All-In with Chamath, Jason, Sacks & Friedberg - E121: Macro update, Fed hike, CRE debt bubble, Balaji's Bitcoin bet, TikTok's endgame & more

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What are you eating Freeberg? Is that buffalo jerky? What is it?

It’s a red pepper.

It is not the bulltongue.

I didn’t have time for lunch. I got pistachios and I got a red pepper.

Oh, wait, wait, look at this.

Is that our branded pistachios?

Aren’t these the best pistachios?

They’re the best.

You got salt and vinegar, yeah?

Salt and vinegar, yeah, yeah, they’re the best.

Are those unpeeled pistachios?

These guys are so rich, people peel their nuts.

People have been peeling my nuts since the Facebook IPO.

Let your winners ride.

Rain Man, David Sachs.

And instead, we open source it to the fans and they’ve just gone crazy with it.

Hey, everybody, welcome to episode 121 of the World’s Greatest Podcast, the all-in podcast

with me again, of course, the dictator himself, Chamath Palihapitiya, the sultan of science,

David Friedberg, and the rain man himself.

Yeah, definitely.

David Sachs.

Gentlemen, how are we doing?

The world’s greatest genuflector.

Strike, strike, strike.

The world’s greatest moderator is here.

Oh, this, you guys, I got to tell you something, the grift is on.

A lot of corporate gigs for me to moderate.

I don’t even have to prepare.

I just show up and moderate.

So great.

What is an example of such a gig?

There’s a lot of corporations and conferences that pay a pretty penny to have the world’s

greatest moderator come and interview people.

This is like the used car parts association of America having a convention.

I did one with like 1000 litigators at an attorney conference for like the SaaS software

they all use.

And it was a wonderful far side.

You know, it’s just great.

This is like the grift is on.

Do you have to fly commercial?

Or do they fly private?

It’s commercial at this point.


What is your, what does your rider say?

Do you ask for spice, salted macadamia nuts?

What do you ask for?

I do not have them peel my nuts.


What I do is I blend the travel costs into the speaking fee.

And then nobody knows when I’m in or out, what hotel I’m staying at or whatever.

But basically, I’m back on the road, folks.

I’m back on the road.

Do you get like a trailer?

Or do you get, you know?

No, no, no.

What he’s saying is, no, what he’s saying is he gets a $2,500 travel budget.

And instead, he comes the day of and leaves the day of

saving and netting himself an extra $2,500.

Well, you know, you can optimize if you’re saying optimize.

I did use, I had, you know, during COVID, I racked up a million and a half,

two million of these United Points.

And I have just been grinding those United Points down.

So shout out to United and the pandemic.

All right.

There’s a lot of news.

So you’re right, Jamal.

It’s even worse than that.

It’s even worse.

He’s charging them for travel expenses when he’s not even paying anything.

Maybe Jason’s part of the grifters using the cash app to commit fraud and murder.

Lord, I mean, that Hindenburg report is, I mean, it’s a work of art,

but we got to start with the Fed hiking rates by 25 basis points.

And the general feeling in the country that maybe the Fed doesn’t know what they’re doing.

And maybe it’s time for regime change.

The Fed increased rates by 25 basis points yesterday,


So the Fed has increased the federal funds rate from nearly zero in March of 2022,

to now the range of 4.75 to 5% fastest rate hike since the 70s.

Speculation, the Fed might pause rate hikes or even cut.

Do the recent banking failures didn’t happen.

So if you bet that they were going to pause, you were wrong.

And if you bet they were going to cut, you were also wrong.

But the market has ripped a bit a day after,

which people are trying to figure out in the group chats doesn’t seem like anybody has

a theory here.

But let’s start with sacks, maybe an explainer a little bit on how the Fed works.

There’s a board there, people serve a 14 year term.

I guess they replace somebody every two years.

And Jerome Powell was placed in 2018 by Trump.

And I guess there’s a lot of hand wringing now that they were late on

inflation, obviously.

And then they went too fast.

And maybe now they’re not slowing down enough.

So what’s your take on it objectively sex, putting aside partisanship and,

you know, for this administration versus that administration, just objectively,

do they know what they’re doing?

And how could they do a better job?

No, I don’t think they know what they’re doing.

They clearly reacted way too late to the inflation.

We’ve talked about this before.

We had that surprise inflation print in the summer of 2021 5.1%.

They said it was transitory.

They didn’t react until November, they continued QE for another six months.

And they’ve suddenly got hawkish November of 2021.

And they didn’t even start the first rate increase until March of 2022.

So they were really asleep at the wheel and late to react to the inflation by about nine


Now I think they’re potentially making the opposite decision, which is they are late

to recognize what stress and distress the economy is under right now.

And Powell had there was three choices they could have made at this meeting.

They could have raised rates, which is what they did.

They could have cut rates, which they didn’t, or they could have done nothing, basically

held pat.

And the argument for raising rates is just that while we have this inflation problem,

we need to keep raising interest rates until the rates are above inflation.

And that will bring inflation down, then you can start to lower rates.

That’s sort of the conventional view.

I think the problem with that view is it ignores that we’ve just seen a run of bank failures.

And there’s tremendous stress building up in the banking system from unrealized losses

on long dated bonds, also unrealized losses on commercial real estate loans.

And we’ve barely scratched the surface of seeing that problem.

That’s, I think, the next shoe to drop in this whole thing.

So I think that the right decision here was to either cut rates or to stand pat.

You may have seen that Elon said, listen, we should be cutting rates here.

There’s way too much latency in this inflation data.

The economy is seizing up and we don’t need to be raising rates right now.

We actually need to be cutting them.

I think that probably if it were me looking at the upside downside of these decisions,

I probably would have just stood pat because, again, we’ve just seen this banking crisis.

Why won’t you just wait one month to see?

Maybe there is latency in the inflation data.

Maybe the banking crisis is not over.

Why won’t you just stand pat for one month?

You can always raise rates in a month.

I think that this move here could, in hindsight,

be seen as the straw that breaks the camel’s back.

Chamath, would you have paused and waited to see another card

and then watch the hand developed?

Or do you think they’re doing the right thing by raising?

Or should they have cut?

I think they did the worst thing possible, which is they took the middle path.

If you think about what the Fed has the ability to do,

they obviously have the ability to raise and lower interest rates.

But what we don’t talk about is they have a balance sheet that can absorb assets.

For the last 10 or 15 years, we’ve had a phenomenon called quantitative easing.

And for folks that don’t understand what that means, that is essentially

the Federal Reserve buying assets out of the market and giving people money for it

so that people can then go and buy other things with that money.

Last June, they started what’s called quantitative tightening,

which is essentially reversing that policy and restricting the liquidity in the system.

So if you look at those tools and you sort of play a game tree on what the Fed could have done,

I think that you have two choices.

One is you massively let inflation run amok, where you have no tools to fix.

Or you have massive illiquidity in the financial system.

But you actually do have tools to fix that, which is through some combination of quantitative

easing and tightening, depending on how much liquidity you want in the system.

So I think, actually, I disagree with Sachs.

I think they should have done the opposite.

They should have raised 50 bips.

It would have created a little bit more chaos in the short term,

but it would have set us up to understand what was fundamentally broken

and still give the Federal Reserve the ability to use their balance sheet

and use liquidity in the future to solve the problem.

They took the worst option, which is neither did they cut nor did they raise enough.

And so this problem that Sachs represents actually is the fundamental problem now,

which is you won’t have enough clarity and signal

to really know whether this 25 basis point enough.

Look, I’ve maintained now for nine months that rates are going to be

higher than we like and longer than we want.

And so I think it’s high time that we acknowledge that we have a sticky inflation problem

whose back we have to break.

We’ve known since Volcker era what we need to do to do that,

which is you need to get interest rates to be greater than terminal inflation,

which means that a 5% Fed funds rate is insufficient.

So we’re going to need to see a print of five and a half, 5.75%.

And that’s when you’re going to have enough contraction.

And then the Fed can come back with liquidity.

But if they don’t take these steps, we’re going to be in this very choppy,

neither here, neither there situation.

And I think that is what causes the real damage,

because it’s the corrosive effects of uncertainty and what that does

to lending to risk taking.

And I think is really bad for the economy.

Freiburg, where do you land?

We have Sachs saying they should have stood pat,

which not saying either go hard, take the medicine.

I don’t know.

I’m not like an economist on judging the balance that they’re trying to weigh right now.

I think everyone’s got a different you can hear a cacophony of opinions on this one.

What I’m more interested in is,

you know, we talk a lot about the banking crisis underway.

And I know we’re going to talk about this

question on commercial real estate in a minute.

But if you look at the yield on the 10 year Treasury, I think,

coming out of this past two weeks,

you know, the yield on the 10 year Treasury dropped from 4.1% down to looks like it closed

at 3.4% today, nearly a point 7% decline in the past two and a half, three weeks.

And that’s also off of 3.8% since the start of the year.

And remember, when we talked about the impact on asset values of banks, I think,

if you look holistically at the roughly $7 trillion of assets held

at banks, some, you know, whatever the set of banks that are that we looked at,

the average kind of equity ratio is about 15%.

So, you know, a 2% or sorry, a 3% adjustment over 10 years on the Treasury impacts the value

of a chunk of that portfolio down 25%, which starts to put you into dangerous territory.

And there’s obviously a distribution of what that does to certain banks that are overweight,

you know, 10 year bonds, whether they’re loan obligations on mortgages or Treasuries,

or corporate bonds or real estate bonds, a real estate debt.

And so the more encouraging point that I think we should pay attention to is,

does the market tell us that these short term rate actions are driving down the long the medium

and longer term rates in a way that will improve the balance sheets of all these institutions

that own a lot of this debt, particularly the banks and funds and so on.

And, you know, I’ll do the math here real quick. But just in the last two weeks,

the impact on the 10 year Treasury has probably had a pretty sizable impact,

you know, we talked about unrealized losses, it’s reduced those unrealized losses,

it’s improved them. So I think that that’s like the more important metric to be tracking is,

you know, if you look at all the assets that we’re all worried about right now,

are they going up in value or down in value in a way that introduces more stability

into these kind of banking systems that we care about? And I think right now, it looks like maybe

things are improving. And that might be part of the optimism around, you know, equity markets

and folks buying and so on. Yeah. And so this is, I guess, where people have started to talk

about the next shoe to drop, we obviously had this time based liquidity issues with Silicon Valley

Bank. Now, the Wall Street Journal is talking about commercial real estate and how much debt

there is. Since COVID, obviously, people are doing more remote work, a lot of the skyscrapers,

it’s not just San Francisco, but in many locations remain empty or underutilized,

people are now having their leases come up. Every year, more and more of these leases will

become vacant. And then we’ll see if these buildings are worth what people paid for them

smaller banks hold around 2.3 trillion in commercial and real estate debt, including

rental apartment mortgages. Almost 80% of commercial mortgages are held by banks,

according to this Wall Street Journal story, sacks, you are an owner of some commercial real

estate. And you play in the space, you have a lot of firsthand knowledge. What what is your

putting aside your personal holdings or exposure? What is your take on what you’re seeing? What is

the game on the field right now in terms of commercial real estate in San Francisco and

beyond? Well, if you talk to the commercial real estate guys, they’ll tell you that the situation

is dire, dire, there’s two problems. First, there’s a credit crunch going on. So there’s

just no credit available. If you’re a commercial real estate developer, and you have a building

and you want to refinance your construction loan, or put long term debt on a building,

you just can’t do it. I mean, the banks are not open for business, they literally don’t want the

business. And I think that comes back to the fact that banks right now are hunkered down

in a defensive posture. They’re seeing deposits flee from their banks, unless of course, you’re

one of the top four is that does that freeze on the banks predate the Silicon Valley bank crisis,

and it was exacerbated? Were people having a hard time getting loans before that?

It predates it, but definitely what you’re seeing what you saw with SVB and these other banks,

including Credit Suisse, is that banks now are getting much more paranoid. And that’s why you saw

that if you look at the discount window, which is when the banks go to the Fed as lender of

last resorts, and basically post collateral to get liquidity, we had the biggest spike

in discount window borrowing since the 2008 financial crisis. Yeah, that line on the right

side, that is that is a spike in one week’s borrowing, this exceeds anything that happened

in 2008. The warning sign should be flashing red over something like this. Now, to bring it back

and be clear, that’s banks who have real estate exposure, going to the Fed going to the government

saying, Hey, can we get some money to cover these? It’s not specifically about real estate is more

about bank liquidity. The banks are saying we don’t have enough liquidity right now to cover

our needs, which are highly volatile right now, because basically, depositors are moving out of

community and regional and small banks into the big four, so called systemically important or

SIB banks. So what’s happening is that again, banks are hunkering down, they’re getting very

defensive, they do not want to make new loans, because they can’t tie up assets, they are trying

to stay liquid themselves. So that’s what’s happening now in sort of with respect to new

lending. And then on the other side of it, you have existing loan portfolios, there’s something

like $20 trillion of commercial real estate debt. And most commercial real estate lending is done by

small banks by community banks. So they are sitting on these huge CRE loan portfolios. And I think

something like 300 billion needs to be refinanced or is coming due in the next year. Normally,

that’s rolled over and refinanced. There was separately, there was a study showing that

unrealized losses these loan portfolios in the banking system may be around $2 trillion. It was

a study that was reported on by the Wall Street Journal. So in the same way that we had huge

unrealized losses in these long dated bonds, I think we also have

at Silicon Valley Bank specifically, that’s where we

were the worst offender, but it’s a systemic problem. I think similarly, we have huge unrealized

losses in commercial real estate loan portfolios. And this is, I think, even a more subtle and

pernicious problem. Because with securities like T-bills or mortgage bonds, it’s very easy to know

what the unrealized losses are. The reason why they hadn’t realized losses was not because they

didn’t know what they were, it was because of a stupid accounting rule that said they didn’t

have to realize the losses if they were quote unquote, holding them to maturity.

With these loan portfolios, we don’t know how big the exposure is. And we won’t know

until you start seeing some defaults and repricings of assets.

Commercial real estate is a much more dynamic market, right? You have to have a buyer there,

you have leases, you have leases coming off at different times, you have sub leases occurring.

And you have the owners of them flipping them right and refinancing them constantly to buy

new buildings. And so and those loans aren’t as liquid, right? With a mortgage bond,

those are basically a bunch of loans, mortgage home mortgages, typically that have been packaged

up and turned into a security and there’s liquid marketplace to trade them. In the case of these

loan portfolios, there may not be a liquid marketplace. So you don’t really know how

impaired that loan portfolio is until you actually get to a place where

when will we know what because that’s the thing I’m wondering, we I saw a lot of headlines,

you know, Pinterest bought themselves out of their new headquarters in the Bay Area,

San Francisco, I believe, specifically, I heard Facebook got rid of a couple billion dollars and

wrote down some expansion. Amazon is selling buildings, they had gotten a ton of buildings.

And we saw last week, they got rid of another 9000. They’re planning another 9000. And they

can’t get people to come back to the office. So how bad is the overbill? I guess is the question,

because that will be the driver of the value of these buildings. Because if there’s too much

supply, then what are these buildings actually worth? Are they worth $90 a square foot? What

if there’s no what if Amazon doesn’t want more space, you can see it in the credit default

spreads of these banks, it’s in the water table already. So you can Nick, you can just throw it

up. If you look at any bank that’s lending, and that has a portfolio, this is Deutsche Bank’s,

you know, euro denominated CDS. But it’s the same for Barclays, it’s the same for sock gen,

it’s the same for a bunch of American banks, there is a risk in the system that sacks articulated

that is now getting priced in, there are all kinds of loans whose payments, which the banks need,

cannot necessarily be insured, which means that then there could be illiquidity there,

there could be a flow of deposits out from those banks, which would then make their ability to pay

their debt holders lower. You also have this complicated issue already, where it’s really

like the first time in a long, long, long time where debt holders actually got wiped out in the

credit suisse debacle before the equity holders did. And that’s created all kinds of ripple effects.

So this credit bubble is here, and it’s being manifested right now in these very sophisticated

parts of the market. And eventually, they’ll ripple to the broader economy at large, but

how a person feels this is, they’re not going to be able to get a car loan or a mortgage or

the interest rates they pay will go up. And then how bondholders will react to all of this stuff

is they’ll just start to find different assets, probably the front end of the curve money market

cash, gold, and they’ll just abandon all these assets. And then the other problem

is that it’s just really, really bad for risk assets. So the things that we

invest in startups, technology companies, either in a world of inflation run amok,

because the Fed isn’t hiking fast enough, which just destroys future cash flows,

or in a world where the Fed pivots in a moment like this, and Nick, you can show the second chart,

both result in the same outcome, which is that you just see these massive drawdowns

in the value of risk assets. So we’re in a really complicated moment.

And this is why I think, again, the Fed needed to take leadership this past week,

and actually do the hard work of either cutting 50 bps, or raising 50 bps. And this middle path

is the absolute worst path because trying to thread a needle in this complicated economy,

I think is just going to be impossible. And then what happens is then the markets move around them.

Right? The markets have completely said, we now discredit what you did. And they’re basically

banking that the Fed will be forced to cut rates massively in short course, because the crisis

will be so severe that it’ll outweigh the risk of inflation. Think about that.

Yeah, so all this real estate comes on the market. There’s no buyers for it. The mortgages are due.

Does that mean a commercial real estate owner just basically gets foreclosed on and they hand

the keys back to the bank or the banks, as this Wall Street Journal story was sort of alluding to

that the Fed will say, you know what, we’ll just extend will backstop this real estate,

which happened in the last bubble. And we hope that over time, it works itself out and demand

returns. Now, of course, that’s different than a post COVID world. So this time could be different.

What happens in the case of 2024 2025? All of these office spaces are returned and the keys

are handed back? Yeah, so okay. So Jason, you asked a question like, how does this problem

manifest? Let me describe from the point of view of that real estate owner. There’s basically two

problems. One is that you have a tenant who’s in a long term lease 5, 7, 10 years,

that lease rolls, so that that lease comes due. Now they don’t need the space anymore. You know,

we know that take San Francisco, which has got to be the worst market for Siri in the country right

now. That’s something like 30 to 40% of the space is vacant. So that’s either space for rent or

space for sublease because no one’s using it. So they put it back on the market. Well,

all those subleases, they’re still paying rent because they have a contract.

So what happens is as those leases roll, and all of a sudden, you don’t pay rent anymore,

so you’re going to stop or if you still need the space, you’re going to negotiate

a much, much lower rent. So now all of a sudden, the real estate owner can’t make their debt

service covenant ratios, the income from the building is just substantially less,

they can’t make their debts on that and explain that ratio to folks, you have a certain amount

of debt you own, let’s say Salesforce tower. In Salesforce’s case, they’re subleasing 125,000

square feet. Let’s say they were into that for 500 million. What is this debt service ratio?

Explain that to the audience when the bank underwrites the loan, they just figure out

the interest that you got to pay on the loan relative to the value of the building or the

income that is generating. But all those ratios are upside down now because the value of the

buildings, the rent has gone down so much because there’s so much vacancy. I mean, when these loans

were underwritten, San Francisco had like a 5% vacancy rate. And now it’s like 30 to 40%.

There’s just no tenants. And then in parallel with that, Jason, you’ve got all these cases where

you don’t only have tenants or leases rolling, you have loans rolling. Again, if the owner of

the building has either a construction loan or like a long-term debt, and that needs to roll,

they have to refinance it. And if they can even get credit, which they may not be able to because

of this crunch, they’re going to be paying a lot more for it. So now all of a sudden,

the income statement for that building doesn’t make sense. Think about it, your borrowing costs

are higher and your revenue is lower. So now all of a sudden the building’s underwater.

So where does that end up? Well, they default on the debt and the bank ends up owning the building.

So then what happens is you end up with all of downtown San Francisco owned by a bunch of banks.

What are they going to do with it? They don’t want to be in the real estate business. So they

have to fire sale those buildings in a bunch of auctions at rock bottom prices. Because by the

way, there’s no cash or liquidity out there. So who are the buyers going to be? Who’s the buyer?

There are no buyers. We have a 30% vacancy rate. There’s no renters.

So what happens? Detroit, is it just like a dead city?

And then the tax base collapses the city because so much of the tax base is dependent on real

estate. So listen, I think they’re going to have to work this out. I don’t think they can just let

the free market take its course here because you’re going to end up with a scenario I just

painted. So I think what hopefully would happen maybe is that the banks do some sort of deal with

the real estate owners that they blend and extend or whatever. But in order to do that,

they’re going to need to be backstopped by somebody. And that’s the Fed.

Freeberg, what are your thoughts just writ large as it were on the commercial real estate space?

Because it’s $90, it was $90 a square foot, right? For class A sacks in the city?

Is that the price? What’s that going to be?

60, 70, 80, 90 bucks a foot, depending on what kind of building you’re talking about. I mean,

you have all these empty office towers. So look, I never invest in office towers. I do

small boutique kind of brick and timber spaces in Jackson Square, we’re doing okay, because people

still want to be in those spaces. But these office towers on Market Street, or in Soma,

I mean, which is where all the investment went during the boom. Nobody wants to be in those

buildings anymore. And it doesn’t help that the city has allowed this giant, you know,

open air drug market to metastasize right outside their door.


Yeah, I think it’s inevitable we’ll have probably two to $3 trillion of federal money

you know, spent to backstop and support the asset. I mean, that’s the general theme here in

case everyone isn’t paying attention at home is that the Fed, the US government will continue to

print money and create programs to effectively support asset values such that there isn’t

a crippling economic ripple effect. And this is the danger of debt spiral of debt. And it’s why

I always talk about how concerned I am about global debt levels, and particularly debt levels

in the US, but really global debt levels. I’ll say the statistic again, and over and over again,

360% global debt to global GDP. But, you know, even within some of these asset classes,

a significant amount of debt has been used to fuel asset prices and to fuel equity value.

And then that equity value gets levered and reinvested. And so the rippling effect in the

economy of declining asset value can be magnified through leverage. And unfortunately, debt in

general forces growth, without growth, debt fails. And so when we’ve used debt to demand growth,

on a macro perspective, it causes, you know, significant stress and strain on the system

when you’re going through periods of like we are right now, what should be natural recessionary

effects from COVID and shutting down the economy, or natural asset price declines because of that.

And we can’t let it happen. Because if it were to happen, the rippling effect would be crippling.

So this is a good example, you’ll probably I don’t know what the facility will look like.

Maybe the government passes some congressional bill that says, Hey, guys, here’s $3 trillion

to support, you know, all this real estate is another, you know, 2 trillion to support banks

and, you know, giving them liquidity. Because the other problem, as you guys know, is most people’s

most of the population in the US has most of their assets, their asset value, their equity value in

their home. And those home prices are supported by residential loan programs. And, you know,

if you actually have a massive write down of the value of that asset class, that’s when, you know,

everything kind of falls apart. So you know, we will continue to be buoyed by that, that that kind

of inflationary behavior, unfortunately, biology, I think, has it right, we’ll talk about it in a

minute, that there has to be money printing to get out of this hole. I don’t know if it’s

necessarily in this moment, hyper inflationary, as he predicts, you know, he uses the Deutsche

Mark and the Weimar Republic as this kind of storyline that this is what’s about to happen in

the US. The truth is, it looks a little bit more like the pound sterling at the end of the British

Empire, where you know, there’s certainly an inflationary and devaluation effect that arises,

but it’s not it is the reserve currency of the world today. Let’s say it’s really hard to kind

of just say, hey, it’s going to be hyper inflationary, and the value is going to go to

zero, it’s just not going to happen. So that seems to be the dollar of the dollar. Yeah.

So that seems to be the bet now chum off that some folks are predicting catastrophizing, hey,

this is the end of US supremacy, the end of the dollar, of course, modern monetary theory

seems to stay, you can just keep printing dollars and make a couple trillion dollar

coins and backstop it. And by the way, TARP was profitable modestly for the United States,

and the backstop of real estate totally work. So where do you land on this? Do you think these

backstops and modern monetary theory stating that you can just print money you own your

own fiat currency is going to work? Or as we pivot to the billion dollar? I’m sorry,

the million dollar biology Bitcoin bet that this is the end of days.

I think it’s not the end of days. But I think you’re conflating a bunch of things together. So

look, MMT. Yes, I am. Yes. Was, in hindsight, idiotic. In the moment, it never quite made sense.

But in hindsight, it’s clearly idiotic. And I think that we can properly dispense with that.

But the reason that we print so much money is sort of what freebrook says, which is that we

just want a well functioning society. And the simplest and shortest way to do that

is to make sure that there aren’t any winners and losers anymore. And the most effective way to do

that in the markets is with money, print a bunch of money, and there are no more winners and losers.

And so everybody can kind of win. Some people may may win more, but nobody really ever loses.

So I think that’s the that’s the mo that we’re operating under.

The thing is, I don’t

something unhealthy to that, Chamath, you’re sort of alluded to no losers,

that’s a more philosophical and a commentary on capitalism and a bunch of other things. And

you’re right, I don’t think it makes sense. I do think you need winners and losers

to really make society function well. But the other part of it is like, does it reinforce,

or does it decay, US dollar hegemony, and I think it actually reinforces it. And the reason is just

very practically speaking, when you look at how dependent other people other countries are on the

US dollar in times of stress, they actually become more dependent. And that has a lot to

do with their boring patterns, the amount of dollars central banks need outside the United

States. And so what did you see in a moment of stress, actually, the Fed opened up swap lines

to all the central banks that they work with their most important operating partners, so Europe,

Canada, Japan, etc, Switzerland, and they move the liquidity window from weekly to daily, and

they pounded the swap lines. So I don’t know, I think that most people that that kind of like,

it’s like a boy crying wolf, maybe at some point, somebody will be right, but you’re going to lose

so much money trying to take a point of view around this topic that it’s more practical to

just look at dollar flows. And dollar flows go up in moments of stress not go down. And they go up

in a distributed manner across the monetary plumbing of the world. Right. So let’s explain

the biology bat since that trended, and he is the boy who, as you’re saying, cried wolf this past

week, cry Bitcoin. Yeah, the boy. So a friend of the pod apology, on March 17, predicted that

Bitcoin will reach $1 million in 90 days, due to us hyperinflation. hyperinflation is defined as

prices going up 50% month over month, just so we’re clear on exactly how dramatic that is. He

made the bet on March 17, against a pseudo anonymous Twitter user, James Medlock, who said

they would bet 1 million that the US would not experience hyperinflation. So biology sort of

inserted Bitcoin into that bet. It wasn’t a Bitcoin bet that and I think he’s done two of these bets.

So he’s betting 2 million in total on Bitcoin hitting 1 million by June 17, which there’s

probably no chance of that happening or a very tiny chance I’ll ask the panel in a second.

Bitcoin was trading at 25 26,000 at the time, it’s now trading at over 28,000. And Balaji has

been on every podcast known to man in the last 72 hours talking about this. I’ve watched one or two

of them. And it’s a pretty out there argument, I think. You can just type in biology on YouTube

and watch any of the 20 he’s done. He believes regional banks are insolvent. He thinks the feds

need to is going to need to print a massive amount of money. Like we’ve said here, do more QE and

then cut rates all seems reasonable, but that that will lead to hyperinflation. It’s not reasonable.

Wow. No, no, it’s not that it’s reasonable. We just print we just printed that they’re going to

cut rates, we just discussed they’re going to eventually cut rates, and there’ll be more QE.

So that part is reasonable. I’m just that one little piece. But then he believes is the part

that is kind of out there, that hyperinflation is going to devalue the dollar and this is the time

he does not and I made a bunch of I asked him a bunch of times and he would not be honest about it

or didn’t want to answer my question. I said, Hey, what percentage are you in Bitcoin?

Somebody says he’s 99% in Bitcoin, he will not confirm. And so I was like, well,

if you want 1000 bitcoins, if this goes up, you know, a very small amount,

four or 5%, you’re going to pay for the bets. And are you talking your own book here or not?

sacks? What do you think of this overall bet? Is it a stunt? Yeah. He’s saying like,

this is the lifeboats moment. And just to add to it, he says, you have to leave the United States

and get to Singapore, or a place or if you’re going to stay in the United States,

you need to get to Wyoming or Texas or somewhere that explicitly allows Bitcoin.

Because the closer you are to the United States banking system, what happened to Silicon Valley

Bank on that fateful weekend where people couldn’t get their cash and we’re going to have to,

you know, miss payroll. He says that’s the dry run for the entire US banking system,

sacks. So first of all, I don’t think you can disparage Balaji because someone who cries wolf

says this repeatedly, and it makes a dire prediction repeatedly and is wrong. And we

can’t say yet that Balaji is wrong. Do I think that we’re gonna have a million dollar Bitcoin

in 90 days? I personally find that very unlikely, but you can’t say yet. He stuck his neck out

making a prediction that will be easily falsified if he’s wrong. Second, the last time that Balaji

made a dire prediction was COVID. And he was right about that one. So you can’t say that this

is just like a doomer who throws out crazy predictions and is always wrong. He’s actually

pretty selective about his predictions. Yeah, there was a tweet from January 30th of 2020,

in which he basically predicted a pandemic based on a coronavirus and laid out a whole

bunch of consequences that mostly came true. Which is why we’re talking about this. This is not just

some like random person, like he actually has a pedigree and a track record. But here’s my view

on it is doom and gloom. Yes, him and Nassim Taleb, the two of our opening speakers at All

in Summit 2023. Those will be our bookhead speakers. Book them now. Anyway, so, so look,

now, what do I think about it? I, I posted my own theory today, which I would call sort of

Balaji light. Which is, okay, look, if you if you think about the spiking interest rates that

we’ve had, and that Chamath thinks will actually continue quite a bit longer, there are three

main effects that it indisputably has. Number one, undercuts the value of long dated bonds.

Number two, it’s made lending much more expensive, particularly for big purchases,

like real estate. Number three, it’s increased government lending costs. Okay, now, play that

through the financial system. What does that mean? Well, if the value of long dated bonds

has sharply decreased, well, that’s led to this banking crisis with the unrealized losses. That’s

already happened. Number two, it’s made lending more expensive, the credit crunch and CRE,

we’re beginning to see that. And I believe that’s going to play out as the second crisis

of this larger financial crisis. And then number three is the increase in government borrowing

costs that will eventually play out in terms of being a government debt crisis of some kind.

And I think it will involve, you know, a spike in borrowing costs at the federal level and involve

sovereign debt issues internationally, I think it will involve budget deficits at states and

cities. So I think there’s three phases to this financial crisis. We’re in phase one,

and I think CRE and government debt are the next two phases. And I think a lot of that lines up

with what Balaji thinks, where I disagree with him as I don’t think we can know what’s going

to happen in 90 days. I think that the CRE crisis is highly deflationary, it’s going to create

distress everywhere in the economy, that is going to lead to a massive reduction in liquidity.

I think that the government debt crisis, assuming the government wants to inflate and monetize the

debt as a way to solve that problem, that will be highly inflationary. But when these things play

out, we can’t know. I think that’s what makes this really hard is I think jumping all the way to the

sort of finish line and saying we’re gonna have a million dollar Bitcoin in 90 days because the

US dollar is worthless. I think that’s premature. I think this could play out over the next couple

of years. We have a real problem if Bitcoin is the exit ramp for an inflationary crisis because

it’s not accessible enough. It’s not easily transactable for folks. I’m sorry to be

negative to the Bitcoin maximalists. I’m generally in favor of this kind of independent

storage system that’s outside of government and state control. I think there’s just this

unfortunate reality. I mean, we saw at the Wells notice to Coinbase today. They just arrested that

that crypto guy don’t Kwan was arrested in Montenegro of all great country cracking won’t

let you wire money in or out as of I think Monday or Tuesday. And so you know, it’s clearly becoming

kind of a less accessible system of storage. So what’s more accessible? Well, I do think that one

of the reasons we’re seeing the market move the way it does is because folks are shifting their

risk assets around quite a bit right now to figure out where is a good place to put money.

I was talking with a asset manager, you know, this morning, and you know, they had a very strong

point of view folks are are moving capital away from what they think are going to be most impacted

by the risk of this kind of massive inflationary event that may arise or this massive banking

crisis that may arise, or this massive real estate crisis that may arise. And there are other places

to then put your capital. That’s not just Bitcoin. And sure, maybe some of these things are

dollar denominated. But for example, there are many businesses that sell products in non dollar

denominated currencies globally. And while they report and trade on US stock exchanges, you’re

buying a security interest in a business that generates most of its income, you’re referring to

many different companies. And so there are many companies that get the bulk of their revenue,

the bulk of their sales. Internationally, there are also many companies that will benefit in an

inflationary environment businesses that are tied to other types of real estate businesses that are

tied to certain capital equipment where consumption will not go down, unless there’s, you know,

significant, massive, you know, global socioeconomic shock. And so I think that that’s

kind of a lot of what’s going on right now. It’s less about, hey, Bitcoin is the only place to go

and be safe. And it’s more about let me reallocate my risk assets a little bit, you know, to places

that may be benefit benefit may benefit from, or may be better guarded from a massive kind of

inflationary shock. And let me just say, let me say one more thing. I think one of the biggest

risks that is not being talked about is the debt ceiling vote that’s due in June. In June, Congress

needs to pass an increase in the debt ceiling, because the amount of debt that the US that the

federal government is going to have to take on in order to meet our budget deficit and refinance our

debt and pay our obligations, historically, means that we’re going to have to have more than what

we’re, you know, we’ve approved to date in terms of the total amount of debt. Now, this has

historically been a last minute vote, you know, crazy dramatic thing that drives markets nuts.

The Hill had a public opinion piece from Peter work and Mary space, but I think they make a good

point. You know, I’ve talked to a lot of folks who are call it in the fixed income market, but also

folks are in the equities markets publicly who are pretty nervous about this debt ceiling vote.

And if it does look like the Republican Party takes a very hard line, and says, because this

is the current party line, if you don’t agree to massive deficit cuts or spending cuts,

austerity, and really commit to that, in a bill that we can pass, that Ben also approves the

increase in the debt limit, we are not going to approve increasing the debt limit. And you know,

what this opinion piece argues, I think is a very good middle of the line solution,

which is, you know, come up with points of view, and actually document those points of view,

on making sure that government spending is effectively accountable, that there’s no more

wasteful spending, and that there are certain programs that both parties can very quickly agree

to as being, you know, very wasteful. And if you start there, you maybe get enough across the line,

that both parties kind of say this makes sense, let’s do this. And then we can kind of increase

the debt limit. Because in the absence of that, the US will have to default on debt, this is always

the big threats never happened. And if that happens, or there is the looming threat of that

happening, combined with the banking crisis combined with you know, the liquidity crisis

combined with the real estate crisis that may be emerging here. Let me ask you a question that you

can have things really meltdown. So look, because I think this is the biggest like black swan,

it’s not a black swan. But this is the biggest kind of elephant in the room right now is and

sorry, I think if people in DC could get together today, and if you could, instead of doing the

typical last minute 24 hour vote, a day before the debt ceiling needs to be increased, be thoughtful

and do it. If this could be addressed today, it could start to put in some of the layers of back

stop and coverage and protection and safety that the markets I think really need to manage some of

the trepidation in the in the weeks and months ahead. I want to jump to the crypto crackdown

and get your opinion on that sex first, but I want to do a clarifying point here with Freiburg,

you have been in the Ray Dalio end of empires, empires collapse, and that hey, maybe the US

is winding down its supremacy and apology was pretty much saying, Yep, this is the moment.

Where is there any light between your position of like, Hey, Dalio is correct. This is the end

of the empire and apologies, like, it’s the end of the empire right now. Where do you stand on that?

Preburn? So I mean, I’ve always I’ve been concerned. I’ve told you guys this for like

three years, and I’ve obviously promoted this book for two and a half years.

When Dalio’s points of view, with lots of kind of empirical wisdom behind it,

I think, indicate that the US is on a path and the way we spend and the way we behave,

and the way markets are reacting, I think, indicates that a lot of what has happened

historically is happening now in the US. Now, it doesn’t, I don’t know if it’s going to happen

overnight, that that’s where I would have light with biology. Okay, the notion of kind of hyper

inflation, again, I think, means that, so think about all the US dollar holders around the world,

it would be a shock for the collective system, it would require the collective system to

collectively agree to get off the dollar very quickly for that to really happen. Yeah, in the

meantime, I do think there will be inflationary effects, I do think there will be massive kind

of asset value shocks. But I’m not sure there’s going to be this kind of like Weimar Republic,

Deutsche Mark, I got your hyperinflation thing, because it is the reserve currency,

and it is so widely held by everyone, it would require collective giving up. It also seems

like there may be, you know, we talked a lot about the petro yuan trade, which I think is

critical to see that actually happen. I think that’s going to be the linchpin. Got it. Maybe

that catalyzes us. And that seems to be a little bit tightrope right now, too. It doesn’t seem

super definitive that Saudis are embracing China, there’s obviously this behavior with

you know, it’s not as definitive right now. I think that that needs to happen

to kind of really catalyze that let’s get our tinfoil hats on here for a second.

In relation to the biology bet, there has been a lot of action against crypto.

Obviously, authoritarian countries took control of crypto long ago, China, banning it, etc. North

Korea, other other authoritarian places kind of tighten their grip on it. Now here in the United

States, Coinbase got a Wells notice. That is a warning basically, and giving you a last chance

to kind of respond to the SEC. And this was based on their loaning programs. And on top of that,

a number of other crypto crackdowns have occurred, we saw celebrities getting smacked down,

and getting fines and doing settlements. This has led sacks to a theory that the United States

government wants to break the back of crypto crypto has done a great job of breaking their

own back with plenty of crypto grifts insider trading and all kinds of shenanigans with FTX

and front running and painting the tape any grift or criminal activity possible seems to have been

exploited. Do you think that these two things are in some way coordinated, or there’s a coordinated

effort by the US government to destroy and kill crypto as an off ramp for the US dollar,

while the US dollar is dealing with these crises?

Well, there’s a really interesting article that was just published on substack by Nick Carter,

who I guess a guest writer on Mike Solana’s substack called pirate wires. This is a follow

up piece to an article he wrote six weeks ago, where he laid out the an operation by the Biden

administration called Operation choke point, which made the case that the Biden administration was

quietly attempting to ban crypto. And now, you know, a month later, there’s all these things

that are all these steps that the administration is taking to go after crypto and he you know,

he lays out a bunch in a bullet point list. So the SEC announced a lawsuit against crypto

infrastructure company Paxos, crypto exchange Kraken settled with the SEC.

SEC Chair Gensler openly labeled every crypto asset other than Bitcoin to security.

Senate Committee on Environment and Public Works held a hearing land basing Bitcoin.

Biden administration proposed a bill that singles out crypto miners for owners tax treatment.

New York Attorney General declared Ethereum, which is the second largest crypto asset of security.

That’s a huge change, by the way. Yep. SEC continues to anti consumer protection efforts

by doubling down their attempt to block a spot Bitcoin ETF. OCC led crypto bank protegos

application for a natural national trust charter expire. And then the SEC just sent Coinbase a

Wells notice. So I think it’s hard to argue that there isn’t a concerted effort now to crack down

on crypto by a wide variety of government agencies and authorities, starting with Gensler at the SEC

who seems incredibly hostile to crypto. So now the only question is, is this correlated

with the stress that the banking system is under? Or is it just a coincidence?

And that I don’t know. But I think the argument biology would make is that

at the same time, they’re going to deflate the dollar, they’re going to make it harder for you

to find an off ramp. And he actually brought up a historical example that I wasn’t aware of,

I think it’s called executive order 6201, which is FDR, way back in the 1930s, actually had an

executive order that confiscated all the gold private gold bullion in the country. And they

seized the gold bullion, making the accusation that private citizens were hoarding too much gold.

So in any event, this is the theory, I don’t know whether it’s true or not,

it could be a coincidence.

Chamath, you think that this is correlated in any way with

the crisis, or is just the fact that FTX blew up and all these other things blew up,

and the public is really upset that they lost a lot of money on this and the SEC has got to cover

and be a little bit more active instead of reactive when it comes to dealing with the

crypto losses that consumers had. That’s the latter. I mean, I think

that there is a rumor going around. I don’t know how true it is that FTX was days away

from getting a critical approval by the SEC to actually even further legitimize their US exchange

before they went out of business. So I think Gensler had to pivot very hard from at a minimum

being very pro FTX, and there’s all kinds of stories about his interrelatedness with Sam and

his family to very anti bit or anti crypto in general, that’s clearly happened. But look,

I think that this is like a lot of tin hatting, which I don’t think is very productive. If you

look at the total number of non zero Bitcoin wallet addresses in the world, and let’s be

extremely generous and say it’s 100 million, there’s still 7 billion people in the world.

And so I just think everybody that tries to speak about the fragility of the US and worldwide

banking system is right. But and that part I think is quite lucid and unemotional. But every time

they try to connect it to Bitcoin, they sound like a crazy person because they’re just talking

their book. And that is exactly the case, by the way, with this kid, Nick Carter.

And the best example to demonstrate this is in all of this chaos,

if Bitcoin or crypto assets in general were truly a legitimate off ramp, and

salvation from US dollar hegemony and all of this stuff. Why isn’t Bitcoin at least at 35,000

a coin right now, it’s barely above 28,000. It really hasn’t moved that much. And I think the

real answer is that most people in Bitcoin are not trying to hedge their existing fiat currency

exposure. They’re just picking off people in retail. They’re just trading this thing. I mean,

how else do you explain an asset that is not absolutely ripped in the face of all of this

terrible news about the financial system? And I think the answer is because it’s still

a cul-de-sac of users. It’s not broadly available, not broadly adoptable, not broadly used.

I still believe that it’s valuable. I was the earliest proponent of Bitcoin, 2011, 2012. So

I believe that there’s a place for it in one’s portfolio. But I just think connecting these dots

misses the point. And I think the point is much, much bigger than a crypto off ramp. The point is

that we have a lot of systemic shocks that are building up in the system. We have broken a ton

of the systems that cause the financial infrastructure in the world to work properly.

And we are just starting to uncover how they’re broken. So I think we need to focus our energy on

that and dial down a little bit of the Bitcoin maxi stuff because it distracts from a really

important set of topics that are more inclusive and actually touch 7 billion people. We have to

do the cleanup work. And just to be perfectly clear here, Nick Carter is a career crypto,

he’s on his third fund, his $250 million third fund, according to a quick Google search,

he’s a partner at Castle Island Ventures. And I believe Balaji believes what he’s saying.

And at the same time, is massively in Bitcoin and the $2 million he’ll obviously lose in this

bet or the 99.9% chance and he said that already. I think he believes he’s doing a service just like

he did believe he was doing a service with COVID. So I do not doubt his intent. But I believe it’s

his book is based on this and the $2 million will be he’s a very smart, he’s a very smart and good

guy. My point is put this in the who cares bucket and get back to the facts. Friedberg mentioned it,

we have a debt ceiling problem that’s in the offing. Saks mentioned it, we have a commercial

real estate crisis. We just talked about the fact that he didn’t raise rates enough, nor did he cut

enough. So we’re in this weird middle path that Jay Powell we’re talking about. So those are the

facts on the ground that I think we should focus on because those will have implications to how

people can borrow, start businesses, capitalized risk assets. That’s a big problem. I guess the

moral hazard comes up sacks. And the critique, I think that people have had of you, you know,

focusing on bank bailouts, etc. has been, you have been anti bailout. And now hey, maybe backstopping

the deposits, not backstopping the bank, the shareholders loss, you’re very clear about that.

But let’s talk about moral hazard here for a minute. Are we sort of getting enough for bail?

When did I say I was either?

I just clearly stated you’re not I just clearly say you’re not I’m saying this is the critique

that people have had of you. So I’m giving you a chance to address

Why? Why are you giving him people’s critiques of him?

When nobody because I want him to talk about the future moral hazard.

People more than seven, six, five, four, two on Twitter.

Okay, I was also thinking about the Wall Street Journal, the New York Times and everything.

Let me jump in and just clarify, I was really clear that SVB shareholders should be wiped out,

their bondholders should be wiped out their management, stock options should be wiped out.

In fact, if it turns out that they should have known the thing was about to go under,

I think their stock sales should be clawed back. So I’m not in favor of bailing out SVB.

I don’t care about SVB.

Yes, of course. Now let’s do that for commercial real estate.

No, the question is what you do with deposits and depositors.


I think there is a real debate about how you treat depositors in a banking crisis.

And I think there are two views on that. There’s kind of an old fashioned view.

And then there’s kind of a more modern regulatory view. The old fashioned view

is that if your money is in a bank, and that bank goes under, and you know, you’re over the FDIC

amount, you lose your money. And we need people in the system to lose their money, because that

creates discipline on the banks, it’ll make those depositors do a better job shopping for the right

bank. That’s kind of what I would call the old fashioned hardline view. There’s a more modern

regulatory view, which is that, listen, the typical depositor, even a fairly sophisticated

depositor, like a small business, or even a high net worth individual, they’re not in a position

to evaluate the balance sheet of these banks. How are they going to figure out if there’s like

toxic assets that are hidden on the balance sheet of these banks?

Regulators didn’t see it with Silicon Valley Bank and a lot of these banks.

You don’t really get that much more moral hazard by putting the depositor on the hook for that.

Remember, the management of the bank already is penalized severely by losing all their stock.

I’m trying to get to before Chamath interrupted me, I’m trying to get to the bigger moral hazard

picture here, which is Jason, fuck you before you interrupt me. But the point, eat your nuts for a

second. The point I’m trying to get to is should commercial real estate? Should that be bailed out?

How should society look at that next card that you are saying is going to tip over?

How would you handle that piece? Should they?

Okay, well, let me just finish on depositors. So the modern regulatory view is that when you

open a bank account, you shouldn’t have to think about the bank’s balance sheet. You just want it

to be safe. You don’t want all the brain damage. And, and look, I think there’s a lot of merit to

that argument. As it turns out, I’ve been trying to look into this, how much would it cost the

system to just fully ensure depositors, it turns out that we have about 17 and a half trillion in

deposits in the US almost 818 trillion. And one of the misnomers you’ll hear as well, it would

cost us 18 trillion to basically ensure all the depositors. That’s not true. Because first of all,

10 trillion people don’t even know already insured under FDIC. It’s only about seven and a half to

eight trillion. That’s less than half is left. Okay. That’s right. Exactly. It’s about it’s

around 8 trillion. So isn’t it shocking the innumeracy of people that make these claims?

This is why the podcast is top 20 or top 10 in the world, because we’re actually breaking down

the numbers. Right. So the leading proponent of this theory that we should just basically

not bail out, but backstop the deposits is Bill Ackman. And he’s been making, I think,

a pretty compelling case that if you don’t protect deposits at small banks, all the money is going

to flow to the top four banks. That’s already happening. Yeah, we’re watching it happen,

right. So I’ve been trying to figure out how much it would actually cost us to do that.

And what I’ve realized is that it’s not 18 trillion, it’s, it’s 8 trillion. But by the way,

that’s the amount of deposits, that’s not the risk premium. So if you look at FDIC, at the end of

last year, there was about 130 billion that have been paid into the FDIC fund by premiums paid by

these banks. So in other words, the insurance premium paid by banks was about 1.3%. So if you

were to now additionally cover the whole thing, all the deposits, it would be another roughly

100 billion of premiums paid by these banks. That seems very manageable to me, actually,

the question is, is the FDIC fund adequate? And I think we’re about to find out it may be the

case that a 1.3% insurance premium, grossly, you know, understated the true risk of putting

your deposit in a bank. And we’re about to find out that the FDIC is inadequate. I don’t know

the answer to that question. I think this boils down to the profitability that an equity shareholder

of a bank expects of them. And to your point, is it viable for large GSIBs to

guarantee 100% of their deposits? Absolutely. The implication of that will be an enormous

hit to their short term profitability and their return on invested capital,

it would just take a massive hit. And so as a result, the stocks of those banks would fall

pretty precipitously, which would have a real negative impact on the executives and the CEOs

of those banks and the shareholders that own those bank equities. So I think, ultimately,

it’ll come down to that decision, which is that if you do want to protect the depositor

in the American banking system, 100% for every dollar, and do it in a simple way,

it will come at the sake of the equity holders of the banks. And if you’re willing to make that

trade off, then you can guarantee 100% of the deposits. If you do not want to make that trade

off, then the equity holders will still retain more value than they would otherwise.

And Freeberg, we’ve seen a couple of examples of the market, the free market,

looking at the situation and making new products and services. Wealthfront, Mercury Bank, both

talked about load balancing across 12 accounts, $3 million. So that would make some people who

had over 250k just instantly be back stopped and insured. And then where, you know, there’s

discussion of which I talked about last week, hey, why don’t you just have a vault where you pay a

bank to hold your money safely? I got a ton of responses from all in fans, pointing out multiple

banks and services that have been trying to do this, and also crypto solution. So is there going

to be a free market solution, you think, or when we’re starting to see them emerge, that maybe

covers this gap a little bit freeberg. And then what are your thoughts just generally on should

we backstop the banks and the deposit? I’m sorry, the banks, the depositors, to be clear.

So if we just quickly analyze the function of a bank, they loan money to either residential real

estate buyers, like homeowners, or commercial real estate buyers or businesses that need it,

I think the majority of the capital goes to residential real estate. And if they can’t loan

enough money, they typically buy bonds, right, they buy other people’s loans, in the form of

bond securities, like treasuries, or asset backed securities, or other things like that,

or mortgage backed securities. So they use the cash to make those investments to make those

loans, and then they obviously earn a return on that. You know, I think we’ve talked about this

in the past, the thing that biology, I think, has misstated, and it would be good to have a

conversation with him about this publicly, because I have listened to some of his interviews in the

last couple days. He says the banks are they don’t have the money that you the depositor

thinks that you have. And so what he’s saying kind of implies that there is no money that there is no

asset value there at all. He uses Sam bankman freed and FTX as an example, that the money that

was given to Sam bankman freed, you know, exchange fund was used to buy assets that then very quickly

declined in value by 99%. But he held them on the book at 100%. And then he reinvested the money and

all sorts of other different stuff. And in the case of the loans made by banks, and the assets

that they as a result hold, the value may have dropped by 25%, in kind of the worst case, which

is, you know, the Silicon Valley bank tenure, Treasury bond scenario, where they bought, you

know, all $20 billion worth of Treasury bonds. And, you know, they took a big hit on that. But

it doesn’t mean that there’s no asset value, it means that the value has declined. And typically,

there’s a buffer between the asset value that the banks are meant to hold, and the deposits that they

owe back to their customers. And if that buffer gets exceeded, then the bank is technically has

negative equity. And if all the, you know, depositors said, I want my money back, and they

went and sold those bonds into the market, they wouldn’t be able to make the depositors whole.

But it doesn’t mean that depositors end up with zero, it means instead of getting 100 cents on

the dollar, they get 93 cents on the dollar 88 cents on the dollar. And it would require an

orderly dissolution of the bank’s assets selling those bonds into the market to generate the cash

to pay back the depositors. So the reason we’ve seen this kind of this Fed vertical spike number

is because assets are moving so quickly, depositors are moving their value so quickly

from one bank to another, that in order for the banks to make the cash available to those

depositors, they’ve had to borrow from the Fed. And then they’re going into the market and doing

this kind of, they should be doing this orderly asset sale of the bonds to generate the cash

to pay back the Fed, which is musical chairs, money, causing these problems as musical chairs.

And if the musical chair stop, then we don’t have this problem, correct.

So if people stopped moving deposits around, then you’re right, the banks wouldn’t need to borrow

money to give depositors their money and then go do the work of selling the bonds in the market

people free moving their money around because of the

so here we go. So you just ensure it and this whole thing stops. So nothing to just say that

right? Yeah. So here’s the thing, Jacob, you mentioned this case that you hear a lot of

people saying, Well, why don’t you just take your two and a half million dollars and break it up

into 10 accounts, which is what people are doing? Yeah, yeah. Well, look, it’s not feasible when

you need to run a big payroll at the end of the month, and you got payables, it’s administratively

too complicated. And by the way, what have you accomplished doing that? You haven’t solved

anything. So who hasn’t accomplished for the startup? It has given that prediction system?

Why wouldn’t you just raise FDIC to two and a half million or have FDIC be based on the number

of employees in your company or allow a higher class a business class of FDIC that goes up to

Yes, exactly. There’s 10 million and in exchange, the quid pro quo has to be that the bank can’t

put that money in risky assets. Why is this not this is so obvious.

The reason I walked through that whole explanation, because I want to answer your

question. I’m sorry, it took so long. But like, I want to highlight that because that is what

an insurance underwriter put aside the FDIC and put aside banks and put aside the government’s

role. Yes, that’s what an insurance underwriters job would be, they would look at the volatility

and the pricing on the bonds that the bank holds. And they would determine ultimately two things,

probability of loss and severity of loss. And the probability is how likely is it that you end up in

negative equity, and that you have people requesting money, and you have to sell those

bonds at a loss very quickly. And then the severity is how much would you actually lose?

So if, if you know, the Fed raises rates by 3%, and your entire book is tied up in 10 year bonds,

you see a 25% decline in the value of your bond portfolio. That’s as bad as it gets. If you start

with a 10% buffer. Now, you only have 85% of the money you owe the depositors. So your loss is 15

cents on the dollar. So the insurance company would say, what’s the probability of that event

happening? How much should we underwrite it for? What should we charge as a premium to do that?

And that’s ultimately how the rates would get set. Now, the problem with most insurance

models around this sort of a problem set is that these are the extreme tail events that have never

happened. And so the insurance to Sachs’s point is super cheap, leading up to the extreme tail event.

And then everyone’s like, Oh, my gosh, we underpaid for so many years, we didn’t realize

how severe the losses could have been, we didn’t realize how significant this was going to be.

And as a result, you now see this kind of multiplying effect, because people are like,

Oh, my gosh, if it happened to them, it could happen to me, let’s all sell and it gets worse

and worse and worse. And so you know, the real rate for the insurance going forward will now

have to take into account this massive risk. But the game theory problem is as taxes point out,

if you just ensure everyone, the cost of the insurance actually goes way, way, way, way down,

because now you don’t have this money movement problem. And so you know, the point is, the more

you ensure at this point, the cheaper the insurance will actually be. If you’re an actuarial or free

market underwriter, you know, free market kind of, you know, underwriting process on this thing,

because now the probability of having this bank run goes way, way down. And therefore,

the cost of the insurance should go way down. And so the irony is, if you actually did,

and this is getting super technical. But if you actually looked at the statistical model and said,

how much is this going to cost to ensure every deposit, it gets much, much cheaper,

the higher the the deposits that you’re willing to ensure would be, that’s my sense of what the

free market would do here. And it’s certainly what I think the federal government should probably

think about doing if they’re going to continue to play a role in backstopping banks, the net net

is people. startups right now are doing five to 10 banks, I’m watching it happen. They’re doing

all these sweep accounts, they’re doing multiple accounts. So the government, if it doesn’t raise

the FDIC limit is basically just creating extra work for everybody, and it’s going to be the same

outcome. So this people are going to the street will find its own use for technology and how to

hack this. And that’s what’s happening with these services. Yeah, time just to steal man, the the

old fashioned view or the traditional view of this, they would say that, well, you want those startups

being paranoid, you want those startups doing the work of disciplining these banks by moving their

money elsewhere, if they detect a problem. However, the problem with that is you get these bank runs,

that is what a bank run is, in parts, is people moving their money, because they’re fearing

that the bank is not doing a good job with their loan portfolio. So this is why in the let’s call

it the olden days before FDIC, we had bank runs and panics all the time. And that’s why FDIC

was invented. So there’s a hugely destructive problem that comes along with placing the

depositor in charge of disciplining the banks. And I would argue that the depositor is not the

best person to do it, it’s the regulator, just to kind of layer on what what Friberg was saying.

I think there’s like a fundamental market failure with banking, in the sense that the depositor,

or the consumer and the bank think they’re getting two completely different things.

When you open a bank account or a checking account, you think you’re getting a checkbook,

an ATM card, a place to do payroll run, you know, and it’s a service, it’s a service,

and maybe you make a little bit of interest, but it’s not even your main motivation. Okay,

that’s what you think you’re getting your money, most of all is safe. Because you’re not signing

up with a service provider to have any chance of losing your money. You’re not gambling, right?

But now what does the bank think it’s getting? You know what the bank thinks it’s getting

an unsecured loan, that they can then turn around and invest in whatever they want,

or whatever the law. So there’s a disconnect between the parties and the transaction.

Exactly. It’s a total disconnect. And moreover, the way the management of the bank is compensated,

is that they only have to pay back your loan, your deposit, basically, is their loan at par.

And anything they make on a bet that they make with that money, they get to keep,

they get to keep all the upside, their stockholders and management get to keep that.

And those incentives are what are driving this. And that’s what drove the risk in all

likelihood at Silicon Valley Bank, they were getting $200 billion, whatever percentage point

they got from off. Somehow, the executive team was

their incentive. It’s not just them, but the whole banking system creates the incentive,

they’re highly leveraged. The deposits from their standpoint, are leveraged, they’re leveraged 10 to

one. So their incentive is to go to the casino and gamble it because they get to keep all the upside.

And if they lose it, it’s basically someone else on the final word.

In early May, the Fed will release their investigation into Signature Bank and SVB.


Powell said that this week. I think it’ll be really interesting to see how much honesty they

both put into the report, and then whether the entirety of that report is made available to

the rest of us to read. But I think Sachs has very elegantly summarized what’s happening.

And it doesn’t take a genius to figure out that this doesn’t make sense. So the question is,

what is the tolerance that we have for changing something that clearly is mischaracterized?

What consumers think they’re getting and what banks are then doing are two totally different

things. And if the Fed actually is really, really honest, and really lays bare everything that

happened, it’ll be very hard to not legislate changes based on it.

And this your best swing at a legislative change would be watch him off. What is the

what is the low hanging fruit? What’s the layup here?

Well, I think we’ve seen this happening in other markets for a while, which is that

banks have become in fairness to them, much, much better at risk management post Dodd-Frank post

great financial crisis. And the result of that is that there’s been a lot of emerging

private credit markets because most the bank is about lending, right? They’re not really

buying equities, they’re lending money. They’re a debtor in possession of something, right. And

there’s been a just a massive explosion of private credit. And it started in the most

obvious areas. It started in things like CLOs, it started in asset backed securities,

solar car loans, credit cards, mortgages, private equity backed deals.

So I think the rational answer is that banks need to protect 100% of deposits.

And that if they want to have extracurricular activities, if you will,

they need to be able to raise money from investors, put that to work in a really fair

and transparent way. And then share in the profits between all of the related parties

that are involved in that transaction, no different than any other risk taking organization.

And I think that this is now what we’ve probably shined a light on

is in really odd loophole that just needs to get closed in 2023.

There’s such easy, easy, hygienic changes here.

Like let’s put it a different way. If you raised money for a liquid hedge fund that

had quarterly redemptions, and then violated the LPA and stuffed it into private companies

that had 10 year illiquidity, there would be hell to pay. And vice versa. If you raise money on 10

year illiquid locked up capital on the presumption you were going to invest in startups, and then

instead put it in the stock market thinking that you could flip it and make some money,

you would have violated the LPA and there’d be hell to pay. Similarly, I think what Sachs is

stating is that there is a mismatch of what the depositor in this case, the investor expects,

and what the risk manager is doing. And I think that you have to correct that one way or the

other, make it abundantly clear that we’re never going to ensure 100% and deal with that risk.

Or make it 100% and deal with the fallout, which is largely about wiping out a lot of

equity value in banks. LPA equals limited partnership agreement.

Just to clarify one thing, I’m not saying that these bank managers are all going to the casino

and gambling the money. I think that they are generally more responsible than that. What I’m

saying is that the incentives created by this crazy system we call banking, create a weird

incentive for them to gamble because they’re so highly levered. From their standpoint,

your deposits are their leverage. Everybody but the GSIBs because I think the GSIBs there’s so

much scrutiny. If you look at how well run Citi, B of A, Wells and JPM are relative and contrast

them to the sub GSIBs. It’s like night and day. And so the other thing that I think we’ve realized

is who thought it was a good idea to raise the bar on eligibility from 50 billion of assets to 200.

Clearly now that made no sense. It makes more sense to actually categorize every bank

as systemically important, maybe not globally, but at a minimum to the US economy,

because these people play a vital function in society. And they were allowed to take a

much more aggressive risk posture because they were able to lobby the government to change the

rules. The CEO of TikTok, which claims to be an American company now, or an international company

was in front of Congress today. His name is show chew. This is the first time he’s really,

I think, spoken publicly in an extended period, four and a half hours, he was grilled.

And it was absolutely brutal. It’s the first time I’ve seen a congressional hearing that was

bipartisan in a long time. And he said that, quote, the bottom line is, this is an American

date. This is American data on American soil by an American company overseen by American personnel,

and then was immediately squirrely when asked if Chinese employees, including engineers have

access to this US data. And he said, this is a complex subject, over and over again, he was

evasive. And this did not look good for TikTok. Well, I think now becomes does it become divested

and go public? Or does it get shut down? sex? I think his goose was cooked as soon as they asked

him the question. In preparation for this hearing, did you consult with any member of the CCP?

And he could not just outright say no. Nope. So that’s his goose was cooked as soon as he

couldn’t just say no. What do you think about the bipartisan nature of this? And what do you

think the outcome is sex? Well, this is one of the rare things where it is bipartisan. I mean,

there’s there’s so much outrage and anger at this. I think that they should let the company divest it.

I think it is divestiture or shutdown for TikTok. Since we’re not communist here,

I think they should be given the chance to fully divest to an American owned company.

But look, I just wish that there was as much bipartisan consensus and outrage directed not

just at Chinese spying of Americans, but on the American deep state spying on Americans, because

we just had hearings showing that the American government conducts elaborate spying operations,

surveillance of Americans on social media, this was all revealed in the Twitter files.

And we got certainly no bipartisan consensus on that Republicans were outraged, but

Democrats tried to portray it as some sort of spat between Trump and Chrissy Teigen. I mean,

that’s all they wanted to talk about. So I would like to see this problem comprehensively addressed.

And that means I think, TikTok going into the hands of an American company, but I also

would like more assurances that American companies will not be working with the deep state to spy on

us and infringe on Chrissy Teigen and Donald Trump, who are two people you’d never invite to

a dinner party. Freeberg, what are your thoughts? Is it going to divest? Should it be forced to

divest? being intellectually honest about it? What are your thoughts on TikTok in America?

Yeah, I think I’ve shared this in the past, I think they’re probably going to have to

spin this thing out. And if they hold any equity, if the Chinese parent company holds

any equity interest, it’ll probably be non voting shares. And there’ll be a mandate that the

majority of the shares and some degree of oversight. I believe that’s the right thing to do.

From a national security issue for America to force them to do that.

I don’t know, from a national security point of view, I really don’t. I don’t have an opinion

on national security and TikTok. I don’t know. I’ve always thought that TikTok was a really,

what’s the right word? Like, it’s like a firefly for, you know, Chinese invasion. And it feels

like, you know, it’s a very easy kind of target for I think, what is generally a big kind of

social consciousness right now. So, you know, whether or not there’s actually like, some

national security points, if there were, I’m pretty sure that national security person would

have stood up and said, we need to stop this thing. I’m not sure I’ve heard that publicly.


But I will say like, my point of view from like, just seeing the political behavior is that

they’re probably going to mandate that these guys spin this thing out to us investors and,

and that they, you know, don’t own any that the Chinese don’t have any equity or management

oversight or interest in it.

Chamath in China itself, the Chinese government does not allow kids to play video games during

the week and only three hours on the weekend. They’re using apps like WeChat to dictate

social score and social behavior, whether it’s smoking on a train or not paying your bills.

And they are saying they will not divest. But any buddy who is an investor in a company that

had a chance to go public for 10s of billions of dollars and eventually take on and people

believe that this is a viable competitor to Facebook and Instagram, this could be a company

worth ultimately hundreds of billions of dollars. If you were an investor in China, you would want

to IPO, you would want to get liquidity. So if they are refusing to sell, what does that tell

you as a market participated in participant in somebody who’s been a capital allocator for over

a decade, there’s bigger problems in China than even tick tock us represents for them.

I think that’s probably what it means. So it’s a pretty bad tell.

I don’t think divestiture is a real option. Because when you think about the details of that,

how will the government be satisfied that the code base was separated elegantly,

that there was no malware surreptitiously planted? How will you actually prove all of this

to a degree that satisfies a legislator? So I think the pound of flesh that they want,

is more easily and more salaciously satisfied by shutting the thing down.

So if I had to bet on what happens, I bet more on that. I didn’t think tick tock did a very good

job. And I think that there are some, they were terrible today. And I think that there are some

real issues around how much control does actually flow back. I don’t think that it was definitive,

he needed to be much clearer and adamant that this was an independent business that didn’t

have backdoors to China and the CCP to appease Congress. He didn’t do that.

No, he was like, I have to check in on that. I’m not sure. Yeah.

I think it was a little bit of the exact opposite. Actually, sax is right. Like that first question

was just the death blow right from the beginning. It’s like, oh, this is not going to go in a good

place. Because they should have been able to see that that question was going to get asked.

And you need to have that asked and answered philosophy where the only answer is no.

The only answer you could have given is no. And the fact that he wasn’t able to say that.

It was a bit of a fact that complete as soon as soon as that was in my mind, I was like,

this thing is getting shut down. Because I don’t think there’s a shutdown. Yeah,

there’s no divestiture plan that can be technically audited in a short amount of time

to appease these folks. They want a pound of flesh. And then separately, the bigger issue that I think

you have to deal with is, what does that mean for how other governments may be pressured to act,

who want to be on the pro US camp? And I think that that’s a question because

bike dance and Tick Tock have presence beyond just China and the US. A third question is,

how does the golden vote get used on the bike dance board? And what do they do? And do they

even want this thing public explain golden vote, essentially, they’ll decide what happens to that

company. And they have that in Alibaba, they have that I think, a 10 cent, I think they have that

at bike dance. So the Chinese government has a very strong hand in the direction of these

business. And then the final point is that there’s a secondary app that Tick Tock has called CapCut,

which also is enormously popular in the United States, which is yet another potential backdoor

for privacy or spying violations, whatever the US Congress wants to pin on them. So

I think it’s a very complicated moment for that business and their US asset

sacks. It’s pretty clear the CCP is making this decision. If they decide, let it burn,

let it get kicked out of the United States. What does that do in terms of game theory between the

two countries? And going forward, because obviously, they don’t reciprocate, we’re not

allowed to have Google, Twitter, Instagram, whatever in China. So is this just, you know,

what? What decision you’re saying the CCP is making? Well, the CCP has the golden vote.

It’s their decision to divest or not divest. Chamath believes they will not divest.

I believe they will not.

Chamath is saying that is they’re not going to have the choice. I don’t I don’t see what

decision the CCP has in this. It’s gonna be

If they don’t divest.

That’s right. They’re there. It’s not a divest or don’t divest. I think it’ll be shut down.

I think they’re getting kicked out of the United States.

Okay, do you but you believe they’re going to divest sacks?

I’m saying that that’s what I would support. Just to give them the chance.

So what do you think is going to happen?

Chamath may be right. I’m not sure. But I think they should be given the chance. And if you truly

can’t move the servers to the United States and vet the code base, I feel like you could,

I think you could have an acquire or figure it out, you know, vet the code base, move the data

centers, make sure there’s no back doors. I think it’s not impossible, hard, but not impossible.

Okay, so let’s go with the scenario that it gets kicked out of the United States is shut down.

Are there any second or third order impacts?

Yeah, it’s it ratchets up the tension between the US and China, but we’re already

we’re already there. Yeah, we’re already there.

No change. All right. Listen, this has been an amazing episode. Oh, Chamath. Did your 3d

rocket company make it to space? I saw they had a nice little liftoff there.

Thank you, Jason. I just wanted to give a shout out this is like,

while all this chaos is happening in the world, it’s amazing to see

pretty incredible engineering. So last night, we did have a successful launch.

So relativity has a 85% 3d printed rocket, which over time, we want to try to get to

95%. But it’s the fuselage, it’s the engines.

It brings the cost of spaceflight down by an order of magnitude. It is a hugely disruptive

idea. And so what they tried to prove was that they could get this thing into space.

And they accomplished a lot of goals, they got past Max Q, which is sort of the point at which

the atmospheric pressure is the strongest on the fuselage. So we proved structural integrity,

we got to main engine cutoff, we had stage two separation.

So a lot of really important technical milestones were achieved, it allows them now to unlock

a bunch of contracts that allow us frankly, just to keep going and building, there’s still a lot

of work to do from here, we’re building now the next generation rocket, which is called Terran R,

and rocket engines, which can take instead of 1500 kilograms, about 20,000 kilos. So

I’m enormously proud to have been around this journey. My partner Jay has been really

the key person on it. But I just wanted to give a huge shout out to Tim Ellis and the team at

Relativity. It’s super, super, super cool what they pulled off.

It’s just amazing how access to space is being democratized and the prices are being lowered

so dramatically. What’s the impact that’s going to have ultimately, Friedberg, you think,

on humanity? I mean, obviously, going to Mars is this incredible feat, technologically and

just mind blowing. But what do you think the net result of all this space activity is going to be

for the human condition and the species?

I mean, I think there’s a vibrant community of startups and money coming into this space right

now. I do think all these guys are going to have to in order to gain wider spread capital markets

attention, like Elon has had to do with SpaceX, they’re going to have to find business models

that have kind of near term viability that don’t depend on government contracts.

Like Starlink.

Like Starlink. Yeah. And so I think that’s the key question. And obviously,

these are very capital intensive businesses, they have very long horizons

to hit their milestones. So there’s certainly capital available in the early stages

to make bets on whether or not they can get these milestones. But But, you know,

the broader kind of attention and capital markets is going to come from these things

building real kind of businesses that generate value for consumers and markets.

You know, one of the things that I think can unlock

opportunity for this market overall, is low cost energy. You know, if we can get below, call it

$0.01 to $0.03 kilowatt hour of power, call it $0.01 kilowatt hour power, I forgot the exact

relationship, you can get very cheap, you know, hydrogen and oxygen fuel sources. And so you know,

the it’s funny, if you actually play out the scale factor for space, for the space industry,

much of it at scale will get driven by the cost of electricity. So it’s another reason why there’s

going to be, I think, a pretty tight coupling between the cost of power and ultimately,

the vibrancy of this market. You mentioned something important. The other key thing

that we proved was that this is a pure methylox engine, so CH four and liquid oxygen. And it was

not just stage one, but also stage two, which is unique. The only other folks that have tried to

prove that you could have multi stage methylox is China and their most recent launch failed,

but it highly simplifies the engineering problem at hand.

Especially the ground operations and whatnot, and sort of like filling these rockets and making

them viable. So that was another really big milestone, which is the producing of that fuel

Friedberg requires energy. If that energy was cheap, it would be cheaper to make and process

that fuel. That’s right. Yeah, there’s a pretty, pretty direct tie in particularly with scale

manufacturing on fuel that would be used in these rocket systems and, and power prices here on

earth. So if and as we get power prices down, either through scaled renewables, or ideally

fusion or some other kind of new technology, or nuclear fission or something, then the cost of,

you know, fuel and the cost of these space programs goes down. And that ultimately, I think

the real question everyone asks is how do you get away from it just being government services

businesses, which, you know, have a low multiple in markets, and obviously, you know, high

dependency on one or two key customers? And how do you actually get private markets, private

market products moving? So tourism obviously makes a lot of sense. Travel, you know, around

the earth in 20 minutes or something, or, you know, some people have talked about mining or

colonies, and you know, who would fund that real estate, it’s unclear right now what the

traveling is a wild one. Yeah, I’ve talked to you on about that. But the idea that you could

have a rocket ship take off from Texas, and then be in Tokyo, you know, like half an hour minutes

later is I can only speak for myself, but I would really like to visit Uranus Reaper.

All right, everybody. Look at the player here. He’s got layers are for players. Sexy. Look at

this. He is he is two layers. And can you get an ascot? It’s subtle, isn’t it? He’s pulling a Steve

Bannon. You got to get more disheveled. He needs the six pens in the color pens. No shave. Can you

tell us? Do you have a stylist, an actual person you pay to the rescue? Nick, can you please put

the picture of Steve Bannon where he wears the multiple? I’m gonna do this again. I need to stop

attacking me. It’s really weird. Oh, yeah. Bannon. He thinks you’re a venture

vulture capitalist or something. He’s been attacking you.

Bannon was attacking me on Twitter. I think on his podcasts. I think Yeah,

you seem to have made a lot of a lot of new friends on Twitter lately,

when you pass around half a million followers. Basically, what happens is you become a

politician, you will know there will always be a fringe element of people who need to manage

their anxiety by venting. And that’s what you’re feeling. You will live that now at million use,

you know, followers, 2 million, 10 million, whatever, there’s always going to be a small

percentage. J. Cal doesn’t know this, because he has mostly bots that are his followers.

It’s true. Real when you have real people, this is what it is, you’ll get this 1% or less than 1%.

And just the number goes up. So I would ignore it. Don’t care. Don’t worry about what user 747

don’t feed the brigadoons don’t care what seven user 74786 has to say. Don’t worry about it. Yeah,

absolutely. I love you. All right. And I’m looking forward to seeing you on Thursday.

For the rain man himself, David sacks, the sultan of science and principanic attacks

our pal David Friedberg and the host with the most going to make me what about me? What about

me? I’m going them calling you the host with the most I’m adding something the host with the most

is making me the she so leaf tempura with Hokkaido. And you are the world’s best genuflector.

I am the world’s greatest guest, greatest houseguest. If you need a houseguest to look

at your house, Italy, Tokyo, Niseko, wherever you need a houseguest, I’m ready to come and make

it a good time. You’re the modern Kato Kaelin. You’re horrible. Absolutely the best. You keep

inviting me every week. You are enjoyable, though. Love you, boys. Let’s have fun. Bye,