VC fund metrics that matter, private market update, recession, student loans, Bill Hwang arrest
Full transcript · Read the full conversation in order, with its original context.
§01Segment 1
Is there gonna be an open mic night in --
We were gonna have you speak Friedberg, but we real I sure not capable.
So -- We want
the show to be entertaining.
Yeah. It's not no. That's not personal free per.
You guys are missing out? I'll tell you guys what makes my stand up comedy so good. Oh,
god. Here we go.
Oh my god. We're back on this. Jesus Christ.
it's my creative sensibilities. So if I have some time to prep and write my script and read my own creative insights, Yeah. Okay. Bring one joke next week. Jake, for all the time we've spent together on this podcast, you know so little about me.
It's so it's so depressing. I gotta be honest.
you know, here's the thing about friendship. It's a two way street. You gotta open up a little bit.
We gotta go out and get drunk one
night.
Absolutely. to let your winter ride. Rainman, David Sachs. We open I just wanna
give a shout out to this guy, Andrew Lacy. Okay. Okay? Shout out. He is the CEO of a company called Pre Nuvvo.
Oh, yeah. Can you just flash it on the screen? Pre Nuvvo. I went to prenuvo, and what they do is they do a head to toe MRI scan in 45 minutes, and they use a bunch of machine learning and image recognition to help a radiologist interpret these MRIs in real time beside you. It's a service that you have to pay a few $1000 for.
There's a location in Silicon Valley in Redwood City and a couple of others, and we mentioned it. But the reason I'm bringing this up is he sent me an email yesterday, and he said, I just wanna thank you and the besties for mentioning Prenuvo because we had a bunch of people come
--
Mhmm.
--
and he said we found no less than
11
life saving diagnoses. 11. 11 people. 11 individual listening to the pod. Pod saves lives.
Went to Pre novo after hearing about it, had a head to toe MRI found, you know, all kinds of issues from a brain tumor and brain cancer to stomach cancer and other things. And was able to get the care that they needed. Amazing. Anyways, I just wanna give a shout out to him for for doing a lot of really important work. And for the folks that are listening that Have some money set aside and can afford to do this.
I would just really encourage you. We have no financial stake in it. Nothing other than we are users of it. but check out prenovo.com and shout out to Andrew and his team there.
Okay. Here we go. 32. Let's start the show. The war in you crane, has him insane in the membrane, and Biden's new disinformation council is gonna have him detained to calm him down from tanking Solana He started smoking.
That marijuana, you know him as the rain man. He's here again, David Sacks. How you doing? Have a good week.
Yeah. Not bad.
Alright. Well, big energy this week. Okay. In high school, he had no friends, but thanks to the pod undergrads are in his DMs. All forms of stake.
He's a virgin. He's the vanguard of all the virgins, the keying of Kenwa. the salted of Science, David Freightberg.
Wait. I missed, like, half of that because Tremont was laughing so
hard.
I could do it again. Do
it again. Do it again.
Let me try from the time. Outtakes. In high school, he had no friends, but thanks to the pod, undergrads are in his DMs. All forms of steak, he's a purging. He's the vanguard of all the virgins, the queen of Kinwa, the Sultan of Science, David Praberg.
Just for the record, there's no undergrads in my DMs, but I appreciate the intro. Yeah.
Alright. Well, Jack. Alright. And 3, 2, he's trying for a free furnace treat in the show as start.
I think I'm taking over intros next week. Okay, Julie. -- gonna do Jake Hall.
Yeah. Please, by all means, next week you do my -- You're a comedian who
has a chance to prepare in advance and think your thoughts. Go ahead,
big boy. Give me
a week.
You got it. Okay. Cheers next week.
Let's see these latent stand up skills in action.
Yeah. Absolutely.
He's been hiding them from us. Yeah. I don't know a lot of stand ups who hide their ability.
You know the funny thing about hiding something and not having something? From the outside end, they look the same. can't tell him difference. Sorry, Jake. I'll go over to you.
Okay. He's dropping annual letters in luxurious sweaters As far as the specs go, well, it can only get better. And to tater himself, Jamal, follow-up with Tia.
Ouch. Cannot I cannot comment on the spec.
Oh my god. I mean, this is getting brutal. Who's writing these? Oh my lord. Alright, everybody.
It's been a big week. last week.
Did you did you read my annual letter, any of you, 3 assholes? I I saw your -- No. That's it. No. That's it.
No. I get it. I get it.
I reviewed the table where you listed all your results. And I actually sent it to my team. I was like, this is a really nice way of summarizing, you know, Affirm's results over, you know, a long period of time because you had every fund, and your totals and and all and all the key metrics.
Well, can I talk about that for a second?
Yes, please. You know
what's what's incredible about what you're saying, Saks, is I I was interested in a bunch of other funds that I'm invested in and their returns. And then I've also seen a bunch of leaked fundraising decks of all kinds of other firms from growth staged to crossover to PE. And it's incredible that they are not standardized. Right? Some people only show gross IRR Some people show net IRR.
Some people don't show the total value of the paid in capital, which means, you know, you if you have a $100 fund, what is the total value of all of its holdings? Some people don't show DPI, which is distributions of paid in capital, which means, okay, for every dollar that you've taken in, how many dollars have you sent up? If you don't show all of them, what was shocking to me is how much you can kind of hide and play and manipulate the numbers. And one of the most crazy things that I saw is that there are these late stage funds that write into their fundraising decks that what they actually use are lines of credit to juice IRR. So what they do is, if they're about to do a deal, they'll actually Get a loan from a bank, put that money into a company.
Wait until it's about to get marked up. And then what they do is they actually call that original money from their LPs and pay back their capital call line of credit. So what does it do? It inflates IRR. But this is why if you do if you see the other numbers, it still shows that it's kind of like, you know, not doing much of anything.
So if you ever see multi 100 percent IRRs or high huge IRRs with 0 DPI. And a marginal TVPI, its folks that are playing games to trick LPs just a heads up to it.
That is so weird. So what you're saying is just to summarize for people in the audience who don't understand, Hey. We get judged on the rate of return each year. So if the stock market does 7 or 8%, we're expected to do triple that. So we gotta hit 20, 25% each year.
Now the clock starts ticking when the money gets called from the LPs, the partners -- Correct.
--
and gets put into the company. So if you invest in your 2 of your fund, You pull the money down from the LPs, you put it into YouTube, whatever it is. What you're saying is, they will take a loan against that future money for bank at an absurdly low interest rate, let's say 1% or
2%.
Correct.
They make the YouTube investment. Then 2 years later, YouTube has a price round that marks it up 20 x. then they put your cash in in year 3 of the fund year
2
and pay back the loan. Now they've paid 2 percent 2 years in a row, but the thing's gone up 20 x. Correct. What a that's that's dirty.
Well, so it's it's dirty enough the SEC has actually now introduced legislation. It was in February that basically is gonna try to uncover all of this nonsense. And so you'll have to be much more transparent. So the format that I used in my opinion is the most transparent way of not being able to hide the cheese. You show all the critical elements together in a simple table that will make it very obvious who's playing games and who can actually make money.
So there is a semi legitimate version of the the loan thing, which is, you know, where this comes from is a capital call loan. you know, we're making a bunch of investments throughout the quarter, a $1,000,000 here for a seat deal, $10,000,000 for a series a. You know, that's happening all you don't necessarily wanna hit your LPs with capital calls for every single little small investment. So what we do is you get a capital call line from SVB or something like that. And then you do one capital call call per quarter.
And -- Right. -- so they will loan you the money for, you know, 1, 2, 3 months. but it's not for a year.
But the but the reality is if you have a reasonably well developed infrastructure, you have a cash forecast of what deals you may or may not close with probabilities. And so you know what the weighted amount of capital you need to have on your balance sheet is. So I agree with you to have a small amount at the edges to pay for expenses to pay for salaries while you clean up at the end of a quarter? Completely reasonable.
But
if you're making, you know, 5 or 10% commitments into a company and you're using this as a way to basically create subterfusion, hide. I I think that that should not be allowed.
Yeah.
Yeah. And the number of capital calls is annoying for people. Yeah.
Yeah. Anyway, I did share you that table with our team to because I did like the format quite a bit. I I booked, like, a star rating
it this weekend. It's very hard for funds who are not performant to use that format. By yours, you're you're you are very highly performing so you can use that format. but I don't think people that have not returned money or or have fake paper markups can use that format because it is too simple.
Yeah. Yeah.
I I at the end of the day, what metric do we all look at when we are LPs in a fun?
Well, this is what I put down. I put down the ones that I look at for everybody else that I'm an LP in.
You know? So what one is that for you?
I I I -- Multiple and cash investment. I I I need to look at the the totality of it. I need to understand what is your gross and your net IRRs. Those are in important things to understand because it shows how efficiently you put the money to work.
Of course.
But then but then, ultimately, then the other two things that really matter is what is the total value you've created And then what percentage of that have you given back to me? Because that allows you to understand how much paper value this. So for example, if today, Let's just say you had a fund that had a TV PI, total value of paid in capital of a 5 x. A 5 x on a fund is incredible. But if you've distributed none of that, well, guess what?
If we're sitting here in May of 2023 or 2022 rather, The total value of your paid in capital is not really 5 x. It may be only 3x, and it may be actually two and a half x considering what the markets have done to these companies. Right? And so it allows me to really understand how Performant funds are and not just being a part of the game, but actually generating realizations. And this is the hardest part, as I told you, Jason, like, this past quarter I think I passed 2 x across my funds when I was managing outside capital.
And I think my gosh. It took me 11 years -- It's hard.
--
to return 2 x the money. And that means that I've returned 2 and a half $1,000,000,000. You know how hard that was?
Yeah. I mean, you gotta time the exit. You have to have the ability
to exit. You can't even time the exit. You have to you have to be constantly managing and working your portfolio. Sometimes you're selling In secondary transactions. Sometimes you're actually trading up in private markets where you help this company merge with another private company.
Other times, you know, if I think about it, the number of IPOs I've had is relatively diminutive. So how do you make $2,000,000,000 where I've only had one IPO, which has been Slack? Yeah. So this is a really, really hard business. And it was just a reminder that, you know, in the last 4 or 5 years, managing capital has seemed relatively easy.
But in these next few years, you're gonna see who's really, really good. It's kind of that old Warren Buffical. You know? You really you know, you you can see who's naked when the tide goes up.
I mean, said another way, the last 5 years raising a fund has been really easy, and writing checks has been really easy, and now comes, you know, act 3, which is returning a multiple on the money you easily collect it, and, boy, is that hard. And, you know, I all of these new LPs -- The other thing that I'm gonna say is one thing, though. I all these LPs send me even if I'm not an LP and a potential they send potential LPs their performance because they're so proud of it, like, quarterly. I'm like, I'm not even in this fund, and they have these crazy markups, crypto investments, this, whatever, but they've returned no capital. And so Just to give
you just to give you a sense of it. If you if you look at the most fantastic organization in the world, if it were an investment manager, which is Berkshire, their long run 50 year track record is, you know, around 20%. Right? Gross. If you look at the most successful asset manager in the world, and I would put Blackstone at that just incredibly good and best in class in probably three enormous parts of the worldwide economy, real estate, credit, and private equity.
You know, their long run track record is that on 200 and somewhat $1,000,000,000 of private equity and another $100,000,000,000 of of of real estate, they've returned 2 x. So that's what the upper bound is. You know, doubling people's money and generating 15 to 20% is the best you can expect if you are really excellent and long lived. That's the best.
What do you look at Friedberg when you're an LP? What number do you care about? Could you LP other funds and and I think all of us do at times?
I made my 1st venture fund investment in 2000 6. And I I am still getting distributions from that fund. And I'm looking at it and I'm like, this is a 2.4x. over that period of time, I'm like, what the hell? Why did I even put this money into this fund?
I guess this makes sense for pension funds and you know, very large balance sheet, long range investors that need to kind of diversify. But as an individual, I should have put my money and have had liquidity on it for 16 years rather than have it locked up and and a bunch of private companies sloshing around and, you know, kind of dribble out. And at the end of all this, I only get two and a half times my money back.
§02Segment 2
two and a half times your money in 16 years. What's that IRR? It's like low teens.
Yeah. Not a great deal. No.
It's lower. You would have been you would have been better owning the S and P
500. That's right. And so for me, I think the the the the key the the metric the only metric that matters, which I think you're saying, Chamath, is how much cash I got out relative to cash I put in. And so initially, my my IRR is negative 97%, and then it goes up to negative 80 and then negative 60, negative 30, negative 20, and now it's 14%, because I finally got more money out than I put in. And so it doesn't feel to me like, you know, the the just generally private investing, everyone gets excited because we all get sold stories, and individuals all get sold stories of put a dollar in, you get a hundred bucks in.
I mean, Jay Cal wrote a book called How I made a hundred million bucks from whatever you invested in Uber. Yep. And and that story, I think, gets everyone kind of excited. But the reality is the vast majority of the time, and if you diversify your bets like this, you're gonna end up waiting a long time to get your money back. You're gonna be locked up, and a top performing fund is returning two and a half x after 15 years.
which is no not much better than kind of investing in the S and P where you could sell that anytime you want and use that cash for any purpose you want.
Well, if you did a $100,000 investment and you return 260,000 in 15 years, I'm on an IRR calculator right now. internal rate of return at 6.58 percent.
Yeah. Better open the S and P.
Yeah. I mean and if you did qqqqqq depending on Yeah. How hot the market was then. Yeah.
And you can resell.
It's really, really, really hard to actually make money. There are always gonna be periods where people look like geniuses and have markups, but you can really see when people have skill after a decade and a couple of up and down cycles.
They would funds, by the way. Right? Hedge funds put up a score every year. And in certain macro cycles that can last many, many years everyone looks like they're doing well and then all of a sudden tides go out and you lose more than you made over that period of time, And then you realize, holy crap, I was actually in an insurance business where you get paid some small premium every year, and then you have some massive loss 1 year And that massive loss, it turns out your underwriting wasn't good because you lose more than the sum of all of the premium you collected over that period of time. And, unfortunately, a lot of investing looks like this, which is you have small returns for a long period of time and then some massive loss and and the whole business makes you look like, you know, along the way, a genius, but the reality is over any any long cycle most folks end up kind of in a bad position.
And and they end up -- You
know, the the ICC, by the way, has has solved this for mutual funds, right, and ETFs? You know, there's there's very strict there's very strict standard reporting, and I do think that as you know, for example, like, if you go to the big banks, Sorry. Sax to interrupt. I just wanna finish the
last thought. If you go to
the big banks and you have if you're an individual, like a doctor or a dentist or somebody and then and they will aggregate and pool capital and put it into these funds on your behalf as an example. So, you know, it looks like JPMorgan or Goldman Sachs is a you know, 50 or a $100,000,000 LP in one of these big funds, but in fact, it's just the sum of a bunch of folks on their platform. It stands to reason that if the SEC cannot actually mandate standardized reporting for private investing, it would actually be a really good thing because All of these games will and probably currently are, as far as I've seen in these presentations, tricking a lot of folks to put their hard earned money into things that actually will not ever make money. And it's because if you selectively cherry pick how you present this data, you you can tell a partial truth. So, you know, I would really I would love I'm happy to be compared to to any organization, but every time I hear somebody chirping about how good they are, My only comment is I just wanna see your table in the same format as my table, and we can compare it because it allows me to really understand.
Yeah. Liquid returns. by the way, the point I made earlier about when markets are generally good, hedge fund, public market investors generally can look like they're doing well by having a good marginal return above the benchmark every year, and then 1 year have a big drawdown, and suddenly they realize that their underwriting wasn't that good, The same can be true in in private investing in the opposite way in the sense that you'll put in small checks, small checks, and lose money and lose money and lose money and then have one big bang and you get a 100 expert turn and you look like a genius because your whole portfolio looks good. But you fast forward and you keep doing that for another 10 years, all those small checks may not even add up to the banker. And that's the flip reality that you realize.
And by the way, I think that's a good analogy for the difference between public and private investing. You have similar cash flow economics where you can have small returns and then a big loss in public, and you can have small losses and then a big return in private. And the timing of when you present your data can make anyone look good if you catch a good hit at the right time or you don't have a bad hit at the wrong time. And then the framing over a long enough period of time I think really becomes the key measure. And the the reality is most people don't make it long enough in their career to actually to actually present true results in in in how they really do underwrite.
And by the way, to the extent anybody's listening is able to invest in these private funds. I think Jason mentioned this superficially, so let me just dig into it because I think it's really, really thoughtful what he said, which few should understand. If you have the option to invest in a private fund, you have to understand that that private fund has 2 huge negative things working against it relative to investing in the s and p 500. So you could put your money into a Vanguard ETF Or if you could put your money into a private fund, you need to realize 2 things. Number 1 is it is illiquid not just for 10 years, but it could be illiquid for 12 or 14 or in you know, Friedberg case 16 years.
So you need to get paid a premium for owning that. And then the second is depending on the business model, you may have very high failure rates, which means that you need to really hit these outsized Grand Slam home runs. And if you don't, then you're going to be worse off than if you invested in the s and p 500. So that deserves a premium. And so Jason's right, which is the s and p is between
7 8%
over long periods of time, predictable compounding. that's you have to add another 7 to 8 percent for this illiquidity premium and another 7 to 8 percent for the business model, viability of, for example, being adventure. When you add those 3 things together, you do need to get paid basically in the low to mid twenties returns to be justified. Otherwise, you are much better off just owning the s and p 5 much, much, much better off.
Zach, do you what do you look for when you're l p ing? And now that you have many large phones, What do you think LPs are looking for now? What do you advise them to stay focused on?
The the number one metric that matters is EPI, which is the ratio of distributions to paid in capital. And it's basically money in versus money out. Right? At the end of the day, that's all that matters, is how much money did you put in the fund, how much money did you get out. The issue is that, to ChipMOS Point, these are 10 to
12
year funds, and it takes a long time to get distributions. So all the other metrics are basically triangulations or approximations of what you think the fund's gonna do until you actually get to distributions. So I would say in the long term, it's all DPI. In the short term, you look at TVPI, the total value to pay it in capital. So it's basically what's the marked up value of all the positions in the portfolio versus how much cash has gone in, And then the big question is, does the TVI TVPI turn into DPI?
PPI. Does the total value
trans that to people, if Chamath had invested in Slack, but there hadn't been an outcome. It could be on the books for a $1,000,000,000 position so that TVPI is looking really great. But until that company goes public and the shares are distributed, you you know, the LPs haven't realized it, so it's It could be ephemeral or it could go down significantly as we've seen with public markets.
Yeah. So in the last four months, we just returned our fund 1. in terms of, like, real distributions. So I think we have, like, a DPI of, like, 1.1or1.2 on that fund now. The TVPI is, like, 4 to
5.
So but it feels great just to distribute the entire fund out
to -- I literally in my first two funds, I think we we did that as well. And it it's a really great feeling And and, you know, sometimes, you know, selling 10% or 20% of a position early and getting over that hurdle and and just getting into the the 1 to 2 x. That's a pretty great feeling.
By the way, just to talk about how difficult it is to convert paper gains into real gains, Let's just say, Jason, in your example, you had a fund that had these huge paper games but haven't distributed anything as coming into this year. Okay? Here's a little interesting data about the ultimate buyer of all of these tech stocks, which is the Nasdaq. Right? People that buy stocks in the Nasdaq.
Listen to this as of yesterday. More than 45% of stocks on the Nasdaq are now down
50%.
So basically, 1 and 2. More than 22% of stocks on the Nasdaq are down
75%.
So almost 1 in 4 and more than 1 in
5.
And then more than 5% of stocks, so 1 in
20
on the Nasdaq are down
90%.
So you can use this to actually get a blended average. But what it means is that the ultimate buyers of tech stocks are taking a 60% discount to what they were able to buy even just 4 months ago.
60%
So there is no public mark that will support a private mark unless it's also discounted by at least
60%.
Now think about that when you talk about this entire panoply of companies that have been overfunded Many who are under executing and burning enormous amounts of money who now have to come back out to the market as any sophisticated buyer will have to tell them the truth, which is sorry, guys. But the data says there's a 60% discount to this mark. Are you willing to accept it or not? Otherwise, the lights are gonna go off.
Yeah. And these marks only happen, at least in the private markets and venture funds when a transaction occurs. So if somebody raised a bunch of money as we talked about in previous it's at a $1,000,000,000, you know, and they're now worth 500,000,000. Well, that's only gonna work itself out in fund documents and reports for a year or 2 later when the next transaction occurs. So the the there's a lagging effect One thing I just wanna bring up before we go into maybe GDP or the Bell Hawaiian situation, is what we talked about on this pod last year about what was gonna happen in private markets.
I've been seeing the last 2 or 3 weeks, and I I don't know, and Friedberg what you're seeing in private markets. But really acutely, people who are going out and skipping rounds, this, like, I'm gonna, you know, just skip my seed round and just do a series a. I don't have product market fit. I'm gonna get credit for work that hasn't been done. I'm gonna raise 10,000,000 without product market fit.
Oh my lord, has this the has the dialogue changed? I've been on many calls with founders who've met with 50 VCs and the conversations are moving to you know, how many months to breakeven? And, you know, how many customers do you have and how they increase? And let's talk about the churn. It is getting super pragmatic out there.
If you're a founder and we we said this a year ago, but it's worth stating here, This is not the moment I would try to over optimize. If you have a term sheet or money on the table, I would I would close it. Just, you know, founder to founder. What are you seeing, Saks?
Yeah. It's it's gotten a lot harder, I think, especially at the growth rounds. We actually have signed
2
growth term sheets recently, and it was much harder for us to do growth rounds last year just because you had these huge mega funds come in at crazy valuations. But now, they're kinda licking their wounds, and we're starting to see some really attractive growth opportunities. Everyone else is backed off. So it's interesting.
Yeah. It's changed quickly.
Yeah. Now one one thing to, you know, to authorize a good point about, you know, private not only are private valuations sorta sticky, but private marks are sticky. And, you know, companies only get remarked every couple of years. And so whereas the public markets get remarked every day. So it is hard to know, like, what is the proper valuation of a company that raised money last year.
Because, yes, valuation multiples have come way down, but then, also, they may have grown, and their performance is better. So the analysis that I saw Jason Lemkin do in his LP newsletter, and we're basically repeating it for our entire portfolio is to calculate what was the ARR multiple that you paid, basically evaluation divided by ARR, what was that entry multiple, and what is it today? And so we're doing that across our whole portfolio. So what you see is Sorry.
Sorry. So that's a clarification. LTM ARR or, you know, NTM ARR? Which one?
Basically, you like -- Last 12 months, next 12 months. Yeah. No. You just look at their current ARR, which is, you know, run rate rate
-- Their current
rate. -- revenue. Yeah. Exactly.
Take January. You times it by 12? Right. It's April. Yeah.
April, October. Basically. Yes. You take the current month and multiply by 12. But they have to be annual commitments.
Right? So if it's not it has to be annually recurring revenue. If they're not in if it's not an annual commitment with an expectation that's recurring, you can't count it. So for example, you don't count professional services revenue in that. in any event.
§03Segment 3
So the point is you you basically calculate what was the multiple that you paid at you know, entry in the company, and what is it today as a function of the current valuation? And what we see is, yeah, there's a lot of companies that we got into I don't know, 2 years ago at evaluation multiple that you couldn't defend today, 60 times, eighty times, a hundred times. But The multiple today is more like
10
or 20 times because it's actually grown really fast. So you need to look at both sides of the equation. And that's the analysis we're running for every company in our portfolio. And then, you know, LPs can decide how to how to market.
I mean, the the most important thing is what's the next investor? If they need more capital, gonna mark it at.
Well, the question is, are you growing faster than valuation multiples are falling?
Correct. And then can you that means you could have a down round, a neutral round, or possibly an up round, but it doesn't So are you starting to see people just or people discussing on the board level or in your firm? Hey. Maybe we take a a sideways round neutral round, we just go to last year's price and top off another 10,000,000. Are you seeing that?
I've still told some of the boards I'm on. Just keep fundraising. Just keep the round open. off if there's money available because, you know, especially if you raised around 8 months ago, 6 months ago, those prices, like, if people are still willing to invest in those terms, that's a good deal.
I literally had this conversation with the founder this week where they had raised that in a great valuation. and they turned money away because they were like -- Yeah.
That was a mistake. That was
a mistake. -- so growing. So -- Yeah.
--
why would we take the money now if our valuation is gonna you know, double in 9 months. And now it looks like, yeah, maybe, you know, that extra 1 to $5,000,000 would have been good to lock up. Okay. So adding to these headwinds, I think we we've been talking about the possibility of a recession for those new to the into the concept diverse session if you're under the age of thirty and haven't really lived through one as an adult, it's two quarters the the official definition, two quarters of negative growth of the GDP. Well, it turns out US GDP fell 1.4% in q
1.
And q 4, we had a 6.9% growth rate q one was the weakest since the spring of 2020 when COVID hit.
Nick cue the clip where Saxon and I basically said this may happen. in January of this year.
So the concern is that, you know, with the losses we're seeing and, I mean, every day, it just keeps, like, you've seen more red. that this could turn into a recession. You know, popping of bubbles is usually followed by by a recessions or So I think, you know, the fortunes of the economy could turn really quickly here and
--
That is that is the marginal risk. The marginal risk is actually for recession. David saying something really important, the risk, in my opinion, is not of runaway inflation anymore The Fed is now in this really delicate situation where China cut rates last week. We have an f o m c meeting, the open markets committee that sets rates on Wednesday, I think, of this coming week. What is he supposed to do?
The risk is to a recession because if we overcorrect Yes. And the leading indicators all around the world tell us that their economies are weak then inflation may have actually been much more transitory than we thought. And right now, we have to decide because if we overcorrect, we're gonna plunge the United States economy into a recession.
There's a lot of data here and and obviously this is when this data is always in the review mirror. So, obviously, we're talking about q 1. It takes a while to collect this data, and there's a lot of different factors going at the same time, obviously, COVID and, obviously, supply chains. Consumer spending rose at a 2.7% annual rate in q 1, a slight acceleration from q 4. There was also a 9.2% rise in business spending.
So we have a lot of spending going on. Who knows if that is Spending that actually occurred in the previous quarters. And because of supply chains, like people's cars are being delivered or people's machines and manufacturing equipment, is
being delivered now. We had negative GDP in q 1 for a whole host of reasons that could effectively be summarized by the fact that we are still trying to restart an economy at the tail end of a pandemic, and we're doing it fits and starts. And so we have these small bursts of incredible GDP, which we had last year, and then contractions in the economy. Right. The thing that's always been true about the United States is that we are a consumer driven economic engine.
which means that as long as people feel confident and they're buying things, the economy tends to do well and we tend to move forward as a society. When consumer confidence ebbs and people contract their spending, we are in a world of hurt. The last couple of years, we've had a lot of consumer savings. Right? We've had a lot of money that's been pent up in the system, whether it's stimulus checks or you know, loan forgiveness or all of this stuff has allowed people to feel much richer.
And as a result they started to spend in dribs and drabs. The problem now is that because prices are so high, all of those savings have largely been depleted. I just sent you guys a a text in the group chat of what consumer spending looks like in consumer savings rather. And it tells a really, really scary story, which is that the savings boom is largely over. Personal savings rate fell to 6.2% in March, the lowest since
20 18.
And so what does that mean? Well, it means that the setup is there for us to sort of really contract what we are able to spend as a society. So I think now the odds even push further in this direction that we could have more quarters of negative GDP And all of a sudden, we're back to what we talked about before, which is a 2019 like scenario, where the government or the fed specifically Races forward to tackle inflation. And in 2018 2019, it turned out to be a head fake. And by the way, In 2019, the stock market ended up more than 30%, up 32% or something like that.
Crazy numbers. Here and by the way, back then in 2019, China turned over. It looked like it was gonna be a fast moving economic recovery for China and instead they they sort of slowed down. We have the same thing here. We have a quarter of negative GDP.
We have China in lockdowns. We have every company that's that's in the manufacturing supply chain ecosystem telling the world that we don't really know what this is gonna look like until today. Archie said there's gonna be shortages in chips through
2024.
So I think I think it it it could be a very difficult path ahead for the fed. How do you raise rates
400
basis points into into a slowing economy. You could raise basis points 75, you know, 75 bps, maybe a 100 bps, but it gives them very little freedom to operate without really taking the economy.
There's also another point to highlight here, which is in some of this data that was released, there was a strong indication that there are real issues right now with inventories. I I don't know if you guys have tried to buy an appliance or a car lately or a piece of furniture, but, like --
I I tried in the q Four to buy a car, and it was absurd.
I mean, right now, there's, like, 1 year delays to get a freaking couch. I mean, like, everything in this in the global supply chain somewhat related to the kind of big inflationary pressure that hit us at the end of last year and then everyone placed orders. All the factories kind of had to produce a lot, they all couldn't keep up. Through to what's going on in China right now, where there's lockdowns and factories are shut down, I have several businesses in the hardware space that are actively searching and frantically trying to find components, suppliers, specific parts, even basic raw materials like aluminum are very hard to get a hold of. And so there's also a very challenging inventory and supply chain problem.
When that happens, I can't actually wire money and buy aluminum because I'm waiting for aluminum to show up. I can't wire and buy the the the microchips I want. I can't wire money to my car dealership and buy money. So that doesn't get credited on the GDP counter because those sales didn't close that quarter. And as we saw with Amazon recently and others, and Apple just said that they're expecting, I think, close to a $10,000,000,000 hit this quarter because of supply chain issues.
A lot of folks want to spend. The spending interest is there. The capital flows are there. It's just that the supply chain is clogged up and we're so dependent on getting atoms and molecules moved around and they're all kind of held up in different places. that folks simply can't get their purchases in, and so the revenue triggers don't get hit.
And so the numbers don't look good from a growth perspective. But it doesn't necessarily mean that the demand isn't there. This is a significant inventory problem and supply chain problem. That's that's driving a lot of this this adversity right now in the market, it seems.
And interestingly, you
-- And, by the way, that doesn't that doesn't mean sorry. That doesn't mean that we're not gonna have a recession. Because, you know, when I when I'm not able to spend money on Apple, Apple's spending less on their suppliers, and they're spending less on their suppliers. So there is a a trickling effect of capital flows and and the recessionary effect may be hit. But, you know, there is capital and there is demand for consumption.
It's just that that we're really clogged up right now.
Well, and and the consumer confidence index has been on a bit of a roller coaster. We were at a 130 before the pandemic. for the year of the pandemic, we were down in the high eighties,
87, 88, 89.
We rocketed back up. you know, in 2021, people started to feel like, oh, we've got these vaccines. Things are gonna go back to normal. Rock it back up to a
128
And it's been a slow tick down to where we're now at a 107. And so I think consumers don't know what to think. They don't know to if you know, inflation is transitory. They don't know if gas is gonna be
$7
or $4. They don't know if they should spend a big spend on a big vacation or not. And so this, I think, in terms of people's planning, I I don't know if people can plan how their own personal budgets. Right? And I think that's on the confidence thing to Chemut's point.
We need to have a predictable economy You know? And it it can't be this schizophrenic to use a term. Saks, what what do you what do you think about what we're seeing here? in terms of we're we're obviously either in a recession or dip you know, dancing around it. We're basically you know, on the edge of the cliff right now.
I think it's probably the most accurate.
I tweeted in February. Hey. Anyone noticed that we've just entered a recession, and I got dumb on by all the professional economists and, you know, all these people. But -- The experts. The experts.
The experts. Exactly. Correct. And now it's like the data just came out, negative 1.5 percent economic growth in q 1. So what I wrote at the time was exactly right.
And, you know, I don't know how the thread the Fed threads this needle. I mean, we've got a slowing economy with negative GDP growth. You've got inflation is still rampant. It's not as I don't think it's gonna be as high as last year just because we're lapping a much bigger number from last year. So on a year over year basis, the comps are are, you know, you start at a higher price level.
But inflation's still there. So, you know, I don't know what you do about that. It's it's a really tough situation. And When you have this kind of wealth destruction in the stock market, I mean, you know, and we there was a good tweet that Matthew shared, but she put it up on the screen. I mean, so much like wealth has been destroyed.
You don't necessarily see it if you just look at the big cap indices, but look at all the engines of you serve growth and prosperity, the small caps, the recent IPOs, the gross stocks, they've been absolutely hammered. It really hasn't been this bad since the dot com crash of
2000,
like and and not just the, like, April period, but, like, all the way in October where it kept going. And then the 2008 real yeah. The 2008 real estate crash. So we're already like, top 3 worst situations for gross stocks in the last 20 years. And when you have that kind of, like, wealth to it eventually trickles down into the economy because people just feel, you know, companies start cutting budgets.
People have less money. And this people the spending goes down.
That dynamic that that we're referring to in this tweet in that image is called dispersion, which means, you know, people may be may be confused when you hear why are all these stocks down so much, but the the indices are not down as much. And it's exactly for the reason that David just said, which is that underneath the surface, the mega cap techs consume so much of the market cap of these indices. So, you know, the Googles, the Microsofts, the Apples, and the Teslas. Those four just clog up an enormous percentage. I think it's approaching 40% of these of these indices.
And so underneath the surface, you have dispersion, which means you have these tale of 2 kinds of stocks. You have these 4 big mega caps, and then you have everybody else. And the mega caps are generating so much cash that they're just basically keeping the market afloat. So at this point, maybe there's a small silver lining and that silver lining is that to be bearish right now is effectively not being bearish these growth stocks because as we said, they've been just decimated. At this point, to be bearish the indices means very specifically to be bearish those 4 names and only those 4 names.
And so that may actually mean that the market has effectively crashed already.
Yeah. By by the way, I'm not necessarily bearish on gross from here because like you said, they've already been beat up so badly. The stock market's usually a leading indicator. What I'm a what I'm a a bearish about is just the state of the economy because The stock market's traded down it trades down on expectations. So it was already trading down months ahead of the slowdown in the real economy.
§04Segment 4
So now
-- --
new in December. The market new in November. The market recession was coming.
--
like around November 6th last year. And -- They
knew it was coming in.
Yeah.
So -- -- knew when we talked about the sales that Bezos and Musk did the you know, when we sold when we sold equities, we were saying. Like, it's like you can't keep all of your money on the table all the time unless you have the the duration of wherewithal, meaning you're just not time bounded. and you can just be there forever. And not everybody's in that position.
An endowment could be in that position, but individuals with
--
No. An endowment is not because they have to create distributions of Right?
They have to say -- -- talking about the mega endowments where they, you know, 4 -- Sure.
--
you know, you know, Ford or or Harvard may not
need to do this, but,
yeah, smaller ones might actually be operating You know? Memorial Sloan Kettering might actually be operating their budget from it.
Yeah. But just to go back to David's point, like, it's a really difficult spot. Like, what is the supposed to do. So they're probably gonna tighten 50 basis points in May. That's relatively well expected.
We'll be we'll be able to digest that reasonably well But what did they say to David's point? You know, if they all of a sudden go on a crazy program of quantitative tightening. Right? And what is that again? That's when you know, we were spend they were spending they were printing, you know -- Money.
-- 1,000,000,000
and 1,000,000,000 of dollars going into the market, buying securities and giving people the money. Right? That's called quantitative easing. Now we're doing the opposite, right, where they're selling and they want the money back. Now the problem is what that does is that removes liquidity from the market.
And when you remove liquidity from a market, you actually make it a little bit more fragile, a little bit more precarious, a little bit more price sensitive. And so it puts us in a very tough situation. when the economy is slowing, when these guys may be raising rates, and then at the same time removing money from the system It may be a lot for all of us to handle, and so I think that they're under a really difficult
--
Well -- set of decisions.
there is a business cycle and, you know, there are always processions periodically every 7 to 10 years. But they have really magnified this because You had the Fed for years maintain interest rates really too low and doing quantitative easing during a boom And then the federal government was printing 1,000,000,000 and
1,000,000,000
of dollars, and they didn't stop. It was one thing to do it during that sort of COVID recession. But then last year, they printed that last 2,000,000,000,000, and that's what set off this wave of inflation. So, you know, when I was, like, in school learning about economics and they would tell us that all these government programs and actions are like, automatic stabilizers or what have you, like, the government helps balance out the business cycle? No.
The government, like, magnifies the business cycle. They've made this so much worse.
Well, they're putting their hand on the steering wheel. Right? because, like, let the economy drive. Let the free market do this. And if you start you know, you might over sear into
Federal government is great at setting incentives, right, in creating, like, tax credit programs and incentives for private enterprise to invest money. But when they act as a direct market participant and start to actually direct capital flows and make decisions about how the capital market should works, it never ends well. because they this is not what they're good at.
Well, I think there's also another I mean, just to counter that, there's there's also this other issue of not just incentives, but when they create a free capital that then allows a market to find a way to take advantage of that free capital. And that's effectively what we've seen happen with Medicare, Medicaid as well as with the student loan program. And, you know, I I don't know if we're gonna get to the student loan program today, But I think, you know, to your point, Shamoff, one of the things that's happened with the cost of education in this country is that the federal program which was, you know and I I took a bunch of notes here to talk about this today, but the federal government began guaranteeing student loans in 1965, it's called the Federal Family Education Loan Program. And that program made capital available for students to borrow to spend on universities or or whatever education, they wanna go go get of their own choice. and the idea being that that will give them the ability to go make more income and and extend their careers and educate the workforce.
And the problem is that when that capital was made available, A lot of private university started to emerge, and private for profit colleges started to emerge. And in the years since that that program was introduced, I just wanna give you guys some crazy statistics. So in 9 the 196970 era, the cost for a public 4 year college was 1200 bucks a year. That's room board tuition and fees. and in 2020 that cost arose to $21,000.
And here's the the the other crazy stat. For private for your college in 1970, 25 100 a year, 2019, 2020, $46,000 a year. And so that capital basically allowed these for profit organizations or these organizations that trying to grow their endowments, which are effectively like for profits. to charge any price they wanted and the consumer, the student, would be able to get free capital to fund that education because it was available to them for free from the federal government. And so the federal government created a bubble in education cost and that bubble and education cost has now overburdened 15% of American adults with student loans, that many of which would they would never be able to pay back And now we're in this really awkward situation of saying, hey.
Maybe we should forgive those loans because it's unfair that people are burdened by this. And and doing so, obviously, doesn't solve the fundamental problem, which is that making those loans available in the first place creates an inflationary bubble effect in the end asset and the end asset in this case is education, but we've seen the same thing with housing, and we've seen the same thing with pharmaceutical drugs and medical care and other services. So any place where the federal government steps in and says, I will provide a backstop. I will provide free capital to support and create a quote unquote incentive for this market to accelerate, you end up with these inflationary bubble -- You're
gonna have people game the system. Right? You get whatever University of Phoenix types and and you even the large -- AJ Calcutta is raising tuition to observe things, and people take these loans, Chamath Before their frontal lobes are even fully developed, and they have long term understanding of the ramifications of this. So where do you stand on this, Jamathia?
So there's a there's an interesting article in the Atlantic about who really wins when you forgive student loan debt, and I and I just pulled out some facts. So I'm just gonna look down here and read them just so I get It said in the article, 13% of the US population carries federal student loan debt. Grad students account for 37 percent of that federal student loan dollars. Currently, it's 1,600,000,000,000 of totals total student debt. versus about 10,000,000,000,000 of mortgage debt.
So the average debt has gone from about 25 k in 2012 to 37 k in 2022. So you know, almost a 50% increase in a decade. The majority of student debt is held by white borrowers. Only 23% of black Americans aged 24 or greater have a college degree in 2019. So the majority of the black population would not be directly benefited by student loan forgiveness.
In 2020, the median weekly earnings for someone without a high school diploma was
$619.
For those with some college but no degree, That number was
$877.
For those with a bachelor's degree, it was
$1305.
and that number continues to grow for masters in professional degrees and and PhDs. Interestingly, the last two points, the Gallup organization who who ran a poll is unable, quote, to report the percentage of Americans who have mentioned student debt or student debt cancellation because it hasn't garnered enough mentions to do so. In 2022, according to the article, across 4 Gallup polls, quote, just one respondent, mention student debt has the most important problem facing the nation, unquote. And then last thing is here is that
43%
of the 2020 Biden electorate graduated from a 4 year college or university versus 36% of Democrats in 2012. So, you know, one of the takeaways is that this may be an issue that affects a certain percentage of the dems who went to college, but it may not represent a plurality of all Democrats, and it doesn't represent you know, a majority of all -- They
sure are vocal, though, to your point, I think.
Yeah. I mean, look, the the this is I I think that there are 2 motivations, political motivations for doing this now. They're they're pretty obvious. And then I just wanna say three things on on kind of the concern about this and why I feel very strongly that if we don't fix the underlying system, you cannot forgive student loans. You have to fix the system before forgivings.
Do you know why? Fix
it first.
What's the number one fix, Freedman? Well, so so let me just say
the 2 motivations. The 2 motivations, number 1, this isn't stimulus. So this morning, the Biden administration said, that they were thinking about taking executive action to make the first $10,000 of student loans forgiven. So if you do the math across 43,000,000 people, that's a roughly half $1,000,000,000,000 forgiveness. What happens?
That half $1,000,000,000,000, much like we saw last year becomes a stimulus payment. It is money that people now have that they didn't have before. It is capital that they or freedom from debt that they didn't have before, and it will stimulate the economy. So there is a very important economic incentive here to do this, which is if we do it, it will be stimulating to the economy and people will spend more, and the economy will grow.
By the way, that's a that's a 2 a half percent boost to GDP.
Right? So half a $1,000,000,000,000 of free money just flushes into the system. The second thing is that it will help in the midterms is their point of view. Right? So they've obviously done the they've done the polling here.
Right? And and it's like, hey. When I was in junior high, the kid that ran for class president was like, I'm gonna make everything in a vending machine free. Guess what? That kid got voted in.
So, you know, the idea that you're just gonna give everyone free, give your your loans back to you for free. Everyone's like, my gosh. This is the best thing ever. Elizabeth Warren, you're a genius. you know, Bernie Sanders, you're a genius, Joe Biden, you're a genius, let's say yes.
And so they believe through polling that this is gonna help help them in the midterms. But the challenge is if we don't solve the problem, if there's no standard of value of an education, if there's no standard around whether or not a specific accredited university increases your income and earning potential as an individual or increases the opportunity for you as an individual. You are wasting money. You are giving federal dollars to private companies who are profiteering from that, and the individuals are not gonna benefit from it. And I think that that we're seeing this sorry.
And and we're seeing this structurally continue in a lot of other places where the federal government doesn't hold itself accountable to the standards of how their stimulus is meant to benefit the individuals that it is being funded for. The individuals are not getting a good education in many cases, They're not earning more by getting this education. Shamoff's data speaks to the average, but a large percentage of people go to crappy universities that don't improve their earnings potential. And then the federal government says, here's this free money. That private university just made a bunch of money, and no one's better off.
And guess who's end up paying for it? taxpayers are gonna end up paying that private company a bunch of money because we're gonna forgive all the loans. And so we have to have a standard around whether or not a dollar should be loaned to pay for education at a specific university by having that university prove that it improves the potential And by the way, if you stop the federal student loan program today, fewer people would go to college. And if fewer people went to college, guess what would happen? Colleges would drop their tuition.
The reason they're able
to raise -- -- demand. Yeah.
Supply and demand. And the reason they're able to raise their tuition is because there's so much demand because there's free money. And so if we actually saw the federal loan program cut back, or put these standards in place, the cost of tuition would actually decline and profiteering would decline, people would get a better education and the taxpayers would be better off end of diatribe. Sorry.
No. No. It's I think it's completely legitimate. Sachs, we talked on a previous episode about how people make things like immigration, you know, such a charged philosophical debate When there are point based systems being used in Canada, Australia, and other places that make it much more logical, do you think the the solution here is to Friedberg point of just and I'm interpreting Friedberg point as, what is the value of this degree? Nursing?
Great. Nurses can take out a 100% of their loans because we know this in nursing shortage. you know, philosophy, graduate students maybe can't take out more than $5000 in debt because we don't -- Yeah. see a bunch of job openings for that.
Getting a history degree at Trump University is a lot different than getting a nursing degree.
So, Saks, what's the solution here? And then we'll, like, give you your your swing at that in terms of buying votes.
Yeah. I mean -- Let's go
solution first before we go partisan.
Look. I think that alone only makes sense when it generates ROI. Right? It makes you you're gonna generate more income on the other side of that loan to make that loan worthwhile. And the problem here in too many cases is these kids go to these schools.
They spent 5 years there. They get a degree in some woke nonsense. And, of course, it doesn't help their earnings power. I mean, that's a bit that's a fundamental issue here is that that these degrees are worthless. Right?
I mean, if you go if you go to if you go to college to get you know, to become a doctor or maybe a computer programmer or something where the skills have value, then, of course, you can pay back the loan because you get a a gainful job. But You know, otherwise, if you just major in fine arts at Harvard or something like that, I mean, you you basically graduate. You get a job at what? The New York Times is your dream. You can't pay back your loan, you're saddled with this enormous debt, and think about the cultural impact that has.
You you have this young generation who believes in socialism, and I think that's a big part of the reason why is they have no capital and they have no ability to accumulate capital -- 100%. -- because they're so subtle with debt.
§05Segment 5
So to interpret what you said, Sax, hard to believe in capitalism if you got no capital.
Right. If you start if you start the race at negative $250,000 in debt to get a degree that was basically worthless for you. Yeah. The system is collecting your mind. Yeah.
Maybe what we do is we reform the the debt. I I had actually be okay with forgiving the debt in some instances. If you got a reform of the system. In other words -- Right.
--
if we stop funding these worthless degrees, but if you're basically gonna acknowledge that, hey. We need debt forgiveness because these degrees are worthless, Why would you keep funding those degrees? So, you know, we need to have a, like, a more honest, comprehensive solution here. The other thing we should do actually is One really crazy part of bankruptcy law is that student debt is one of the only types of debt that's not dischargeable in bankruptcy. I don't know if you guys know that.
But -- Right. --
under George W Bush's presidency -- Explain
it to everybody.
Yeah. Yeah. Basically, look. When when if if you ever get to the point where you have too much debt and you can never pay it back, you declare bankruptcy, and then this the court starts you over from 0. So you can at least start building some wealth.
Right?
But
you lose credit but you lose credit.
Yeah. Exactly. No one's gonna wanna give you credit after that, but at least you're not so deep in the hole you can never recover. So that's the point of of a personal bankruptcy. But the crazy thing is that in bankruptcy, you cannot get your college debt.
Your student debt canceled. You can get your credit card debt canceled. You can get other types of debt canceled. You can't get your student loans canceled. It's crazy.
So that's one thing they should fix immediately is make these debts just
charge for -- -- private market, Saks. You wouldn't need to do that. Right? The reason that's the case is because it's federal dollars that are funding those loans. But if it was private market, dollars, people actually if banks and and lenders took a loss when people couldn't pay back the loans, then the market would work itself out.
problem is it's the federal government stepping in and trying to be a market maker. Right. And it creates this this totally crazy incentive.
Right. It creates it creates double distortions. On the one hand, like you said, it it basically means that because government's money is funding everything, the tuition goes up because college just take advantage of it. But then also nobody's really making a smart ROI decision about whether a smart underwriting decision about whether this loan is worth making, whether it actually stands a reasonable shot at being paid back.
There is such an easy free market solution here. It's called an ISA. It stands for income sharing agreement. This is where you give a loan to somebody and you get a percentage of their income over a period of time capped at a certain multiple, say 2x. And what this does is it aligns the person giving the loan with the job that's expected to come from the education.
You already have that. You already have that.
It's called taxes. Yeah. But here's the problem. Nobody's watching the store. So nobody's looking at it saying, I will give an ISA at this percentage return for nursing.
Nursing.
I gotta pay 50 percent of my income every year to the federal go to the government. Like, I pay talking.
The the thing we have to remember is, like, if the federal government tries to do this, it really is just about buying votes going into a midterm election, and here's why. If you arbitrarily give a bailout of one sliver of the population. Unless that sliver is really, really large, which we know it is not, It's going to really anger everybody else. Think of all the people that are tradespeople, working class people who don't have a college degree.
Yeah.
What are they gonna think? What about all the people that just finished paying off their debt? What are they gonna think? It's going to upset so many people, and, ultimately, what this is is a bunch of coastal elites who are miscast in jobs and saddled with debt is pushing pro for a program that isn't a broad based mechanism to create a quality at all. It's just a gate out of jail free card for a small people several small group of people who unfortunately were taking advantage of, and this is the thing that we're not losing sight we're we're losing sight of.
You can only pay back a loan if you're making more money than you owe. And the fact that this exists shows that these loans were really poorly constructed and they were given in instances where they should not have been. In the private markets, we have seen that happen, but we go through a cleansing mechanism to sort it out. Right? We've gone through
--
That's literally what happened during the 2008 real estate bubble. People gave mortgages to people who could not
--
Exactly.
--
pay them back.
If I as a lender, think that you're not gonna be able to pay back the loan? I don't give you the loan. That's the simple mechanism that exists in free markets. And part of the issue is a lot of people got loans thinking, without doing the calculation, will I ever be able to pay this back? and they took the loan to get an education.
The other the other is
a binary concept that I will just make money. But let me ask one other question of you guys. At what age And at what level do you think individuals should take responsibility for the decisions that they're making when they take on personal debt? Because we see ourselves getting in the cycle where consumers are given debt, they don't think about the consequences of that debt down the road or do the analysis themselves, and maybe they're not quit to. And they'll take out a loan on a car, on a house, on
a -- But the problem is
-- And on a loan -- -- on on on education.
But but here's the thing. Like, education is a very dangerous thing because we put so much societal credit and external signaling to it. And we give everyone effectively the same quantum of risk, but that's not true for a credit card nor is it true for a car loan. So the private markets are efficient in that when you first try to get a credit card -- Sure.
--
you don't get an MX Inturion or platinum card. You're given a Chase Sapphire card with a $500 limit And you earn the right to borrow more. Same if you applied for a car loan, the same with the mortgage it's based on a down payment. So there's differential risk pricing. And if you don't have differential risk pricing, you're getting a lot of people.
How would you advertise education?
The market would figure it out.
The market would because you would differentiate price the risk. As as you -- You
literally brainstorm it right now. Like, what are your grades?
Well, no. It -- What courses did you take? Whatever whatever it is, skills. We're not gonna get it right. The market will get it right.
but the market would figure it out. The problem is and and and, sorry, the incentive was and this is a really important point. You know? If you guys read Ray Dahlio's book, which we've talked about a number of times, he's identified and highlighted that a growing economy and a successful country improves by improving education and having more people get higher education, generally speaking. And so the initial incentive, the initial intention behind the Federal Student Loan Program was a good one, which was to give people access to capital that the private markets were not providing at the time so that they could go out and get a higher education.
We could improve the education of our workforce, and we could grow our economy. Nowadays, the question that we always forget remember, we always get one step away and then two steps away and five steps away and we miss the point. We're in that moment now where the question really is, is the federal student loan program doing more harm than good? Well, that's actually are we actually creating value from our higher education system in this country or not? No.
And and and no. And most importantly, is the private market there because you look at the total debt outstanding, $1,700,000,000,000. there would be a private debt market. Yeah.
Freeberg don't sell beyond the close. The answer is no. We have a massive employment gap. Okay? The data tells you in every single which way possible that we are not educating our young people to take the jobs that are needed for a high growth functionally moving economy.
We know that. So we are miseducating these folks, and then we are giving them access to enormous amounts of debt that they have no reasonable chance to pay back. And I think that that should be fixed by fixing the incentives of the universities. You are right. Universities today Our for profit asset management businesses wrapped by this philanthropic do good or nonsense that they try to tell people to get you to go there and pay $50,000 a year in tuition.
It's a joke. And they're telling people to think that these degrees are actually going to make them successful humans.
They come out miseducated and undereducated and incapable of servicing the economy's needs. Separately, The other thing if you take a step back and take student loan off the table for a second and just say, any consumer handout that touches less than, you know, 40 or 50 percent of the economy or of the population of a country is very precarious. So student student debt, in this case, 15% of the US population, so a lot of people. But it also means that there's 85% who don't benefit. What will those 85% of the people say when they have to foot the bill for the 5th 1st 15%.
And then what do you think happens with other kinds of debt? What happens when the oil lobby says, forgive our debt because we're in a national energy crisis? What what what will all the climate first? no accountability. Well, it creates on the first slope.
And and and the my last point on this is to the extent that we actually want to forgive student debt, I'm fine if that's a law of the land, that's great. It should go to the floor and it should to be debated in congress and it's a law that should be passed it should not be by executive edict trying to back in to buying votes in a midterm election. It's gross. Saks -- Well,
by the way, just on the politics of that, I think this could potentially hurt them because, to your point, this is basically a bailout of the woke professional class. It's the it's the underemployed graduates of these universities who, again, are members of the professional class. They measured in things that didn't increase their earnings potential Meanwhile, the majority of the country is working class, something like 2 thirds of the country is still working class meaning non college educated They're gonna have to pay pay for this bailout in one way or another either through higher taxes or more deficit spending or more debt. the burden of this bailouts gonna fall on them, and why should they have to pay to bail
out in the first place? Like, somebody working in retail is paying for somebody's graduate school degree in creative writing or something is completely profoundly unfair. To the answer to Freeburg's question, we actually know when executive function fully matures in adults, it's twenty five years old. And that's when you can actually make long term thinking. So there is an argument that people should not be allowed to take these loans that are not even that you can't get out of or there should be some cap on the amount of loans you can take because people at the age of seventeen eighteen nineteen twenty are absolutely not able to make these decisions.
There are other programs as well that work. So in Canada, I went to a school called the University of Waterloo And -- Fantastic engineering school. Yeah. The the reason I went there and I did elect engineering there is that they had a program where after the 1st year so the 1st year looks like every other year at every other school. Okay?
But You're you're there for, you know, 2 semesters from September to May. But after that, you start working and you alternate 4 months of work with 4 months of school, and you get paid for that work. And what it allowed me to do was graduate with meaningfully less debt but it also allowed me to graduate with a commercial skill set. And I was able to get a job. And in that moment actually, I was working at a bank, And I got profoundly lucky, which is I I worked for an individual, and I was trading interest rate derivatives And I was learning to trade technology stocks on the side, and this guy Mike Fisher, incredible human being, And I made in 1 year, like,
25
or $30,000 for him.
Yeah. I'm young. Zipzip.
He wrote me a check, and he said here, you have $25,000 a student go pay it off. Right now, I'll, like, cash out this whole book. I I graduated with about 28,000 of debt.
I had about 8000, I think.
I had a somewhere between 10,151,010,000. And then I got my first bonus check after my first year of work after undergrad. and I paid off all my debt, and it felt incredible. Incredible. It was amazing.
When I paid off my debt, I've never been in debt since.
I walked downstairs to the bank, and I pay I gave them the check, and I endorsed it. And I said, here's my student loan number. And I was like, oh my god. I was free for the it's like it was an enormous sense of relief. For
me, it was credit card debt. I had accumulated all the credit card because I went to Cal. It was, like, $4 a year to go to college. But but
if I -- -- cheaper back then.
If I didn't go to Waterloo, I would have had double the debt because I wouldn't have had work. But then also, like I think about all these scenarios, I wouldn't have had 2 years of work experience. I may not have gotten the job that I did at Bank of Montreal at the time that may not have been able to give me a chance to meet Mike Fisher. Hey. All these things could have happened, so You can't rely on the luck of the butterfly effect so that you have a reasonable shot of building a good life.
Yeah. Right? So there are all these things in diversities that I think are really mismanaged today, and they go and work against what is right in society. So I'll give you another example. The the Dean of the engineering school and the president of University of Waterloo was here this week with me.
And I asked them, tell me about these global rankings And they said, you know, it's just a really difficult game. They said, if we wanted to compete to try to get high on the list, we would have to do the things that would undo all the things that made us great and unique in the first place. And I was like, you know what? I am such a huge supporter of this school. Please just continue to do what you're doing, and I'm so proud that they have the strength to just stand on their own two feet.
But every other school is running this shell game of, you know, gerrymandering all of these statistics, trying to get high on the list to trick some parent to force their kid, to go to some school, to then graduate with $200,000 of debt, to get a job that that doesn't then give give them any line of sight to paying it off, It is I don't think it's their kids' fault, but you have to reform the system. And I think the first thing you need to do is look inside these universities and hold these folks accountable.
§06Segment 6
I mean, the the these incentive systems are just crazy. speaking about
crazy, we talked
about Bill Wang and his --
That's your transition.
--
transition. Sorry. I they can't all be as elegant and smooth.
Jake, here's Jake Howell. He's looking at the agenda for today, and he sees Bill Hoang. And he's like, okay. How do I do this? How do I -- The hanger.
Okay. The hanger. Wait. Yeah. Okay.
Crazy. Crazy. The the link is just craziness. Okay. Go.
I mean -- No.
No. No. No. No. No.
Hold on. The the linkages, 1,000,000,000,000 and billions.
1,000,000,000,000. Link -- Speaking of 1,000,000,000,000. $1,000,000,000,000
mistakes -- We gotta -- -- lying, and his CFO were arrested on Wednesday in charge with. racketeering Wire fraud and conspiracy. We talked about this when it happened. His firm are Chue Ghost. I think it's our Arceagos.
Arcegos. Arcegos. Arcegos. His poorly named firm and family office. We covered this in real time back on episode 28 they famously lost $20,000,000,000 over 2 days.
When they were margin called back in March of
2021,
He worked at Tiger Management, yadayadayada. And it was at the time reported that they were trading 1,000,000,000 of dollars at over 5 x leverage. According to the SEC complaint, at its peak, the firm was managing 36,000,000,000 with a 160,000,000,000 of exposure, which is four 0.5 times leverage. But Archego, so where the Harvard's pronounced, started with only 1,500,000,000 in assets in March of 2020. So Wang flipped
1,500,000,000
in capital into a 160,000,000,000 of exposure in 12 months, essentially trading somewhere in the neighborhood of a 100 to 1 at its peak. according to this complaint, a bunch of banks have lost money because they were supporting this Credit Suisse lost 5,500,000,000. Morgan Stanley lost a billion UBS
774,000,000.
The New York Times described it as, quote, orchestrating a stock manipulation scheme that relied on them masking and concealing the enormous risk they had taken. Shamoff, you had some thoughts on this, I think.
So first, I think we should probably explain how he did this. Right? Yes. So -- That's every
that's everybody's question is how did the banks let this happen?
So explain. Well, I think first, it's what's the mechanism? So you know, there are ways in Capital Markets to take really extreme bets. This way is called what's called a total return swap. And so the basic way that this works is you have two people on on each side of a trade.
And what you basically say is let's agree on what's called the reference asset. So I'll just use an example. Let's just say it's I think discovery was one of the companies that they were trading. So discovery communications. Let's look at let's that's the reference asset, that stock.
And what I'm going to do is buy protection, and what you're going to do is sell protection. And, essentially, what happens is as the stock goes up and down, you're gonna net the difference between these two people. And when you do it that way via a derivative so what it what it forces the person to do the bank in this case, is to go out and buy the stock. Okay? So that they are hedged in case the price goes up a lot because they have to pay that difference in this case to Bill Huang.
And if the price goes down, Bill Huang has to pay that difference. back to the bank. So what happened is that he went to 3 different banks, Morgan Stanley, Goldman Sachs And Credit Suisse. And effectively what he did was he bought he he made these bets across a handful of names. but he did it with so much leverage that he ended up owning 60 or 70 percent of some of these companies.
And in March of last year, when the stock market turned over, He owed them enormous amounts of money so much so that these banks had to unwind these trades which caused further downdrafts in the stock and almost spilled over to the broader stock market. Jason, the the numbers from the SEC complaint are pretty crazy. As of March
31 2020,
they had 1,600,000,000 invested. On a gross exposure of 10,200,000,000, which that what that means is they were able to go and lever up this
1,600,000,000
to behave in the market as if they had
10,200,000,000.
By January 1 2021, so 9 months later, they had
$7,700,000,000
of invested capital, so they'd done really well. Right? they they've made 70% on this 10,000,000,000. But they levered that up again, and so they had gross exposure of
$54,000,000,000.
And then just, I think, 3 months later, by March 22nd, they had $36,000,000,000 of invested capital, meaning they had 36 $1,000,000,000 of cash. This guy had taken 1.6 and spun it up to 36,000,000,000 in between. This guy went,
like, 20 x. In a
in a year, But then he had levered that up again and he had a $160,000,000,000 of gross exposure. And then the turned, and he owed all this money. And so all these folks had to get out of it.
But -- He also alleged that he was trying to do short squeezes on the stocks to try and make them goose even more.
So there was massive manipulation because of its position size. Correct? Yes. So this is what happened. But then here's how it is allowed to happen.
So if you try to do the same thing in interest rates. In the interest rates market versus the equities market, it's not possible. Why? If I wanted to go and buy a credit default swap, effectively think of that as the same kind of thing he did, but on the debt of a company, on the debt of discovery. What I would do is I would be able to enter into that trade with a bank, but it goes into a clearing house.
And that clearing house is able to tell all the banks how much risk is building up in the system. And the reason we implemented this clearing house was to make sure coming out of the great financial crisis none of that chaos ever happened again. But we did not include the equity markets in that clearinghouse and in the laws that regulate it. And so what this is is a very shadowy great part of the of the market that is poorly regulated that has very little oversight. So what do the banks do?
The bank say to you, if you wanna put this thing on, give me a balance sheet so I understand what the risk is.
A piece of paper,
a report. And I think what what they're alleging is that these guys lied so that any individual bank, in this case, Goldman, Morgan, and Credit Suisse, had no idea because they kinda doctored these reports to each other. And that's why that's why all this risk built up in the system. It would be solved if you had a clearinghouse for equity derivatives the same way you have for interest rate derivatives.
It is crazy to think that somebody was doing this and Thought they would get away with it and had been up 20x. And the psychology of these people, the made offs of the world, I just find fascinating. Why wouldn't he if
he went back? We we we talked about how the 3 the 4 of us we talked about how the 4 of us are grinding to return 2 x of our money in 10 years.
This guy is like Yolo.
He he's 7 x or 10 x,
2
you know, $1,600,000,000. And it was not enough.
It's not enough. And people have I mean, what do you think the psychology of this is? Like -- I have no idea. That's what I'm trying to figure out, Saks. What's a psychology of somebody who tries to do this?
They're already a billionaire. They've already got their jet. They could go anywhere. They could have anything. They could buy any home.
They could go on any vacation. That's the thing I never understand about these people is, like, This has gotta be some crazy sociopathic behavior.
Jake, hell, did you always wanna get? By the way, the guy's
got I just got so business select on Southwest.
When you started your career, what did you want? The Knicks.
That's that's what I still want.
Well, when you started your you wanted Right? And then you got the house, and you wanted the the
home in Tahoe. And then you or the home, you know, the the vacation home. And then and then you want the jeff,
and then, I mean, I don't know why why this is confusing.
Well, no. But I don't want it enough to put my entire freedom at risk or to cheat. Apparently, this
dude was a Christian. I'll put that in quotes because I don't I mean,
I don't know.
Sometime like Christian Bay.
Ran ran bible study and stuff in the mornings. He lived in some modest house in Jersey, blah blah blah. But, you know, he was a bit of a freaky deke.
What does that mean?
So weird.
I mean, the guy couldn't deal
with her. By the way, the
the the dude was pinched in 2012 for insider trading and had to pay a settlement and might get back everybody's money.
You got pinched. It's crazy. And it is what it is. You know? You guys have it in your country.
I got pinched.
You got pinched. Got pinched. Got pinched. You got pinched. Yeah.
When you grew up in the streets, you know that. What happened
to this guy? got pinched.
He got pinched.
When
you grow up
in the streets?
The guy ate cheese. He didn't rat out he he ratted on his friend. No jiggle. You ran
out of
the man jiggle. He tried to steal some man jiggle.
He ratted on his friends now, the CFO got pinched too. because they they flipped him. This is super deranged. Speaking of deranged,
Transitions stop.
Where are
we going? Where are we going?
You don't get too many to do. someone needs to take all of Jay Kalff's transitions from the last couple of shows and just put them together in a row. Yeah.
Just to seek it out. -- crazy. Speaking of the rage. It's making them deranged. Yeah.
On Wednesday, the Department of
Homeland Security -- Speaking of Billions. --
announced a disinformation governance board. Disinformation governance board, according to the announcement, the board will immediately immediately begin focusing on misinformation aimed at Migrants at the US Mexican Board of the board will be led by disinformation expert Nina Jankiewicz. Jankiewicz. He has research, Russian misinformation tactics, and online harassment. This is also the woman who sings, show tunes on TikTok.
Take care. I
feel like
this information. You should
be running you should be running our disinformation board. You always have such a strong opinion. You have you have such a nose for what's BS and what's not.
Here's what's going on here. So first of all, This woman claims to be an expert in disinformation. Let's evaluate that claim. She was an active pusher of the steel dossier, which turns out is disinformation for which people are now under indictment. She also
--
There we go. -- was active in trying to censor the 100 Biden laptop story which as it now turns out was not disinformation. It was absolutely true as acknowledged by the New York Times of the Washington Post. You would think that these blemishes on her record might disqualify her from being an expert on disinformation. But, actually, in the view that people are hiring her, these are actually qualifications.
because they are not interested in the truth. They are it the reason this department is set up and what they mean by disinformation is they have hired her to push partisan political points that's what's going on here. That's what this information is. Now it used to be that if you disagreed with somebody, you would just say, listen. I disagree with you or maybe you're an idiot, whatever.
You're wrong. But now the way that these debates are set up and the way they work is they don't just say you're wrong or that's not true. They try to label you as information so you can get you censored And the point of hiring this disinformation czar is is basically to censor the dis basically, to shut down the debate. that that is basically the whole point of the subject.
--
any timey here with Elon Buck?
Of course. It's it's well, it's it's there was a great tweet about this.
I mean,
I love conspiracy sacks, by the way.
I don't
think it's conspiracy theory. It's there was a great tweet about this that that we live in a future where it's like a mash up of George Orwell and Ayn rand. because here you have, you know, Elon Musk, the heroic, loan entrepreneur trying to rescue freedom of speech. At the same time, you have this Orwellian Ministry of Truth being created by the federal government. So -- I
mean, no awareness of naming Yeah.
It's just bizarre. But but the disturbing thing about it is
--
This information governance board is such a dystopian name.
The The the thing about it, that's a little bit scary here. I know you play the video of of her doing showtunes, and it seems sort of silly. But the thing that scary is that this is under the homeland security department.
That's another weird wrinkle. Why is that there?
It's it's the most militarized department in our government. So it's really scary to put the Ministry of Truth under the Department that has all the soul
within our weapons. It's not the name of it, but It's close.
Pretty darn close. Now now why is it there? I'll tell you why. Because this was built up to. There was a
--
Truth truth. Shout out Churchill Well.
A couple of months ago is a news story that we might have covered on this pod where the homeland security department redefined disinformation to comprise they they said it represented an escalation of the terror threat level. So in other words, they basically said that discrimination was tantamount to terrorism. You remember that? Can we talk about that? This is the payoff to that.
First, they define they basically define the other side as being of the debate as being disinformation. Then they define disinformation as con as basically terrorism. Then they have the Homeland Security Department, which is supposed to be responsible for terrorism, create this ministry of truth. This is what's going on here.
It's
really weird. Just to remind everyone, there was concern in the last election. I I I'm gonna play devil's advocate if I often find myself doing here. that just just to try and explain the world, that that's the reason I often play this role, because I try and understand the world. But, you know, there was a real concern that, you know, the Russian government was using, you know, information warfare and propaganda through social media -- Approved.
-- to influence voting. and and that that is considered a security threat to the integrity of our elections. Therefore, this is a homeland security issue And there is a question mark, of course, that everyone has on how far are they gonna go once you set this precedent, when would they ever stop, in terms of, quote, unquote, policing information and policing what's true and managing internal propaganda and internal media delivered to us by the government. That's the other side of the coin. But the primary side of the coin, the initial side, the initial representation that I think folks do have concerns around is how do we keep foreign actors from creating misinformation campaigns that go viral and influence elections.
§07Segment 7
And, Saks, I don't know if you think that that's a concern we should or shouldn't have. But how would you address it if you were the president? And that was the the challenge, you know, to to, like, how do we stop that from happening?
Foreign actors interfering is certainly a concern we should have if it was actually happening on a big scale or in a meaningful way. I mean, this is basically look. This is basically a hoax. Okay? John Durham is basically out there making indictments right now proving the extent of this oaks.
It started with the whole steel dossier, which was a piece of campaign Opposition research that was manufactured by Hillary Clinton's campaign, the lawyers who basically produced it are under indictment and that's where this whole thing of Russian disinformation came from. And the only proof for that thesis is that supposedly, the Russians bought a
$100,000
of Facebook ads on Facebook. So I'm not denying that that occurred, but it was relatively minor, it was a drop in the bucket of all the activity going on around
the hospital. To be clear, that was just the ads that were bought with with, like, credit cards that said, like, FSB on it. Like but
who went to go Facebook here and you
probably you probably, you know, didn't count all the number of credit cards that were stolen. I'm pretty sure the Russians are capable of stealing John Smith's credit card and using that to buy as well.
Well, so I looked at those ads. I you've seen those ads. They were ludicrous. They weren't gonna convince anybody of anything. I mean, they had, like, Jesus and the devil armrest in each other, and the Jesus figure was basically set.
And the the you know, it was just absurd. I mean, the Jesus figure was
I went to be clear, it happened, and you've now stepped back your position on, like, it just wasn't at scale to your opinion.
I think I think look. The the scale interference in the election was committed by Big Tech. I mean, they sunsered the Hunter Biden story 2 weeks before the election, it turns out that's a completely true story that Hunter Biden has extensive business dealings in Ukraine. The country we are now -- Yes. but we are now deeply involved in a war there.
And that story, the electorate had the right to take that into account, Big Tex Center, that story. what
--
There was
a reason for that. May I respond to that? Just -- Sure.
--
to give people, like, making a very difficult decision, you have to remember Trump asked Putin on stage to hack Hillary's emails and they did. Then he asked the Ukraine to take action against the Bidens or he wouldn't give them support. He was impeached for that. So if you put yourself in the and I'm not saying Twitter made the right decision here, But there was and there was also sexual material, you know, people's nudes with which and hacked material and nudes are against the terms of service. So I think 2 things happened concurrently.
1, listen. The people working at Twitter are 98% liberal. They don't want Trump. They sort as an existential threat. And then, 2, they don't wanna link to hacked material.
Oh, really? Well, hold on a second. Hold on.
During the
whole hoodie and trucker, wear it underneath your point. No.
I have to finish my point. The 3rd point, and then I'll let you go, is that in it in addition to all that, Hunter Biden is completely a grifter. Go.
Okay. I agree with you on that one. Yeah. So look, during the whole Canadian trucker thing, remember when all the people who contributed to those Canadian truckers. They got docs.
I mean, basically, there was a hacker who leaked all the people who had donated, and social networks were happy to print all that information. So this idea that they censor. Act information is nonsense. The libs of TikTok account just got docked by Taylor Wrens, Look, whether you think that was a good idea or not, the point is these principles are invoked very selectively when there's a story they wanna suppress. And the New York Times and the Washington Post have both not come out and said that the laptop was real.
It's been authenticated. The story was real. And this whole idea that it was disinformation That was just invented. I mean, it was just invented.
Well, no. Hat. It wasn't that it was disenrich. It was that it was potentially hacked, and you and Trump says he missed it. Here's the thing.
Trump set the stage for that. And the the the people at Twitter and Facebook who also made these decisions They were informed by 3 later agencies, department of justice, and and FBI, etcetera. Hey. This is potentially hack material designed to interfere with the election. Listen.
It also be true that
Biden is
pressure. -- and other Democratic Party operatives just made up out of whole cloth that the 100 Biden's story was disinformation. It was true. It's been a cardiologist's true. The Washington Post is true.
I mean, I think this is true.
So hold on. So it goes
to my point. -- can improve
It's not about improving it. Look.
Well, no. No.
I you didn't fear my sentence. I think this is where social media can improve, which is if they had to explain every one of these decisions they make, in full in transparency. I think that's something Elon could bring to this party, which is if you're gonna block something, we we need to know why, and they'd never explain why and who made the decision. And I think that that transparency would benefit situations like this. If the DOJ or FBI told them this is hacked material, then they gotta go to the DOJ and say, hey.
You gotta give us cover here. If this is in fact hacked material, you told us not to print it. we're not gonna print it, but it was just bizarre that one publication got dinged like the New York Post. It it didn't -- The
oldest the oldest newspaper in America. The oldest newspaper in America is
I'm not a
-- --
Sebastian of, like
--
It doesn't matter. That's not for Twitter to decide. It's not for Twitter to decide. It's legitimate publication. had a true story.
And I don't disagree
with that.
--
was relevant to the election and the American people should have been able to take take that into account. And people like Nina Jenkins, whatever, are new Zarr of the ministry of truth, she was out in the forefront basically calling that story disinformation. Meanwhile, she's pushing the steel which really was I
think if that story was confirmed, would Biden have won?
I don't know. I don't know the answer to that. But the point is that it shouldn't have been suppressed. That was that was election interference. Now Elon came out this week and specifically tweeted that, that that was basically a mistake
back -- That
--
Jack also said it was a back call.
Jackman said it was a mistake too, and Elon repeated the same thing that they shouldn't have done that.
I think everybody was -- -- agree. It's a back call in hindsight. Yeah.
Of course. But In hindsight. Right. But what was the reaction to what Elon said? He was accused by virtue of criticizing the policy decision that Twitter made, that that was supposedly targeted harassment of the legal counsel at Twitter who made the decision who gets paid $17,000,000 a year to make those decisions.
You guys see this debate this happened last year? This this last week. So the point is that if you criticize somebody who's on a certain side of the debate, that's harassment. But he didn't even mention her by name. And this is absurd this discourse has gotten.
Can I make a prediction? Yes. Patricia is great. I think people misunderstand Elon's incentives for buying Twitter. So and and I haven't talked to him about this, so I'm just making a complete subjective prediction.
I think he's going to buy Twitter. I think he's going to clean it up I think he's probably gonna generate something like a 2 x on this. You know, we talked about how yeah. You know, that's like a good terminal valuation in 6 or 7 years. that basically, you know, puts that asset worth at around a
$100,000,000,000.
In the meantime, he's gonna open source as much as possible. I think he's gonna make it very difficult for misinformation and disinformation to get very far. He said he's gonna authenticate every human being that uses the platform He said all of these things publicly already. And then here's the masterstroke. And, again, this is just me speculating.
I think he's gonna donate it into a foundation and a trust. And I think it'll be an incredibly powerful competitive alternative to all these other for profit businesses because everything you guys are talking about Is the incentives that get perverted when you have to layer economics inside the New York Post, inside the Washington Post, inside the New York Times, The Wall Street Journal. Everything eventually evolves to clickbait, to hearsay, to doxing, to whatever can get you more revenue. But if you can take it off the table and run these things as a public trust, you can actually win back a bunch of confidence and a lot of these cases go away. Now you would say, why would anybody do that?
Well, I think the real answer is because then if he if he were to donate it into a foundation, he'd get a $100,000,000,000 credit that he could use you know, to offset the gains when SpaceX or Starlink go public.
Interesting, Barry. Interesting, Barry. There you go.
Well, I I agree with everything except for the donation part because he's raising 27,000,000,000 from private equity partner
and lenders. -- then donate.
He'll pay the debt off. He'll loan it a
100%,
and he'll pay people a a very fair living wage and it'll attract people that wanna seek out the truth, that wanna work in an apolitical environment, he's already said that 10% of the extremes you know, are are both equally crazy. He's gonna force this thing to be rational and predictable. It's an
interesting it's an interesting prediction.
I think it goes public again at and it goes to 5 times evaluate.
Are we gonna be able to ask him these questions in Miami? Sure.
Why not?
Yeah. So let let me ask you guys a question. What would you do? because a lot of people have pointed out in response to what has obviously become a very polarizing set of discussions this week around what should be censored, what should be banned, what shouldn't etcetera. Elon's gonna let bullying and hate speech kind of proliferate.
Other people have said we need to release, you know, the and let people say what they wanna say. Freedom of speech has no bounds, etcetera. What do you guys think about the argument that there there does need to be constraints and bound reset around things related to health and safety, meaning if someone is making calls to violent action, Should that be censored, Saks? And how do you make that interpretation because it becomes a fuzzy gray interpretation? And then separately, like, when there are scientific papers that say one thing and someone says that's not true and says something else, how do you kind of decide whether or not that should be a louder sensor on the platform.
because I think those are 2 very key issues that --
We gotta take them separately. Let's do violence first. Sachs. There's plenty of precedent in law. Yeah.
Just explain the violence.
Look. I the biggest straw man around this whole
-- This was the whole Trump argument. It was like he was inciting violence was the argument that was being made. But, like, generally speaking, is that an appropriate form of censorship on this private platform And if so, how do you set that standard?
Let's start here with you hear this argument a lot, which is that if Elon brings free speech back to Twitter, then we're gonna have all this horrible content on there. You're gonna have violence. You're gonna have racism. You're gonna have harassment. You're gonna have all, you know, all these bad things on fraud.
The the truth of matter is that and it it's really a straw man argument because what it's basically arguing is that free speech means anything goes. But free speech does not mean anything goes. There's we have 230 years of Stream Court case law basically discussing this question of what speech is protected and what's not. And there the Supreme Court has ruled that there's 9 major categories of speech that are not protected by the first amendment. Why?
Because that speech is considered to be dangerous in one degree or another. So for example, you can't commit fraud like, you know, the Archigo sky or whatever and then say, well, that speech was protected by the first amendment. First Amendment doesn't protect fraud. First Amendment doesn't protect incitement to commit violence or a crime. You know, it doesn't protect fighting words.
So you could ban, you know, all ethnic or racial slurs on these social networks under the concept of fighting words. So I think if you actually look at support case law
--
Yeah. Well, what I would do is I instead of just making up the content moderation policies as I went along, I would look at the peep at the cases where people have been wrestling with these decisions for decades And I would create a content moderation policy inspired by First Amendment case law where I would take these 9 categories of of sort of dangerous speech or harmful speech, and I would operationalize those. So for example, you can't defame people. Right? You know, the first amendment doesn't protect you against claims of defamation.
Would you make people go to court, though, in order for them to take it down?
Right. So this is where the word operationalize really comes in. It's not practical for a social network to require a court level burden of proof to to proved defamation. Right? So what I would do is I would say that if you are a person who claims to be defamed, you could file a report on Twitter and provide the tweet and provide you know, some explanation.
And as long as it looks like a colorful claim of defamation, meaning the person is attacking you in a way that seems out of bounds. And Typically, that can be taken down. You don't have to subject it to a jury trial or something like that. So what I would do is I wouldn't you you can't literally impose First Amendment case law, but I would use it as the basis for defining a constant moderation Can
I just say something? I think one of one of the best things about being your friend is sometimes you say stuff that is so powerfully smart and elegant. because it's so simple. Basically, what Saks said for everybody else because this is how I he's like, the PRD for content moderation has existed. It's called the constitution.
It's just that nobody in any of these companies has taken an effort to actually try to write code that maps to this PRD where the PRD is the constitution
--
Right.
--
whose rights have been established for 100 years.
By PRD, you mean product requirements document.
Yeah. Sorry. Yeah.
Yeah. It's what a product manager would use. Yeah. Yeah. Exactly.
Instead of them making this up at all as they go along, I would look to the categories of speech. The supreme court has already ruled
out the dangerous.
Right. A
PRD. Let's just
do the health 1 sec. So there's a scientific paper that says this drug doesn't cure COVID. and then someone goes on Twitter and says, take this drug. It cures COVID. What's the what's your and I know you're not obviously of constitutional lawyer at this point in your career.
But how would you kind of think about about that? And and how would how do you think that that would ultimately resolve in this regulatory framework.
§08Segment 8
That's a debate that should exist. I mean, I don't know why we need to suppress that debate.
So if someone says declaratively on Twitter, this drug will cure COVID, which, by the way -- And and just to be clear, by the
way, you
know, the FDA actually regulates claims like that on boxes and material and a commercial setting. And if you're making money off Twitter and you're getting a lot of followers, and then you make more money by putting out a tweet that says -- Yeah.
But you're not you're not making money off the drug.
Yeah. Right. Exactly. Look. If the person is selling the drug
--
Roche, Roche should never say that.
Right. So if someone went on Twitter and they said take this drug, it cures COVID, there's a site --
You're confusing facts and authority. Twitter's riddled with people that have zero authority that spit out what they think are facts.
Right.
So I I think I think what you're speaking to is something very different, which is if you're gonna design a social network, I've been part of helping to design 1. So let me just give you my 2¢ on this topic. There are layers of of of decision making that need to go into an algorithm to get to a sense of rank. Okay? Rank means do we believe with some reasonable probability distribution in some probability distribution that this thing is worth showing to somebody else.
And the way that you get there is through multiple layers, So there's obviously a layer where you can get signal relative to the authenticity of the person and individual making the claim. Is it a bot? Is it a real person? Then there's a separate layer which is how, you know, roughly accurate do we think this is. Then there's another layer which is, is this person believable in making all of those statements?
And my point is there are different subsystems you build for those things. He has already said all these algorithms are gonna be open sourced, and what you're talking about is authority. You should allow people to say stupid things. It's not illegal.
Right.
Yes. A person can be on a street corner saying Jesus is the son of god, and he will save yourself. Saks doesn't have to believe him. And somebody could say that on Twitter, the the issue here is does it trend? And do you show it to people the algorithm?
And if you fix those problems, then who cares if a person says, hey.
Listen. Twitter has an authority problem and a ranking problem. And the authority problem comes from the fact that there's all kinds of long tail non human individuals in the system.
So solve for identity, and this problem can get easier solved and solve for trending, and it gets solved.
If you guys were running Twitter, you would not put on these COVID 19 warning. This is misinformation. And and and rely solely on CDC guidance and recommendations and FDA approvals when it comes to treatments and vaccines and risks and so on.
I I what I would do is -- -- let
anyone say whatever they wanted.
See, Bert.
--
say what you want but see wrong.
--
label. Yeah.
Yeah. By the way, I'm
not I'm not I'm not arguing against him.
I'm just gonna get clarity here. Yeah.
He's just asking the question. I what I would do is I'm not gonna use taxes. I would label it And I would I wouldn't label it right or wrong. I'd say ivermectin is a drug. Here's the Wikipedia.
I just wanna hold Yeah. Here's the Wikipedia page on ivermectin. Let's say there's a lot of confusion about ivermectin, which there was. You could just put anytime anybody says they were of ivermectin, Here's a sentence of what ivermectin is. Here's the Wikipedia page, the CDC page, the UK government's page, DHS, whatever.
for more information about this topic.
So I just wanna That's it. Not this morning. Yeah. I just wanted to learn more. Jake, I wanna disagree with what you're proposing.
Okay. because it is the topic dejure. It was the one off that then triggered the ability for everyone to bifurcate on their point of view on what should or shouldn't be done as opposed to having a universal standard that is universally applied that doesn't speak specifically to just the COVID 19 pandemic or just ivermectin or just what Trump said or didn't say. But each one of these things can and should be universally standardized. and then universally communicated and then treated with universal standards across everyone and every topic rather than have each of these breakouts where you've got someone on Twitter scratching their head saying this seems to be an important topic.
Let's come in and annotate it. Let's create a classification for this, and that's where everyone gets riled up. in my opinion. I think if there was a universal standard that was universally applied without -- Well, give another example. -- for the topic.
Give an example.
ahead. Can I address this?
Well, vaccine is another good example. But yeah.
First of all, nobody contradicted the CDC more than the CDC at self. It constantly it constantly put out revisions of its old opinions. First, it said that COVID was not spread human to human than it obviously said that it was. It basically was against mass, than it was for them, and on and on and on it went. Okay?
The idea that you cannot criticize your government or an agency of the government is absurd. But that is the type of censorship that was being leveled in these social networks is that that basically they are preventing us from criticizing the so called experts. That is precisely the kind of censorship that should not exist on these networks. That is precisely the kind of debate
--
What about labeling? In the way I talk about it. Like -- The problem with labeling
-- --
more information.
The problem with labeling is, once again, is done selectively, and the people at Twitter basically decide who they think is right in a debate, and they basically wanna act as a referee to raise the hand of one of the participants of the debate, raise their hand over their head, and declare them the victor. Now it's a lot better to label than to just censor the other side's point of view. But still, it is a form of soft sensitivity.
--
labeling I described where and which happens on our podcast on Spotify where it says, here's the COVID information center, you know, for more information, and they give a range of so if it's active duty in that way, do you oppose it? there was, like, a very confusing public interest going on?
If if if you were to algorithmically post related stories or something like that, and it was done in a completely fair and speech neutral way. And it was just as a feature of Twitter. Fine. But if you have employees at Twitter, sitting around discussing issues and deciding who the winner is in various debates, and then putting their their thumb on the scale to tilt the debate towards those people. That's not what they should be doing.
Now, you know and that is basically what they're doing with censorship. If you look again, let let let's go back to this this this topic of misinformation because this is really the crux of the debate. Okay? Once again, on the base of first amendment case law, you could remove offensive material on Twitter on the basis that It is, you know, fighting words. It's a slur.
It's harassment. It's incitement to violence. You could it's fraud, okay, inauthentic that the The account is not who they purport to be. You remove all the bots. So all that content can get removed.
So what is really left then? It is basically this idea of misinformation, this idea that we are gonna declare one party the victor in this debate. And I think that is what is so offensive about this mystery of truth that homeland security is setting up. It's what's so offensive about the censorship that Twitter has been practicing. which is they are trying to end the debate.
They're trying to say, look. This is the person with the on the side of truth, and that is not what they should be doing. It's up to the marketplace to decide what the truth is.
Alright. There you have it, folks.
Do you disagree with that?
I I agree with you.
To your point, David, I do think in a situation where the public good and there's confusion in a situation sending people to more information isn't a bad idea. I do think a lot of this, there were thumbs on the scales, and it wasn't transparent what was happening. I think if you add transparency, so I think every time there's an action that's taken, it should say, agent number and what their agent number is, took this action on this tweet for this reason, and then data scientists can look at all the actions that occur and then say, look. We're we're looking at this agent number, and here's their manager's agent number, and here's why they took down this post. you know, then at least you could have a starting point to figure out what's going on.
We don't even have enough information to know what what thumbs are on what scales, if at all, or to what stent, and I would like to see transparency first so we could have a more informed decision. And then sending people to trusted information sources, a group of them isn't a bad idea, I think.
What's trusted?
Yeah. I mean and so to your point, you don't need to look to a podcaster, a social network or the government to find truth in the world. You have to have a process yourself. That's part of what this podcast is. It's for people to develop
-- --
being an a part of being an adult.
Yes. You have to come up with your own process of coming to the truth. You could trust some people trust the government agencies. Some people trust a Joe Rogan or a podcast or this podcast. Some people trust a folk singer.
Trust yourself. That's the number one thing you have to learn how to do as an adult in life. Taking all this information and make a reasonable decision. To take ivermectin or to not take ivermectin is a perfect example. People said there's no downside to it.
People have been taking this drug forever and it's cheap. And then another group of people said, well, you're taking horse medicine. It's like, no. That's something completely different. And the whole conversation became I felt very easy to parse.
When you think about
--
Do the research. Do your own research.
Right. And and Talk to your doctor. Do your own research, but you can't do your own research if you're not permitted to see everything. And and you think about, like, with drugs. Think about how many drugs over the last 30, 40 years have become the basis for product liability lawsuits because they had unintended side effects or consequences, and they revised the use of those drugs or drugs were taken off the market.
If people weren't allowed to question those things because, supposedly, the experts had ruled on the issue and ended the debate, how would we have gotten a correction on that? How would we have gotten to the truth? So just because the experts say something, doesn't mean
--
Well and that's why there's there's pros and cons to this. We we have kids getting tons of kids taking all kinds of SRIs and antidepressants and all kinds of drugs. Parents have to make difficult decisions, adulting to make difficult decisions. Do they do this? Do they not?
And by the way, there's no we don't know. We're doing large experimentations on the population in real time with drugs. It is a decision you have to do the pros and cons for.
The medical establishment medical establishment at one point in time thought it was a good idea to lobotomize people. Like, they were doing that as like a medical procedure. So these people can be wrong. You know? this idea that we've arrived at the the end of history, and we know the truth.
Here's all truth.
No no new facts are being or no new knowledge is being created.
For fuck. sake, I mean, is wine is red wine good for you or bad for you? because every 3 or 4 fucking years, coffee and red wine are good for you or bad for you depending on the year. Well, I
saw I saw a longitudinal study that just came out that said, there are no caloric benefits of intermittent fasting. Now there's a lot of people that would be up in arms with that. What are you supposed to do if if, you know, maybe there's some value to organ health. Maybe there's some value to managing your glycemic index. But again, the point is there are study upon study.
There's work going on all the time. All these things are in an area of gray And so if all of a sudden you jump down one person's throat and basically become very judgy because you think that the total bounded body of knowledge is already being created, you are making an enormous mistake.
I mean, Steve Jobs thought he could cure his own cancer. I mean, intelligent people are free to make bad decisions with one of the most intelligent, talented people in the world who, by all accounts, might have survived longer If he had trusted
-- --
to this very specific method of juicing. You know, there's a there's a certain sliver of folks. There's a really incredible documentary on Netflix if you wanna understand it. of people that went down this path of juicing their trying to eliminate their cancer. Micronutrients.
The irony is that the people who are, I think, some of the stupidest people like that woman singing show tunes that you like, these are the people who are making these determinations over what is true and what is false and what is labeled as information and what we get to discuss, it's crazy.
--
bias. It's riddled with bias.
You have to make your own decisions in these cases. And, you know, like, it's great to have smart friends to have a dialogue with and it's a beautiful dialogue.
It's the beautiful thing about being an American and work so hard to get to this country is the independence and the freedom to be your own self. I mean, why is that such a bad thing and why would anybody wanna give that up to a nameless, faceless blob into an organization.
Well, I and the and the response you get back from people is
I'm not abic indicating my ability to think for myself to this random woman singing show toons?
Right. And then people say like, oh, well, the response I got when I said, listen, trust herself, is like, Well, what about all these bros who are listening to Joe Rogan, and they're making decisions on their health according to Joe Rogan? I'm like I'm like, yeah. It's cool personal responsibility. Like, I'm not responsible for Joe Rogans listeners.
If Joe Rogans The same
the same person that told you that is probably microdosing and thinking Ayahuasca as a solution to the pump they've ever had.
fasting and micro juicing and
From the childhood trauma they had when they didn't win their, you know, soccer metal and
--
Nobody knows anything. -- get into Harvard. So they're on Ayahuasca every day. I mean, give me a break. Yeah.
Nobody knows. No. We we we all know so little. So that's
what we know. You live. You die. the end.
And we're all just trying to do our best. And so why don't we all just try to have a reasonably decent time and be nice to each
Alright, everybody. It's been an amazing episode. We will see you in Miami, which will be absolutely fun and thrilling, sold out. Our first all in Simon. And last, because I don't know who the fuck's gonna do this work next time.
You will. You're doing an amazing job.
Oh, thank you.
Continue it. Bye bye.
Bye bye. Bye. Bye bye. Bye bye.
Bye bye. Bye
bye. Bye bye.
Bye bye. Bye bye.
Bye bye. Bye bye. Bye bye. Bye. Bye bye.
Bye. Bye bye. Bye. Bye. Bye.
Bye bye. Bye. Bye. Bye. Bye.
Bye. Bye. Bye. Bye. Bye, boys, boys.
Bye. Bye. Bye, boys. Bye, boys, boys, boys, boys, boys, boys, boys. Bye, boys, boys.
Bye, boys.
We open source it to the fans, and they've just gone crazy with it.
besties are gone. driveway sex. Oh, man.
I might
have a casual media analyst.
We should all just get a room and just have a be cute, George, because they're all just useless. It's like this, like, sexual tension, and they just need to release her mouth.
What? You're the b p. What? You're
a thief. What?
Where did you get Murkeys are back?