The Breakdown - Cronyism, Zombie Companies and the True Cost of the Corona Crisis, Feat. Morgan Creek's Mark Yusko

Episode Date: March 24, 2020

Mark Yusko is the founder of Morgan Creek Capital Management. In this wide-ranging conversation, he and @NLW discuss:  Why bitcoin has fallen with stocks over the last few weeks Why price and value are not the same thing Why stocks have been manipulated  An argument for buy backs being illegal  Why cronyism is not capitalism  Why bailouts and other types of intervention help zombie companies that should perish A debate about whether the “cure is worse than the disease” The costs of a 0-risk tolerance  The polarization of health vs. economics  Why there should be a market holiday  Why bitcoin is the last and only free market  Why the big market announcements are always on Sunday  Why we’re headed to debt jubilee  There is a non-zero probability that Trump tries to cancel the election   Why a lack of leadership is the biggest cause for pessimism today

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Tuesday, March 24th. And today, guys, I got to tell you, this is a hell of an episode. My guest today is Mark Yusko. Mark is the founder of Morgan Creek Capital Management and has been investing in market. for decades, has an extremely wide-ranging view on the world, and today we just let it rip. We talk about why Bitcoin fell with stocks, why there is a difference between price and value,

why stocks are of fundamentally manipulated assets, why buyback should be illegal, why cronyism is not capitalism, the cost of propping up zombie companies. We get into the extremely important and painful and all-to-politicized conversation about the cure being worse than the disease and whether that's the case now. We talk about the cost of a zero risk tolerance in society. We talk importantly about the polarization of health versus economics as though there wasn't solutions available that didn't have those two things as mutually exclusive. We talk about why Mark thinks there should be a market holiday because it can't price anything right now. We talk about why Bitcoin is the only free market, the last free market. We talk even on the granular level

about why big market announcements happen on Sunday. We talk about the future and why we're headed to Debt Jubilee, and we talk about why Mark thinks there is a non-zero probability that President Trump tries to cancel the election. There is no one single overarching theme, although I think that there is a palpable frustration that you'll hear from both of us around the trying to box everything into one extreme reaction or another extreme counter reaction and why the over-politicization of everything and the scorecard nature of everything from our politics to our markets leads us to these types of scenarios inevitably. In fact, inevitability is a big theme, the inevitability that we were going to get to QE infinity. So this is, I think, one of the most wide-ranging, important

episodes I've done. I know that you're going to enjoy it. So without further ado, let's dig in. As always, caveat with long interviews, we edit these very, very minimally to capture the feel and flare of the whole conversation. But that said, let's dive in. All right, Mark Yusko, thank you so much for joining today. No, Nathaniel, thanks for having me. It's great to chat this morning. Yeah, so we were just discussing this. You know, I told you I was listening to your podcast with David Nage on Base Layer, which was just on March 12th, right?

So like 12 days ago. And it literally feels like 100 years since then. in terms of how it does feel like 100 years ago and and it's it's so eerie the world in which we're living and which time is kind of standing still and you don't see people on the streets you don't see people driving around you know we're still a little bit active here in north carolina we're not on full lockdown but it's a very strange time yeah so i i i honestly don't even know where to start, but I was writing down, I was thinking through like what's changed since that conversation. So March 12th was obviously, if you're a Bitcoiner, it's the day that Bitcoin fell

from $8,000 to $6,000 and then the evening dropped to like $3,900 for a time before coming back, right? So that's a day that'll live in Bitcoin infamy. It was obviously a day that was reflective of the broader market conditions. And since then, we've had a few different things have happened. You've had the introduction of first limited and now unlimited QE. You've had a line of corporations lining up for bailouts and buybacks becoming the boogeyman of this crisis. You've had the complete inability for Congress to do anything in terms of both the Main Street need or the corporate need. You've had the politicization, I think, of the discussion of what's the right way to do things. And as part and parcel of that, the rise just recently in the last couple of the last couple of,

days of a reopen the economy narrative, which is not, I don't think, informed much by real policy, but just people being sick of being stuck. And then, again, if you're in the Bitcoin world, you have a slight since that low, you have the start of some signs of decoupling and obviously this new narrative emerging around money printer go burr. So, I mean, in some ways, the question is like, where do we even begin? You know, what I want to find right now? Like, you know, I know that you've been thinking through all these things. But what stands out about the question? the moment that we're in right at this moment, I guess. No, look, you summed it up so perfectly that this has been just a cacophony of things that are somewhat

related, but are so discordant in that people are unhappy about things. They are opportunistic about things. I think the thing that has me the most frustrated is really the lack of understanding or appreciation or just the unwillingness to accept that, you know, the actions that that we as a country and as a world have taken in response to the threat, to this virus threat may and probably will be worse than the threat itself. And nobody wants to talk about that and nobody wants to say it out loud and I'll say it out loud because, you know, what people aren't taking account of. I mean, the Bitcoin drop 12 days ago was a great example. I had all these people

screaming, you know, what's going on? I thought Bitcoin is a safe haven. I'm like, guys, it is a safe haven as a store of value, as an ultimate currency for the long term. Gold has been a currency for 5,000 years, one ounce buys a fine man suit, you know, 875 paper currencies, three quarters of them have disappeared. The pound sterling, 374 years ago, one pound note got you one pound sterling a pound of sterling silver today cost 375 pounds of sterling silver so paper currencies devalue and go away and real money sound money stays forever but but but we're young in bitcoin's life and bitcoin is owned by two types of people maybe more than two but really two one is hodlers right people who who own it believe in it want it to be their store of value and then speculators who are like hey this

thing moves. I like things that move. I'm going to trade it. And the problem is people bought in sometime after the low back at 3100 in December 18. And they didn't get it right at the bottom. They got it sometime, the $4,000, $5,000, whenever it was. And they wrote it up and we had the big rally up through $12,000. And then it starts to roll over again. Be like, wait a second, wait a second. Well, those were weak hands and some of them started to sell. But when this crisis hit, and stocks started being liquidated and hedge funds started being liquidated. And, you know, individuals started getting margin calls. In a margin call or in a liquidation, you don't get to sell what you want to sell.

You have to sell what you have to sell. You have to sell what's liquid. And there were a lot of hedge funds and a lot of individuals, individual investors, that bought Bitcoin, not really understanding or caring what it was. what it is, but they just wanted it because it was moving. And so the fact that it fell dramatically when everything was getting liquidated should not have been a surprise to anyone. But again, I think a lot of people in the Bitcoin space, you know, just by definition, I mean, not by definition, but just by happens, it happened to be younger, happened to not have a lot of experience

in the markets. And so they weren't there in the 2008 liquidations. They weren't there in the 2002 liquidations. They weren't there in the 1994 liquidations or the 1987, you know, unwinding of portfolio insurance. So that's a long answer. I actually don't do short very well, Nathaniel. Me neither. We're canceling my next meetings, right? Yeah, exactly. But, you know, I think you bring up so many good points. So one was, you know, Bitcoin is still a safe haven. It doesn't change. The volatility of the price doesn't change the essential nature of the assets. And that's the thing that gets lost in both bull markets and bear markets. You know, people look at Boeing and they say, oh, you know, this was a $400 stock, you know, just a

couple months ago and now it's $100 and I should buy it. Like, well, no, the price of the stock doesn't reflect the nature of the underlying business. The price of the stock is just what two people will buy and sell something for 100 shares on an exchange. and the value of a company is the value of a company or the value of an asset is the value of an asset. But the price is just an ephemeral reflection of supply and demand. And so when Boeing was going up, it was going up because people saw it going up. And so they bought it and they didn't really understand the value. When the max started crashing, the 737 Macs started crashing, and then they realized, huh, it's an engineering problem.

Huh, wait a minute. it got through approval, government approval, even though it has this engineering problem that causes crashes, how did they do that? Oh, well, they paid a lot of money into lobbying. Oh, well, maybe that's worth less. Maybe the value of that business is lower. And, you know, yeah, maybe they're going to get a bailout to probably are going to get a bailout because they're, you know, they pay a lot of money into lobbying. And, you know, bailouts, buybacks, you said it. They are the pariah of this cycle, you know, the idea that companies have been manipulating their stock price, you know, again, people talk about Bitcoin being manipulated. Stocks have been manipulated

like crazy, like never in my career. And, you know, I have white hair to prove that I'm old. It's been a long time coming to get to this point where, you know, the stock market is, I tweeted about it yesterday. It's just a casino. And they should close the casino because There's no price discovery going on. We've got financial engineering going on. You got companies borrowing money at basically zero because the Fed has put interest rates to zero, borrowing money to buy back their shares, which financially engineers their earnings per share. And then the sheep will buy the stock because it's moving and they don't do the math.

And my favorite is Apple, right? Apple, you know, went up almost 100% last year. But their earnings were the same as 2015. How can that be? Well, their earnings per share went up because they bought back stock. Well, why do they buy back stock? Well, because Warren Buffett bought the stock and he likes to get, you know, buybacks and dividends because it juices his returns in the levered structure with no taxes.

So it's all interrelated. And we're at this very interesting junction where finally with this, you know, corona crash triggering some realization of way, wait a minute, maybe I need to look at valuation. Maybe I need to look at underlying cash flow. Maybe I need to look at things that have a durable franchise and just aren't speculative bubbles. And there are so, so many examples, companies that were selling at 20, 30, 40, 50 times revenues. Forget earnings. You know, my favorite to pick on was beyond Meat. And full disclosure, like, we made a lot of money on Beyond Meat. We were early venture investors. We sold as soon as the lockup ended. And, you know, we actually made 50 times our money, which is pretty

amazing. That's awesome. But the company was selling at over 50 times sales when it got into the $200 price. And, you know, I think it could fall from here. I think he's down in the 50s. I think it could fall 75% from here and still be overvalued. Crazy. It's funny, actually, Beyond Meat story, one of the things that we've noticed a lot, we have a mixed dietary household, and so Beyond Meat's are around a lot. And when people started to get real nervous a couple weeks ago around here and the grocery stores started to get kind of cleaned out, there was still freezers of Beyond Meat, which I think probably reflects that we live in an older town, you know, that's outside of the city more than anything fundamental. but it was a funny little note. I want to go back to Boeing for just a second. I think that there's something interesting about, you know,

the buyback conversation is interesting to me because it has, it's not totally bipartisan per se, but it is one where there are, you're seeing, you know, folks, you know, prominent right commentators rallying against this as well as kind of far left folks. And I think one thing that makes Boeing so interesting, about it is that in most conversations about buybacks, it's largely a financial engineering question and the dynamics aren't necessarily clear to people. And the cost, the cost and the

consequences aren't clear. Whereas with Boeing, you had planes crash because of presumably or potentially a lack of focus on engineering on R&D. And so people get this contrast, rightly or wrongly where if this money hadn't gone to this financial engineering thing, it would have gone into this other thing and the difference is, you know, human lives. And I think that that's a, usually when it comes to these sort of boogeyman's, you need some crystallizing force or image, right, that people can hold on to that's not, that's not intellectualized in a way. Yeah, look, I again, I think it's perfectly summarized. And, you know, I love how you've done your background research on, on thinking through the gray question.

to talk about. And we think about this exactly as you described, you know, buybacks in and of themselves are not completely evil. Now, you know, I'm actually not one of these people to think, oh, they're the same as dividends. They're actually not. And people forget that up until 1982, buybacks were illegal. They were considered insider trading. I actually still believe that they are and they should be illegal again. If you want to dividend out cash to shareholders, that's fine. But buying back stock is very different. I don't want to go into all the details of how it's different, but it's not the same as sending cash back to shareholders because only the people that that sell the shares benefit from a buyback. So different. All shareholders get a dividend. So ultimately, I think you said it very well

in that had the money been allocated to higher and better use, which would have been R&D and safety testing, then we'd have a much better outcome. But this is true across the whole series of, you know, you said people have their handout begging for assistance because we've had this disruption, right? We've had this disruption. And, you know, I'd love to spend some time talking about the disruption. And like I said, I think the cure is way worse than the disease. And I'm not saying that the disease isn't a bad thing. It is.

But the cure is way worse. And I actually believe more people are going to be harmed, maybe even pass away from the cure than the disease over the long term. When we talk about the impact of bankruptcies and homelessness and all kinds of things that are going to happen because of this overreaction. But if you think of just buybacks and bailouts, if you look at the airline industry, the cruise industry, restaurant industry, everybody is now saying, government, government, give me money to help me. Like, whoa, whoa, wait a second. Okay. Give you money, how? Well, give me money so that my stock price goes up and then everybody wins. It's like, well, no, no, not everybody wins. Because again, your stock price wouldn't have gone down as much had you had money for a rainy day to be able to combat some of the impact of what's going on to in order to get through the crisis. We've had temporal crisis before.

After 9-11, people didn't travel and stocks came back without a bailback without a bailout. In the great global financial crisis, we did go to the mat for a couple of the automakers, GM in particular, but we did it in a way that the old equity got wiped out. And that's the way it should be, is equity is a contingent claim. It has risks. Debt is a contractual claim. You must get paid back or you can sue. Equity is a contingent claim.

Therefore, it has more risk and you get a higher return. That's why equity investors make more money over the long term than bond investors. And the idea that we're going to socialize that risk and bail everybody out, I think is insane because it breaks. Then what you do is you break down the entire financial system that we all believe in, which is if you take intelligent risk, you get compensated for those risks. when you take unintelligent risk or you do unintelligent things, you get penalized. But if you socialize risk and make everybody pay back those that lost money, as if losing money is a bad thing, I just think it's a very slippery slope. And I think we've been on that slippery slope for a while in that, you know, we've kept the stock market elevated by doing, I think, ill-advised things with interest rates.

I think cutting interest rates as quickly as we did back in 2015, 16, 17 was ill-advised. I think we should have been, you know, raising rates and people's, oh, but we would have caused a recession. What's wrong with recessions? Recessions are actually good. They cleanse the system. We get rid of the weak companies. That's how capitalism is supposed to work, right? We're supposed to allow the weak to go away.

We're supposed to encourage the strong to survive. We're supposed to give the tools for all companies to compete and build markets. Instead, what we've got is cronyism today, whereas if you're well connected to the president or the administration, you're going to get a handout and you're going to continue to exist. And the stat I keep going to is zombie companies. 38% of the S&P 1500s, so the biggest 1,500 companies, 38% can't service their debt with their current EBITDA. Forget paying back their debt. They could never do that, but they can't even service their debt. So interest rates have to stay low. They have to be zero,

and they're going to be zero for a long time because of what I talked to about is the killer D's. Demographics, bad demographics, too many 65 to 85 year old people who don't spend a lot. They like bonds, not equities. Then you have too much debt. And when you have too much debt, you can't afford to service it. have low interest rates, and then we have deflation. And deflation comes from, you know, basically competition is one, but also just an abundance of caution and hoarding. And again, that's why I think the response to the crisis is going to cause a more deflationary environment because people are going to hoard and not spend. So it's really interesting, the zombie company's idea. It's from a different context, but Paul Graham, you know, who's the founder of Y Combinator,

has a famous post where he called companies he says are either default alive or default dead. And default dead doesn't mean they don't have runway. It means that there's no plausible path from where they are to either getting to profitability or getting to another raise, right? And those companies, if you're default dead, the best thing you can do often is pack it up, you know, return what you have left to investors. This is unbelievable. painful. I've been in some, I have dragged default dead companies along as a zombie for way too long. You know, it's very difficult if you're the entrepreneur in that situation. But I do think that, you know, there's a comparativeness here in terms of like that doesn't, it doesn't serve anyone.

It just sucks resources out of the system in terms of talent in terms of, I mean, by any dimension, right? And I think that, you know, so let's actually shift into this, the, the, the dynamics of this catastrophe that we're dealing with now, as you requested, because from where I'm sitting, there's this fascinating thing happening. And this is, I think, why we can't take our eyes off this thing and why it is so all-encompassing, is that you have a cascade of bad decision-making in a localized crisis, I mean, which happens to be a global crisis, but in a specific crisis, let's say, that are coming into contact with larger structural heavings of the world, both in terms of the way that the economic system has been post-2008.

And I think, in this one we're not talking as much yet about, but also in terms of the way that the global political order has been shifting for really more like the last 30 years, right? And because of that, this coronavirus has actually set off a huge array of additional crises. But let's start, I guess, with the specific response, right? this cure worse than the disease. From where I'm sit, like, we basically had this window probably when we saw that the supply chain capital of the world was shut down to maybe try to get out ahead of it, right? Instead, Marcus didn't react. Instead, they went to all-time highs, right? There's hundreds of millions, tens of millions or hundreds of millions, whatever statistics you want to believe of people locked down. And we're printing all-time highs over here. Meanwhile, we get to a point,

we deny, deny, deny, deny until we shift literally overnight two Wednesdays ago from, denial to terror in a single night, right? And that was the day, actually, it was right before you talk to David. That was that same night in a half an hour period, Trump finally said, this is a thing. Tom Hanks came out as having it, and the NBA shut down in literally a 30-minute period. And so you go from denial to terror in half an hour, and you can't not get an overreaction. And what's been missing in this whole conversation to me is specificity, right? Like, we're just, we're obsessed with the scorecard of, pick your scorecard, the scorecard of the stock markets, the scorecard of deaths, you know, the scorecard of whatever, rather than saying like,

what does it look like to manage this? And because of that terror, everything has been painted with huge broad brushstrokes. And unfortunately, I think that you can't, what we're seeing now is that it's very hard to get people to fundamentally change their lives and shut things down this way, A, without conviction, that it's the right approach, and B, without a plan for how you reopen it. And instead, you're seeing neither in my fear is that what's going to happen is that we will have made things worse on literally every dimension for lack of just picking the right strategy intentionally. Oh, no, look, so many great points in that summary. And I think the really important point is that shift from, you know, denial to terror.

is nonsensical, but unfortunately, it's reflective of the lack of leadership that we have in this country and reflective of the individual spokesperson at the top. Our Twitter in chief, you know, his bombastic approach to everything is this all or nothing, in or out, you know, all caps. And so for him to be in total denial up to that point, point, then to flip-flop and then say, oh, I've always thought it was a crisis. No, no, there's video of your total denial, right? So I think lack of leadership, lack of understanding of how economics work is a big problem. But the real issue for me is that suddenly we went from the normal operating process of life, which is that suddenly we went from the normal operating process of life,

which is in life there are risks every day, right? There are risks that we confront. For example, I got in my car this morning and drove to work. Now, it's not a very far drive. It's about four miles. It takes me about 11 minutes. But every single day, 3,800 people die in car crashes. Every single day.

Now, I hope I'm not one of them, obviously, but I could have chosen that, well, I want to have zero probability of getting in a car crash, so I'm just not going to get in a car. Then I have zero probability to get in a car crash. But a zero tolerance standard doesn't make any sense. And that's actually what happened with self-driving vehicles, right? We're going down the path of self-driving vehicles. We're doing some testing. And then there was that one death where the woman darted out from between cars late at night, dressed in black, and she gets hit by a self-driving car. And everybody says, oh, we have to stop. Like, well, wait a second. Why does self-driving, standard zero deaths, and regular driving is 3,800 deaths. That just doesn't make any sense.

And I think the same thing's true here is, you know, we have many viruses circulating throughout the world at any one time. And but we don't have a scoreboard. I think your, your, your analogy of the scoreboard is exactly right, right? We've, we've scoreboardized the stock market in the past three years since, you know, again, Twitter and chief, all he cares about is, you know, is stock market, stock market, stock market. Although he's not tweeting about it now that it's lower than when he took office, but we won't go there. But here's the crazy thing is by scoreboardizing coronavirus, now we've created this fear and terror that perpetuates and builds on itself. Again, one, because people are looking at bad data, right?

We know that the data is bad. We know that there's not universal testing. We know that some of the tests have false positives or even false negatives. We know that the deaths are being miscoded in some areas, that there are comorbidity factors. We know that the data is bad. So why are we hanging on every little permutation of the data to stoke this fear? And the one that gets me really crazy is we quote total cases. So, oh, the total cases are up.

Well, no, no, no, but a third of those cases have resolved either with a death or with a recovery. And, oh, by the way, the recoveries are way bigger than the deaths. So, but the fear is really palpable. And so our reaction to that terror, and I love your word terror, our reaction to that terror was, had to be, as you said, overreact. So we overreacted. We're shutting everything down. Without one thought of what does that mean? What does it mean that an average restaurant has 17 days of cash?

What does it mean? I got really angry at this because I was supposed to be going to the ACC tournament on that Friday when everything started to get shut down. And I watched the guy from the NBA get up and cancel the season. They was feeling like, you know, I'm such a good person. I'm such a social justice warrior. I'm like, whoa, whoa, whoa, what about all those vendors who rely on selling all those hot dogs and hamburgers and Coca-Cola's and T-shirts and Choshkis? What are they going to do with all that inventory? They don't have any money now and they can't pay their bills and they can't feed their kids and how are they going to survive? No one talked about that. No one talked about the impact. of those people or that a restaurant, if you close a restaurant and don't let people go to the restaurants, that in 16, 17 days, most of them will be out of money. They won't be able to buy new inventory. They won't be. And so I just think that the lack of thought of what it means to shut down a system for a zero tolerance. And zero tolerance was impossible. Because as you said,

we waited too long to make the decision. Like, had we called? Had we called? Had we closed the borders, which I don't like the idea. But had we done that right when we knew that there was a problem in China and we didn't let anybody come into Seattle, you know, I grew up in Seattle. My brother was born at the hospital where the first person passed away. I mean, it's kind of freaky to think, you know, Kirkland, Washington, where I grew up was the epicenter of the crisis. But had we not let people come in from Wuhan, we probably could have nipped it in the bud, but we didn't do that. So then we said, well, Well, okay, we're just going to lock everybody down. I heard a great thing this morning. I know I'm rambling, but I heard a great thing this morning. You know, we closed schools, you know, colleges and schools and we sent everybody home. No one thought about the fact that the young population has lower likelihood of getting the disease. They have higher resistance to the disease. And we had isolated all those young people together where, yeah, maybe they would have more.

people would have contracted disease, but they have better defenses. But instead, we sent them home to their parents and their grandparents who now are actually having really bad complications and some are dying. That was an unintended consequence that nobody thought about. And so I'm with you. There's no plan and there's no plan to get out of this. Yet every time we do something in response to the crisis, like we're going to pass this big bill, we're going to give away money to cronies who spend a lot of money lobbying. I'm not sure that's going to fix anything.

I know it's not going to increase demand. And sending money to individuals, okay, that has some potential to increase demand, except most people are going to use that money to survive and to pay the rent that is now overdue and to try to buy some food and maybe, you know, unfortunately, they're going to have to pay down some debt because everybody's over indebted. So I don't know that it's going to be enough to get us back to normal.

Yeah, it's not George Bush trying to get us to buy an extra TV with a stimulus check. Exactly. I mean, I think the thing that's so frustrating to me is that because of the, because the lack of a real sincere conversation, like that starts with leadership and, you know, from the top down, but across so many different. dimensions. We're creating a situation, too, where we're painting the economic loss and the health loss as somehow mutually exclusive. And you're either on team health outcomes or team economic outcomes, which is total bullshit. It forces everyone into a camp where you're either you don't care about people dying or you don't care about the economy, which is so ludicrous. And by the

way, the scary thing is because everything in the structure of our media and especially our politics is designed to turn things into a team competition. What's scaring me right now is I'm watching the rise of the reopen the economy narrative, not from an intelligent like, hey, here's a plan, right? We're watching now what's going on in Singapore and Taiwan. We're going to make sure that every building has thermometers and that's the new thing. We're going to phase this in where every assisted living facility still stays out. There are millions of ways to be specific about this, right?

And instead, it's just, well, that was really annoying. that we stayed home for, you know, what amounts to a week. I mean, I'm in New York, so I'm in the place that's been in this way kind of for the longest at this point. And people are just bored with it. So now we're going to shift entirely. That's just as stupid a reaction, you know? And especially because, again, going back to your point, I think originally about the,

what the, there's no specifics. Like new diseases are scary, but this one we're learning a lot about really fast. And really the issue in so many ways is hospital capacity. the capacity of our medical system to deal with it. It could have been a good decision a month ago to say, let's take those 15 days or three weeks or whatever so that we can deploy the Army Corps of Engineers across the country to set up field hospitals with ICU beds, you know,

and flip the ventilator machine. Like, you know, there are ways that it could have been, because that's really the issue here is that over what it does to that death rate if the medical system gets over, it gets compromised, basically. But that's not the conversation we're having. It's all reactive between big broad brushstrokes. Look, again, so many great points and I try to get to them. But the point you make about the polarization is so frightening to me.

I mean, I had to step into a conversation between actually two really good friends who were going at this. And it did devolve into a Twitter debate of, you know, life versus, you know, back to work. And, and, oh, you don't care about deaths. No, that's not what we said at all, right? We're saying that everything that we do in the world has risks. And there are certain risks that are associated with everything from viruses to driving around to, you know, industrial accidents. I mean, there are all kinds of risks that we face. And to say that you don't want the cure, you know, the clamp down on stopping the economic flywheel to be worse and end up

with more deaths and homelessness and bankruptcies and economic carnage than the deaths from the disease itself is not saying that you don't value human life, which is how this devolved. But the echo chamber problem that you talk about is real. And what I don't understand, and this is true about everything, is just because someone has a different opinion than yours doesn't make them a bad person. And in fact, you may not have the truth. They may not have the truth. Maybe the truth is somewhere in between or maybe imagine the other person has the truth and you have an opinion that's wrong. I mean, it does happen.

We're all wrong sometimes. But debate and dialogue should be civil and they should be engaging and they should be engaging. and it should be encouraged. And it shouldn't be this, oh, that person is on the left or that person is on the right. There's nothing to do with left or right or in or out. It has to do with let's seek truth through dialogue and debate. And this discussion of, oh, well, you know, every, again, we want zero deaths. Well, yeah, that would be great.

That's not going to happen. And this issue of your point on overloading the, healthcare system. That's exactly. We saw that in the data in China, right? Outside of Wuhan, outside of Hubei, we had less than a 1% CFR case fatality rate. Inside, where they did run out of beds and they were putting people too close to each other and they made some errors, you know, we had a 4% death rate. And so they seized on the 4% said, oh, this is a terrible, awful disease. Well, now what we're finding is absent a health care crisis, it really, really is more like the flu than not. It has a higher spread rate than SARS and MERS, both of

which had really bad, you know, death rates. I mean, SARS was 9%. MERS was a crazy 34%. One out of three people was almost as bad as Ebola at 50%. So, in fact, I've been watching the Jack Ryan series and it just freaks me out because they have all the stuff with Ebola and all these other things. But this idea that, again, we're keying on the wrong data and we're being afraid of things that might not be there. But to your point, we could set up mass units, you know, mobile ambulatory centers and help solve the healthcare issue. Or, you know, the patients, while they're still not in critical condition, are mobile, right? Literally, if we had an epidemic in New York, and we had hospital beds and ventilators in West Virginia because they only have like

12 cases, forget they have no deaths, but they only have 12 cases. Why couldn't we put people on an airplane and move them? Because they're not in critical condition yet. And I don't know if that's feasible or not, but it seems like a plan or how about we pack up some of the ventilators and move them to New York. Maybe do that. So there are solutions other than just be forced into this crisis. And yet the numbers, at least in the United States, don't add up. Right. We have 160,000 ventilators in the United States. I think there's 62,000 that are one type and then the rest are a little less good type. But 62,000 is still a really big number relative. to one, even the number of hospitalized cases at this point and the number of ICU required cases.

So unlike that little town in northern Italy and unlike Wuhan, I don't see the same risk factor at this point. And everybody says, oh, but what about the exponential growth? Well, again, look at the data where we have the most data, you know, Singapore, Taiwan, Hong Kong. China, Japan, all of those did bend the curve. And maybe they didn't even bend the curve. And clearly, I think they did. But the curve gets bent with time. This type of virus, a novel coronavirus, doesn't live forever. It's not like HIV. It doesn't exist forever. It is seasonal. And whether it lasts just this season or whether it gets a rebirth in the fall, we don't know yet. But if you look at novel coronaviruses in history, they are seasonal. And, you know, unless this is a biological

weapon, which I don't believe, but if it were, then, you know, all bets are off. But if it's not, and it's just a novel coronavirus that comes from a bat biting a pangolin and someone ate the pangolin, which I don't understand why anyone would eat a pangolin, actually. But I don't know. It's a long conversation and a lot of permutations on it. I think the frustrating thing is that, the window where you could have a reasonable position of basically everything that you just stated, especially at the beginning as it relates to economic policy. Unfortunately, what I see now is there is a set of basically the political right in America that is now using this. And you're no longer going to have the ability for people on the left, right, or middle to have the opinion about

reopening the economy. It's just going to get polarized into. a right thing, right? When you have the lieutenant governor of Texas going on TV and saying that grandparents would die so that the economy doesn't open, like your calm conversation and structured debate goes out the window. And it's the same, the machine of political discourse in this country just seats everything. But it's a really, it's a really, really important problem and one where the longer we delay, the worse it's going to be. Right. And we're having this conversation here Tuesday morning and everybody's excited because the futures are up and there's been an announcement of the plan and and there's going to be a, you know, a big boom just like we do

every Tuesday. Why Tuesday? It's weirdly, it's weirdly specific how this happens. Fed takes action Sunday or Monday night. It doesn't really do what it wants. Somehow Tuesday gets more exciting again and then people get scared again by Thursday, Friday, like Thursday Friday. Yeah, it's really kind of interesting. And I have lots of, you know, thoughts about that, like the plunge protection team and, you know, the dark pools and all that good stuff. But, but at the end of the day, that hasn't been enough. And, you know, you can see it, right? You can see it every morning from 10 o'clock to 1130, stock market goes up every single morning. Why? Well, somebody happens to be buying from 10 o'clock to 1130. And I don't know why they only work an hour

and a half, but that's what happens. And then, and then we get some fear in the afternoon, mid-afternoon, and then from two to three, you know, buy-backs are allowed to happen. And there have been less of those, but there's still been some positive pressure. And then, you know, starting at 3.30, the smart money trades. And that's the big institutional money. And then the last minute of the day is the ETFs. And so, you know, yesterday we had the big rally in the last 20 minutes trying to get us back from the, you know, down five to down three.

but the problem was the last tick was pretty ugly, right? The ETFs were all selling. And they always do in that last minute. So, I mean, they always trade in that last minute. Sometimes they're up, sometimes they're down, but they were down big last night. So now we're going to have the inverse, and we're going to have this relief rally and, you know, short covering rally. And a lot of people have turned and gotten short.

But my problem, and the reason I've actually been talking about why I think they should have taken a market holiday and should take a market holiday is you got you know human beings been banned from the trading floors you got you know firms that have skeleton crews up and and so we're basically running with not full teams allocated to the markets and so the markets were already having trouble with price discovery before this happened now I think it really has trouble with price discovery and, you know, up nine, down six, up four, down seven. You know, that's not normal. And so taking... That's Bitcoin. Yeah, exactly. That is Bitcoin. All right. That's Bitcoin volatility. And yet, you know, here we are with Bitcoin, you know, recovering nicely from its nadir when people

are getting liquidated. And now the hoddlers are back and the people who believe in the long-term story are nibbling. And that is interesting. You know, Bitcoin is the only free market. It's the last free market. And what I mean by that is, you know, there's no Fed to intervene. You know, there's no one to, there's no dark pools. There's no plunge protection team. You know, it's interesting that every Sunday, they make these big announcements. So why are they always on Sunday? Why are the announcements always on Sunday? Bear Stearns was on Sunday. Lehman was on Sunday. You know, Washington Mutual was on Sunday. And now this time, you know, you got the big announcement by the, you know, Fed cutting rates before the meeting on Sunday. Why is it always Sunday? Well, every Sunday,

the Council on Economic Stability meets, and who is that? Well, it's the Secretary of the Treasury, the President of the Fed, and the presidents of the four big banks, J.P. Morgan, City, Gomez-Ax, and Morgan Stanley. And they meet, you know, at the New York Fed, and they make these big decisions, and they do them on Sunday because, you know, then they can act ahead of everybody else.

But we know that there is this pool of capital out there, whether it's driven by the banks or whether it's driven by the government, it doesn't really matter, but we know it's out there. We know that it is functioning to try to keep the markets more stable because they have this goal of stability. Now, the Council on Economic Stability was formed after the 87 crash, so in the January, February of 88, and it's been functioning really ever since. And they just want to avoid the type of big down drafts that occur in open and free markets. And yet, you know, Bitcoin had that big drop that you mentioned at the top of the pod, you know, two weeks ago. Well, yeah, because there was no one there to buy it other than the buyers and sellers, the actual participants in the market.

And free markets are really good. I like free markets. I think they're the best arbiters of value. And it would be nice if we would allow, you know, the stock markets globally to go back to a time when they were free again. and we could have some price discovery. So it's, you know, 43 minutes into a nominally Bitcoin and markets podcast. And I haven't even had, haven't even asked you what you, what was your reaction to the unlimited QE, right? The unlimitedization of QE.

Was this just inevitable in your mind? Absolutely. Yeah. Look, I even have a hashtag for it. You know, I'm big on my hashtags and everybody gets mad at me. Like, you know, you don't even understand how hashtags work. I'm like, no, you don't understand. At least you make them up.

I like that you make them up rather than like you're not looking for. trying to create the trend, right? Well, no, no, I don't even want to create the trend. And that's what people say, you're so arrogant. No, they're a virtual filing system for me. I can do a search on one of my hashtags, and I can get every tweet that I've done related to that topic, and I can go back and review really easily what I think about, you know, second that emotion or, you know, my one, QE infinity, right?

Or QE forever. I've been doing hashtag QE number forever for forever for a couple years. And look, once you start QE, you can't stop. And how do I know that? Well, because I've seen the movie before. Japan is 11 years ahead of the United States demographically. So whatever happens in Japan, 11 years later, it happens in the United States. So, you know, their market crash in 1989, 11 years later, 2000, our market crashes.

So their debt got downgraded in 1996, our debt got downgraded in 2007. So 11 years later, the same thing happens. And so what happened in 2007 is the Bank of Japan owned 26% of Japanese government bonds as a percentage of GDP on their balance sheet. And they said they were going to stop doing QQE. They call it QQE, qualitative and qualitative easing. And today, they're at 100%. Well, wait a minute. You said you were going to stop.

So how did you get to 100? Well, we lied. So we can't stop because their debt to GDP kept rising and now is over 220%. And once a government finds out that they can spend, they will. And you're seeing it today. Oh, remember all of the Tea Party, right, the right, the right, the right that was going to get elected and we are never going to have a deficit again, you know, those evil Democrats that were overspenders, we have the greatest deficit. we have the greatest deficit in the history of mankind, and we have Republicans in office. But I always say there's no Republicans, there's no Democrats, there's no left, there's no right,

there's in and out. If you're in, you do or say whatever it takes to stay in. And if you're out, you do or say whatever it takes to get in. That's all it is. So, and people, you know, switch parties and they run on different parties. Ronald Reagan was a Democrat. He ran as a Republican, you know, Bloomberg. I mean, all these people, you know, Mitt Romney, It's just in and out. People want to be in. But the challenge is, I got it on such a rant. I forgot my point, Nathaniel.

What are we talking about? We're talking about the inevitability of QE. Oh, QI, yeah. You can't stop. Basically. Japan got to 100% of debt to JGB, that Japanese government bonds as a percentage of GDP on the Bank of Japan balance sheet. So we got to, surprisingly, around 20%.

and we said we're going to stop. And we actually did shrink the balance sheet for a little bit. And like, no, this is exactly what happened in Japan. And as soon as the market goes down, which is what happened in 2008, Japan turned around and started buying bonds again. Same thing happened here. As soon as the stock market goes down a little bit, they're going to buy bonds. And we're going to be at 100%.

Why? Because it's inevitable. Because we have to monetize the debt. There are no natural buyers of debt of over-indebted companies. countries. The only person is yourself. And so what's going to happen eventually is there's going to be a debt jubilee. And Japan will be first. And once they own all the government bonds, once they buy up all the government bonds, they just cancel them. And they start over. And it says, oh, you can't do that. The currency will crash. No, the currency crashes slowly while you're buying the bonds. The yen has been

going down for the last seven years. And it's going to continue to go down. And eventually it will be worthless, like every other paper currency in the history of mankind. And then the euro will follow, and then, you know, the U.S. dollar will follow. I started tweeting lower for longer and headed to zero about two years ago and just got lamb-baseded on Twitter. People say, no, there's no way U.S. interest rates could be zero. They are. And they're going to be negative. And hell, the president of the United States is calling for negative rates because he doesn't understand economics. But But for him, it's all about if I were a real estate developer, I would love to get paid to borrow money.

And that's the way he thinks. So at the end of the day, governments spend because that's how they get elected. And they buy votes. And that's where we are. We're in a place now where we're going to buy votes by giving people free money. Wait, that's what happens in dictatorships. That's the dictator playbook, right? You give away money to poor people and you cause them.

to be loyal to you. Well, where are the poor people come from? Oh, well, you create economic malaise. Well, let's take Venezuela. Venezuela has the highest oil reserves in the world, highest gold reserves in the world. At one point, one of the most wealthy countries in the world, well, what happened? A dictator comes in. He destroys the economy. He creates a dependency of the people on the government, and he stays in power, and it's a kleptocracy. The people at the top get really, really, rich and then you devalue the currency and they devalue the boulevard people forget the best performing stock market in the world the last two years Venezuela would you like to own Venezuelan stocks hell no but that's where we're headed that's the that's the path we're on we've created this destabilizing

reaction to coronavirus some might argue that that's been the plan all along to create and foment fear and political and economic destabilization so that you get a dependency culture so the people at the top can stay in place. And I'm going to put one thing out here and people are going to go eight bat shit crazy on this one. I guess bat shit crazy makes sense. That term has new meaning now, huh? Yeah, it does because it's coronavirus. But I'm going to say there's a non-zero probability that the big guy tries to cancel the election because of the virus. That is a freaking scary proposition. I've said that to friends and family,

that the single scariest thing to me from the, like, Ben Hunt has this phrase that he uses. He doesn't have hashtags, but he does a similar thing where this is at Epsilon Theory on Twitter. He'll use these phrases to provide both a rhythm for his readers, also you can go back and see all of them. You can't unring that bell. That's one that he uses a lot. And I think that what you're saying effectively, which I agree with, is that once you get into the game of the government propping up markets, the markets will forever say, well, why can't you

do that again or a different version of that? It's just natural, you know, and that becomes a force outside of the ability of anyone to control for the political incentive reason. You know, This is just, I mean, it's just game theory in some ways. It's a dependency culture. And it goes, look, it's the participation trophy problem, right? Everybody gets a trophy. Look, I live in the People's Republic of Chapel Hill. They don't keep score in soccer.

I'm like, why not? Well, someone might lose. Like, well, that's why you play the damn game. I mean, losing is okay. Failing is okay. We learn more from failure than success. You know, you talked about it with entrepreneurs and startups, right? We need to fail.

We need to have things go down. Not everything is a good idea. everything works. But everybody gets a trophy. In fact, my wife was horrified. My son, we have a unique family. We have two older kids and a younger caboose. And, you know, he was in his first soccer league a couple years ago and they went over, right? They did not win a game. And they had fun, but they did not win a game. And he got a little medal. And I took it and I threw it in the trash. My wife was horrified. And everybody was a horror. I was like, no, you don't get a medal for going over, right? You don't get participation trophies. And that's,

where we are is from participation trophyism, you get this dependency culture, which is, well, you know, mom and dad will bail me out, the government will bail me out, the school will bail me out, I don't like my grade, I'll just argue it, and they'll give me a better grade. I don't like my salary. I'll ask for more. I don't like my outcome in the stock market. Well, the government will socialize it. No, that's not how it works. But that is how it works if you're a government agent who wants to become a dictator, you want dependency. You want everyone to not have economic upward mobility and have to depend on government handouts and have to depend on socializing their losses.

And we're very perilously close, I think, to that bang point, that shift. Very scary. Yeah. I think for me, the cat out of the bag problem is exacerbated by the potential of this disrupting, you know, an election cycle for sure. Well, it's crazy, crazy amount to discuss and think through. I've been kind of ending on this question for everyone, just because it's so people are exhausted, too. what's your biggest cause for pessimism right now? What's your biggest cause for optimism?

And you can take that in any dimension that you want. It can be political, social, economic. Yeah, you know, pessimism, we've already talked about it. It's from... It's easy. See the last 53 minutes of conversation. Yeah, I mean, pessimism is lack of leadership. You know, I believe everything comes from leadership.

In fact, you know, I believe it so much that, you know, my wife and I created a scholarship program at our alma mater all about training leaders. and giving people the ability to become better leaders. And I think we have a complete lack of leadership at, you know, all levels globally. And I think it's very scary to me. So I think that's the biggest cause for pessimism is I think there's too much self-interest in people of positions of leadership. And gone are the days of the altruistic selfless leaders. Now it's all about self-angundizement and wealth creation for individuals and they don't care about the people.

So that's my biggest cause for pessimism. And I think outcomes will reflect that lack of altruism and more focus on self-interest. My reason for optimism is the human spirit, right? We are resilient. And I think resilience is the most important thing there is really. I mean perseverance and commitment and other things are good too, but resilience is really what's all about. And, you know, Seneca the younger said it best, right? Failure changes for the better, success for the worst.

And those of us who are able to, you know, look at setbacks and look at untoward outcomes and look at loss in our life and pick ourselves back up and get better and learn from it. And, you know, I live in North Carolina and Chapel Hill and, you know, the famous coach here, Dean Smith, had a great line. He said, you know, mistakes. Mistakes happen. Bad things happen. But you have to Ralph. You have to recognize the mistake, admit the mistake, which is hard for most people, learn from the mistake, and then forget it and move on. And, you know, the other coach across town at that other school that I don't like has another great line.

he says, you know, great players, and I use great investors or great people, always focus on the next play. The average player, the average investor, the average person always focused on the last play. So again, a reason for optimism is I think there are a lot of people who are able to focus on the next play. They understand that some bad things have happened. They understand that we're faced with some tough times, but they're focusing forward. They're looking for the next thing. It's how Bitcoin got created. It's how, you know, blockchain technology is going to revolutionize the world and be the greatest wealth creation opportunity we'll ever see in our lifetime. It's why markets will recover. It's why, you know, this two shall pass. You know, King Solomon's advisors were right and that we will get

through this and it will be hard and we're going to have to oust some of these bad leaders and we're going to have to rise up. And so I want to end on an optimistic note because there's a lot to be pessimistic. about, the rise of nationalism, the rise of populism, the pushback against globalization, we're doing all the things wrong. I wrote a long piece about this two and a half years ago called Welcome to Hooverville. And I kind of talked about why 1929 was inevitable in terms of a market correction and potentially crash because, you know, Sir Isaac Newton was right. For every action, there's an equal and opposite reaction. And the bigger the bubble, the bigger the bust, the bigger the crash. So the 1929 light crash was inevitable, and I think we're in the midst of it right now.

But what made it worse was that reaction of the government of Hoover and the administration in 1930. And I unfortunately believe that our current administration, he was only the third president with no experience after Hoover, her being the second, was going to make the same types of mistakes, the Smoot-Hawley tariff act. He calls himself tariff man. You know, we marched Mexicans back to Mexico in the 1930s physically. We had the Mexican Repatriation Act. So the same playbook is happening, the same culture of fear, the same culture of discontinuity, the same culture of, you know, self-aggrandizement. And that we need to rally against, but not in a rise-up populism, you know, nationalism, America first kind of way as we did in the 30s, where we ended up in the Great Depression. if we want to avoid the Great Depression, we've got to think forward.

We've got to think in ways that are uniting and globalizing and realize that we're in this together and that we can all come together and we can make it better. We don't need Cold War 2.0 against China. We don't need to make them out like the Ruskis or the commies. We need to embrace what they did right to nip their crisis in the bud with the disease. We need to learn from Singapore and Taiwan and not think of them as Chinese. We need to think about unifying. And so anyway, I am very hopeful.

I am very positive. People listen to me all the time say, oh, you're so negative. I'm like, no, I'm a realist. The optimist thinks the wins are going to change. The pessimist thinks they never will. The realist adjust the sales. So let's adjust the sales. let's get focused on the future and let's make it a better tomorrow.

I think the thing that I always think about or want to remind people is that if you didn't have any hope, why would you spend 60 minutes on a podcast talking about this? Why would you keep going on? Just because you are going deep on the real seriousness of the challenges that we face doesn't mean you're going to stop fighting. And ultimately, like you said, it's what's next. So thank you so much for taking time. say and I really appreciate it.

No, it's great to be with you, and I really appreciate the conversation and a lot of fun and hope we'll do it again. Like Mark, there is, I believe, much to be nervous about now. I'm watching, even in the hours since I recorded that interview this morning, the politicization of the open the economy versus the save lives conversation, just getting dramatically torn. This is now no longer two different approaches to how to solve a crisis. it is becoming firmly entrenched in the American left and the American right. And I believe that will be with absolutely disastrous consequences because it is stupid,

fundamentally stupid, wrong-headed, and overly easy thinking, overly social media thinking to somehow believe that these are two mutually exclusive outcomes and that you can have one without the other. It is just nuts. But it is, as I said earlier in the intro to this episode, inevitable based on the way that our system is organized right now. So I hope that you guys who stick around for long enough to hear the outro of these episodes. I know that you're the folks who are trying to think more broadly, who are trying to inform your own opinions and go be active participants in the conversation.

And I have so much appreciation for you for that. So thank you for hanging out. Thank you for listening. We will be back with another episode of The Breakdown tomorrow. Until then, stay safe, guys. Peace.