All-In with Chamath, Jason, Sacks & Friedberg - E78: VC fund metrics that matter, private market update, recession, student loans, Bill Hwang arrest

Episode Date: April 30, 2022

0:00 Bestie intros 4:32 Understanding VC fund metrics that matter, state of private markets 29:37 Recession possibilities, Q1 negative growth 44:56 Student loan forgiveness, fixing the underlying system, solutions 1:09:52 Archegos founder Bill Hwang arrested and charged with fraud and racketeering 1:19:08 New Disinformation Governance Board 1:30:23 Predictions for Elon's Twitter vision, policing speech on social media using existing case law Follow the besties: https://twitter.com/chamath https://linktr.ee/calacanis https://twitter.com/DavidSacks https://twitter.com/friedberg Follow the pod: https://twitter.com/theallinpod https://linktr.ee/allinpodcast Intro Music Credit: https://rb.gy/tppkzl https://twitter.com/yung_spielburg Intro Video Credit: https://twitter.com/TheZachEffect Referenced in the show: https://www.socialcapital.com/ideas/2021-annual-letter https://twitter.com/jasongoepfert/status/1520040516955643905 https://www.wsj.com/articles/us-economy-gdp-growth-q1-11651108351 https://twitter.com/lizannsonders/status/1520021943621140483 https://www.conference-board.org/topics/consumer-confidence https://twitter.com/DavidSacks/status/1489128016508719104 https://educationdata.org/wp-content/uploads/78/historical-cost-of-tuition-and-fees-room-and-board.webp https://www.theatlantic.com/ideas/archive/2022/04/should-biden-forgive-student-loan-debt/629700/ https://www.sec.gov/news/press-release/2022-70 https://apnews.com/article/russia-ukraine-immigration-media-europe-misinformation-4e873389889bb1d9e2ad8659d9975e9d https://www.dhs.gov/ntas/advisory/national-terrorism-advisory-system-bulletin-february-07-2022 https://www.nytimes.com/2017/11/01/us/politics/russia-2016-election-facebook.html https://twitter.com/elonmusk/status/1519073003933515776

Is there gonna be an open mic night in We were gonna have you speak freedberg, but we real nice you're not capable so we want to be entertaining You guys are missing out. I'll tell you guys what makes my stand-up comedy so good. Oh my god. We're back on this Jesus Christ It's my creative sensibility So if I have some time to prep and write my script and read my own creative insights. Yeah, okay, bring one joke next week. Jake, for all the time we've spent together on this podcast, you know so little about me.

It's so depressing, I gotta be honest. Well, you know, here's the thing about friendship, it's a two-way street, you gotta open up a little bit. We gotta go out and get to work one night. Absolutely. Yeah. For like your winners ride. Bring man David Sack.

And it said we open source it to the fans and they just go crazy with it. Love you guys. I just want to give a shout out to this guy Andrew Lacey. Okay. Okay. Shout out. He is the CEO of a company called Pre-Newvo. Oh, yeah.

Can you just flash it on the screen? Pre-Newvo. I went to Pre-Newvo and what they do is they do a head-to-to MRI scan in 45 minutes and they use a bunch of machine learning and image recognition to help a radiologist interpret these MRIs in real time beside you. It's a service that you have to pay a few thousand dollars for. There's a location in Silicon Valley in Redwood City and a couple of others.

And we mentioned it. But the reason I'm bringing this up is he sent me an email yesterday and he said, I just want to thank you and the besties for mentioning pre-newvo because we had a bunch of people come 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-newvo after hearing about it, had a head-to-to 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 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 pre-newvo.com and shout out to Andrew and his team there. Okay, here we go. Three, two, let's start the show. The war in Ukraine has him insane in the membrane and Biden's new disinformation council is going to have him detained to calm him down from tanking Solana. He started smoking that marijuana. You know him as the rainman.

He's here again, David Sacks. How you doing? Have a good week? Yeah, my bad. All right, big energy this week, huh? Okay, in high school he had no friends, but thanks to the pod undergrads are in his DMs. All forms of steak, he's a virgin. He's the vanguard of all the virgins,

the queen of Kinwa. The Sultan of Saiyan, David Friedberg. Wait, I miss like half of that because tomorrow's is laughing so hard. I can do it again. Do it again. Let me try from the top. How it takes. 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 queen of Kinwap the Sultan of science Daily free bird For the record there's no undergrads in my DMs, but I appreciate the intro. Yeah, we'll check all right To he's For free for this to be the show hasn't started. I think I'm taking over intros next week Okay, really it's gonna do J. Cal. Yeah'm taking over Intro's next week. I'm really gonna do J-Cal.

Please, by all means, next week you do mine. You're a comedian who has a chance to prepare in advance and think your thoughts go ahead, big boy. Give me a week. You got it? 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 how to stand up to hide their ability. You know the funny thing about hiding something and not having something from the outside and they look the same. You can't tell. Sorry, Jake, I'll go over to you.

Okay. He's dropping annual letters in luxurious sweaters. As far as the SPACs go, well, it can only get better. And to take it in self-traumat polyopathy. Ouch. I cannot, I cannot comment on the SPAC. Oh my God. I mean, this is getting brutal.

Who's writing these? Oh my Lord. All right, everybody, it's been a big week. You guys read my, did you read my annual letter and any of you three assholes? I, I saw your comment. No, that's a no. That's a no.

I get it, I get it. I reviewed the table where you listed all your results and I actually sent it to my team. I was like, this is a really nice way of summarizing, you know, a firm's results over, you know, a long period of time because you had every fund and your totals and all the key metrics. Well, can I talk about that for a second? Yes, please. You know what's incredible about what you're saying, SACs is I was interested in a bunch of other funds that I'm invested in and their returns.

And then I've also seen a bunch of leaked fundraising decks of all kinds of other firms from growth stage to crossover to PE. And it's incredible that they are not standardized, right? Some people only show gross IRR. Some people show net IRR. Some people don't show the total value of the paid in capital, which means, you know, if you have a hundred dollar fund, what is the total value of all of its holdings? Some people don't show DPI, which is distributions of paid in capital, which means, okay, for

every dollar you've taken in, how many dollars have you sent 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 right 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 L.D. and pay back their capital call line of credit. So what does it do? It inflates IRR. But this is why if you see the other numbers, it still shows that it's kind of like, you know, not doing much of anything. So if you ever see multi-hundred percent IRRs or high huge IRRs with zero DPI and a marginal TVPI, it's folks that are playing games to trick LPs just to heads up to. That is so weird.

So what you're saying is just to summarize for people and the ones that don't understand, hey, we get judged on the rate of return each year. So if the stock market does seven or eight percent, we're expected to do triple that. So we got to hit 20, 25 percent each year. Now, the clock starts ticking when the money gets called from the LPs, the partners, and gets put into the company.

So if you invest in your two of your fund, you pull the money down from the LPs, you put it into YouTube, whatever it is. What you're saying is, they will take a loan against that future money from a bank at an absurdly low interest rate. Let's say 1% or 2%. Correct. They make the YouTube investment.

Then two years later, YouTube has a price round that marks it up 20x. Then they put your cash in in year three of the fun. You pay back to loan and pay back the loan. Now, they've paid 2 percent two years in a row but the things gone up 20x correct what a that's that's dirty well so it's it's dirty enough that the SEC has actually now introduced legislation it was in February that basically is going to try to uncover all of this nonsense and so you'll have to be much more transparent so the format that I used in my opinion is the most transparent way of not being able to

hide the cheese. You show all the critical elements together in a simple table that will make it very obvious who's playing games and who can actually make money. So there is a semi-legendment version of the loan thing, which is where this comes from as a capital call loan. So you know we're making a bunch of investments throughout the quarter of a million dollars here for a seed deal, 10 million for a series A. You know, that's happening all the time. You don't necessarily want to hit your LPs with capital calls for every single little small investment.

So, what we do is you get a capital call line from SVB or something like that. And then you do one capital call per quarter. And so they will loan you the money for, you know, one, two, three months, but it's not for a year. But the reality is if you have a reasonably well-developed infrastructure, you have a cash forecast of what deals you may or may not close with probabilities.

And so you know what the weighted amount of capital you need to have on your balance sheet is. So I agree with you to have a small amount at the edges to pay for expenses, to pay for salaries while you clean up at the end of a quarter, completely reasonable. But if you're making, you know, five or 10% commitments into a company and you're using this as a way to basically create subterfusion, high, I think that that should not be allowed. Yeah, the number of capital calls is annoying for people, yeah. Yeah, I mean, I calls is annoying for people. Yeah. Anyway, I did share you that table with our team,

too, because I did like the format quite a bit. I think we'll start using it. I'm reading it this weekend. It's very hard for funds who are not performant to use that format. Now yours, you're very highly performant so you can use that format. But I don't think people that have not returned money

or have fake paper markups can use that format because it is too simple. Yeah. Yeah. At the end of the day, what metric do we all look at when we are LPs in a fund? Well this is what I put down. I put down the ones that I look at for everybody else that I'm an LPN. So what is that for you?

I look at the totality of it. I need to understand what is your gross and your net IRRs. Those are important things to understand because it shows how efficiently you put the money to work. Of course. But then ultimately, then the other two things that really matter is what is the total value you've created and then what percentage of that have you given back to me? Because that allows you to understand how much paper value this.

So for example, today, let's just say you had a fund that had a TVPI, total value of paid in capital of a 5x. A 5x on a fund is incredible. But if you've distributed none of that, well, guess what? If we're sitting here in May of 2023 or 2022 rather, the total value of your paid-in capital is not really 5x. It may be only 3x and it may be actually 2.5x considering what the markets have done to these companies.

And so it allows me to really understand how performant funds are in not just being a part of the game, but actually generating realizations. And this is the hardest part, as I told you, Jason, like this past quarter, I think I passed two X across my funds when I was managing outside capital. And I think, my gosh, it took me 11 years to return two X the money. And that means I've returned two and a half billion dollars. You know, hard that was. Yeah. I mean, you got a 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 diminuously. So how do you make $2 billion where I've only had one IPO, which has been slack? Yeah. This is a really, really hard business. It was just a reminder that in the last four or five years, managing capital has seemed relatively easy. But in these next few years, you're going to see who's really, really good.

It's kind of like old Warren Buffaco. You can see who's naked when the tide goes out. I mean, said another way, the last five years, raising a fund has been really easy. And writing checks has been really easy. And now comes, you know, act three, which is returning a multiple on the money you easily collected. And boy, is that hard. And, you know, all of these new alp others, the other thing that I'm going to say is one thing, though. the money you easily collected. And boy is that hard. And you know, I all of these new LPs, the other thing that I'm going to say is one thing, though, I all these LPs send me, even I'm not an LP and it potentially 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 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 around 20%. 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 some odd billion dollars of private equity and another hundred billion dollars of real estate, they've returned two X. So that's what the upper bound is. You know, doubling people's money and generating 15 to 20% is the best you can expect if you are really excellent and long lived. That's the best.

What do you look at free bread when you're in LP? What number do you care about? Because you LP other funds, and I think all of us do at times. I made my first venture fund investment in 2006 and I 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 very large balance sheet, long range investors

and need to kind of diversify, but as an individual, I should have put my money and had liquidity on it for 16 years rather than have it locked up and a bunch of private companies sloshing around and kind of dribble out. And at the end of the wall, I only get two and a half times my money back.

Two and a half times your money in 16 years. What's that IRR? It's like low teens. Yeah, not a great deal. No, it's lower. You would have been better owning the S&P 500. That's right. And so for me, I think the only metric that matters,

which I think you're saying, Tomoth, is how much cash I got out relative to cash I put in. And so initially my IRR is negative 97%. And then it goes up to negative 80, and then you negative 60, and negative 30, and negative 20. And now it's 14%. Because I finally got more money out than I put in. And so it doesn't feel to me like,

you know, just generally private investing, everyone gets excited because we all get sold stories and individuals all get sold stories of you put a dollar in, you get a hundred bucks in. I mean, J. Cal wrote a book called How I Made a Hundred Million Bucks From Whatever You Invested in Uber. Yeah. 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 going to end up waiting a long time to get your money back. You're going to be locked up. And a top-performing fund

is returning two and a half X after 15 years, which is not much better than kind of investing in the S&P, or 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 on an IRR calculator right now, internal rate of return is 6.58%. Yeah. Better off than the S&P. Yeah. I mean, and if you did QQQQ, depending on how hot the market was then. Yeah. And you get to sell. It's really, really, really hard to actually make money. There are always going to be periods where people look like geniuses and have markups. But you can really see when people have skill after a decade and a couple of up and down cycles.

Same with hedge funds, by the way, right? Hedge funds put up a score every year. And in certain macro cycles that can last many, many years, everyone looks like they're doing well. And then all of a sudden, tides go out and you lose more than you made over that period of time. And then you realize, holy crap,

I was actually in an insurance business, where you get paid some small premium every year, and then you have some massive loss one year. And that massive loss, it turns out your underwriting wasn't good, because you lose more than the sum of all of the premium you collected over that period of time. And unfortunately, a lot of investing looks like this, which is you have small returns for a long period of time. And then some massive loss.

And the whole business makes you look like, you know, long the way a genius, but the reality is over any, any long cycle. Most folks end up kind of in a bad position. And they end up in a bad position. The SEC, by the way, has solved this for mutual funds, right? And ETFs, there's very strict standard reporting. And I do think that as, for example, if you go to the big banks, sorry, I'm sexy and rough,

I just want to finish the last thought, if you go to the big banks, and you have, if you're an individual, like a doctor or a dentist or somebody and 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 JP Morgan or Goldman Sachs is a, you know, 50 or a hundred million dollar LP in one of these big funds, but in fact, it's just a sum of a bunch of folks on their platform. It stands to reason that if the SEC can actually mandate standardized reporting for private investing, it would actually be a really good thing because all of these games will,

and probably currently are, as far as I've seen in these presentations, tricking a lot of folks to put their hard-earned money into things that actually will never make money. And it's because if you selectively cherry pick how you present this data, you can tell a partial truth. So, I would really, I would love, I'm happy to be compared to any organization, but every time I hear somebody chirping about how good they are, my only comment is,

I just wanna see your table in the same format as my table and we can compare it because it allows me to really understand. Yeah, like undertones. And by the way, the point I made earlier about when markets are generally good, hedge fund public market investors generally can look like they're doing well by having a good marginal return above the benchmark every year. And then one year have a big drawdown.

And suddenly they realize that their underwriting wasn't that good. The same can be true in private investing in the opposite way, in the sense that you'll put in small checks, small checks, and lose money, and lose money, and then have one big banger, and you get a hundred extra 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, although small checks may not even add up to the banger. And that's the flip reality that you realize. And by the way, I think that's a good analogy for the difference between public and private investing. You have similar cash flow economics where you can have small returns and then a big loss in public. And you can have small losses and then a big return in private.

And the timing of when you present your data can make anyone look good if you catch a good hit at the right time, or you don't have a bad hit at the wrong time. time where you don't have a bad hit at the wrong time. And then the framing over a long enough period of time, I think really becomes the key measure. And the reality is most people don't make it long enough in their career to actually present true results in how they really do underwrite. And by the way, to the extent anybody's listening is able to invest in these private funds, I think Jason mentioned this superficially. So let me just dig into it because I think it's really, really thoughtful what he said, which you should understand. If you have the option to invest in a private fund, you have to understand that that private fund has two huge negative things working against it relative to investing in the S&P 500. So you could put your money into a Vanguard ETF or if you could put your money into a Vanguard ETF, or if you could put your money into a private

fund, you need to realize two things. Number one is it is illiquid, not just for 10 years, but it could be illiquid for 12 or 14 or in, you know, freebrook's case, 16 years. So you need to get paid a premium for owning that. And then the second is depending on the business model, you may have very high failure rates, which means that you need to really hit these outsized grand slam home runs. And if you don't, then you're going to be worse off than if you had invested in the S&P 500.

So that deserves a premium. And so Jason's right, which is the S&P is between 7 and 8% over long periods of time, predictable compounding. That's, you have to add another 7 to 8% for this liquidity premium, and another 7 to 8% for the business model, viability of, for example, being adventure. When you add those three things together,

you do need to get paid basically in the low to mid 20s returns to be justified. Otherwise, you are much better off just owning the S&P 500, much, much, much better off. Sex, what do you look for when you're LP-ing? And now that you have many large funds, what do you think LP's are looking for now? What do you advise them to stay focused on?

The number one metric that matters is DPI, which is the ratio of distributions to paid in capital. And it's basically money in versus money out, right? At the end of the day, that's all that matters is how much money did you put in the fund? How much money did you get out? The issue is that such a small 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 funds are going to do until you actually get to distribution. 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 turn into DPI? Does the televali transition? To explain that to people, if Chimath had invested in Slack, but they're hadn't been in outcome, it could be on the books for a billion dollar position. So the TVPI is looking really great. But until that company goes public and the shares are distributed, the LPs haven't realized it, so it could be ephemeral or it could go down significantly as we've seen with public markets.

Yeah. So in the last four months, we just returned our fund one in terms of real distributions. I think we have a DPI of 1.1, 1.2 on that fund now. The TVPI is like four to five. So but it feels great just to distribute the entire fund out. I literally in my first two funds, I think we did that as well. And it's a really great feeling. Sometimes selling 10% or 20% of a position early and getting over that hurdle and just

getting into the one to two X. That's a pretty great feeling. By the way, just to talk about how difficult it is to convert paper gains into real gains, let's just say Jason, in your example, you had a fund that had these huge paper gains but haven't distributed anything as coming into this year. Okay. Here's a little interesting data about the ultimate buyer of all of these text stocks, which is the NASDAQ, right? People that buy stocks in the NASDAQ, listen to this as of yesterday. More than 45% of stocks on the NASDAQ are now down 50%. So basically one and two.

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 tax stocks are taking a 60% discount to what they were able to buy even just four months ago, 60%. So there is no public mark that will support a private mark unless it's also discounted by at least 60%. Now think about that when you talk about this entire panoply of companies that have been overfunded, many who are under executing and burning enormous amounts of money, who now have to come back out to the market, as any sophisticated

buyer will have to tell them the truth, which is, I'm sorry guys, but the data says there's a 60% discount to this mark. Are you willing to accept it or not? Otherwise, the lights are going to go off. Yeah. And these marks only happen, at least in the private markets, in venture funds, when a transaction occurs. So if somebody raised a bunch of money, as we talked about in previous episodes, that a billion dollars, you know, and they're now worth 500 million, that's only going to work itself out in fund documents and reports for a year or two later when the next transaction occurs.

So there's a lagging effect. One thing I just wanna bring up before we go into maybe GDP or the bill, a lying situation is what we talked about on this problem last year about what was going to happen in private markets. I've been seeing the last two or three weeks and I don't know, Sachs and Freiburg, what you're seeing in private markets. But really acutely, people who were going out and skipping

rounds, this like, I'm going to, you know, just skip my seed round and just do a series A. I don't have product market fit. I'm going to get credit for work that hasn't been done. I'm going to I don't have product market fit. I'm gonna get credit for work that hasn't been done. I'm gonna raise 10 million without product market fit. Oh my Lord, has this, has the dialogue changed. I've been on many calls with founders who've met with 50 VCs and the conversations are moving to, how many months to break even?

And how many customers do you have and how have they increased them? Let's talk about the chart. It is getting super pragmatic out there. If you're a founder and we said this a year ago, but it's worth stating here, this is not the moment I would try to overoptimize. If you have a term sheet or money on the table, I would close it. Just found it a founder. What are you seeing, Sacks? Yeah, it's gotten a lot harder. I think especially at the growth rounds, we actually have signed to growth term sheets recently.

And it was much harder for us to do growth rounds last year just because you had these huge megafunds come in at crazy valuations. But now they're kind of looking at 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 thing to, you know, Tarroth raised a good point about, you know, private, not only are private valuations sort of sticky,

but private marks are sticky, and you know, companies only get remarked every couple of years, and so where it's a 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, sorry, sorry, it's a clear revision. LTM ARR or, you know, NTM ARR, which one? Basically, you lost 12 months, next 12 months. Yeah, no, you just look at their current ARR, which is, you know, run rate. Their current revenue. Their current revenue. Yeah, exactly. Take January, you time, so by 12?

Or in case April, April, April, basically. Yeah, basically, yes, you take the current month and multiply by 12, but they have to be annual commitments, right? So if it's not, it has to be annually recurring revenue. If they're not, if it's not an annual commitment with an expectation that's recurring, you can't count it. So for example, you don't count professional services revenue in that in any event. So the point is you, 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 in the current valuation? And what we see is, yeah, there's a lot of companies that we got into, I don't know, two years ago, at a valuation multiple that you couldn't defend today, 60 times, 80 times, 100 times. But the multiple today is more like 10 or 20 times because it's actually grown really fast. So you need to look at both sides of the equation and that's the analysis of running for every company in our portfolio. And then LPs can decide how to market. I mean, the most important thing is what's the next investor, if they need more capital,

going to market at. Well, the question is, are you growing faster than valuation multiples are falling? Correct. And then can you, that means you could have a down-round, a neutral round, or possibly an up-round, but it doesn't. So are you starting to see people, or people discussing on the board level or in your firm, hey, maybe we take a sideways round, a neutral round, we just go to last year's price and top off another 10 million? Are you seeing that?

I've told some of the boards of mine to just keep fundraising, just keep the round open and top off if there's money available because, you know, especially if you raised around eight months ago, six months ago, those prices, like if people are still willing to invest in those terms, that's a good deal. I literally had this conversation with the founder this week where they had raised that in a great valuation and they turned money away.

Because they were like, yeah, that was a mistake. That was a mistake. We're still growing, that was gonna stay. That was a show growing. So why would we take the money now if our valuation is gonna be double in nine months? And now it looks like, yeah, maybe that extra one to five million dollars would have been good to lock up. Okay, so adding to these headwinds, I think we've been talking about the possibility

of a recession for those new to the concept of recession of your under the age of 30 and haven't really lived through one as an adult. It's two quarters, the official definition, two quarters of negative growth of the GDP. While it turns out, US GDP fell 1.4% in Q1. And Q4, we had a 6.9% growth rate. Q1 was the weakest since the spring of 2020 when COVID hit. Nick, you the clip where Sachs and I basically said this may happen in January of this year. So the concern is that, you know, with the losses we're seeing, and I mean, every day, it just keeps like you see more red, that this could turn into recession. You know, popping of bubbles is usually followed by, uh, by recessions are, 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 a recession. David is saying something really important. The risk in my opinion is not of runaway inflation anymore. The Fed is now in this really delicate situation where China cut rates last week. We have an FOMC meeting, the Open Markets Committee that sets rates on Wednesday, I think, of this coming week. What is he supposed to do? The risk is to a recession because if we over-correct, 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 over correct we're gonna plunge the United States economy into a recession There's a lot of data here and obviously this is When this data is always in the review mirror So obviously we're talking about Q1 it takes a while to collect this data and there's a lot of different factors going on at the same time, obviously COVID and obviously supply chains. Consumer spending rose at a 2.7% annual rate in Q1, a slight acceleration from Q4. There was also a 9.2% rise in business spending. So we have a lot of spending going on. Who knows if that is spending

that actually occurred in the previous quarters and because of supply chains like people's cars are being delivered or people's machines and manufacturing equipment is being delivered now. We had negative GDP in Q1 for a whole host of reasons that can effectively be summarized by the fact that we are still trying to restart an economy at the tail end of a pandemic and we're doing it in fits and starts. And so we have these small bursts of incredible GDP, which we had last year, and then contractions in the economy. 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've 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 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 felt to 6.2% in March, the lowest since 2013. And so what does that mean? Well, it means that the setup is there for us to sort of really contract what we are able to spend as a society. So I think now the odds even push further in this direction that we could have more quarters of negative GDP. And all of a sudden

we're back to what we talked about before, which is a 2019 like scenario where the government or the Fed specifically races forward to tackle inflation. And in 2018 and 19, it turned out to be a head fake. And by the way, in 2019, the stock market ended up more than 30% up 32% or something like that crazy numbers. Here. And by the way, back then in 2019, China turned over. It looked like it was going to be a fast-moving economic recovery for China, and instead they sort of slowed down. We have the same thing here. We have a quarter of negative GDP. We have China in lockdowns. We have every company that's in the manufacturing supply chain ecosystem telling the world that we don't really know what this is going to look like. Intel today actually said there's going to be shortages in chips through 2024.

So I think it could be a very difficult path ahead for the Fed. How do you raise rates 400 basis points into a slowing economy? You could raise basis 0.75, you know, 75 bits, maybe 100 bits, but it gives them very little freedom to operate without really tanking the economy. There's also another point to highlight here, which is in some of this data that was released, there was a strong indication that there are real issues

right now with inventories. I don't know if you guys have tried to buy an appliance or a car lately or a piece of furniture, but like I tried in the Q4 to buy a car and it was absurd. I mean, right now there's like one year delay to get a friggin' couch. I mean, like everything in the global supply chain, somewhat related to the kind of big inflationary pressure that hit us at the end of last year and then everyone placed orders. All the factories kind of had to produce a lot. They all couldn't keep up through to what's going on in China right now where there's

lockdowns and factories are shut down. I have several businesses in the hardware space that are actively searching and frantically trying to find components, suppliers, specific parts, even basic raw materials like aluminum are very hard to get 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 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, an Apple just said that they're expecting, I think close to a $10 billion at this quarter because of supply chain issues. A lot of folks want to spend,

the spending interest is there, the capital flows are there. It's just that the supply chain is clogged up and we're so dependent on getting atoms and molecules moved around and they're all kind of held up in different places that folks simply can't get their purchases in. And so the revenue triggers don't get hit. And so the numbers don't look good from a growth perspective, but it doesn't necessarily mean that the demand isn't there. This is a significant inventory problem and supply chain problem. That's driving a lot of this adversity right now in the market, it seems. And interestingly, that doesn't mean that we're not going to have a recession,

because when I'm not able to spend money on Apple, Apple spending less on their suppliers, they're spending less on their suppliers. So there is a trickling effect of capital flows and the recessionary effect may be it, but you know, there is capital and there is demand for consumption. It's just that we're really clogged up right now. Well, and the consumer confidence index has been on a bit of a roller coaster. We were at 130 before the pandemic. For the year of the pandemic, we were down in the high 80s, 87, 88, 89. We rocketed back up, you know, in 2021, people started to feel like, oh, we've got these vaccines. Things are going to go back to normal. Rock it back up to 128. And

it's been a slow tick down to where we're now at 107. And so I think consumers don't know what to think. They don't know if, you know, know what to think. They don't know if inflation is transitory, they don't know if gas is gonna be $7 or $4. They don't know if they should spend on a big vacation or not. And so this I think in terms of people's planning, I don't know if people can plan how their own personal budgets, right? And I think that's on the confidence thing to Tramots Point,

we need to have a predictable economy. It can't be this schizophrenic to use a term. What do you think about what we're seeing here in terms of? We're obviously either inter-recession or dancing around it. We're basically on the edge of the cliff right now. I think it's probably the most accurate. I tweeted in February, hey, anyone noticed that we've just entered a recession and I got dunked on by all the professional economists and all these people.

But the experts, the experts, the experts. Right. And now it's like the data's came out, negative 1.5% economic growth in Q1. So what I wrote at the time was exactly right. And I don't know how 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, I don't think it's going to as high as last year, just because we're lapping a much bigger number from last year. So on a year over your basis, the comps are, you know, you started on a higher price level. But inflation's still there. So, you know, I don't know what you do about that. It's a really tough situation. And when you have this kind of wealth destruction in the stock market, I mean, you know, there was a good tweet that, Jamal, you know, there was a good tweet

that, um, Jamal, you shared, we should put it up on the screen. I mean, so much, uh, like wealth has been destroyed. You don't necessarily see it if you just look at the big cap indices, but you look at all the engines of, possibly sort of 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 .com crash of 2000, and not just the April period, but all the way in October where it kept going. And then the 2008 real estate crash. So we're already top three worst situations for gross stocks in the last 20 years. And when you have that kind of

like wealth destruction, it eventually trickles down into the economy because people just feel companies start cutting budgets, people have less money. That feels 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 means people being confused when you hear why are all these stocks down so much? But the indices are not down as much, and it's exactly for the reason that David just said, which is that underneath the surface, the mega cap techs consume so much of the market cap of these indices.

So the Googles, the Microsofts, the apples, and the Teslas, those four just clog up an enormous percentage. I think it's approaching 40% of these of these indices. And so, underneath the surface, you have dispersion, which means you have these tail of two kinds of stocks. You have these four big mega caps, and then you have everybody else. And the mega caps are generating so much cash that they're just basically keeping the market afloat. So at this point, maybe there's a small silver lining and that silver lining is that to be bearish right now is effectively not being bearish these growth stocks

because as we said, they've been just decimated. At this point to be bearish the indices means very specifically to be bearish those four names and only those four names. And so that may actually mean that the market has effectively crashed already. Yeah, but by the way, I'm not necessarily bearish on gross stocks from here because like you said, they've already been beat up so badly. The stock market is usually a leading indicator. What I'm a bearish about is just the state of the economy because the stock market is traded down, it trades down on expectations.

So it was already trading down months ahead of the slowdown in the real economy. So now- The market knew in December, the market knew in November. The market was coming. The market was coming in like around November 6th of last year. They knew it was coming in. Yes. Market 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, the duration aware with all, meaning you're just not time bounded and you can just be there forever

and not everybody's in that position. And endowment could be in that position, but individuals with... No, an endowment is not because they have to create distributions every year, right? I'm talking about the mega endowments where they, you know, forward or Harvard may not need to do this, but yes, smaller ones might actually be operating. Memorial Sloan Kettering might actually be operating their budget from it. Yeah, but just to go back to David's point, like, it's a really difficult spot, like what is the Fed supposed to do?

So they're probably going to tighten 50 basis points in May. That's relatively well expected. We'll be able to digest that reasonably well. But what do they say to David's point? You know, if they all of a sudden go on a crazy program of quantitative tightening, right? And what is that again? That's when, you know, we were spending, they were spending, they were printing, you know, money, billions and billions of dollars going into the market, buying securities and giving people the money, right? That's called quantitative easing. Now we're doing the opposite, right? Where they're selling and they want the money back. Now, the problem is what that does is that removes liquidity from the market. And when you remove liquidity from a market, you actually make it a little bit more fragile, a little bit more

precarious, a little bit more price sensitive. And so it puts us in a very tough situation when the economy is slowing, when these guys may be raising rates. And then at the same time removing money from the system, it may be a lot for all of us to handle. And so I think that they're under a really difficult, well, and if you've had a decisions, there is a business cycle and, you know, there are always recess, recessions periodically every seven 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 trillions and trillions of dollars. And they didn't stop. It was one thing to do it during that sort of COVID recession. But then last year, they printed that last two trillion. And that's what set off this wave of inflation.

So, you know, when I was like in school learning about economics, and they would tell us that all these government programs and actions are like automatic stabilizers or what have you like the government helps balance out the business cycle. No, the government like magnifies the business cycle. Magnifies. They've made this so much worse. Well, they're putting their hand on the steering wheel, right? It's like let the economy drive, let the free market do this.

And if you start, you know, you might oversee or into the federal government. It's great. It's setting incentives, right? And creating like tax credit programs and incentives for private enterprise to invest money. But when they act as a direct market participant and start to actually direct capital flows and make decisions about how the capital market should work, it never ends well because this is not what they're good at. Well, I think there's also another, I mean, just to counter that there's there's also this other issue of not just incentives, but when

they create a Free capital that then allows a market to find a way to take advantage of that free capital And that's effectively what we've seen happen with Medicare Medicaid as well as with the student loan program and You know, I don't know if we're gonna get to the student loan program today But I think you know to your point, Chimoff one of the things things that happened with the cost of education in this country is that the federal program, which was, you know, and I took a bunch of notes here to talk about this today, but the federal government began guaranteeing student loans in 1965, it's called the federal family education loan program. And that program made capital available for students to borrow, to spend on universities

or whatever education they want to go get of their own choice. And the idea being that that will give them the ability to go make more income and extend their careers and educate the workforce. And the problem is that when that capital was made available, a lot of private universities started to emerge and private for-profit colleges started to emerge. In the years since that program was introduced, I just want to give you guys some crazy statistics. In the 1969-70 era, the cost for a public four-year college was $1,200 a year. That's room, board, tuition, and fees.

In 2020, that cost rose to $21,000. And here's the other crazy stat for private for your college in 1970, $2,500 a year, 2019, 2020, $46,000 a year. And so that capital basically allowed these for-profit organizations and these organizations that try and grow their endowments, which are effectively like for profits, to charge any price they wanted. And the consumer, the student, would be able to get free capital to fund that quote unquote education,

because it was available to them for free from the federal government. And so the federal government created a bubble in education cost. And that bubble in education cost has now overburdened 15% of American adults with student loans that many of which they would never be able to pay back. And now we're in this really awkward situation of saying, hey, maybe we should forgive those loans because it's unfair that people are burdened by this. And doing so obviously doesn't solve the fundamental problem,

which is that making those loans available in the first place creates an inflationary bubble effect in the end asset. In 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 views. You're going to have people game the system, right?

You get whatever university of Phoenix types and even the large, uh, H.A.C. universities raising, uh, tuition to observe things and people take these loans, Chimoff, 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, Chimoff? Yeah.

So there's an interesting article in the Atlantic about who really wins when you forgive student loan debt. And I just pulled out some facts. So I'm just going to look down here and read them just so I get them right. It's said in the article, 13% of the US population carries federal student loan debt. Grad students account for 37% of that federal student loan dollars. Currently it's 1.6 trillion of total student debt versus about 10 trillion of mortgage debt.

So the average debt has gone from about 25K in 2012 to 37K in 2022. So, you know, almost a 50% increase in a decade. The majority of student debt is held by white borrowers. Only 23% of black Americans 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 $1,305,

and that number continues to grow for masters in professional degrees and PhDs. Interestingly, the last two points, the Gallup organization 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 four Gallup polls, quote, just one respondent

mentioned student debt as the most important problem facing the nation, unquote. And then last thing is here is that 43% of the 2020 Biden electorate graduated from a four-year college or university versus 36% of Democrats in 2012. So 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 a majority of all of these. Sure, our vocal though to your point, I think. Yeah.

I mean, look, this is, I think that there are two motivations, political motivations for doing this now. They're pretty obvious. And then I just want to say three things on kind of the concern about this and why I feel very strongly that if we don't fix the underlying system, you cannot forgive student loans. You have to fix the system before forgiving student loans. Fix it first. What's the number one fix?

Well, so let me just say the two motivations. The two motivations, number one, this is a stimulus. So this morning the Biden administration said that they were thinking about taking executive action to make the first $10,000 of student loans forgiven. So if you do the math across 43 million people, that's a roughly half trillion dollar forgiveness. What happens? That half trillion dollars,

much like we saw last year, becomes a stimulus payment. It is money that people now have, that they didn't have before. It is capital that they, or a 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 two and a half percent boost to GDP.

Right. So half a trillion dollars of free money just flushes into a system. The second thing is that it will help in the midterms is their point of view. They've obviously done the polling here, right? It's like, hey, when I was in junior high, the kid that ran for class president was like, I'm going to make everything an eventing machine free. Guess what? That kid got voted in.

The idea that you're just going to give everyone free, give your loans back to you for free. Everyone's like, my gosh, this is the best thing ever. Elizabeth Warren, your genius, Bernie Sanders, the idea that you're just gonna give everyone free, give your loans back to you for free. Everyone's like, my gosh, this is the best thing ever. Elizabeth Warren, you're genius. You know, Bernie Sanders, you're genius. Joe Biden, you're genius, let's say yes. And so they believe through polling that this is gonna 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 of an education, if there's no standard around whether or not a specific accredited university increases your income and earning potential as an individual or increases the opportunity for you as an individual, you are wasting money, you are giving federal dollars to private companies who are profiteering from that and the individuals are not going to benefit from it. And I think that we're seeing this, sorry, and we're seeing the 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. Jamas 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 will

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... Supply and demand. And the reason they're able to raise... 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 diet drive, sorry. No, no. I think it's completely legitimate.

Sex we talked on a previous episode about how people make things like immigration, you know, such a charge philosophical debate. When there are point-based systems being used in Canada and Australia and other places, that make it much more logical. Do you think the solution here is to Freeberg's point of just, and I'm interpreting Freeberg's point as, what is the value of this degree? Nursing? Great. Nurses can take out 100% of their loans

because we know there's a nursing shortage. You know, philosophy, graduate students, maybe can't take out more than $5,000 in debt because we don't see a bunch of job openings for that. Getting a history degree, Trump University, they're a lot different than getting a nursing degree. So, Saks, what's the solution here? And then we'll give you your swing at bat University is a lot different than getting a nursing degree. So, Saks, what's the solution here?

And then we'll give you your swing at bat in terms of buying votes. Yeah, I mean, the solution first before we go partisan. Look, I think that alone only makes sense when it generates ROI, right? It makes, 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 spend five years there, they get a degree in some woke nonsense, and of course, it doesn't help their earnings power. I mean, that's a fundamental issue here, is that these degrees are worthless, right? I mean, if you go, 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, a gainful job. But, you know, otherwise, if you just major in fine arts at Harvard or something like that, I mean, you're, you basically graduate, you get a job at what the New York Times is your dream, you can't pay back your loans. You're saddled with this enormous debt. And think about the cultural impact that has. You have this young generation who believes in socialism. And I think this is a big part of the reason why is they have no capital and they have no ability to accumulate capital because they're so saddled with debt. So to interpret where you said sex, 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. Yes, the system is cool. So look, I think maybe what we do is we reform the debt. I had actually okay with forgiving the debt in some instances if you got a reform of the system. In other words, if we stop funding these worthless degrees, but if you're basically going to acknowledge that, hey, we need debt forgiveness because these degrees are worthless,

why would you keep funding those degrees? So, you know, we need to have 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 under George W. Bush's presence. Yeah, explain it to everybody. Yeah, basically look, when if you ever get to the point

where you have too much debt and you can ever pay it back, you declare bankruptcy, and then the court starts you over from zero. So you can at least start building some wealth, right? But you lose credit, but you lose credit. 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 a personal bankruptcy. But the crazy thing is that in bankruptcy, you can knock at your college debt, your student debt canceled. You can get your credit card debt canceled, you can get other types of debt cancel,

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. If it was private market sacks, you wouldn't need to do that, right? The reason that's the case is because it's federal dollars that are funding those loans.

But if it was private market dollars, people actually, if banks and lenders took a loss when people couldn't pay back the loans, then the market would work itself out. The problem is it's the federal government stepping in and trying to be a market maker. Right. And it creates this totally crazy incentive. Right. It creates double distortions on the one hand. Like you said, it basically means that because government's money is funding everything, the tuition goes up because it's called just take advantage of it. But then also nobody's really making a smart ROI decision about whether

it's smart underwriting decision, about whether this loan is worth making, whether it actually stands a reasonable shot of being paid back. There is such an easy free market solution here. It's called an ISA, it stands for income sharing agreement. This is where you give a loan to somebody and you get a percentage of their income

over a period of time, capped at a certain multiple, say, two X. 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've got to pay 50% of my income every year to the federal government. Like I pay taxes. The thing we have to remember is like if the federal government tries to do this, it really is just about buying votes going into a midterm election. And here's why. If you arbitrarily give a bailout of one sliver of the population. Unless that sliver is really, really large,

which we know it is not, it's going to really anger everybody else. Think of all the people that are trades people, 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 and jobs and saddled with debt is pushing for a program that isn't a broad-based mechanism to create a quality at all. It's just a get out of jail free card for a small group of people who unfortunately were taken advantage of and this is the thing that we're losing sight of. You can only pay back alone if you're making more money than you owe.

And the fact that this exists shows that these loans were really poorly constructed. And they were given in instances where they should not have been in the private markets. We've seen that happen, but we go through a cleansing mechanism to sort it out. Right? We've gone through it. That's literally what happened during the 2008 real estate bubble. People gave mortgages to people who could not exactly pay them.

If I as a lender think that you're not going to be able to pay back the loan, I don't give you the loan. That's the simple mechanism that exists in free markets. And part of the issue is a lot of people got loans thinking without doing the calculation, will I ever be able to pay this back? And they took the loan to get an education. The other the other secondary concept that I will just make money. But let me ask one other question of you guys at what age and at what level do you think individuals should take responsibility for the decisions that they're making when they take on personal debt because we see ourselves getting in the cycle where consumers are given debt. They don't think about the consequences of that debt down the road or do the analysis themselves and maybe they're not equipped to and they'll take out a loan on a car on a car, on a house, on a... But the problem is... And on a...

On a education. But here's the thing. Like, the education is a very dangerous thing because we put so much societal credit and external signaling to it. And we gave 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 Centurion or Platinum card. You're given a Chase Sapphire card with a $500 limit and you earn the right to borrow more. Same if you applied for a car loan, the same with 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 edit education? The market would figure it out. The market would, because you would differentially price the risk as you guys literally brainstorm right now. Like, what are your grades? Well, no, it did. What courses did you take? Whatever it is. Whatever it is. We're not going to get it right. The market will get it right. But the market would figure it out. The problem is, and sorry, the incentive was, and this is a really important point.

You know, if you guys read Ray Dalio's book, which we've talked about a number of times, he's identified and highlighted that a growing economy in a successful country improves by improving education and having more people get higher education, generally speaking. And so the initial incentive, the initial intention behind the federal student loan program was a good one, which was to give people access to capital that the private markets were not providing at the time so that they could go out and get a higher education.

We could improve the education of our workforce and we could grow our economy. Nowadays, the question that we always forget, remember, we always get one step away and then two steps away and five steps away And we missed 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 no most importantly is the private market there because you look at the total debt outstanding 1.7 trillion dollars

There would be a private debt market. 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 are for profit asset management businesses wrapped by this philanthropic do good or nonsense

that they try to tell people to get you to go there and pay $50,000 a year in tuition. It's a joke. And they come out 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 40 or 50% of the economy

or of the population of a country is very precarious. So student debt, in this case, 15% of the US population, it's a lot of people, but it also means that there's 85% who don't benefit. What will those 85% of the people say when they have to foot the bill for the first 15%? And then what do you think happens with other kinds of debt? What happens when the oil lobby says, forgive our debt because we're in a national energy crisis? What will all the climate change? We don't have to talk about that. It's no accountability. Well, it in a national energy crisis. What will all the climate for?

It's no accountability. It's no accountability. Well, it creates a slippery slope. And my last point on this is to the extent that we actually want to forgive student debt, I'm fine if that's the law of the land, that's great. It should go to the floor and it should be debated in Congress and it's a law that should be passed, but it should not be by executive edict trying to back in to buying votes in a midterm election. It's gross.

Well, by the way, just on the politics of that, I think this could potentially hurt them, because to mouth to your point, this is basically a bailout of the woke professional class. It's the under-employed graduates of these universities who, again, are members of the professional class. They measured in things that didn't increase earnings potential. Meanwhile, the majority of the country is working class. Something like two-thirds of the country is still working class meeting, non-college educated. They're going to have to pay for this bailout.

In one way or another, either through higher taxes or more deficit spending or more debt, the burden of this bailout's going to fall on them. And why should they have to pay to bail out the first months? Clearly, like somebody working in retail is paying for somebody's graduate school degree in creative writing or something. It's completely and profoundly unfair. To the answer to freeberg's question, we actually know when executive function fully mature as an adult, it's 25 years old. And that's when you can actually make long-term thinking.

So there is an argument that people should not be allowed to take these loans that are not even that you can't get out of, or there should be some cap on the amount of loans you can take, because people at the age of 17, 18, 19, 20 are absolutely not able to make these decisions. There are other programs as well that work. So in Canada, I went to a school called the University of Waterloo and Fantastic Engineering School. The reason I went there and I did electrical engineering there is that they had a program where after the first year, so the first year looks like every other year at every other

school, okay? But you're there for two semesters from September to May. But after that, you start working. And you alternate four months of work with four months of school. And you get paid for that work. And what it allowed me to do was graduate with meaningfully less debt, but it also allowed me to graduate with a commercial skill set.

And I was able to get a job. And in that moment, actually, I was working at a set. And I was able to get a job. And in that moment, actually, I was working at a bank. And I got profoundly lucky, which is I worked for an individual. And I was trading interest rate derivatives. And I was learning to trade technology stocks on the side. And this guy, Mike Fisher, incredible human being. And I made in one year like 25 or $30,000 for him. Yeah, Zips it. He wrote me a check and he said here you have $25,000 a student debt. Go pay it off right now. I'll let you cash out this whole book. I graduated with about 28,000 of debt. I had about 8,000 I think. I had to somewhere between 10 and 15,000, 10 and 20,000. And then I got my

first bonus check after my first year of work after undergrad. And I paid off all my debt and it felt incredible. Incredible. It was amazing. When I paid off my debt, I've never been in debt since. I walked downstairs to the bank and I gave them this 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 four grand a year ago. But if I didn't go to Waterloo, I would have had doubled the debt because I wouldn't have had work. But then also, like I think about all these scenarios, I wouldn't have had two years of work experience. I may not have gotten the job that I did at Bank of Montreal at the time. That may not have been able to give me a chance to meet Mike Fisher. 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 universities that I think are really mismanaged today and they go and work against what is right in society. So I'll give you another example. The dean of the engineering school in the president of University of Waterloo was here this week with me. And I asked them, tell me about these global rankings. And they said, you know, it's just a really difficult game.

They said, if we wanted to compete to try to get high on the list, we would have to do the things that would undo all the things that made us great and unique in the first place. And I was like, you know what, I am such a huge supporter of this school. Please just continue to do what you're doing. And I'm so proud that they have the strength to just stand on their own two feet. But every other school is running this shell game of, you know, gerrymandering all of these statistics, trying to get high on the list to trick some parent, to force their kid to go to some school, to then graduate with $200,000 of debt to get a job that doesn't then give them any line of sight to paying

it off. It is, I don't think it's their kids' fault, but you have to reform the system. And I think the first thing you need to do is look inside these universities and hold these folks accountable I mean this incentive systems are just crazy Speaking about crazy. We talked about Bill Wang and his that's your transition Transition sorry, I think they can't all be elegant and smooth here's Jake out. 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 do this? The Hwanger? The Hwanger. Crazy. Crazy. The linkage is craziness. Okay, go. No, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no,

no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $ billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $1 billion. $ billion. $ real time back on episode 28. They famously lost $20 billion over two days when they were margin-called back in March of 2021. He worked at Tiger Management, Yadiata. And it was at the time reported that they were trading billions of

dollars at over 5X leverage. According to the SEC complaint, at its peak, the firm was managing 36 billion with 160 billion of exposure, which is 4.5 times leverage. But our Chego, so what a Harvard's pronounce, started with only 1.5 billion in assets in March of 2020. So Wang flipped 1.5 billion in capital into 160 billion of exposure in 12 months. Essentially trading somewhere in the neighborhood of 100 to 1 ounce peak, according to this complaint, a bunch of banks have lost money because they were supporting this credit suites lost 5.5 billion, mortgage-downly lost a billion, UBS,

774 million. The New York Times described it as quote, orchestrating a stock manipulation scheme that relied on them masking and concealing the enormous risk they had taken. Chimoff, you had some thoughts on this, I think. So first, I think we should probably explain how he did this, right? Yes. That's everybody's question is how did the banks let this happen? So explain. Well, I think first it's what it'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's stock. And what I'm going to do is buy protection. And what you're going to do is sell protection. And essentially, what happens is as the stock goes up and down, you're going to net the difference between these two people. And when you do it that way via a derivative. So what it forces the person to do the bank in this case is to go out and buy the stock, okay? Show that they are hedged in case the price goes up a lot because they have to pay

that difference in this case to Bill Hwang. And if the price goes down, Bill Hwang has to pay that difference back to the bank. So what happened is that he went to three different banks, Morgan Stanley, Goldman Sachs and Credit Suisse. And effectively what he did was he bought, he made these bets across a handful of names. But he did it with so much leverage that he ended up owning 60 or 70% of some of these companies. And in March of last year when the stock market turned over, he owed them enormous amounts of money so much so that these banks had to unwind these trades, which caused further down drafts in the stock and almost

spilled over to the broader stock market. Jason, the numbers from the SEC complaint are pretty crazy. As of March 31st of 2020, they had 1.6 billion invested. On a gross exposure of 10.2 billion, what that means is they were able to go and lever up this 1.6 billion to behave in the market as if they had 10.2 billion. By January 1st of 2021, so nine months later, they had $7.7 billion of invested capital. So they'd done really well, right? They'd made 70% on this 10 billion. But they levered that up again,

and so they had gross exposure of $54 billion. And then just, I think three months later by March 22nd, they had $36 billion of invested capital, meaning they had $36 billion of cash. This guy had taken 1.6 and spun it up to $36 billion in a year. Yeah, I mean, it was like 20X. In a year, but then he had levered that up again,

and he had $160 billion of gross exposure. And then the market turned and he owed all this money and so all these folks had to get out of it. But they also alleged that he was trying to do short squeezes on the stocks to try to make them goose even more. So there was massive manipulation because of his position size, correct? Yes. So this is what happened.

But then here's how it is allowed to happen. So if you try to do the same thing in interest rates, in the interest rates market versus the equity's 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 clearing house and in the laws that

regulated. And so what this is is a very shadowy, gray part of the of the in that clearinghouse and in the laws that regulate it. And so what this is is a very shadowy, gray part of the market that is poorly regulated that has very little oversight. So what do the banks do? The banks say to you, if you want to put this thing on, give me a balance sheet so I understand what the risk is. A piece of paper, a report. And I think what they're alleging is that these guys lied so that any individual bank,

in this case, Goldman, Morgan and Credit Suisse, had no idea because they kind of doctored these reports to each other. And that's why all this risk built up in the system. It would be solved if you had a clearing house for equity derivatives, the same way you have for industry derivatives. It is crazy to think that somebody was doing this and thought they would get away with it and had been up 20 acts. And the psychology of these people, the made-offs of the world, I just find fascinating. Why wouldn't he, if he'd just start by the way? We talked about how the four of us, we talked about how the four of us are grinding to return two acts of our money in 10 years.

Yes. And this guy is like yellow. He's seven X or 10 X, you know, $1.6 billion and it was not enough. It's not enough. I mean, people have, I mean, what do you think the psychology of this is? Like, I know I do. And that's what I'm trying to figure out, Saks. What's the psychology of somebody who tries to do this?

They're already a billionaire. They've already got their jet. They could go anywhere. They could have this. They're already a billionaire. They've already got their jet. They could go anywhere. They could have anything. They could buy any home. They could go on any vacation. That's the thing I never understand about these people is like, this has got to be some crazy

social path of behavior. Jekyll, did you always want a jet? By the way, I just got a business to lack on Southwest. When you started your career, what did you want? The Nix. And that's what I still want. Well, when you started your, you wanted a house, right? And then you got the house and you wanted the, the home and Tahoe and then you, or the

home, you know, the, the vacation home and then, and then you want the to do. And then, I mean, I don't know why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, why, 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 sound like Christian bear brand brand 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 deep What does that mean so weird? I mean the guy could get up by the way The dude was pinched in 2012 for insider trading and had to pay a settlement

and like get back everybody's money. He got pinched. It's crazy. Where is what it is? You know, you never mentioned your friends. I got pinched. He got pinched. Yeah, when you grow up in the streets, you know that.

What happened to this guy? I got pinched. When you grow up in the streets. The guy A. Cheese, he didn't run, he'd run it on his friends. No, Jake, you run it on the man, Jake. We tried to steal some man. Jake got it and he ran it on his friends. Now the C, you ran it on his friends. You tried to steal some of my jacos. And he ran it on his friends.

Now the CFO got pinched, so they flipped them. This is super deranged. Speaking of deranged. Ah. Ah. Transitions, so where are we going? Where are we going? You know what someone needs to do?

Someone needs to take all of J-Calf transitions from the last couple of shows and just put them together in a row. Yeah, just a super crazy. Secret transitions from the last couple of shows and just put them together in a row. Yeah, just a secret of crazy. Secret of crazy. Secret of crazy. Secret of crazy. 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 Jank-Uwitz Jank-Uwitz He has research Russian misinformation tactics and online harassment. This is also the woman who sings Show tunes on TikTok. Jekyll, I feel like you should be running out of this information board You always have such a strong opinion. 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 what people are now under indictment. She also 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, the Washington Post. You would think that these blemishes on her record might disqualify her from being an expert on disinformation, but actually in the view that people are hiring her, these are actually qualifications because they are not interested

in the truth. The reason this department is set up and what they mean by disinformation is they have hired her to push partisan political points. That's what's going on here. That's what disinformation is. Now, it used to be that if you disagreed with somebody, you would just say, listen, I disagree with you or maybe you're an idiot, whatever, you're wrong. But now, the way that these debates are set up and the way they work is they don't just say you're wrong or that's not true, they try to label you as discrimination so you can get you censored.

And the point of hiring this disinformation czar is basically to censor the, basically to shut down the debate. That is basically the whole point of the censor. Do you think there's any timing here with Elon Buffett? Yes, 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. Why don't they 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 mashup of George Orwell and I ran because here you have you know Elon Musk the heroic Lone entrepreneur trying to rescue freedom of speech at the same time you have, you know, Elon Musk, the heroic Lone Antwerp and Nore trying to rescue Friedman's 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 the just everything about it is, I mean- This information governance board is such a dystopian name.

The thing about it, that's a little bit scary here. I know you play the video of her doing show tunes and it seems sort of silly, but the thing that's scary is that this is under the Homeland Security Department. That's another way to rank. Why is that there? It's the most militarized department in our government. So it's really scary to put the Ministry of Truth under the department that has all the soldiers. 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... True truth. Shout out, George, farewell. A couple of months ago, there's a new story that we might have covered on this pod where the Homeland Security Department redefined disinformation to comprise... They said it represented an escalation

of the terror threat level. So in other words, they basically said that disinformation was tantamount to terrorism. Remember that? Didn't we talk about that? This is the payoff to that. First, they define, they basically define the other side as being disaffirmative, the debate, as being disaffirmation,

then they define disinformation as basic terrorism, then they have the Homeland Security Department, which is supposed to be responsible terrorism, create this ministry of truth. This is what's going on here. It's really weird. Just to remind everyone, there was concern in the last election, I'm going to play a devil's advocate if I often find myself doing here, just to try and explain the world, that's the reason I often play this role, because I try to understand the world. But there was a real concern that the Russian government

was using information warfare and propaganda through social media to influence voting. And that that is considered a security threat to the integrity of our elections. Therefore, this is a homeland security issue. And there is a question mark, of course, that everyone has on how far they're 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? And sex, I don't know if you think that that's a concern we should or shouldn't have, but how would you address it if you were the president? And that was the challenge, you know, to like, how do we stop that from happening? The foreign actors interfering in our elections is certainly a concern we should have if it was actually happening on a big scale or in a meaningful way.

I mean, this is basically, look, there's a Hokes, okay? John Durham is basically out there making indictments right now proving the extent of the spokes 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 hundred thousand dollars 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 social action.

No way to be clear, to be clear, that was just the ads that were bought with, with like credit cards that said like FSB on. But who would go Facebook security? You probably didn't count all the number of credit cards that were stolen. I'm pretty sure the Russians are capable of stealing John Smith's credit card and using that to buy ads as well. Well, I looked at those ads. I've seen those ads. They were ludicrous.

They weren't going to convince anybody of anything. I mean, they had like Jesus and the devil, arm wrestling each other. And the Jesus figure was basically set. And it was just absurd. I mean and the Jesus figure was basically set. And it was just absurd. I mean, the Jesus figure was saying that- Okay, we have to be clear it happened. And you've now stepped back your position on,

like it just wasn't that scale to your opinion. I think, I think, look, the scale interference in the election was committed by big tech. I mean, they censored the Hunter Biden story two weeks before the election. It turns out that's a completely true story that Hunter Biden has extensive business dealings in Ukraine. He's a great guy. We are now, but we are now deeply involved in a war there. And that story, the electorate had the right to take that into account. Big Tech censored that

story. So look, I'm not interested in that. Couldn't be a response to that. Just to give people, like, making a very difficult decision, you have to remember Trump asked Putin on stage to hack Hillary's emails and they did. Then he asked the Ukraine to take action against the Biden's or he wouldn't give them support and he was impeached for that. So if you put yourself in them, and I'm not saying Twitter made the right decision here, but there was, and there was also sexual material, you know, people's needs, which, and hacked material and nudes are against the terms of service. So I think two things happened concurrently.

One, listen, the people working at Twitter are 98% liberal. They don't want Trump. They sort of as an existential threat. And then two, they don't want a link to hacked material. Oh, really? Hold on a second. Hold on during the whole whole. Let me finish this point.

I have to finish my point. The third point and then I'll let you go is that in addition to all that Hunter Biden is completely a grifter. Go. Okay. I agree with you on that one. So look, during the whole Canadian trucker thing, remember when all the people who contributed to those Canadian truckers, they got docs. I mean, basically there was a hacker who leaked 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 hacked information is nonsense. The lips of TikTok account just got docs by Taylor Rennes. Look, whether you think that was a good idea or not, the point is these principles are invoked very selectively when there's a story they want to suppress. And the New York Times and the Washington Post have both not come out and said that the laptop was real, it's been authenticated, the story was real, and this whole idea that

it was disinformation, that was just invented. I mean, it was just invented. Well, no, hacked. It wasn't that it was discerverated. It was potentially hacked. And Trump said that. Nothing was hacked. Here's the thing, Trump set the stage for that and the people at Twitter and Facebook who also made these decisions, they were informed by three later agencies, Department of Justice

and FBI, et cetera. Hey, this is potentially hack material designed to interfere with the election. Listen, Nina Jekovitz, Nina Jekovitz and other Democratic party operatives just made up at a whole cloth that the Hunter Biden story was disinformation. It was true. It's been acknowledged as true. The Washington Post is true. I mean, I think it was. So it goes right and it can improve. No, it's not about improving it. Look, well, no, no, I didn't fear my sentence. I think this is where social media can improve, which is if they had to explain every one of these decisions they make in full in transparency, I think that's something Elon could bring

to this party, which is if you're going to block something, we need to know why. And they'd never explain why and who made the decision. And I think that that transparency would benefit situations like this. If the DOJ or FBI told them, this is hacked material, then they got to go to the DOJ and say, hey, you got to give us cover here. If this is, in fact, hacked material, you told us not to print it, we're not going to print it. But it was just bizarre that one publication got

dinged like the New York Post. It didn't. The oldest newspaper in America. The oldest newspaper in America. The Bastion of like. It doesn't matter. It's not for you. The site is not for Twitter. It's a legitimate publication that had a true story of like it doesn't matter. It's not for you. Your side is not for Twitter to sites legitimate publication that had a true story and I don't just relevant to the election and

the American people should have been able to take take that into account and people like Nina Jacobits, whatever our new czar of the Ministry of Truth, she was out in the forefront basically calling that story disformation. Meanwhile, she's pushing the steel dossier, which really was that story was confirmed would Biden have one. 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 election interference. Now, Elon came out this week and specifically tweeted that that was basically a mistake. Jack also said it was a bad joke. It was a mistake too. And Elon repeated the same thing that they shouldn't have done that. I think everybody was angry.

It's a bad 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 million a year to make those decisions. You guys see this debate this happened last year, this last week. So, the point is that if you criticize somebody who's on a certain side of the debate, that's harassment. But he'd even mentioned her by name. This absurd, this discourse has gotten.

Can I make a prediction? Yes. Prediction is great. I think people misunderstand Elon's incentives for buying Twitter. So, and I haven't talked about this. So, I'm just getting a complete subjective prediction. I think he's going to buy Twitter. I think he's going to clean it up. I think he's probably going to generate something like a 2X on this. We talked about how, yeah, that's like a good terminal valuation in six or seven years. That basically puts that asset worth at around $100 billion. In the meantime, he's going to open source as much as possible. I think he's going to make it very difficult

for misinformation and disinformation to get very far. He said he's going to authenticate every human being that uses the platform. He said all of these things publicly already. And then here is the masterstroke. And again, this is just me speculating. I think he's going to donate it into a foundation and a trust. And I think it'll be an incredibly powerful competitive alternative to all these other for-profit businesses because everything you guys are talking about is the incentives that get perverted when you have to layer economics inside the New York Post, inside the Washington Post, inside the New York Times, the Wall Street Journal, everything eventually devolves to clickbait, to hearsay,

to doxing, to whatever can get you more revenue. But if you can take it off the table and run these things as a public trust, you can actually win back a bunch of confidence and a lot of these edge cases go away. Now you would say, why would anybody do that? Well, I think the real answer is because then if he were to donate it into a foundation, he'd get a hundred billion dollar credit that he could use to offset know, to offset the gains when SpaceX or Starlink go public. Interesting. Very interesting.

There you go. Well, I agree with everything except for the donation part because he's raising twenty-something billion from private equity part and then don't it? He'll pay the debt off. He'll own it a hundred percent. And he'll pay people a very fair living wage and it'll attract people that want to seek out the truth, that want to seek out the truth, that want to work in an apolitical environment. He's already said that 10% of the extremes

are both equally crazy. He's going to force this thing to be rational and predictable. It's an interesting prediction. I think it goes public again and it goes to five times of evaluate. Are we going to be able to ask him these questions in Miami? Sure. Why not? Yeah. So let me ask you guys a question.

What would you do? Because a lot of people have pointed out in response to what has obviously become a very polarizing set of discussions this week around what should be censored, what should be banned, what shouldn't, etc. Elon's going to let bullying and hate speech kind of proliferate. Other people have said we need to release, you know, the restrictions and let bullying and hate speech kind of proliferate. Other people have said we need to release, the restrictions and let people say what they wanna say, freedom of speech has no bounds, et cetera.

What do you guys think about the argument that there does need to be constraints in boundary set around things related to health and safety, meaning if someone is making calls to violent action, should that be censored, sex? 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 loud or censored on the platform? Because I think those are two very key issues that... Well, you got to take them separately. Let's do the violence first. Saks, there's plenty of precedent in law. Yeah. Just explain the violence. Look, I think it's straw man around the whole Trump argument, right? It was like he was

inciting violence was the argument that was being made, but like generally speaking, is that an appropriate form of censorship on this private platform? And if so, how do you set that standard? Let's start here with, you hear this argument a lot, which is that if Elon brings free speech back to Twitter, then we're going to have all this horrible content on there. You're going to have violence, you're going to have racism, you're going to have harassment, you're going to have all, you know, all these bad things are fraud. The truth of matter is that and 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, a stream court case law basically discussing this question of what speech is protected and what's not. And there, the stream court has ruled that there's nine major categories of speech that are not protected by the First Amendment. Why? Because that speech is considered to be dangerous in one degree or another. So for example, you can't commit fraud like 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 and sitement of 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 some. What i would do is i instead of just making up the content moderation policies as i want to long i would look at the people at the cases where people been wrestling these decisions for decades, and I would create a content moderation policy inspired by First Amendment case law, where I would take these nine categories of sort of dangerous speech or harmful speech and I would operationalize those. So for example, you can't defame people, right? You know, the First Amendment doesn't protect you against claims of defamation. Would you make people go to court though in order to take it down? Right, so this is where the word operationalized really comes in. It's not practical for a social network to require a

court-level burden of proof to prove defamation, right? So what I would do is I would say that if you are a person who claims to be defamed You could file a report on Twitter and provide the tweet and provide You know some explanation and as long as it looks like a colorable claim of defamation meaning the person is attacking you in a way that seems out of bounds and That could be taken down. You don't have to subject it to a jury trial or something like that So what I would do is I wouldn't you can't literally impose for some of my case law, but I would use it as the basis for defining a content moderation policy. Can I just say something? I think one of the best things about being your friend is sometimes you say stuff that is so powerfully smart and elegant because it's so simple.

Basically what SAC said for everybody else, because this is how, he's like, the PRD for content moderation has existed. It's called the Constitution. It's just that nobody in any of these companies has taken an effort to actually try to write code that maps to this PRD where the PRD is the Constitution whose rights have been established for hundreds of years. By PRD, you mean product requirements document.

Yeah, sorry, yeah. Yeah, that's what a product manager would use. Yeah. Yeah, exactly. Instead of them making this up as they go along, I would look to the categories of speech that she can court has already ruled out. Write a PRD? Exactly.

Let's just do the Health One sac. 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, a constitutional lawyer at this point in your career, but how would you kind of think about that,

and how do you think that that would ultimately resolve in this regulatory framework? That's a debate that should exist. I mean, I don't know why we need to press that debate. So when someone says declaratively on Twitter, this drug will cure COVID, which by the way, the FDA actually regulates claims like that on boxes and material in a commercial setting. And if you're making money off Twitter, you're getting a lot of followers. And then you make more money by putting out a tweet that says, but you're not you're not making

money off the drug. Yeah. Right. Exactly. Look, the person is selling the drugs. Roche, Roe should never say that. Right. So if someone went on Twitter and they said, take this drug, it cares COVID, but there's a sign. You're confusing facts and authority. Twitter is riddled with people that have zero authority that spit out what they think are facts. Right. So I think, I think what you're speaking to

is something very different, which is if you're going to to design a social network, I've been part of helping to design one. So let me I think what you're speaking to is something very different, which is if you're going to design a social network, I've been part of helping to design one. So let me just give you my two cents on this topic. There are layers of decision making that need to go into an algorithm to get to a sense of rank. 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 going to be open-sourced. And what you're talking about is authority. You should allow people to say stupid things. It's not illegal.

Right. Yes, a person can be on a street court or saying, Jesus is the son of God and He will save yourself. Sacs doesn't have to believe him. And somebody can say that on Twitter, the issue here is, does it trend and do you show it to people, the algorithm? And if you fix those problems, then who cares if a person says, hey, listen. Twitter has an authority problem and a ranking problem. And the authority problem comes from the fact that there's all kinds of long tail non-human

individuals in the system. So solve for identity and this problem can get easier solved and solve for trending. And it goes, So if you guys were running Twitter, you would not put on these COVID-19 warnings. This is misinformation and reliable. And rely solely on CDC guidance and recommendations

and FDA labels when it comes to treatments and vaccines and risks and so on. I would I would I would you would let anyone say whatever they wanted. Not a free bird. How far you would see wrong. Yeah. Yeah, I'm not I would, you would let anyone say whatever they wanted. Three birds, often worse than CDC wrong. You could call a label. Yeah. I'm not arguing for the kids.

I'm just going to get clarity here. Yeah. He's just asking the question. I would, I would do is, and not go to your taxes, I would label it, and I would, I wouldn't label it right or wrong. I'd say, Ivermectin is a drug. Here's the Wikipedia page. But you can't, I just want to hold on.

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 the word 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 want to dis... Not this morning, I just wanted to learn more. I want to disagree with what you're proposing, because it is the topic to sure. It. Yeah, I just wanted to learn more. Jake, I want to disagree with what you're proposing because it is the topic to sure. 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 to 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- Give another example. Give it an example. Go ahead, let's address this.

Well, back to you is another good example, but yeah. First of all, nobody contradicted the CDC more than the CDC itself. It constantly put out revisions of its old opinions. First, it said that COVID was not spread human to human, then it obviously said that it was. It basically was against mass, then it was for them, and on and on and on it went. 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 level of these social networks is that basically they are preventing us from criticizing the so-called experts.

That is precisely the kind of censorship that should not exist on these networks. That is precisely the kind of debate we're talking about. What about labeling? In the way I talked about it, like the problem with the label information. The problem with labeling is once again, it's unsillectively, 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 saucency. The labeling I described, and which happens on our podcast on Spotify, where it says, here's the COVID information center, you know, for more information, and they give a range of, so if it's executed in that way,

do you oppose it? If there's like a very confusing public interest going on? If you worked 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's go back to this topic of misinformation, because this is really

the crux of the debate. Once again, on the base of First Amendment case all, 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 excitement of violence, you could, it's fraud, okay, inauthentic that the account is not who they purport to be, you remove all the bots. So all that content can get removed. So what is really left then? It is basically this idea of misinformation, this idea that we are going to declare one

party, the victor in this debate. And I think that is what is so offensive about this mystery of truth that a 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 on the side of truth. And that is not what they should be doing. It's up to the marketplace to decide what the truth is. All right, there you have it folks. Do you disagree with that? I agree with you. To your point, David, I do think in a situation where the public good and there's confusion in a situation,

sending people to more information isn't a bad idea. I do think a lot of this, there were thumbs on the scales, and it wasn't transparent what was happening. I think if you add transparency, so I think every time there's an action that's taken, it should say agent number and what their agent number is, took this action on this suite for this reason and then data scientists can look at all the actions that occur and then say, look, we're looking at this agent number and here's their manager's agent, and here's why they took down this post. You know, at that at least you could have

a starting point to figure out what's going on. We don't even have enough information to know what thumbs are on what scales, if at all, or to what extent. And I would like to see transparency first, so we could have a more informed decision. And then sending people to trusted information sources, a group of them isn't a bad idea, I think.

What's trusted? Yeah, I group of them isn't a bad idea, I think. What's trusted? Yeah, I mean, 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. It's part of being an adult. Yes, you have to come up with your own process of coming to the truth. You could trust some people, trust the government agencies, some people, trust Joe Rogan or a podcast or this podcast, some people, trust a folk singer, trust yourself. That's the number one thing you have to learn how to do as an adult in life, taking all this information and make a reasonable decision.

To take ivory mechnant or to not take ivory mechnant is a perfect example. People said there's no downside to it. People have been taking this drug forever in its 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 research,

do your own research. Right. And talk to your doctor. Do your own research, but you can't do your own research if Right, and talk to your doctor. Do your own research, but you can't do your own research if you're not permitted to see everything. And 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 were advised to use 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 we have gotten to the truth? So just because the experts say something doesn't mean that it's true. Well, and there's pros and cons. 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-scale experimentation on the population in real time with drugs. It is a decision you have to do the pros and cons for.

The medical establishment, the medical establishment at one point in time thought it was a good idea to lobotomize people. Like they were doing that as like a medical procedure. So these people can be wrong, you know, and this idea that we've arrived at the end of history and we know the truth. Here's all truth. Exactly.

No new facts or being or no new knowledge is being created. For fuck's sake, I mean, it's a dangerous assumption. Is red wine good for you or bad for you? Because every three or four fucking years coffee and red wine are good for you or bad for you depending on the year. Well, I saw I saw a longitudinal study that just came out that said there are no caloric benefits of intermittent fasting. Now, there's a lot of people that would be up in arms with that. What are you supposed to do if, 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 a song 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.

You went through this very specific method of juicing. You know, there's a certain sliver of folks. There's a really incredible documentary actually on Netflix, if you want to understand it, of people that went down this path of juicing they're trying to eliminate their cancer. Micro-nutrients, in it, in it. The irony is that the people who are,

I think some of the stupidest people like that woman's singing show tunes, like these are the people who are making these determinations over what is true and what is false and what is labeled as deformation and what we get to discuss. It's great. 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 beautiful. And it's the beautiful thing about being an American and working so hard to get to this country is the independence and the freedom to be your own self. I mean, why is that such a bad thing? And why would anybody want to give that up to a nameless, faceless blob in an organization? Well, and the response you get back from people is, I'm not

abdicating my ability to think for myself to this rando woman singing show tunes. And then people say, like, oh, well, the response I got when I said just interest yourself is like, well, what about all these bros who are listening to Joe Rogan and they're making decisions on their health according to Joe Rogan? I'm like, yeah, it's called personal responsibility.

I'm not responsible for Joe Rogan's listeners. If Joe Rogan's... You know, the same person that told you that is probably micro-dosing and thinking ayahuasca is a solution to every problem they've ever had. And they've been fasting and micro-juicing. From the childhood trauma they had when they didn't win their soccer medal and nobody knows anything. And they getting to Harvard. So they're on a high a wask every day.

I mean, give me a break. Yeah. Nobody knows. No, we all know so little. So there's what we know. You live, you die the end. And we're all just trying to do our best. And so why don't we all just try to have a reasonably decent time and be nice to each other. 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-time. And last, uh, because I don't know who the fuck's gonna do this work next time. You will. You doing an amazing job. I'll continue it. Bye-bye. Bye-bye. I love you boys. I'll see you in the next one. That's a good boy! That's a good boy! Everyone is lying. Oh, no, no, no. Besties are gone.

Go through that. That's my dog. Take it away. I wish you're driving. Sit down. Oh, man. My ham is a disaster. We need to be at police station.

We should all just get a room and just have one big hug. Or two because they're all just like this like sexual tension that we just need to release that house. What? You're the big. What? You're the beer of beef. Beef. What you're that beat, what you're that beat? What you're that beat?

Beat, what you're that beat? We need to get merch. I'm going to be a bad man. I'm going to be a bad man. I'm going to be a bad man. I'm going to be a bad man. I'm going to be a bad man. I'm going to be a bad man.

I'm going to be a bad man. I'm going to be a bad man. I'm going to be a bad man. I'm going to be a bad man. I'm going to be a bad man.