E104: FTX collapse with Coinbase CEO Brian Armstrong + election results, macro update & more
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Sex, the united states is maybe not going to send weapons to ukraine indefinitely and their asim to sit down and negotiate something that people on the left started to do and got, I got smash for something you've been pushing for. So I guess mini Victory lap for you sex. what?

What's the n game here? Well, yeah, I mean, i've been talking common sense about this for months to saying that we into open to diplomacy because total defeat for russia also means A A maximum risk of nuclear war, means these things go hand in hand. That's a paradox.

This war is that if russia faces the prospect of a total defeat, that's when they're most likely to escalate this conflict into something much, much worse. So therefore, we need to be open to diplomacy. But IT was good to hear administration officials over the past week say things that i've been saying for months and that i've been accused of being like a putin sympathiser for.

So apparently this is a about a putin in the administration. And just to read you some of these reMarks, actually, I want to play like a fun game with you guys and set of just how really yeah so as much in the quotes I want to get game called mili or sex so I want you guys to guess, okay, whether was general Milly who said the quote or whether I said the quote. So does this sound like a fair, fair?

Yes, put some game show music here.

Leo sax, I can read you like four.

five quotes. And you guys are going to say whether IT was Milly, yes, or sex?

Who said IT first quote, who said, in general, million or x.

one of the lessons that should have been learned from war one is that european powers refusal to negotiate compound with the human suffering and LED to millions more dead million or sacks.

I'm going sex. I'm going sex.

It's a very historic .

new next one. Next one. Go, go, go. OK.

A regional war turned into the first world war because all parties made maximum demands and assumed .

others were bluffing. IT can happen .

again is a maximum em?

yes.

OK say maximum list? yes. He would .

never say bluefin, yeah. Where there's .

opportunity to negotiate when peace can be achieved to see that mili mili.

It's very peppy. It's .

peppy .

like melly was one. And it's .

deely possible to .

try for statement. There has to be a mutual recognition .

that .

military Victory is probably in the true sense that we may not be achievable through military means. And therefore you need .

to turn to other me that, Milly, it's a word.

I, I got the world .

s the million words out. IT, it's too, too convoluted for sex.

Sex.

I go. Million, I go. Milly, ut, now i'm three.

two time. IT must be our objective now to help achieve a ceasefire and negotiated piece.

rather than protract the conflict. Wow, it's so formal. So mal els, like on the steps of, like a building outside, very formal to well spoken.

It's crisp. Can we hear one more time? May we hear at one time?

IT must be our objective now to help achieve a ceasefire and negotiated piece, rather than protract the conflict.

Mei, it's a little too formal for a podcast, but in a tweet, IT wouldn't be so. IT could be a sex wait, but i'm dict or parking. I gotta go meili.

I gotta .

Milly.

You can tell million from sex is what we learned. What a great game right now. We're going to play the next game. This is called berny made .

of or S P F.

Berny made of or S P F.

Do we know 你？

We may give.

We sort to the fans and .

just got crazy.

Aren't everybody welcome to the all in pod with us again, the dictator and a beautiful herbal sweater sweater. Karen man is the fourth .

season to be the inside. The inside of this is, wait.

Very nice, very nice. So multiple animals killed our pleasure. Yeah, right.

What animal do they kill to make? Swayed, I thought, like a type of letter. Or what is that?

I hope it's an endangered one. Well.

actually that first of way that he's wearing is from a White right now. So they just take the hide and they throw everything. Also, the please, can we take this show?

These are every body.

I think .

it's baby safer .

around the cow.

Any baby seals were .

killed to make your office freeplay ing airport. How was a jet blue mint? I heard you upgraded to mint your comment. What you don't want to talk about, the twelve hundred .

and up talk about.

are you embarrassed to fly commercial?

What did you eat?

Are you embarrassed? Fy, J, K, L.

yeah. What are you? 你， what? I am mint.

I not like i'm the president. I like hold that mint coming through IT. Then I start reading out.

I think jacot classes like the sea by the bathroom.

the give you've save one hundred fifty boxes.

What is is jeep in? The name of like .

jeep in is their first bus coast to coast.

IT is so delightful, they just have figured out a .

way to make like sleep er sea that are very nice and it's upgraded service where they they put like a little war between you and everybody else. It's kind of like having a private plain if he didn't and sex is here, the whole cruise here. Basically we'll have a surprise best gusty jumping in in the middle of this.

I'm not going to tell you who because nothing going on this way, nothing is going on this week. I mean, there's so much to talk about. Let's just start with the elections.

And we have to my pa.

usually this is like throwing red meat to sax. But I mean, at this point, right? So the santis won by double digits. And Flora, he got a huge amount of the vote. But all the high profile trim back candidate seem to have lost doctor s.

Day cox, just that was a show action, I guess or the red wave became like a podder or like an I dropper or something. But some of the trump candidates did win some of the a Peter tile collection j events one. So I guess that's a big win for present .

a trump candidate though because if you remember when, uh, trump went to stump for events, you forgot his name, his name wrong. So anybody.

your side.

you don't need friends, anybody that trump actually cared about turned out to be just a complete dot and lost and everybody that kind of, you know how to keep somewhat around, just that he didn't throw bombs actually did decently. But I mean, trump is a just A A weight on the neck of the republican party, and it's time to just get rid of them.

sex? What happened to your red wave? Yeah, listen, I got this wrong.

I think is a few reasons for IT. So I think when you get election wrong, you have to admit and figure out what what your mistake was. Otherwise you improve.

I mean, number one, I was looking at you know the R C P. Polling, the real clear politics where they take in average of all the different polls. They were adding a factor to IT.

They were showing, by the way, plus three or plus four in the center for republicans. But they were adding a factor to IT based on the underwaiters that the pollsters did the last election. Cyclone IT turns out that the poll sters, I think, did a great and job correcting their polls.

And so the R, C. P. Overnight turned out to be just basically completely wrong. The other thing that I got wrong with, I was looking at the fundamentals. I mean, three quarters of americans think around the wrong track and we're in a recession.

So based on that, you would think that this would be a great year for republicans in in fact, the out of power party usually wins in a mid term and battened popularity that historically lows like forty one, forty two percent. So everything was cheered up for the republicans. So what went wrong? I think a couple of things.

Number one, two days before the election, trump basic comes out and for analysis that he's running yeah, you know, this basically plays into the narrative that biden has already created, that this is a, this is not a referendum on. Biden is a referendum, democracy. And basically trump mated into a choice election.

Who do you like Better? Biden or trump? And the fact the matter is, if you look at the exit polling as unpopular as biden is, trumpet is even more unpopular.

So that is absolutely nothing to help the republicans. And I think IT really hurt to the margins. The other thing that turned out, I think the other big thing that help democrats was dos, and I never thought that IT wouldn't be a factor.

But if you look at the polling before the election, fifteen percent of likely voters said that he was the number one issue. If you look at exhibiting at the election, he was twenty eight percent. So dos turned out to be twice as significant as what the early Polly was showing.

And if you remember, Jason, go back to the episode did on abortion. I said the shoot play for republicans here was the Roberts compromise. What did Roberts wants to do? He basically was gone to allow fifteen week restriction on abortion, but not have the headline of roby weight overturned.

And that basically is what the santis implemented in florida. He basically restricted abortion after fifteen weeks. It's the purple state compromise is where I think the purple states and where most the countries is going to end up. And the sooner republicans get their heads rapped around the fact .

that they're gna be long term, the I who stacked the supreme court deliberately to turn off a roof.

we listen. I mean, there, this was a long term priority of republic.

Another question.

well, we do have to recognize that trumps said he would do that. He did IT. So this is doubly trumps fault.

Every party nominates justices with their values. I've been at cycles.

You have a truck said he is going. Trump said he would specifically do IT .

in order to know. But the president doesn't choose who dies in the supreme court and when. Yeah right there there there.

Yes, it's also more complicated than that because what this dob decision did is throw the issue back to the states. And the fact the matter is that now it's up to each of these states to determine where they going to come out in this issue. So if you look at there were a Better initiatives in red states like kansas and .

like kentucky, but that's right.

The saying is there were a prolife about initiatives in red states that lost. And so you can see all over the country that the republicans try to go too far, or they do try to go to forward. They try to impose a total ban.

What IT seems to be popular is this. What i'm saying is the purple state compromise is what the senses did in florida. IT seems like most of the country we talked about this on that episode yeah most of the countries in the messy middle, they want abortion to be safe, legal, rare and early. They're willing to support IT and say the first fifteen weeks, but then after that, there need to be some restrictions that of saying most of the country supports that now is also the case that democrats, though, are taking out a pretty extreme position too, because most of the democrats, we're taking the position that abortion really legal up into the month, months, which is not even that's more radical than even row rose sa that you can restrict IT after twenty three weeks. So you know what we set on that podcast stage and was the party that gets the middle first on this issue as the one that's going .

to do what decision?

yeah. And I think, yes, I think it's true on this and I think it's true and other thing. So look, I think the republicans can correct pretty easily if they listen to folks like scientists and Young and and camp uh, people who understand that they have there's a compromise here and the ones who basically insist on pushing a total ban are gonna go down in flames.

There's a couple of things, I think, that are worth looking at now that we have all the exit polling in the result. The democrat strategy of helping to promote these extremist mega candidates in the primaries turned out to be a huge winning strategy, because every single one that they helped put up against the democrats, the democrats one, but number two. So what that shows is the extreme right cannot feed a winning candidate.

But on the other side, all of these extreme left leaning democrats also did not do very well either. And so you're back to David, what you said, which is we have been saying for a while, the winning strategy is that messy middle. It's the moderate person that kind of like tax to the center.

And this is what you see everywhere around the country, all of the battle ballot initiatives, every time you had an extremist ballot initiative, whether IT was uh a complete banner abortion in a red state, or whether the attacks the rich policy in a blue state, they failed. And so I think the message that you have to take away is the extreme left doesn't work. The extreme right doesn't work, right? If you look at, for example, like Cathy oko almost lost in new in new york's state because of who? Because of like A O C.

And all of that extremist progressive rank and file of that party. So people need to really understand and look at the data on the ground. If you want to win in twenty four, you got to be in the ddd. You got got to clean up. Follow this extremist C.

E. And I think .

the georgia senate run off race that we had in the twenty twenty election cost the U. S. Ten trillion dollars. And I think IT, uh, because if you will remember, that was the race that when the democrats won, tip the power in senate to the democrats in all this legislation for the last two years was past, including a lot of the fiscal stimulus and spending that very likely may have faced significantly more opposition they could have been faced where the democrats have the White house and the cent in the house.

And so that single seat and and the loss of that seat in the run off to the democrat party, I think, ended up allowing a lot of loose behavior over the last two years that's going to cost this country for a very long time. And in part, perhaps we can argue a lot of the inflationary pressure. And now the dead load, the U.

S. Dead load increasing by ten trillion dollars in the last two years since that election, by the way. And so I think one of the most important things that perhaps people don't cognition, ly recognize, but feel in some way is that having a baLance of power is really important in this country.

And so to some degree, while there may be issues that folks can argue about to disagree about, there maybe candidates that are vial to us. I think ultimately folks are recognizing the benefit in the value and having a good uh legislate of debate and a good check and baLance in this country. And so ah I think there's a lot of what's taxi saying that, that is into to that kind of. Emotional condition.

That's probably underwear. Okay, sax. Trump said he was going to announce. He went after the santa called them to sanctimonious. Obviously, the trump endorsements here didn't help a roby way, didn't help the situation.

What is gonna happen here? Is the republican party finally going to cut ties because they want to start winning? Or is trump gone to just announced next week and cause massive chaos? What's going to happen in the republican party in the coming weeks because we're fourteen months away from isle, right? I mean.

this is so now the next issue, the question comes down to deal republicans to want to start winning elections, yes or no. And freebies brought up the right point in the last election cycle. He's right that the reason why we got ten million dollars of a nessy spending is because of that georgia run off seat are about to another one where per do one that seat on election night and then we're not wanted in the run off.

Why did things go against purdue? Because trump had a six week hy fit after the election. The georgia run off happened on january fifth th, and then all commination in the right on january six.

So the fact the matter is trumpet has been having this extended heavy feet and living in denial since the law in twenty twenty. And as a result of that, we've lost the georgia run off. I think we did worse than we had to in this term.

I think we're going to lose the georgia run off again if trump continues with these antics. And so IT really comes down to republicans do want to win a look. I know that there's call IT forty percent of the country passionate trump, but here's the problem.

He's captured forty percent independence and moderate centrists will not give the guy another look. And so you cannot win a major national election in this country with forty percent of the vote, no matter how passionate that forty percent is. You know what forty percent is? Forty percent is charly quest, the guy who dissent as beat, who wiped out in florida.

That was a sixty forty election. That is what a forty percent of the elector looks like. Land slide a landslide. exactly.

So the bottom line is that who your messenger is in politics is incredibly important, and trump just gives his enemy's way too much to work with. Now, if he weren't or republican, that might be different. Take fetterman, for example.

Okay, this guy federman, okay. He's been portrayed as this man of the people. He's got to go tea and the tattoos and the hood or whatever.

Who is he really? He's a trust fun kid who never on her job until his mid forties. But the press completely gives him a pass on that.

They would never do that for republican and federal. Were republican, the press would explode them in two seconds. Now does the complaint that the fact the matter is, republicans have to accepted.

These are the rules of the game. If you are a republican, canada for office, you have be perfect, you have be focused, you have to be disciplined. You have to be descendest.

You cannot give your opponents something unnecessarily to work with every fight to santis. Pix has been a smart fight that he is one, and the same thing with one Young king as well. He doesn't give his opponents things to work with. And unless republicans realized that these are the kinds of canals were to nominate in this media environment, we're going to keep losing elections.

Yes, to math any final dot here as we wrap up election.

I'm going to D. C. Next week during the rounds, high five and slapping.

Yeah, just finished. Thought one other quote from new empire governor Christine, you know who's kind of a is a republican who's been in space with trump he he said, listen, the message of this election is first fix crazy, then fix policy. If you're coming across like you're crazy, the voters will reject you.

Now that doesn't mean you can't stay for principle. Rona santis says that florida, where woke, goes to die. He says we will fight.

Woke in the boardroom, will fight in the classroom. This is certain. Ly, not a liberal position. These are pretty conservation position is taking, but he does IT in a calculated.

disciplined way. I'll say this right now. He is a winning candidate at the scale of region. If the democrats also don't figure out how to clean up their act, because the other message that so interesting that I took away is the legislative under that works is actually what biden has always believed.

The problem is that biden seems to get distracted or confused or high jack by the left towing of his party. And they introduce all these unbelievably crazy iterations of progressive policy that just are not popular, even in blue states. Just look at the number of bills that failed. So he also has to fix what he is doing.

By the way, he doesn't think that that could fail. A the us. Judge in texas and not sure you you can tell me if this is the jet or or not.

No, they stayed. What we should talk about, the economy, actually.

that was predictable. Dict is for a present. A trillion dollars without congress is approval month. Point here to sentience, one miami daid, which went for hillery by thirty points. okay?

He showed that a competent executive, an energetic, youthful Operator who actually runs the state well, okay, can win over models and independence. And democrats know he's a winner. That these are the .

types of canner prod served.

Yeah, is a winner, is a winner. We are breaking in a special have been a big news week is not the elections fx crypto exchange went belly up and we thought, well, let's bring somebody in who super credible .

encrypt u and that's .

friend but because he's .

wearing a fine, a great .

it's not it's not my player and it's not a laugh, hana. But Normally I I just squared the black t shirt and the hood. But when times like this, I gotta talk to media, policymakers, regulators, and is a good time to spruce up the image.

This is a week to break out the time.

Yeah, this is men's warehouse. IT never look good. Thank you.

I see a red time and I think fiscally .

responsible I guess bryan, just to kick IT off F, T, X in spectacle of fashion blew up this week. And it's pretty nearly you run an exchange as well. What you take on what happened with F, T X? And then what is your position in terms of making sure your customers understand that coin base is not going to have a similar fate to all the other exchanges that seem to be blowing up every couple of months?

yeah. Well, first of all, I mean, I think we were all shocked at somebody like sam who seemingly is so smart and and capable, ended up in this really the situation where he appears that have done something quite unethical and illegal. So you know, my job right now this week has been to go out there and just help people understand that coin basis, not like that.

We've been pursuing a different strategy for the last ten years where a public company where we're regulated our our financial statements are audited. They can show that you know customer funds or psycho gated their back one to one. We're not investing customer assets without their explicit direction.

And so that's been the first step is just to make sure people understand that. But then after that, we need to have think about how we go forward as an industry here and both take a long term perspective, make sure the good companies in the space aren't allowing one or two bad actors to kind of messed up for everybody else. And IT feeds into the whole regulate story too, because companies like coin base are already regulated, but we're regulated like a traditional financial service business.

But we don't have clarity about the crypto specific regulations like what's a commodity, what's a security. And that lack of regulating clarity, I believe, has pushed a lot of his business offshore to these less regulated exchanges. That's part of what caused the blow up today. They were based on the bahamas and just there's not sophisticated financial regulators overseeing what they were doing.

Brand, there's a lot to contact, but maybe we can just take a step back. And for the uninitiated or for the person who's only been just following this very superficially, can you just in a nutshell, explain what happened? Yeah so ah my .

understanding is and again, this is from peace i've talk to and I spoke with sam and C C. Briefly during this, but I didn't get details from them. I got of other people, you spoke to them this week yeah, I mean, this was all going down.

I mean, I I spoke to sam about, you know, he was trying to raise emergency financing and things like that. And I spoke to see about why he was considering buying the as I thought that was a bad idea, but my understanding what happened at this point, and again, I don't have all the facts. This is just my my understanding is that, you know, F, T X was in a position where they had this markets, ker alamito, that was investing in risky things.

And that's fine. Like market makers, hetch funds, they are designed to take more risk. IT appears at this point that back during the last uh shake up in the crypto industry where you know Terry luna and voyager and salsas and three arrows went under IT appears that a all of me that took a big loss at that time as well.

They may have even been underwater. And instead of just saying he know this hetch funds gonna blow up to which would have been unfortunate people like, you know, sam would have lost money. It's embarrassing, but it's not for a had fun to blow up that happens with some regularity instead of just letting IT blow up, IT seems like at this point he took customer funds.

But you have to explain he also he owns both that for the people that may not understand that, right, that he wants .

his own exchange called F X, and he wants his own head from called a alamito.

which Operate inside the F, X, as well as in other places, right? But again, aleema seems to have blown up, sorry, brand, back to you.

yeah. So IT seems that they had this solvency issue. And instead just letting you blow up, sam basically said, um hey, we have a bunch of customer assets over here at F, T, X.

Or he somehow basically made a loan from f tx. Into alamito to try to prop IT up. I don't I don't know why he did that. I mean, that's the moment in my mind where he crossed the line into probably committing fraud. And I think he probably lie to users, lie to investors and he went around and try to bail out these different companies like like voyage and block kf e, and to sort of prop up this thing. And and maybe he thought he could trade this way out of IT or something, i'm not sure, but that seems to be where the mistake was made.

Brand, to ask one question. Which I which I think will help frame the contagion risk set of questions that everyone having when people have an asset. We we all talk about customer deposits and customer assets held at these exchanges, but those assets and those deposits are very often some form of coin.

I have some amount of bit coin, some amount of either or some amount of something else. Is IT the case that there is an assumption of total asset value that held in its in a portfolio of coins that doesn't necessarily match the individual users accounts. And then when one coin goes down in value nominally to dollars, that the whole value of the portfolio will go down and now you can actually make the customer's whole. So in the statements that have been made by these guys and other exchanges that we have enough liquidity to cover customers accounts, that the assumption might be we have enough liquidity if you assume the current market Price for a whole bunch of different coins, but then have one coin tanks, the total liquidity tanks and may not actually have IT matched up correctly because now the customer account body didn't go down as much as the exchange of the uh total uh asset value, but that does. And is that part of the contagion with is going on here that they're not match truly between customer accounts and the exchanges, you know holding of of coins.

So not exactly okay. So if you're a regular financial service business, um that but you're not a bank reregulate is a trust company money transmitter or eeta a you're required to hold customer assets one for one and ominous in the the asset. So is if you say the customer has one big coin, you have to hold one bitcoin.

If they say hundred dollars, you have to hold one hundred dollars. And so that's the case with coin base you don't have to take our word for. By the way, you can look at our audited public financial statements as a public company with an independent big for accounting firm who went to go verify of that.

And that's what various custodians and exchanges, that's what they all should be doing. If by the way, if you regulate is a bank, you can actually uh, go invest some of those. But there's very strict regulation around that in capital requirements and we're not a bank.

So we we hold one to one. Now if you're an investment fund or hetch fund or or something like that, then you can try to take positions in different coins and different assets and they could go up and they could go down. You know you you may lose your investor's money, but there's no such thing as the customer assets being involved in that.

There needs to be clear segregation of those customer funds and from what an investment fund would be, our corporate funds. And that's where they ve got in trouble. They they basically com ingle to customer funds with their hetch fund.

And can you explain the contained, by the way, just so we can because everyone's been talking about the contagion and understanding what's next. So that's sure. I just want to yeah because I think people going to ask you that a lot this weekend.

yeah. So I do think there is there is some contagion risk here. I think there's other firms that had first of all, there's firms that had money just sitting in F T X, and that's now going through bankrupcy court.

So that's been bad. I mean, multi coin came out publicly and said they had ten percent of portfolio sorted on fd x. Um there's other firms that alamito may have had loans with and those firms are probably struggling.

You know, I don't want to say who, but we have received a couple of inbound calls from other people trying to get emergency financing. There's people who may have just totally different from F T X and alomar tra. They may have just had their own portfolio that they took margin or leverage, john, to buy a cypher u and now is the Prices have come down a little bit.

They're getting stopped out. So um that's all been very chAllenging. And I get just for the sake clearly, I should say that coin base did not have any material exposure to the F.

T, X or F T token. This is really talks to the issue from a legal standpoint, right? I mean, remember when I was doing paypal like twenty two years ago and the company was like six months away from lying on the money.

Remember, the lawyers told us really clearly you cannot use customer deposits to fund the Operating expense of your business. In other words, if this business sense are going bankrupt, you'll still have all the custom money there and they able to get IT back. And you know, IT was really clear, like, hey, if you use customer funds to pay for the burn of the business, to Operate the business, that is a do not pass, go, go directly to jail type offence.

And so like, that's really the heart of this. Now I read in some articles covering this that the way IT worked is that aleema had a bunch of these f tt, these F T X token, S F calls F T T. And they basically use, that is like a markers collateral.

So they basically borrowed was IT like six billion of customer funds from F T, X. And then they use their own token to them as collateral. So yeah, exactly.

And then what happened is apparently like cz got wind of this and he owned a bunch of these tokens and he's signal that he was going to dump IT in the Price space. He went down. It's an alvis on the clatter, al, for the customer loans was insufficient and then there was a run on the bank.

And but when this happens in the public markets, a lot as well. So like when you see heavily shorted names or when you know that certain hetch funds are on the brink, other hedge funds will go in and essentially force a margin call and a stop out because then it's what cause is all these runs.

And if you look actually inside a game, stop the reason why you got all this gamier ation in the game, stock equity in a bunch of these other names was in part because of this dynamic, folks that are highly levered, folks that don't have the right matching of risk. And what happens is their solvent but a liquid. And then if you run the instrument into the ground, they both become involvement and illiquid all of the same time, and the whole thing is fluent.

So bran, the question is, now that we know what happened, which is all of these crazy interparticle ted transactions, and, you know, all of this stuff seems very illegal, there was a bankrupcy filing today, and up until today, IT seemed like this issue was really about F T X international and alumina. And I didn't touch F T X U S, which for a lot a long time tried to position itself as mean a well run and regulated as coin base to be know. They tried to say that.

But now, if you look inside the walls rejang nal. All the articles say that this is actually F T X groups. So the whole thing seems to be imparted.

Can you just help us explain that? Because there now that's a lot of U. S. People that were following the rules thinking that this thing was matched one to one .

that maybe also affected yeah so look, I don't know who inside F, T, X is and its orbit of companies actually knew that the the fraud had been taking place. I IT would not surprise me. I, I have no idea, to be honest, but I would not surprise me if F T X, U S.

People and employees had no idea that this was happening. I, I am imagining if sam was doing, when he started doing this, he probably wanted to keep IT to a very small group. Others SE this, the kind of thing that leaks and the whole thing blood up. Now that being said, I don't necessarily think F, T, X, U, S is worth anything as a business right now because of the and being so tainted.

And there probably was not great separation of these entities in the sense of, you know like did they have truly separate boards and beneficial owners and governance? And sam seems to have you know, IT appears that they didn't fx didn't really have a CFO or maybe even like a real board, anything like that. And so it's hard on read.

We found on red, there was an article that appeared that said that the head of compliance at F, T, X was also the head of compliance at a poker site called ultimate bet, which in the two thousand and tens did this exact thing.

Apparently some version of this, where they went in and they looked at whole cards of poker players, and then the few employees inside the business would basically play against these folks, knowing what the whole cards were, ran the cheek, stole millions of dollars. Somehow that person found way to be ahead of compliance. Selective ex, yeah, ten years later, which is incredible.

But back to this question. So so now what happens now is you have the international business and the U. S. Business and elevated research all rolled up into this one frozen entity, right, with now regulators having to.

So do you know what happens in the process like this? Like is that that the the D O J N S C C get priority? Or is there some international monetary like who whose, who on winds all of this? How how do people get their money back, if at all?

yeah. So i'm not an expert of this, but my high level understanding is that the bankruptcy courts were essentially, and I believe they filed bankrupcy in the U. S, which is interesting thing.

I didn't know why they did that versus bahamas, but anyway, the bankrupcy quart will basically go through and try to find any assets of value. So I mean, they must they still have some tokens and value. They have a venture of portfolio.

No, I think sam owns nine percent of Robin hood. There's various things that they may own. And then the kind of auction there was off to various bitters on distressed assets and then try to dirigo te those funds to the customers. I don't know the exact process beyond though.

I mean, you remember the night of um wine down took many years and for years he was uh trying to find assets and then he found a market, sold them. There's this the trust and he still active and then you know tried to redistribute the funds. Obvious ly so many more customers here than I was, what mad off. But I can be a very long and winding process to identify the assets, then run the market sale process on them, then figure out who gets what first, and then distributed ted.

There was an interesting thing that Larry summers did, I think, for bloome berg where he was asked whether this was lemon or non and he said IT seems more like an n ron than IT is a lemon and ban. I'm just curious how you think about IT like is this sort of. A fraud d perpetuated by a group of executives to essentially take advantage of the situation? Or do you think that this is more like a lemon situation, which is a well run business? I guess, that just, you know, got caught in a liquidity trap.

I think it's my guess is, is a little more like and run in the sense that, I mean, yes, they were over levered in that kind of thing. But the minute that they moved customer funds in some way, shape or form to back stop the hatch fund that that was, in my mind, fraud. And you know, that's more like I run.

Do you think now that we have to open the gates on regulation, like the whole point of crypto, in some ways, was no trust, nobody. And you know, decentralizing is the key. But here what we see is a lot of people were tricked into trusting F T.

Acts and having their deposits there. And IT was a centralized exchange, which caused all these problems. So it's like IT almost violates the principles of what the whole product market fit was supposed to be. So what what should sort of the observer expect? And what do you expect as a business in terms of how governments now react to all of this?

Yeah, I think it's really important to distinguish between the centralized players and cypher. U, which are kastoria exchange is extra coin base has a big business there. And the decency zed players, which are you south kastoria wallets defy protocols, web 3 battle world。 So the centralized players um should be regulated. And today they're regulated already like like kind of traditional financial service businesses. But they don't have the the regular lation clear when IT comes to the crypto aspects.

So for instance, in the U S, we actually don't still have clearly about what is a commodity, what is a security should which one should see ftc regulator versus S C C that kind of thing and that lack of regulatory clarity and Frankly, the the climate of regulation by enforcement, the negative rta c from, you know, chair gangs or particular, has created this sort of chilling effect in the U. S. That has pushed a lot of that centralized actors activity offshore.

In fact, ninety five percent of the trading volume in cypher is now outside the united states, and it's come down a lot since the big inning of this year. Even now, the decentralized players, self custodial wallet defy web three. This is where crysta really has opportunity to make a more fair and free and transparent system because you can go look at any smart contract to see exactly what is doing.

Anybody can audit the code if you have a self custody a while, you you can just trust yourself. You don't have to trust any other intermediary out there. And um that's where you get through decentralized.

And I think that's actually uh, now those areas still have a couple of their own chAllenges. You know sometimes people will lose their password, their phone and they'll lose their own money. So if you if you're trusting yourself, you still have the you have trust, you know that you're going to do that piece correctly. But there's a lot of good things we can do there around making social recovery mechanisms and M P C wallet and things like that.

We uh remember just a couple of months ago against are started saying, hey, these things are all securities and you went to visit the S C. A couple years ago. You try to they wouldn't meet with you.

You were very public. You did a tweet ster and we talked about the some other part that hey, like we wanted meet. We want to talk about that now. We're still in a position where bsc position as these are all securities, which means the any that's trading, we would have to be limited to accredited investors.

Eta, what should the united states do here and how close we to get in clarity because I know you're trying to talk to the sec directly about can we just get some clarity here? Can people buy these tokens or not? What is the status of? Are they tokens? Are are they security or are they not here in the united states?

yeah. So luckily sense then we have had a lot of productive dialogue with both the sec and the C, F, T, C. And treasury and all kinds of people in congress.

And I do think the U. S. Is making some steps in the right direction. There was actually there was a bill going through congress recently called the dc cpa or the stab now bosman bill, although it's having some chAllenges now, Franklin, to this F T X blow up because, uh, S B F was one of the people out of pushing that bill forward.

But regardless of that, the sort of system that we should have is there should be a clear design nation between what is egypto commodity and that can be regulated by the cftc and what is egypto security. Now this is one of those legal and widely what is also a stable coin and artwork and other things that are not any of those things. The chAllenge lies in that there is kind of um a fuzzy line between what is a commodity and what is a security.

And a lot of this law is based around the how we test, which says a security is an investment in a common enterprise with an expectation of profit. And so it's basically a point based system. And in the absence of really getting a clear list between C, F, T, C in the us.

Here in this turf battle, I would love IT if they could basically put out a list, um get their heads together and put out a list C, F, C is going to do this. If is going to do these, a bunch maybe are in the middle. Lets let the courts figure out out or whatever. But that just hasn't happened and it's a missed opportunity in the U.

S. So if the how we test is not perfect given the dynamic nature of crypto currencies and all the innovation, if brian armstrong g was going to say, hey, this is in the best interests of americans balancing, you know, some amount of security and safety for people, making bets on currency and lower innovation, what would you say is the best definition, the best way for us to regulate crypto coins? Putting nf aside, putting down aside, just specially .

let me just tweet your question. We should switch to S, P, F as well. Just talk about the person.

But to me, IT seems the whole issue, if you come back like, what is the first string that you pulled that unravel the sweater was the fact that these tokens were created out of thin air. They had no meaningful value. Somebody prescribed the value.

And all of a sudden, everybody else in the economy all of a sudden said that i'll take that as collateral. You cannot do that in the regular world. I can't call J.

P. Morgan and say i've invented this thing. It's called the share and xyz, and i'd like you to margin loan, you know give me a loan against IT. So brand explained, like there is a ton of these tokens that i've been engineer, right? And there's been a ton of these tokens that have been sold.

So what should people do that only things thinking that there was going to be some safety or value or you know like how do you think about all of these tokens that are that that could be as basically as as fragile and shadi and worthless as F T. T? yeah. Well, there there is this .

concept like an exchange token and there is a couple other firms out there that have them. That's something we haven't done. And I I I think I think you're right, like the actual utility of those things is a little questionable.

And so if someone's going to sort of mark those up on on a low supply and then a low float, and then somehow that is that that's gonna get yourself into trouble. But look, I don't want to throw out the entire concept of people creating tokens. I think there's actually a lot of good stuff there.

And IT IT comes down to this idea if if you're trying to raise money for your company and a through a token, that's fine. That should be a security and there should be regulated way to do that in the us. Like go register IT with the sec, you know let IT trade on broker dealers.

That's that's what we've been wanting to do for a long time. And the is taking their time getting there. They don't you know cancer, to be honest, he doesn't seem that um excited about the idea of this whole industry existing.

And so anyway, but IT IT should exist and IT should be happening. Regulated way. So people want to issue a token that's raising money for a company. Let's regulated as a security if they want to issue a token that's truly on a decentralize protocol or has some other purpose like voting in a doll or or boards or something like that, then that's probably not a security. And let's be honest about that and allow those things to trade in a different environment, a different regulator under the C.

F, T, C. We probably running at a time with you because you said you had a heart stop. So let's ask the million dollar question. Tell us about s, what's who is this character? When did you first suspect .

what's read on the psychology like this wasn't legit? Do you think that that was his alternate content that allowed himself to convince himself to do this, or giving this was like malicious the whole way? Or what? What's your sense of the guy? 嗯。

so again, i'm speculating here. I mean, I ve spent time with I, I ve met up a bunch times, and I have to say I did not see this coming like he he appeared to me to be um a very bright, credible, competent person perhaps a bit Young, perhaps you know a bit reckless at times, but not unethical and not not committing fraud. I I definitely did not see that.

You know, if I look back to see where there any warning signs that I should have thought twice about IT know, one of the things I noticed was that in twenty and twenty one know, coin base had a good year. We did seven billion revenue for a billion of positive, but a went, we became public as a company at that time. F, T, X stood about one billion in revenue.

And I knew how much money we had for our venture budget. And just like different investments we wanted to make, and I knew their revenue, and I had to scratch my head up under times, and I was like, where is this guy getting all this liquidity? Because he was like buying nine percent of robyn hood.

He was putting like a billion dollars into this. He was donating to all these politicians. And I was like, I did not make sense to me where he was getting all this cash.

People would just keep telling me, oh, his market maker alamito just printing cash I guess like, okay, I guess you know IT seems like a conflict venture to own an exchange, the market market that's why we haven't done IT. But more power to you, I guess. And so I was surprised I didn't speak up.

I not I can't explain the psychology of that at this point, whether he is a pathological liar or if he's started off good and somehow under the pressure of this whole thing went bad. But the minute you can, you can go watch the interviews. He he's lying to people about why he's he's know a bAiling out voyager and and blocked fy and this and he he knew at that time that most likely he knew at at that time that they were not solvent, meter was not solvent. And so that's where he cross a major line in my book.

And we see the time and time again a lizbeth homes burning out off. I mean, once the leg gets too big, you can't get out of IT anymore. Uh, if that's the case, really incredible.

And the most important thing at this point, brian, is that the unstated makes a decision on, do we want to be in crypt du? Do we want to have a say in this and create a regulatory framework that entrepreneur s like yourself can deal, if that is the most important thing to happen in the next year? But you're saying the sec is not motivated. I guess why are .

they not motivated? They're just sea. What motivated?

Now this is a political.

I find, who did give all this money to. He was touted as one of the future biggest donors, the democratic party, if you want signals. So if you want signals, I would say here, pretty big signals here.

Number one, he says, going to donate a billion dollars democratic party and he kept touting this like effective altruism, whatever the same in the world stuff. Now why do you need to do that unless you're reputation launder ing and trying to buying political protection come? okay. You don't think that was a little bit signal.

I'll tell, i'll tell you even more explicit sign we he pitched us in that seventeen billion dollars, and I did a zoom with him. And after the zoom, I like this doesn't make much sense, but i'll have my team do some work. We did some work and we sent him a two page deck, and we said, here are our recommendations for taking the next step.

One was the formation of a board. The second was the creation of dual class talk. The third was some reps and warranties around defiled transactions and related party transactions. And the person that work there called us back in literal i'm not i'm not kidding you said go up yourself was caught on, quote the response to us we're like, okay, so that was the easy decision but message I message received but I still thought, okay, i'll just put that in the bucket of these guys are unbelievably arrogant and smug. But brian, I thought what you thought, which is maybe it's because they've put you've created a money making machine in the bahamas, and so they they have that level of IT of confidence, you know, i'd IT but then to see this thing, to the extent of which is now we're only scratching .

the surface, guys, we're to be a and what had happened? You said, I want to pick up bond. You said, which is the esc doesn't see motivated. Why is the S, C, C, in your mind, not motivated? IT.

well, I think you're write that. I hope that they use this as a moment to come together and help you local companies in the U. S.

Being built here to end up in a Better place. And I do believe, you know, David, I think that is right. IT is a political issue at this point.

There is going to to be a major impetus to get the clarity here in the U. S. And hopefully to help build the companies here in the U.

S. That are going to serve the rest of the world and in every major financial hub. So we are committed to building that together with all the regulators around the world.

And crypt is here to stay. This is a temporary setback. Um but i'm here to keep building and make this thing happen.

We really appreciate you taking the time, but you want to get .

to know. And so story after story here about, you know, sbf was going to create this billion dollar philanthus to you, save the world, improve humanity, long term prospects. Number two, donor to the entire democratic party, and on and on and on and like, quite Frankly, what this shows is you want to know what effective altruism means. IT means that you steal other people's money while bragged about saving in the world while taking a big chunk for yourself.

That's what that means. There is a research paper in twenty eleven and uh this research team looked at drug admins and drug abuse four thousand people and they found that the biggest addicts had the highest intelligence that you were twice likely to become an abuse and adapt uh um if you were any kind of intelligent uh quite contel that they were measured and I someone explain this to me at the time that the smarter you are, the more you can convince yourself that when you're doing bad things, you actually doing good things uh, even if you're doing bad things to yourself for bad things to other people that you really may actually care about, you can convince yourself that there is some reason to keep doing IT. He seems like a brilliant guy um I think that to some extent he may actually I don't know the guy but he may actually believe that the um you know the the ends to justify the means and he thought that he was doing good for the world and this was something that had to be done in some way and oh, just got a little bit away from me.

But I think the problem is bigger than F T X A. And and i'll say the uncomfortable part out loud and nobody needs to necessarily comment if you don't want to. But there were an enormous number of venture firms that talk their their way into just completely doing zero work here.

I mean and the the tip of the spear is this thing, uh, who's the guy that works? That founder on bulgar bull jar? The bull jar.

The bull jar. 用过 delhi。 Thank you. Yeah, yeah, yeah. That tweet that he had where he basically took the snapshot of the skua transcript was one of the funniest things that i've ever seen. I mean, this was a two hundred and fifteen million dollar decision and qua documented IT and put IT on their own website. And I think that's an example of something that was happening, which is people just look the other way and didn't even even want to do the layer of work.

Let me just staring together a couple of things we've talked about over the past few episodes, and I think you will agree with this point. But generally speaking, there seems to be a very heavy lack of governance in investing given the amount of capital and the velocity of capital in silicon valley, particularly in private markets of late.

And a lot of the stuff that's been talked about where last week we talked about super voting shares and the founder does whatever they want and there's no governance and there's no board and there's no and particularly with this F T X situation, we're clearly there wasn't aboard that. That was, you know, getting the necessary information that had the necessary influence, that had the necessary is the meta conversation. But all of these threats tie together the concept that maybe there's a not a lot of governance and not a lot of diligence going on. And the amount of money that flowed into silicon valley has allowed a lot of this. Lucy.

today and consequence. Let's thank brian armstrong for joining us, and I was a very busy day.

What a great time.

And handed and and cycle finish a large math.

I just want to say the second uncomfortable thing out loud, which is there was a lot of venture firms in silicon valley in this period of both not doing any worker diligence who also took the extra step and actually created classes and would teach teams how to create these tokens. okay. And those artifacts, those video links and artifacts are sometimes on their website.

They're still on youtube. They're inside of twitter. And what these folks would do when we talked about this, the game that they played was they would get a team.

They would create token. They would also buy equity at some crazy valuation. The equity was locked up, but the tokens were not. And then they would put a morning exchange and sell them to unsuspecting people. And they would be able to dump these tokens.

And if you look inside of that trend, what you're gonna and brian just mentioned this, those were the sale of securities, except that was done in a completely unregulated way. So if the S, C, C is really in, the D, O, J is really gonna, take this F T T token issue seriously. And what happened to F T X, they're gonna start to look at a bunch of other tokens and tokened sales. And you're going to end up looking at some very well known venture firms inside a silicon valley.

This is going to be super early, and we talked about a before on this pod. There are people who knew Better. So you get a bunch of kids who are living in the bahamas in a house and their winging this thing. That's one level of responsibility, and they'll go to jail. But when we talk about venture capital of capital allocations been added for decades to to mox point, and they're teaching people how to do this and they're hiring attorneys and creating offshore anima know bvi, whatever uh places to put these coins and then teaching people how to do IT and then flipping them potentially, this is we're just peeling back the on you on this. I have a feeling that this is gonna.

The turning point in all token guys is not the only token that has been engineered by silicon valley venture firms, and IT is also not the only token that's gone to zero that was engineer by silken value venture firms.

Well, I mean, who knows, engineered by but a Jason to, at the very least.

Jason. Jason, there's videos today on some of the most one on venture firm sites on how to do this.

H wow, i'm going to have to see those. Um yeah so they're basic. You're your point to oh, is they are instructing people on how to do this. Images are the deal capabilities what they did.

Can I ask you, your guide is a point .

of you on just one big macro o philosophical question. I'm obviously not big in the crypto world and haven't been. But so much of the positioning has been that these networks get decentralized through the cypher graphic verification systems that obviously enable.

You them to Operate a effectively and truthfully incorrectly and without centralized controller manipulation. But ultimately, while these networks themselves may be decentralized, the users point of access often ends up being centralized as a point on the network. And IT is that point on the network that includes the same level of influence, power control and value as what we saw in the prior centralized my network model.

You know we had ology on last uh, year and you know I tried to get to this point with him. We had to cut the thing conversation short, but I still not heard from anyone, and I ve spoken with brian and separately about this point. And and the the concept I use is like, look media, if you put all the you be on a decentralize zed network and anyone can access them, they're distributed everywhere.

You still need to have a really good application. And whoever makes the best application is going to get all the usage, and then all the users will use that application. And that becomes effectively the point of control and influence and value once again.

And so IT seems to me like in this case, the exchange was being used as a centralized, while IT certainly you can do let know exchange through the exchange. But but mechanistically, these guys were storing their coins, their crypto currency inside of F, T, X is wallets. And what s had control over their assets until the network centralized.

And so does the decentralized model. It's it's a question i'd love to just ask you guys in your point of view on does the decentralized model actually ever manifest where everyone has their own well? And I know this all these new protocols and these distributed wallets and b five things.

but I don't I don't be Better. But then I just out to me.

you basically creating an exchange without a regulator and of course, someone looked you off in a blew up like, I mean, he wasn't any different than what we had in versions. One point of and is a really a model where decentralized works are ultimately because of the network .

effects and and the economy because we get the question good.

No, I mean, I I have I have I don't know the answered the freeboard question because I don't I don't know this spacewalk enough. I mean, you know why my my biggest purchase ever was bit point in two thousand and eleven. You know i've bought a bunch of these tokens that are massively depreciated in value.

I think lots of investors have you know I kind of fell into IT as well like I thought, wow, this is incredible. Like you to buy these tokens. They do all of the school stuff. They represent all this value. And my experience has been the opposite that i've lost a lot of money in these things.

Um and so you know, I really hope that regulators, not just obviously, I hope that regulators do the do the best they can to get investors money back in F T X, but I really also hope they figure out all these other tokens as well because you can just rank them in terms of market cap, start the top and work your way down. And you will see that these were unregulated security days that were manufactured. And so by our brother and people who understand .

the law around accredited investors and the stuff very well.

Yeah but yeah, do you guys think cyp to investing, uh, is dead or what do you think how do you think people think about that risk profile? Now inside of I think .

the investing in the tokens is going to end, investing in the corporation is going to begin and any the tokens are going to be super regulated. Building on what you said, your maths about the ultimate bet is IT possible that alamito, the trading hedge fund, was looking at the F, T, gx data, which they had insights, ed, into. And essentially, that's the same as seeing the whole car in the ultimate bet. And so making their trades based on what they see, the consumers are making their trades front.

run their trades or otherwise. That's not illegal. You know city deal does this in regulated market. That's what payment for order flow is, is right? It's the ability to front run retail volume. And so you know in dark pools that is legal by the law in the united states, and that's what allows sit dell and you know I think James street and SaaS khana, you know all these folks basically run these dark pool exchanges for regulated security like options and bonds and and stocks. And they get this order flow, and they front running by a millisecond, and they they just take small thing.

but they can't print the F, T, T, tokens and and otherwise manipulates market to the level that I think S P.

Could I just think that there there's these really, uh, strict walls and segregation, as you heard brian talk about, when you have those businesses in these regulator markets. The problem here is that this is totally wild west, unregulated, wild, wild d west. So who knows what's going on? relish.

And we're pushing the business acts off of the shores of the states, as he said, ninety five percent. What do you think should happen regulatory y sex in terms of amErica and competitiveness? Or do we not to be need to be competitive in this? No.

I think we do. If cp is the future of this is an important that I think we should enable through some sort of constructive regulatory framework. I think the regular I think there were regularly to listen to brian and help come with the appropriate framework that to be clear, look, what seem did is way worse than people going on an exchange and speculating.

I mean, look, I think that people who speculated in the buying and only these tokens there, they were using IT like a casino. Okay, like that's different than a customer putting their money on F, T, X and having their money gets stolen. That's a big difference.

So I think there's levels here now for me to your point about who's maintain these tokens. You're right. Maybe that's like another category. But I do think that the reason why this is on a different level is because IT wasn't seems money to give away.

There are such an easy .

solution to you, and I agree with you on that point, but I think don't underplay when there's an organized process to create an illegal security with special rules for them that allows the liquidity for one class of asset and not liquidity for yeah.

the cat. I don't think it's the same as what sam did.

And I don't think I think that that's .

something that the speed looked at and we need a constructive regulatory framework for that.

There is such a simple silver bullet for all of this, which is these things need to be there needs to be proper governance. People have to have skin in the game insurance, people signing off on the taxes boards, not on shore here in the next states. And then we need to, and i'll keep saying this a way for the americans to become sophisticated investors. Only six percent of this country fall into the qualified purchaser and a credit. If you want to trade in these things or you want to trade in nfs or private companies, we should have a driver's license like test.

a fire on my test.

a sophistic test, and let into with an education.

The problem is, when you have guys like this, IT sets that desire back by a decade, if not more.

Okay, agree. Because every single, so fruiting.

every single person inside of washington right now who's anywhere near this from a regulatory perspective or a policy perspective is meeting on monday morning. And the meeting topic is, how do we defend the mom and pop folks that lost money here? Yeah, that's the only thing.

So we took this out of, you know, because I I remember remember I taxi into the group chat. Hays, what what what do you think the the legal ramifications are that drive prosecution? And one of our and said legal ramifications, these are political ramifications. Yeah, which means that this is gonna go to the utmost level and it's gonna the most scrutiny and they're gonna really quickly.

They're na drop the hammer instead of having a path to accreditation, I agree with, they're na drop the hammer because their constitution, some grandma, grandpa or some people put their college education to the some lost everything. We just need a test, let people prove their sophisticated and let them participate only.

Haven't you been a proponent for letting people invest in startups that are just mops and and departition ing access?

I'm only allowed to do that with incredible investors. I would like there to be a test. And I actually teach a course in your university six times a year for charity.

I do IT for charity. It's a four our course where you learn about diversification, you learn about the asset clash, you learn about seventy, eighty percent go to zero. We teach you about the parallel.

I try to teach people about the stuff so that they can participate. Intelligence IT. IT would be the equivalent freeborn. And thank you for asking the question. IT would be equivalent if we had a poker test.

And to play in the world series of poker, you had to go to a five hour seminar, and you had take a practical test, and you had to say, a flush beats a straight, and you had to just prove that you had some level of knowledge. You had to play the game. It's such an obvious path to removing these problems was in competitive as a country.

And instead we're letting people do this offshore like cz with no rules. When whatever rule S Y chooses, it's is infuriating. It's so stupid. Our politicians and washington are so done. I just say something.

I think the chAllenges there is always the spectrum of understanding, and you'll always end up seeing the people on the wrong end of the spectrum and getting taken advantage of. There is this notion of adverse selection distributions are not equal.

People will end up um you know kind of opting in to spend money on things or making investments that they think we're good investments, but they're actually getting taken advantage because they're not savy enough where they miss an important angle or important perspective about the person or the thing that we're giving their money too. And there will always be some number of those. And the way that regulation has worked historically is not by first saying, hey, let's figure out the right way to create a framework for Operating.

It's that some sort of people got advantage. That story then becomes the regulatory framework. And that story has repeated itself for five hundred years across capital markets.

We talking about a mulatter thing here. We want to see cyp to have a framework. We wanted to blossom here in the united states.

And then there's multiple level of people who are um causing chaos in this ecosystem, in this very promising technology with their god dem, whether it's VS grafting or S P F or incompetence. Uh, we just need to clean this framework up. If people sometimes people I understand in dc listen to this podcast, if they're listening.

It's essential that amErica be competitive. Here is essential that everybody participate in risk capital and get educated. Let's clean IT up and make a framework that allows all americans to participate and educates them, and then stop these grifters from doing stupid things. If people were educated, that's the first step.

And is the best talk about the economy?

sure. You want to talk about facebook with eleven thousand. You want to talk about the a market popping.

So at the beginning of october, yeah, I think what we basically said kind of generally speaking, as markets up right markets, I went from nimbly to being constructively positive and basically being position long. Here's this really interesting set up. We have a bunch of very positive news that I think we all have the process.

First positive news was that inflation tick down. Now here's what i'll tell you. There's a cavy at here.

I talk to a bunch of pretty smart sharps on wall street. And oh, two things. Number one is they all gave credit to David sax and they said sax was totally right.

Double procession is coming. But then they said, tell sacks that we think that these are the sharps. We think that there's a double humping inflation coming, which means it's coming down to come back up and there's a bunch of reporting vae ries that may cause that.

So keep that in the back of your mind. But positive news number one is inflation taking down um number two, a Jason, we talked about this uh a federal judge basically stayed bitings attempt at giving student loan relief. Now that would have been a five hundred billion dollar or transfer payment from the government into the hands of individuals.

IT is deflationary to not put give their money to people, it's effectively taking stimulus away from folks number three, IT looks like we are headed towards the split government, which means that um we are not probably gone to see any more stimulus over the next two years. Number four, uh, ukraine wins and curse on, I hope i'm pronouncing that right. Number five, the united states, uh, announced yesterday through the wall street journal that they had essentially said, no, the ukraine's request for advanced drones and they said to ukraine, essentially you need to go and negotiate an end game here and now. Number six, china has started to relax its covet policies and g is pivoting to economy first.

So if you took old way, take seven. Don't forget seven. Facebook, which would not take the medicine they refuse bragton letter, cut seven thousand people forty eight hours ago.

I don't one of the facebook .

matters that much to be on well, but IT matters .

that big tech is and they're taking much.

doesn't economic. Think that does if people my .

my point point is these seven things are macro level things that affect everybody. You and I think if you take them together, what IT says is that, wow, there's the potential for a lot of great positive developments over the next six or nine months. And I don't think that, that was adequately Priced in the market.

But here's the problem. And this is what why we've been rallying. The problem is that most of this rehiring has been because of a bunch of short covering by folks that who were pretty pessimistic and negative after the last few inflation prints.

So this is not really net newt buying that we saw over the last couple days. So you take IT all together. I am like it's still gonna probably trend up a little bit.

But then again, you know we talked about the station when the wax gets into the low twenty years of the high teens, that's probably the short term top and then IT turns around and unfortunately were near. Yes, the look to what is I teens. So that's kind of my thought on things right now. okay.

For any thoughts on the influence print?

yeah. So I think there's two things, one of which i'll give credit to a guiding carl h. Two, I hope, by pronounced crown name orright.

He's from William blair. He put out these excEllent research reports, and we used one of his graphics a few weeks ago. So I put IT up here, and basically he showed that would be the mazda move that we saw this week. So you can see this here, you basically track the move in the tannic treasury against the the one day move in the next stack.

And uh, he said that IT IT really indicates a unique sentiment shift towards in other times, you've seen big moves in the nastec that weren't really seeing significant moves in in the treasury rate at the same on the same training day and that this is such an outlier. What happened at this week, the only other time that we've seen anything like IT was won, the bank of england issue happened back at the end of september, are in the last you know twenty times that we've seen to speak of a move in the maza in a single day. And so we saw thirty one um basis point move in ten year treasuries in a single day, the same time that we saw what at seven point move in the attack. So he said, because you don't Normally see the bomb m mark in the equity market trade in this way together, IT really speaks to a big shift in sentiment. Now what is what is that shift .

in sentiment that there .

is going to be less of a driver for the feed rates, interest rates at this point that gives a team like the inflation print indicates that inflation is coming under control faster than what folks that otherwise anticipated. And so there may not be as many right takes as quickly as folks who are anticipating, which will you know benefit benefit equality and then the bond market traded that that with that perspective as well.

Now the counter narrative, which um I just put a tweet by a guy who i've never heard of before but someone shared this with me the names gordon Johnson and he said um the C P I surprise may actually be due to a technical print that within the CPI one of the biggest indicators is health insurance cost and um you know in the health insurance cost plunged by four percent october september, but the heart care costs didn't actually magically collapse. There was just an accounting difference in how the shifting how the accounting for health care costs that that took place during the month. And if you did not a um if you assume that, that was flat a month over months, are you would end up actually with a six point seven percent, you're over europe, which was higher than expected.

So there is a counter narrative going on in the market. Ah I don't know how significant this guy is or how much of a voice he has. H but I don't know. We're out of the woods yet by some folks are saying that the market is saying we're feeling a lot Better, but there are still analysts that are indicating that maybe they're still risk uh uh to be had uh, ahead of us.

I think the sharps tend to be on that second, second prospect.

And by the way, I see this week, I heard five and a half points even after that print. So is where we're going to get to.

I think consensus we have here is, is that we're in the end game now maybe what two quarters, three quarters, four quarters of chopping ss trim. What would your good tell you of you?

I i've been telling all of our startups that you need to plan and to have money through the first quarter of twenty twenty five. You must ah you absolutely must. And the the way that I cash OK the way that I frame that out to them is nine yeah eight or nine quarters of cash, ideally nine.

And the reason is that we have all of these positive news in the offing. But, but, but the problem is, again, there is still a lot of risk to the downside. We haven't seen, David second, you know, dip in the recession, right? So that double dip is going to be expensive.

And again, the sharps think that inflation will come back at some point in the next six months that will keep the feed foot on the gas. Maybe it's two or three more fifty basis point six. The point is just and you could be at five and a half again, we said this last week, we're gonna get to a point that's probably higher than what people expect.

That's probably around five and a half, and we'll stay there longer than people want. That's probably through the middle part of twenty four. And if you don't prepare for that worst case scenario you're doing yourself at the service, I think the market can start to rebound in the second time twenty four.

But if you are a company, you need to baLance and and plan for the first quarter of twenty five because you know, again, most venture investors are gonna. You want to see six months of data on the ground that things are Better before their climate changes. yeah.

And we're just starting to see the draw out. We're just starting to see the impacts in people's portfolios that will drive behavior change. I mean, this S, B, F thing is the tip of the iceberg in terms of the money at risk.

You know, I went in, by the way, I did IT an analysis. I shared IT in the group chat. Hopefully we can show this up. Bad has a little chart neck. Maybe you can throw up the, the, the historic drawed downs. So for people that care about early stage technology since two thousand and eighteen through two thousand and twenty one and including an estimate for two thousand and twenty two, we have injected one trillion dollars into venture capital.

And if you look at historically how money has been lost in periods like this, and you later that into two thousand and eighteen to now, what IT basically tells you is about five hundred billion dollars of that trillion from eighteen, nineteen, twenty, twenty one and twenty two is going to be destroyed. We have been even started to see that yet, right? And then if you factor in another hundred billion or so from older vintages, we're talking about six hundred or seven hundred billion dollar destruction of paid in capital. So there's still for all the good news, there are still a bunch of these unfortunate pieces of bad news that have to work is way through the system.

yeah. And for people who are looking at the chart right now and you can see the chart on spotify or if you search for all in on youtube, we have a video version there. You just take a look at one thousand nine hundred eighty seven, the peak T V P, I was no seven and half x seven and hf times you cash on cash money.

And what actually got realized was five acts, right? So what paper said? And what got distributed for two different things anew tally. What i'm seeing in the start up world truth is people are taking the medicine and a lot of people are shutting their companies down.

They're giving up on raising money and then asking me, which portfolio company can I get a job at? Because I my personal baLance sheet. Have been teen, a five k draw month, and I had, I have two kids.

I need a job. Can you get me a job at amazon or another portfolio company? And a lot of aquarius have started to happen. And so what's happening is the consolidation of talent. People who would be a great number three or four person, but maybe they weren't suit to be the number one person, are now consolidating into startups. With these layoff s at meta and other corporations, we're starting to see very talented people who had peak comp of three hundred, seven hundred K A year are going to go to startups or go to smaller companies. And that is also positive, more consolidation of talent, stronger companies.

Did you guys hear the story yesterday that nick, if you could just leave out the name told about his friend? His friend basically makes one hundred and forty thousand dollars working for a tech start up, and then also makes two hundred and eighty thousand dollars working for meta. And so and he's been working at both of those companies virtually for the last two years. The guy, one hundred, four hundred and fifty thousand dollars year and nobody knows and he says he works about twenty .

twenty two hours week on both combined. So the eighty hours and and remember when we started and starts in the late night into the turn the century, the number of hours that was expected that I start up was what sacks when you were at paper was.

Ty.

I was expected .

the baseline sixty eline ten day plus coming on the weekend for couple no .

easily early .

days of facebook. Our executive .

management meetings wouldn't start on nine P M.

Yeah, well, I think ella's gna be a trailblazer. A lot of ways on this twitter thing, the first day of the big hack reduction. But then he also, just this past week, everyone has to come to the office.

And if you don't come to the office, you don't come the office. So you could excuse if you're an exceptional performer and you have a good reason, then you will have to. But the basic is everyone comes to the office.

By the way, just to put this point into focus, nicky, just drop this chart for these to see, because I think is just ridiculous. So this is basically what we're dealing with, which is like if you look at, and these are just a couple of examples, but this is meta, amazon snowflake data, dog verses gilliat rafting on the next on what is the point of this?

The point of this is just to show you that we have had a massive rotation away from our industry. Is the point right where Normally the things that we would work on, we're just so well received by so many different kinds of investors that unfortunately just isn't the case anymore. And I think IT just goes to show you that the reason why this is happening is because people are hedging their beats about how long the economic pain lasts. That's why you know, they'd rather belong health care stocks, you know, industrial defense companies and oil companies because at the end of the day, they're banking on oil and war and sickness of no versus .

social media and e commerce and sas often. And if we this charge.

no matter how good, by the way. So this is not an indication .

on these companies.

Go od you I know that on crypt a we clipt was to create these four horsey ma amazon snowfall down twenty three to twenty seven percent. And then the guilty at race, thy on exxon cohort eight, twenty eight percent up. I think your math, what this says also is we don't think your management style and how you are running these businesses is appropriate for this moment in time.

Please consider uh, some austerity measures and some thoughtful ness in how you treat shareholders this well. I mean, I it's just watching the number. Uh, you know how people are running companies. I think we took IT too far in silicon valley. We took IT too far.

Whether J L. I, I, I know that. I know it's sort of a pet issue of hours because we have to deal with some incredible hubris in american sometimes on the boards of these companies because folks don't want to listen to to reasonable advice. And we come off as what blankets.

But that chart, to be honest, this is because of what we explained last week, which is the when rates go up, the value of a dollar that you aren't today is just meaningly meaningfully more worthwhile than a dollar that you may earn even two or three years in the future. That's why that chart looks the way that that does. And if you believe that David forecast of a double dip recession is accurate, which again, most of the sharps do, and then you also layer in this idea that inflation could come back.

You have to be really defensively positioned. You know, you can't take a lot of risk, which is why startups have to expect that if that's the dynamic and six hundred billion dollars is gonna get destroyed in venture capital portfolio OS. How open are VC is going to be for business? They're probably not going to be that open. And so you have to plan, I think, for the middle for the early part of twenty five.

if amazon and how do you get incremental dollars in these tech companies? Amazon does a rif some of the measures. They raise Prices a little bit, if they can.

You know, maybe you see more incremental dollars coming today and maybe that incentivises people look what happened. And we were at eighty nine dollars for facebook showers week to when he made the rift one or seven, he went up like fifteen, twenty and hours. What does that tell you?

I mean, I think IT tells you that a lot of people were short going into that, and they were probably caught outside a little bit by the magnitude de of IT. I think that that's good. The the issue that a lot of these companies had, even in the face of rifts, is that you have to reset expectations now on earnings.

And if you do that, the problem is that when you flow that through to what people think the S M P will look like in the year, there's some real issues. So this is not free. You know, it's really hard treading. And I just I would I would just encourage people IT feels wonderful to have a few days of like, it's like a recipe in the middle of huge storm, right? IT feels like we .

been getting website back. And if else came out.

I would just really encourage people in this moment to to reset your energy, which I think is good, but you gotta go back into that office and you gotta a find the money. And where, with all, I think the last through twenty four, if possible.

it's grand time to facebook.

And twenty seven month, twenty seven two years.

twenty four years, eight quarters, is the new six quarters.

And by the way, you know, the thing that employees need to do now in this moment is to hold the management teams of your company is accountable. Because in those Q N S, hopefully you're not just glad handing, talking about bullshit.

You actually going to ask the question, how much money do we have? What decisions are you onna make to get this company to be no in a position to survive? That is really what's at stake here for the venture capital industry is just survival of as many of these companies as possible through these .

next two years. The conversation has to shift from like culture and features to like the bottom line and grinding IT out and just proving IT to wall street into the investment community that your business is worthy of investment. As you're saying, the dollars today matter. All right, it's been a crazy week. Thank you to David free bird for showing up unfortunately no time for science corner. Apologies to the freeburg stance who are many and i'll see you in the youtube comments for the dictator himself to my poy hop tia with just a wonderful sweater going into the strong november strong showing for november with that purple sweater, I it's move for purple what I ve got going and looks wonderful. Thank you for team mom Clair saul himself sax people don't understand what you're .

saying when you say that Jason.

oh no, you're .

an nestle.

No, you're a David also is a great executive in software as a service. In addition to being a nasal, you put the two together and you get David is a wonderful person. People are excited that I are friends again. My moments.

To make you right, we will see you next time. byebye. Rainman give.

We open sources to the fans and they .

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