Macro update, Fed hike, CRE debt bubble, Balaji's Bitcoin bet, TikTok's endgame & more

The episode opens with snack chatter about pistachios and a joke about nuts being peeled, before the host welcomes listeners to episode 121 and introduces the four regulars.

One host says corporate moderating gigs are booming and need no preparation. He claims he folds travel costs into the speaking fee and travels commercial, and another host jokes that he pockets the unused travel budget. These are the hosts' own remarks and cannot be checked from the transcript.

The show turns to the Fed's quarter-point hike. As the host frames it, the federal funds rate has gone from nearly zero in March 2022 to a 4.75 to 5% range, the fastest tightening since the seventies. Both a pause and a cut had been speculated about after recent bank failures, and neither happened.

Sacks says the Fed does not know what it is doing. In his account it was about nine months late on inflation, after a 5.1% print in summer 2021 that it called transitory, and it may now be late to see the stress in the economy. He argues that rate-raising ignores unrealized losses on long-dated bonds and commercial real estate loans, which he calls the next shoe to drop. He would have held steady for a month, and he says Elon wants cuts.

Chamath disagrees and says the Fed took the worst middle path. His reasoning is that the Fed still has a balance sheet tool, quantitative easing and tightening, to fix illiquidity, but no tool to fix runaway inflation. He would have raised 50 basis points. He says rates must exceed terminal inflation, as since the Volcker era, so a 5% funds rate is insufficient and he expects 5.5 to 5.75%. He warns that uncertainty itself damages lending and risk taking.

Friedberg says he is not an economist and will not judge the Fed's balance. He points instead to the 10-year Treasury yield, which by his figures fell from about 4.1% to 3.4% in recent weeks. He adds that banks' roughly $7 trillion of assets carry an average equity ratio near 15%, so a few points of yield movement can cut a chunk of a portfolio's value by about 25%.

His argument is that falling longer-term yields shrink unrealized losses, so the better metric is whether the assets people worry about are gaining or losing value. He reads recent moves as mild improvement and a possible source of equity-market optimism. He says he is still doing the math, so these are rough estimates.

The host cites a Wall Street Journal story: empty or underused office towers, leases coming up for renewal, and smaller banks holding about $2.3 trillion in commercial real estate debt, with nearly 80% of commercial mortgages held by banks. He asks Sacks, who owns some commercial property, what he sees.

Sacks says industry insiders call the situation dire and describe a credit crunch. In his telling, developers cannot refinance construction loans or place long-term debt because banks are defensive, and deposits are leaving all but the very largest banks.

Asked whether the credit freeze predates Silicon Valley Bank, Sacks says it does, but SVB and Credit Suisse made banks more paranoid. He points to a chart of discount-window borrowing and says it shows the biggest spike since the 2008 financial crisis, a spike in one week and, in his words, larger than anything in 2008. He stresses it is about bank liquidity rather than real estate: depositors are moving from community, regional and small banks to the four so-called systemically important banks, so lenders hold back on new loans.

On existing loans he cites roughly $20 trillion of commercial real estate debt, mostly lent by community banks, and about $300 billion due for refinancing within a year. He also cites a Wall Street Journal-reported study putting unrealized losses in these loan books near $2 trillion. These are his figures as relayed on the show.

His main point is that loan portfolios are harder to value than bonds. With T-bills or mortgage bonds the unrealized losses are knowable and were hidden by a hold-to-maturity accounting rule. Real estate loans have no liquid market, with leases, subleases and constant refinancing, so the true damage will show only as defaults and repricings appear.