.
It’s been acknowledged as true.
The Washington Post is true.
I mean, I think this is true.
So hold on.
So it goes to my point.
Social media can improve.
No, it’s not about improving it.
Look.
Well, no, no,
I didn’t fear my sentence.
I think this is where
social media can improve,
which is if they had to explain
every one of these decisions
they make in full
in transparency,
I think that’s something
Elon could bring to this party,
which is if you’re
going to block something,
we need to know why.
And they’d never explain why
and who made the decision.
And I think that that transparency
would benefit situations like this.
If the DOJ or FBI told them,
this is hacked material,
then they got to go to the DOJ
and FBI and say,
you got to give us cover here.
If this is, in fact,
hacked material,
you told us not to 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.
The oldest, the oldest
newspaper in America,
the oldest newspaper in America.
Also not the bastion of like.
It doesn’t 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.
And it was relevant to the election
and the American people
should have been able
to take that into account.
And people like Nina Jankovic,
whatever, our new czar
of the Ministry of Truth,
she was out in the forefront,
basically calling
that story disinformation.
Meanwhile, she’s pushing
the Steele dossier,
which really was.
If that story was confirmed,
would Biden have won?
I don’t know.
I don’t know the answer to that.
But the point is that
this shouldn’t have been suppressed.
That was that was
election interference.
Now, Elon came out this week
and specifically tweeted that,
that that was basically a mistake.
Jack also said it was a bad.
Jackman said it was a mistake, too.
And Elon repeated the same thing
that they shouldn’t have done that.
I think everybody can agree
it’s a bad call in hindsight.
Of course.
But in hindsight, right.
But what was the reaction
to what Elon said?
He was accused by virtue of criticizing
the policy decision that Twitter made,
that that was supposedly
targeted harassment
of the legal counsel at Twitter
who made the decision
who gets paid $17 million a year
to make those decisions.
Do you guys see this debate?
This happened last year,
this last week.
So the point is that
if you criticize somebody
who’s on a certain side of the debate,
that’s harassment.
But he didn’t even mention her by name.
This is how absurd
this discourse has gotten.
Can I make a prediction?
Yes.
Prediction’s great.
I think people misunderstand
Elon’s incentives for buying Twitter.
So, and I haven’t talked to him about this.
So I’m just making a complete
subjective prediction.
I think he’s going to buy Twitter.
I think he’s going to clean it up.
I think he’s probably going to generate
something like a two X on this.
We talked about how
that’s like a good terminal valuation
in six or seven years.
That basically puts that asset worth
at around $100 billion.
In the meantime,
he’s going to open source
as much as possible.
I think he’s going to make it very difficult
for misinformation and disinformation
to get very far.
He said he’s going to authenticate
every human being that uses the platform.
He said all of these things publicly 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 foundation and a trust.
And I think it’ll be
an incredibly powerful competitive
alternative to all these
other for profit businesses,
because everything you guys
are talking about
is the incentives that get perverted
when you have to layer economics
inside the New York Post,
inside the Washington Post,
inside the New York Times,
the Wall Street Journal.
Everything eventually devolves
to clickbait, to hearsay,
to doxing, to whatever
can get you more revenue.
But if you can take it
off the table and run these things
as a public trust,
you can 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, I think the real answer
is because then if he were
to donate it into a foundation,
he’d get $100 billion credit
that he could use,
you know, to offset the gains
when SpaceX or Starlink go public.
Interesting theory.
Interesting theory.
There you go.
Well, I agree with everything
except for the donation part,
because he’s raising
20-something billion from
private equity partners and lenders.
He’ll pay the debt off.
He’ll own it 100%.
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 in
an apolitical environment.
He’s already said
that 10% of the extremes,
you know, are both equally crazy.
He’s going to force this thing
to be rational and predictable.
It’s an interesting prediction.
I think it goes public again,
and it goes to five times evaluation.
Are we going to be able to ask him
these questions in Miami?
Sure. 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
a very polarizing set of discussions
this week around
what should be censored,
what should be banned,
what shouldn’t, etc.
Elon’s going to let bullying
and hate speech kind of proliferate.
Other people have said
we need to release,
you know, the restrictions
and let people say what they want to say.
Freedom of speech has no bounds, etc.
What do you guys think about the argument
that there does need to be
constraints and boundaries set
around things related to health
and safety?
Meaning if someone is making
calls to violent action,
should that be censored, Saks?
And how do you make that interpretation
because it becomes
a fuzzy gray interpretation?
And then 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
whether or not that should be
allowed or censored on the platform?
Because I think those are two
very key issues that
we got to take them separately.
Let’s do violence first.
Saks, there’s plenty of precedent
in law.
Just explain the violence.
Look, the biggest straw man around
this was the whole Trump argument, right?
It was like he was inciting violence
was the argument that was being made.
But like, generally speaking,
is that an appropriate form of censorship
on this private platform?
And if so, how do you set that standard?
Let’s start here with
you hear this argument a lot,
which is that if Elon brings
free speech back to Twitter,
then we’re going to have
all this horrible content on there.
You’re going to have violence,
you’re going to have racism,
you’re going to have harassment,
you’re going to have all, you know,
all these bad things on fraud.
The truth of the matter is that
it’s really a straw man argument
because what it’s basically arguing
is that free speech means anything goes,
but free speech does not mean anything goes.
There’s we have 230 years
of Supreme Court case law,
basically discussing this question
of what speech is protected
and what’s not.
And the Supreme Court
has ruled that there’s nine
major categories of speech
that are not protected
by the First Amendment.
Why? Because that speech
is considered to be dangerous
in one degree or another.
So, for example,
you can’t commit fraud
like, you know,
the Archegos 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 protect
incitement to commit violence
or a crime.
You know, it doesn’t protect
fighting words.
So you could ban, you know,
all ethnic or racial slurs
on these social networks
under the concept of fighting words.
So I think if you actually look
at Supreme Court case law,
well, what I would do is I,
instead of just making up
the content moderation policies
as I went along,
I would look at the cases
where people have been wrestling
with these decisions for decades.
And I would create a content
moderation policy
inspired by First Amendment case law,
where I would take
these nine categories
of sort of dangerous speech
or harmful speech,
and I would operationalize those.
So, for example,
you can’t defame people
you know, the First Amendment
doesn’t protect you
against claims of defamation.
Would you make people go to court,
though, in order to take it down?
Right. So this is where the word
operationalize really comes in.
It’s not practical
for a social network
to require a court level
burden of proof
to prove defamation, right?
So what I would do is I would say
that if you are a person
who claims to be defamed,
you could file a report on Twitter
and provide the tweet
and provide, you know,
some explanation.
And as long as it looks
like a culpable claim of defamation,
meaning the person is attacking you
in a way that seems out of bounds,
then potentially
that can be taken down.
You 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
impose First Amendment case law,
but I would use it
as the basis for defining
a content moderation policy.
Can I just say something?
I think one of the best things
about being your friend
is sometimes you say stuff
that is so powerfully
smart and elegant
because it’s so simple.
Basically what Saks said
for everybody else,
because this is how I,
he’s like,
the PRD for content moderation
has existed.
It’s called the Constitution.
It’s just that nobody
in any of these companies
has taken an effort
to actually try to write code
that maps to this PRD,
where the PRD is the Constitution
whose rights have been established
for hundreds of years.
By PRD, you mean
product requirements document.
Yeah, sorry, yeah.
Yeah, it’s what a product manager
would use.
Yeah, exactly.
Instead of them making this up
as they go along,
I would look to the categories of speech
the Supreme Court has already
ruled out as being dangerous.
Write a PRD, write a PRD.
Let’s just do the health one, Saks.
So there’s a scientific paper
that says this drug
doesn’t cure COVID.
And then someone goes on Twitter
and says, take this drug,
it cures COVID.
And I know you’re not obviously
a constitutional lawyer
at this point in your career,
but how would you kind of think
about that?
And how do you think that
that would ultimately resolve
in this regulatory framework?
That’s a debate that should exist.
I mean, I don’t know why
we need to suppress that debate.
So if someone says declaratively
on Twitter,
this drug will cure COVID,
which by the way,
And it trends.
And just to be clear, by the way,
you know, the FDA actually regulates
claims like that on boxes
and material and in a commercial setting.
And if you’re making money off Twitter
and you’re getting a lot of followers
and then you make more money
by putting out a tweet that says,
Yeah, but you’re not making money
off the drug.
Yeah, right, exactly.
If the person is selling the drug,
Roche should never say that.
Right. So if someone went on Twitter
and they said, take this drug,
it cures COVID,
but there’s a site.
You’re confusing facts and authority.
Twitter is riddled with people
that have zero authority
that spit out what they think are facts.
Right.
So I think what you’re speaking to
is something very different,
which is if you’re going to design
a social network,
I’ve been part of helping to design one.
So let me just give you
my two cents on this topic.
There are layers of decision making
that need to go into an algorithm
to get to a sense of rank.
Rank means,
do we believe with some
reasonable probability distribution
in some probability distribution
that this thing
is worth showing to somebody else?
And the way that you get there
is through multiple layers.
So there’s obviously a layer
where you can get signal
relative to the authenticity
of 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 roughly accurate
do we think this is?
Then there’s another layer,
which is, is this person believable
in making all of those statements?
And my point is,
there are different subsystems
you build for those things.
He has already said
all these algorithms
are going to be open sourced.
And what you’re talking about
is authority.
You should allow people
to say stupid things.
It’s not illegal.
Right.
Yes. A person can be
on a street corner saying,
Jesus is the son of God
and he will save your soul.
Saks doesn’t have to believe him.
And somebody can say that on Twitter.
The issue here is,
does it trend?
And do you show it to people,
the algorithm?
And if you fix those problems,
then who cares if a person says,
hey, listen.
Twitter has an authority problem
and a ranking problem.
And the authority problem
comes from the fact
that there’s all kinds of long tail,
non-human individuals in the system.
So solve for identity.
And this problem can get easier solved
and solve for trending.
And if you guys were running Twitter,
you would not put on
these COVID-19 warnings.
This is misinformation.
I like labels.
And rely solely on CDC guidance
and recommendations
and FDA approvals
when it comes to treatments
and vaccines and risks and so on.
What I would do is let anyone
say whatever they wanted.
You can say what you want,
but you can put a label.
Yeah.
I’m not arguing for the kids.
I’m just trying to get clarity here.
Yeah. He’s just asking the question.
I would, what I would do is
and I’m going to use taxes.
I would label it.
And I would, I wouldn’t label it
right or wrong.
I’d say ivermectin is a drug.
Here’s the Wikipedia page.
Hold on.
Here’s the Wikipedia page on ivermectin.
Let’s say there’s a lot of confusion
about ivermectin, which there was.
You could just put anytime
anybody says the word ivermectin.
I here’s a sentence
of what ivermectin is.
Here’s the Wikipedia page,
the CDC page,
the UK government’s page, DHS,
whatever for more information
about this topic.
So I just want to, not a warning.
Yeah. I just wanted to learn more.
J Cal, I want to disagree
with what you’re proposing.
Okay. Cause it is the topic.
The juror, it was the one-off
that then triggered the ability
for everyone to bifurcate
on their point of view
on what should or shouldn’t be done.
As opposed to having a universal standard
that is universally applied.
That doesn’t speak specifically
to just the COVID-19 pandemic
or just ivermectin,
or just what Trump said or didn’t say.
But each one of these things can
and should be universally standardized
and then universally communicated
and then treated with universal standards
across everyone and every topic,
rather than have each of these breakouts
where you’ve got someone at Twitter
scratching their head saying,
this seems to be an important topic.
Let’s come in and annotate it.
Let’s create a classification for this.
And that’s where everyone gets riled up.
In my opinion.
I think if there was a universal standard
that was universally applied
without judgment to the topic.
Give an example.
Go ahead.
Can I address this?
Well, vaccines is another good example,
but yeah.
First of all, nobody contradicted the CDC
more than the CDC itself.
It constantly put out revisions
of its old opinions.
First, it said that COVID
was not spread human to human.
Then it obviously said that it was.
It basically was against masks
and it was for them.
And on and on and on it went, okay.
The idea that you cannot criticize
your government or an agency
of the government is absurd.
But that is the type of censorship
that was being leveled
in these social networks
is that basically they are preventing
us from criticizing the so-called experts.
That is precisely the kind of censorship
that should not exist on these networks.
That is precisely the kind of debate.
What about labeling?
In the way I talked about it,
like the problem with more information,
the problem with labeling is,
once again, it’s done selectively.
And the people at Twitter
basically decide who they think
is right in a debate.
And they basically want to act
as a referee to raise the hand
of one of the participants of the debate,
raise their hand over their head,
and 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 is a form of soft censorship.
The labeling I described where,
and which happens on our podcast
on Spotify, where it says,
here’s the COVID Information Center,
you know, for more information.
And they give a range of,
so if it’s executed in that way,
do you oppose it?
If there’s like a very confusing
public interest going on?
If you were to algorithmically post
related stories or something like that,
and it was done in a completely fair
and speech neutral way,
and it was just as a feature of Twitter,
fine.
But if you have employees at Twitter
sitting around discussing issues
and deciding who the winner is
in various debates,
and then putting their thumb
on the scale to tilt the debate
towards those people,
that’s not what they should be doing.
Now, you know, and that is basically
what they’re doing with censorship.
If you look again,
let’s go back to this topic
of misinformation,
because this is really
the crux of the debate, okay?
Once again, on the basis
of First Amendment case law,
you could remove offensive material
on Twitter on the basis
that it is, you know, fighting words,
it’s a slur, it’s harassment,
incitement to violence.
You could, it’s fraud, okay?
Inauthentic that the account
is not who they purport to be.
You remove all the bots.
So all that content can get removed.
So what is really left then?
It is basically this idea
of misinformation, this idea
that we are going to declare
one party the victor in this debate.
And I think that is what is so offensive
about this mystery of truth,
that Homeland Security is setting up.
It’s what’s so offensive
about the censorship that Twitter
has 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 side of truth.
And that is not what
they should be doing.
It’s up to the marketplace
to decide what the truth is.
All right.
There you have it, folks.
Do you disagree with that?
I agree with you.
To your point, David,
I do think in a situation
where the public good,
and there’s confusion in a situation,
sending people to more information
isn’t a bad idea.
I do think a lot of this,
there were thumbs on the scales
and it wasn’t transparent
what was happening.
I think if you add transparency,
so I think every time
there’s an action that’s taken,
it should say agent number
and what their agent number is,
took this action on this tweet
for this reason.
And then data scientists can look
at all the actions that occur
and then say, look,
we’re looking at this agent number
and here’s their manager’s agent number.
And here’s why they took down this post.
You know, then at least
you could have a starting point
to figure out what’s going on.
We don’t even have enough information
to know what thumbs are on what scales,
if at all, or to what extent.
And I would like to see transparency first
so we 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 what’s trusted.
Yeah. I mean, and so to your point,
you don’t need to look to a podcaster,
a social network or 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
part of being an adult.
Yes. You have to come up
with your own process
of coming to the truth.
You could trust,
some people trust the government agencies.
Some people trust Joe Rogan
or a podcast or this podcast.
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,
taking all this information
and make a reasonable decision
to take ivermectin
or to not take ivermectin
is a perfect example.
People said there’s no downside to it.
People have been taking this drug forever
and it’s cheap.
And then another group of people said,
well, you’re taking horse medicine.
It’s like, no,
that’s something completely different.
And the whole conversation became,
I felt very easy to parse.
When you think about
doing your own research,
do your own research, right?
And talk to your doctor,
do your own research,
but you can’t do your own research
if you’re not permitted
to see everything.
And, and you think about
like with drugs,
think about how many drugs
over the last 30,
40 years have become the basis
for product liability lawsuits
because they had unintended side effects
or consequences.
And they revised the use of those drugs
or drugs were taken off the market.
If people weren’t allowed
to question those things,
because supposedly the experts
had ruled on the issue
and ended the debate,
how would we have gotten
a correction on that?
How would we have gotten to the truth?
So just because the experts say something
doesn’t mean that is true.
There’s pros and cons to this.
We have kids getting, tons of kids
taking all kinds of SRIs
and antidepressants
and 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 don’t know.
We’re doing large scale
experimentations on the population
in real time with drugs.
It is a decision you have to do
the pros and cons for.
The medical establishment,
the medical establishment
at one point in time
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,
this idea that we’ve arrived
at the end of history
and we know the truth.
Here’s all truth.
No new facts are being,
or no new knowledge is being created.
For fuck’s sake.
I mean, is red wine good for you
or bad for you?
Because every three
or four fucking years,
coffee and red wine are good for you
or bad for you,
depending on the year.
Well, I saw,
I saw a longitudinal study
that just came out that said
there are no caloric benefits
of intermittent fasting.
Now there’s a lot of people
that would be up in arms with that.
What are you supposed to do if,
if, you know,
maybe there’s some value
to organ health.
Maybe there’s some value
to managing your glycemic index.
But again, the point is
there are study upon study.
There’s work going on all the time.
All these things
are in an area of gray.
And so if all of a sudden
you jump down one person’s throat
and basically become very judgy
because you think that
the total bounded body of knowledge
has already been created,
you are making an enormous mistake.
I mean, Steve Jobs thought
he could cure his own cancer.
I mean, intelligent people
are free to make bad decisions.
He was one of the most intelligent,
talented people in the world
who by all accounts
might have survived longer
if he had trusted.
He went to this very specific method
of juicing.
You know, there’s a,
there’s a certain sliver of folks.
There’s a really incredible documentary
actually on Netflix
if you want to understand it
of people that went down this path
of juicing,
they’re trying to eliminate their cancer.
Micronutrients.
The irony is that the people
who are, I think,
some of the stupidest people,
like that woman singing show tunes,
like these are the people
who are making these determinations
over what is true and what is false
and what is labeled as information
and what we get to discuss.
It’s crazy.
It’s riddled with bias.
It’s riddled with bias.
You have to make your own decisions
in these cases.
And, you know, like,
it’s great to have smart friends
to have a dialogue with.
No, but it’s a beautiful dialogue.
It’s the beautiful thing
about being an American
and working so hard
to get to this country
is the independence
and the freedom to 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 blob
in an organization?
Well, and the response
you get back from people is.
I’m not abdicating my ability
to think for myself
to this rando woman
singing show tunes.
And then people say like,
oh, well, the response I got
when I said just entrust yourself
is like, well,
what about all these bros
who are listening to Joe Rogan
and they’re making decisions
on their health,
according to Joe Rogan?
I’m like, I’m like, yeah,
it’s called personal responsibility.
I’m not responsible
for Joe Rogan’s listeners.
The same person that told you
that is probably microdosing
and thinking ayahuasca
is the solution to every problem
they’ve ever had.
Intermittent fasting and microjuicing.
And from the childhood trauma
they had when they didn’t win
their, you know, soccer medal
and nobody knows
he didn’t get into Harvard.
So they’re on ayahuasca every day.
I mean, give me a break.
Yeah.
Nobody knows.
No, we all know so little.
Here’s what we know.
You live, you die.
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 be nice to each other?
All right, everybody.
It’s been an amazing episode.
We will see you in Miami,
which will be absolutely fun
and thrilling.
Sold out.
Our first all-in assignment.
And last,
because I don’t know
who the fuck’s going to do
this work next time.
You will.
You’re doing an amazing job.
I’ll continue it.
Bye-bye.
I love you, boys.
Oh, man.
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
that they just need to release somehow.