E120: Banking crisis and the great VC reset
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Sorry, d everybody, welcome to the all in podcast and with me again this week, the sultan of science, the principal ic, attacks the queen of kwai. They have freeburg the dictator from off Polly hop tia wearing a beautiful mr. B sweater, and David sacks, the rain man himself.

Thanks for coming to .

my tuesday. wonderful. thanks. H, at least one best he showed up for wonderful, wonderful dinner.

I SAT as far away from the european and to people as possible in the arrange seating. Thank you for that. I guess maybe you were like, i'm going to contain the .

damage burner no, that put put the all caps at the end and I said, okay, yeah.

he still hurt me. I was like you what's the amuse .

bush dinner? Every time he said something, he yelled like he was in off. I want another butterscotch putting.

The butterscotch putting is the lighting short? Let me take the time again.

You the alarms when the restaurant .

like almost ran active, something alert, alert, alert restaurant is running low .

on coffee or.

We man.

We open sources to the fans .

and .

they just got.

And everybody, welcome to the pot where we you know try to inform you, we try to make some jokes here. I just want to make what is a little bit of an opening statement. Here is an an apology and it's not a Victory lap in any way. But there has been a lot of attention, I think, on the last episode of the pod and perhaps some tweet from two of the four bees this past weekend .

I saw and now let you speak for yourself.

your sacks, and we're going to get into the timely of what's occurred and then what potential outcomes here and solutions to the banking issues that we've witnessed. What is a week since the bank run on silk value bank in the shutdown on friday? But what I saw, and again, speaking only for myself here, was absolutely terrifying, up close and personally, watching people pulling money out of banks and watching people have to set up loans to hit their payroll.

And this was like one of those surreal moments in a in a movie where, like a media coming towards earth, and you see in the telescope, and nobody sees IT, or only a small number people, the and I think part of the reason people listen to this podcast is because we are insiders. And speaking again just for myself, i'm always trying to beat exceptional Candy and transparent with the audience. Additionally, I make jokes, so sometimes you might laughter in this podcast, or you might laugh when you're reading my tweet.

And that's part of what I do now. I also realized that we have an audience now is larger than, I think any of us expected for this pocket. I certainly magnet m larger than I expected and Frankly know of this pocket was going to make A P fifty one hundred episodes. And my twitter following count doubled since we started this podcast.

And we just try to room the pot.

I think IT was because of the caps locks, but anyway, putting all on that aside, what I would like to say as well, I was like, we are living in a situation that is unprecedented. I think the alarm bell ee sounded was because I saw our fire will in the time line here, but I sounded that alarm belt after silk valley bank was put into receivership. And when I saw additional bank runs occurring, I wouldn't change IT.

I think these were the right. The right thing to do is to inform fox. Now, I did use all caps, perhaps a little too much.

That was a little bit of a bit. If people didn't understand that, maybe I need to adjust my communications to help now that the thing is so popular. But I stand by my mode of Operating in the world, which is I always want to be handed with people.

I always want tell the truth and yes, sometimes say I make jokes about life and you know, dealing with these stressful situations. That's IT. It's an apology. It's more than explainer. And yeah, maybe I need to adjust the cap lock or or how I deliver stuff. But I stand by the message of what I said, and I think it's important for us to maybe look at the series of events and misinformation that has spread because there are people literally blaming venture capitalist for the bank run that is now systematic and the the baLance sheet of multiple banks around the world. And I think that, that would be great for you to maybe just comment on the week that was in the .

timeline of events. yeah. So as usual.

you're apology. No, absolutely apologizing. But will recognize that this platform is bigger and that maybe on the margins, I could adjust my communication strategy. But Chris, a lot of people who don't know that I make jokes and maybe people don't understand what i'm joking and what i'm serious, right? And so just .

what would you .

change anything you chmagh? I think I might not have used a mad max image and give about the end of the world because people are too stupid to understand. That's a joke and a fictional movie I see.

So you find yelling effective IT depends.

Well, jail.

I agree that I don't think you have anything to apologize for in terms of the substance of what you're trying to get across. I percy could have done without the all caps IT was a bit yeah what you're basically saying as no, I should listen to you because you're not that important and I had really with that no.

i'm saying understand I might make a joke. Consider me more category yeah let's go back.

Let's go back and look at the time like there are now serious accusations and I will call a really scapegoating and IT wasn't just you. IT was me and bill ackman, in fact, the last general editorial board, which I respect a lot, mischaracterized. What me and action we're trying to do in terms of drawing attention to regional banking crisis in progress are run on the banks.

They called IT spreading panic. I don't know how you tweets or publicly discuss a run on the bank that currently happening need to be addressed with an immediate federal intervention. I don't know how you can discuss IT without then having someone else mischaracterize IT as trying to spread a panic, but check out the vector board didn't mention you, so you often didn't know you work, but thank you.

But no, but seriously, so I went back and look at the timeline, evolve this. And so first, all we have to understand that this banking crisis now has swept in five bank, five bank failures. First are silver gate.

But ever want to dismiss that? Because there was some where cyp to bank, then IT was sv b, but everyone's ort of dismissed because they said I was based on panicked VC rather than a systemic problem in the banking system. Then IT was signal bank, which got seized on sunday, which I think utterly refuted.

The idea that this was just valley problem, then you had the fed step in and back stop, first republic, which would have been the next doma to fall if IT wasn't back stop. And then five, you had credit. Sis, basically again avoided an outright failure because they got back, stopped by the swiss government.

So we now have five banks in roughly a week. And these are not small banks are created is A G, C, A globally systemically important bank. And the other ones are top twenty.

Top thirty type banks were twenty, about hundred hundred and billions of liars and deposits. So clearly, there's a larger phenomenon going on here. And Frankly, it's been caused not by like anything VC did because VC are just depositors.

Where is one class of depositors? And depositors are not to blame for what's going on. Or what's going on is that these banks have huge unrealized losses on their baLance sheet, and the losses have come from the suns Spike and interest rates that was going on the sun Spike.

And interest rates is because you've had the most rapid fed tightening cycle in our lifetimes. In the last year, the fed funds raised gone from roughly zero and almost five percent. That has broken a lot of things.

And the banks which have broken first are the ones that had preexisting problems, and they had a horrible rist management. But that who gets broken first in the stress test, right, is the most poorly run banks, the ones with resisting issues. But just because they want first doesn't mean that others don't have similar kinds of issues.

Now i'm not saying this anyway would be panicking me with those banks we find. But there are larger issues in the banking system that are we're talking about in to the point about whether VC could have spread this. J, how you absolutely write about the time line.

I mean, I went back and check. C, I personally never tweet anything about sb. Until friday afternoon when S, D, B, was already in receivership and the run on the bank already started with significant for republican.

We could see IT with our own eyes. And then this pod didn't drop. The one where we talked about this problem didn't drop until saturday morning when the banks already closed. And by sunday night, the fed had acted and basically implemented our recommendations, which was to basically intervene. So I don't know how you can blame this search for escape goat, I think is going out of control and it's just not factually accurate and .

you know that it's convenient to make tech, which is hated right now to moth and freedoms. G, you know, the escape goat venture capital, obviously the part of tech that people might hate the most or the easiest target. But let's talk about the fed raised those rates because of inflation, and inflation happened because of out of control spending due to covered and then the the second administration.

So we had a republican administration that spent a lot of money, and then a democratic administration should not to spend a lot of money. So maybe we could even go backwards from fed fun rate going, you know, what looks like paraos. C, when you look at the chart, maybe you could speak to what got us to the fed making those decisions to th or freedoms.

G, maybe I can just do a little clean up on what sax said. I think the issues that credit swiss are different than the issues at first republic. And the issues at first republic are different than those other three banks. The other three banks, David, that you mention, signature silicon valley bank and super gate, all had very traditional liquidity crisis, right? We talked about this last week, which is duration mismatching, where you have depositors who want their money today, but you have assets that mature in ten years and as a result, you have huge unrealized losses.

If you all of a sudden cash them out today versus waiting ten years, I think what's happening at first republic is really just about making sure that, that loan book and the depositors can get parked into a combination set of banks that can take care of the baLance sheet so that there are no more liquidity issues at credit ease. They have an enormous amount of liquidity. What that was, was I think a lot of speculation around whether they would defauts on their bonds or whether they would theoretically need more liquidity.

But the baLance sheet itself was not only liquid but also very solvent. So I think that was just more of hankey reaction to comments from a nine point nine percent shareholder who just said that they can put a name more equity. But even then I went back, this is the chairman of the sadi national bank.

He was asked on bloomberg, would you give credit with its more money? And he had a very reasonable answer, but IT was snaps shots in a very awkward way. The first sentence was, under no circumstances what he do that.

Okay, now if you stopped there, you could be panic. But the rest of IT made a lot of sense, which is, he said, look inside arabia, if we go above ten percent, we have to go through regulatory approvals domestically. And there are regulatory approvals abroad, that's a big hills to climb in.

All of a sudden, no longer becomes a financial investment. IT becomes a somewhat political investment. And so we're very happy at nine point nine percent, that was the totality of the statement.

But if you just Cherry pick the first forty five seconds and ran with IT, which people on the internet did, this is sort of what caused that second level wave panic at a jesuit. And then the swiss national bank stepped in. And I think that that panic has largely gone OK.

So what is the real issue? The issue again is I think we've had a bit of supervisory failure here, right? Because we all know this, in any industry, if you let capitalism go totally unchecked, shareholders will demand immediate profits.

today. IT happens in every industry, except in ones where you can basically gamble on future profits. And that's what text us.

But every other shareholder in every other asset class demands money today. And that's the same for banks. The problem is the banks are a highly regulated business. They are supposed to be supervised by the regulators.

And this is a very clear example where why is there not a real time spread, chief? I mean, this is not complicated stuff where assets and liabilities and duration mismatching can be known on a real time basis, where the 3Francisco fed mary daily should have a report that escalated to her when S。 B.

B. Got over their ski tips, which they did in q four of twenty twenty two. So I think the real question that has to be examined is where were these folks with the last four months when they could have done something not just about this, but rules in general for all banks that are not the Joseph. And I think that's a very important question that politicians need to get to the .

ruddle freeburg. We are discussed this article from seeking alpha, which came out on, let me get the exact date here, december nineteenth. Title of this seeking alpha story is S V B financial Colin, blow up risk.

And the summary in three bullfights says bull point one, potential losses and long portfolios could severely empire book equity number two and realize unrealized losses in whole to maturity portfolio ready equal to book equity number three. Funding environment for artus were pressured to posit base getting even more pressure to the baLanced. Another world started up spending money to cover their burn rate free bird. And obviously, we had the dod Frank rules lessen or lucent under the previous administration. And that specifically was driven by hyslop value bank that had big part in that. So looking back on this and and people do on a place plane, let's talk about the effects that occurred, because this was hiding in plain sight, literally in december in an article that looks like IT was written by somebody who went into a time machine and said, how do I warn people in december about this? Maybe you can talk about the fed's interest rates, the spending and what LED up to this look issue with the banks.

You guys remember when we started this podcast three years ago, we were like they're gna shut down the economy. There's gna be crazy. Second and third order effects of doing that.

No one knows what they gonna be. Here they are. And I think that's like the root of what is a rippling effect. You can't shut down the global economy and stop trade and stop people and have the government step in to write a giant check and not expected you're gonna have to cash that check at some point. That's effectively what I think we've been kicking down the the road here.

The way we initially tried to resolve the problem was to draw a ates to zero and then spend our way, you know, back to a growing supported economy, and then overshot, ended up with, you know, too much stimulation, too much stimulus to lower rates for too long, responded too quickly, which lashed back. At the end of the day, there was a giant gaping hole blown into the global economy, and we shut down the world from coffee. Does not blame just what happened.

And when that happened, there was a massive cost that had to be born at some point, and it's gonna get born at some point. And the rippling in a pond, you don't know where the ripple is. Gna hit, what part of the pong? What leaves? It's gna hit.

That's what's going on still. And it's such a dynamic system. It's so hard to say with linux certainty.

This is what should be done and what could have been done and what they should have done at the time. No one had that predictive capacity back then. They did what they needed to do.

People thought that they should have still drop tes. They said we should have written all these big stimulus checks. Some people said you shouldn't. Some people said you did. Certainly, some people are being proven right and some people are being proven wrong.

But at the end of the day, the economic loss that was realized at that period of time, we're still trying to get out of IT and we're still recovering from and I think that's a big part of what's being eat up right now. And you're going to see IT in the White out of certain equity. You're going to see IT in the White out of these banks of the assets are behold and and these portfolios and the effect of that, obviously, you have still being .

held sax to you agree that mistakes, that this there isn't somebody to blame because IT is clear that the fed said inflation is transitory. That was wrong, and then they went faster than in history to raise the rates. Those seem like two glaring mistakes. And then the todd, the dod Frank loosening under trump and with silicon value bank pushing them, that seemed like a really big mistake.

By the way, I wasn't saying the feds not to blame for not raising rates festive that because you guys remember, I was the first person to talk about what stand rock and Miller had said, there not rain rates fast enough, that we had got massive inflation. We should been rating rates. I was person on the show to be, you know, barking that.

So don't forget, like I was there OK like, pretty early. What I was pointing out was like we shut down the economy, you're uncovered that is the same, blown through the god, and everything else is plug and patching and work to try and keep the ship float. And we're still dealing with that.

And at the same time, as you guys know, we've been loading the ship up with debt, the global ship, the global economy with debt, three hundred and sixty percent global debt to global GDP ratio right now. And as that chip has gotten heavier and heavier to have a giant hole blown on the side while you're going to do all this patch work with all this debt weight on IT, it's a critical chAllenge. And the feeling acutely here, they're feeling in europe now. And we're certainly gone to see the global ramifications as we try and fix the economic catastrophe that was caused by covet at the same time that we've been spending our way into a happier future that IT turns out we have to pay the bills for, at some point.

sex. In response.

the question of who you blame for the banking crisis has really become a political row shock test. And i've seen that there are six different parties that people want to blame in this situation, and there are some merit to all of them. But the degrees are very difference.

Number one, you've got the bank kk. Number one, the bank management of all these different banks, clearly very poor risk management didn't do a good job. They are to to, however, and Timothy is write about these banks.

They differ the details, but the point is that they are all Operating under conditions of extreme stress. Where did that come from? Number two, the feds rapid rate tightening cycle. Clearly, I think that the combination of poor risk management with the spiking interest strates that basically has precipitated this larger problem. Number three is, I think the administration spending, which inferiors started with covet before biden, but biden really intensified IT.

And then I think IT really compound the problem in the summer of twenty twenty one by claiming that inflation was transitory when IT wasn't that allow them to keep spending and keep printing money and kept Q E. Going for another six months. That created the bubble of twenty twenty one.

Everything got super fossy. And then that made the right height cycle even more vicious because you started six months later, they could started six months earlier, they could have bit more gradual. And I think that really what is disaster for the economy? okay. Number four, the dragon in two thousand.

And I think a liz with warn and roka have made what I would call a compelling case that the drag in two thousand eighteen have contributed to this problem, I think, in a hind sight, creating a two tier system of banks, where one teer are the semicon important banks who are completely guaranteed and backstop by the federal government, and then a sort of lower tier, second tier of regional banks, was a poison choice for the region banking system. Because in the short term ament, they were more lightly regulated, which may be appropriate for you smaller banks and aren't these mega banks. However, IT has also now, I think, creates a situation for people less confident about them.

And so the money flows are going from the regional banks to the chemically important banks. The sips so black, I said I might be a double at sort. And I think we're going to look at those regulations and figure out what's the right regulatory regime to create confidence in the regional banking system.

We want a thriving regional banking system. And so the question is, what's the right regulations? I get us there. And then the final two that we can talk about later, or i'm hearing weakens, getting blamed, which listen, I think that weakness was a distraction. There were a lot of crazy programs happening at these banks.

But listen, if weakness was the key factor, the whole four to five hundred would be out of business because because they all do this stuff. They all do this stuff. So I think I think we're going back to the, well, little too often on that critique. I don't want to burn that critique because I think that weakens is bad, but it's not the key reason why this stuff happened. And then the least group for workers.

we could also maybe frame at as esg more broadens as the direction because workers is charged esg is real.

yeah. What what I would say for sure is that if these banks that spend as much time on risk management as they did on esg or on woke, then this crisis when to happen. So definitely distraction, but not not the thing that like specifically caused IT. And then just the final thing as vcs, and I just can't father at this point, given the most more bank failures, is given that we see the larger palm of unrealized losses on bank baLance sheet, that somehow any classic depositors would be blame me for this, that this makes no cheap.

I think the V C, the critics is specific to silicon valley bank because I think and this articles. In the wall street journal. But what IT shows is a really complicated, intertwined relationship between VC and silicon valley bank, where, you know, vcs were given very cheap interest rate loans.

They were given G, P, call lines of credit. They were given L, P lines of credit and then those same VC would be directing their companies to put their deposits inside of S P B. Who would then take those deposits have and by and while the reality is all of this stuff will come to light because I think I will get exposed as we go through congressional hearings on all of this.

But I think the I think pointing the finger at V, C S in this specific case is somewhat warranted because there was a little bit of people working in lockstep together and there was A A lack of functional responsibility around how to be a true fiduciary. So if you come to a board and your founders is twenty two years old and you give that person fifteen or twenty million dollars, I think IT makes a fair amount of sense that you are supposed to be the more sophisticated financial person in that room. And if you have incentives that aren't properly disclosed to that, C, E, O. And now a set of decisions are made, I think that that there should be some accountability for that, or at least some exploration of why that happened.

I just want to make sure you want to understands this because this is a bit in the weeds and is a bit inside the ball. What you're saying to moh is if I can summarize IT, there are people who are the adults in the room. Venture capital.

They have deposits at silicon, an value bank. They also might have loans that are fantastic with silk valley bank. I had mortgage for this office from silk and value bank, and I talked about how, on the last epo de, how graded as they come, they open one with you.

Its White al love service that you wouldn't get at another bank and then they might have loans against what's called the G P. Carry or the G P. Share or they might have mortgagees into. There's a conflict there if you're adventure capitalist and you're directing a twenty two year old CEO to soaking about bank, maybe you're doing that is I guess your saying .

could be explored because of and in some cases.

silicon valley bank is a limited partner in all of these funds. My point is that all of these things OK hold on.

We have to explain that.

So imagine a situation, you go and start a fund. Silicon valley bank content says, let me be a limited partner and invest with you. Let me give you some amount of money.

I don't know where that money comes from from silicon. Well, let's be realistic. More like twenty five, fifty million, one hundred million.

Okay, this is a lot of OK. So a million kind of is White washing this problem. So you give them a reasonable amount of money.

They are like wall. I I have tremendous loyalty for you. Thank you.

What do you need anything else? Do you need personal loans? Do you need lines of credit for your business? sure.

Why not? I take those two, and invariably on the back. And now your loyalty obviously builds up.

And nothing. None of this is wrong, but this is what's happening. And then you tell your companies to keep your deposits there. Maybe the cash management program is not as strong as I would have been if you are more circumspectly, you didn't have those incentives to drag people to one institution only in any other part of the market. So in the public market has an example, there is such a bar for disclosure oka ay.

And I cannot stress this to you, enough related party transactions, all of this stuff, we have to tell everything, not just for us, but even if I like sister or brother or mother, may have a transaction with entity that we're doing a deal with. And IT just isn't the case in private markets. And so it's not to say that anything untoward happened, but when people point the finger, V, C, S, I think they are pointing to this whole set of issue is in asking the question, shall there be more disclosure and transparency around IT? And now that this is come to pass, shouldn't we explore IT? And I think what the wall street journal did, they started pulling on the sweater thread. And my guess is that you're gonna find a whole ball of your on at the of the sex.

What do you think of this? I think that makes the fair point that if VC have sv b as an faster and then they're directing startups to use sv b, that is a conflict that should be disclosed. By the way, we never did either one of those things.

We never had sv b as a limited partner, and we also never direct our starts to bank at sv B. I don't know why we've ever do that. Moreover, I always try to talk founders out of taking venture debt, whether from S, V, B. Or elsewhere.

So be clear about that. And we could. I never directed anybody .

to a specific bank. No founders have multiple VC, typically on their boards to the idea that, like anyone, VC direction, which being to use this is not that's not realistically what happens at these startups. But look, I think chaos is right that when there is a bank failure or any kind of failure this big, then all the practices are going to be under microscope and there's going to be some screening of and maybe there should be.

But my larger point is we're now Operating an environment in which clearly there's a larger set of stresses on the banking system. We already had now five bank failures or near failures. Moreover, do any of us believe that this is over? Or do we believe there are more shoes drop?

If we believe that there are more shoes to drop, we may not know exactly what they are. But but I think all of us probably believe that were not the end of this. But but thought if we believe there, there will be more shoes to drop, then clearly, the issues cannot just be limited to silicon valley. They have to be a larger side issues.

I think that is important to understand the facility that the fed created. So what the fed did this weekend, it's essentially create a buyer of last resort again. Now how did they do this?

So all of these banks basically had assets that they bought for a dollar and are not worth ninety five cents. And that's what's creating this whole issue. Or eighty cents, or eighty five cents, you you pick the number, but they're not worth the dollar that they Better.

What the fed basically said is, okay, give me that ask, give me that bond. I will value IT at a dollar, and I will give you a dollar as alone, and you will pay me interest. And the interest that I think is what's called O I S, and they added ten basis points on top.

So I think it's about four point nine percent. So what IT allows all of these banks, and if you take all of the banks that are not the top four in america, so the top four are jp Morgan, B A, A city and wells, so just ignore those for one second. The other end banks, if you look at all of the assets that are underwater because of all the right hikes that sacks talked about and you add up all those losses, that is about two trillion dollars.

And the fed didn't denounce that there was a beginning and an end to this program other than saying these would be one year loans. And so I think the closure for the american banking system, at a minimum, is gonna this two trillion dollars. Because now the incentive, if you are banker right now running one of these banks that has not gone under, is to immediately go to the fed, put all of those assets to them, get alone, and now take that and buy different assets, different bonds, different U S.

Treasury's that are yielding much more than what your old treasury ies were yelling. And I think that the arbiters that we've unfortunately created and the other question now though, however, is what does that mean for the top four banks, right? Because if it's too early for everybody else but the top four, what's the gap for the top four? That looks like it's a summer between a trillion and two trillion.

So that's another amount of money we're going to have to cover. The fed will have to back stop. And then as freedoms k said, these checks always come to what do we do in a year? Because in a year, the problem is the only wait to make the banks in a position to repay this much money in one year is to cut interest rates so massively that these assets massively inflate, and all of a sudden you in a position to cover this.

So IT described what that delta is because it's about they're down fifteen percent, ten percent in booklet ue.

These long ger that depends on the security. Again, IT depends on what they bought. We don't really know enough details what I don't want want to guess.

But if you own these ten year treasury ies, you could be off ten or fifteen percent. If you own morning spec security, that could be off a little bit more. If you own short term securities, they are off a little bit less.

But these are with the government. You get alone coLori zed, by these assets. So you still holding them, right?

Yes, and they mature.

So of the fed takes an emergency post as, okay, guys, we want to avert a crisis in a year from now, and we're getting to cut rates, these assets that these bank zone will be worth more, which will allow them to repay alone. As far as I can tell, all we've done is we've kicked the can and down the road for a year. But I do think it's important for people to realize this doesn't solve the problem IT just means that mark your calendar for hear from now, we have a problem on march fifteen and two thousand and twenty four, because all perfect folks that took money, what do we do?

But until a year to work IT out, freeburg would seem like a good idea because the satisfied ting inflation, they seem to have gotten some portion of IT under control. It's not out of control, right? inflation. And maybe if they can slowly, you know, either start rate cuts or pause.

So let's shift the discussion to, hey, what are the changes we need to make to the system and how do we think this plays out over the next year? Free cheap had one suggestion, which was all of these banks should have a disclosure statement, market to market every day, week, month, quarter, whatever. IT is just like circles USD c, their stable coin has a page with their disclosure of all their holdings.

So that seems to be a very productive one. We should have them market to market the the dod Frank stuff, as sax said. Eliza, the warm probably correct. We need to reverse that. So those are two very tangible suggestions.

What you need to have a real time dashboard. We need to have a real time dashboard at every single fed that allows them for every bank that they supervise to know in real time they can ignite. I'm not sure that should be true, but they are their supervisors. They should see they should choose to ignore IT, but they should not not have IT freeze?

Or what are your suggestions going forward as to how we can learn from the situation? Forget about the cannibal, as you vividly express there, I think very well. Great analogy. But just going forward, how do we keep the ship from taking on water if we do have accountable?

Hit ted again. Now we got a hard that's a hard equation to solve.

And that's why .

i'm asking you that's why a to change for money. You guys see I I think there's a lot of things that are seem unrelated that are all pretty related right now. There's a massive protest underway by labor in france.

There's a massive protest underway in the netherland, ines, their strikes on the underground in london. When we talk about global debt in U. S.

That we often, I don't think, account for all the debt, which also includes promising obligations made to a workforce, global workforce that's been working for decades, individuals that have spent their whole lives committed to some company here, to some government, working with the expectation that they gonna retire and have some benefits pay to them. And there is this massive underfunding of those benefits and those pools of capital. We very quickly talk about unfunded pension liabilities.

But when you actually kind of account for the number of people and the amount of capital that those people are expecting, that the workforce, the global workforce, is expecting to be paid to them in retirement, both public and private, is a massive amount of money that's not funded today. And you start to see the cracks in the system when that population says my pension payments are not keeping up with interest with inflation or when there's a threat that pension payments or retirement benefits are going to kick in at a later age or you're not going to get them fast enough, you're not going to get as many as you thought you were going to get. We have that problem in the united states, in the former social security, these underfund dependent liabilities. That is the critical macros sion in the equation .

that I think drives the real problem .

that's GTA come to ahead at some point we blow a hole in in in the boat. But we're also forgetting that there is like a massive amount of weight that's gonna rop on the boat. And I think that it's a really hard equation uh, to solve.

We can talk about keeping bank solve in and all sort stuff. At the end of the day, the central bank IT appears in the united states and probably love it's going to be one big bank right there. Myc ally gonna take on the whole baLance, chief themselves and and at the same time, you've got a lot of foxing.

I want to get paid more. I have obligations due to me. And guess what? You know a Jason here important statement historically about the importance of democracies. Ultimately, you know, the members of that democracy, you're going to say this is a benefit that that the majority old and that's going to pull things up.

I think the only stop cap, but i'll just say one thing, the only stop gap in the next decade, he's going to be significantly higher tax rates in the united states. I I don't see how you're going to fulfill the tension gap that's under way right now with respect or productivity is going where capital markets are going and where the demands are on the system from people requiring additional capital to come out to them without taxing assets away from the asset holders. So this would be corporations and high network people.

And I think that's why you see the spy and proposal. We may not like IT, but at the end of the day is is going to be the only way to create a stop gap. That's that's .

that's gonna void, massive inflation in the near let me just .

say the only other way, the only just say one more thing, check the only other way besides know a massive long term tax regime to fill the hole would be some extraordinary productivity gain. And this is where we can all have a hope in a dream and investment and effort around technology, A I automation. People think that they're a job, energy.

But if you can get energy down below a presents, a killer an hour, and you can scale its production by ten fold, if you can automate a lot of labor, if you can get A I to do a lot of stuff that we do today, productivity go through the roof. The economy will grow fast enough to get out of the dead bubble and meet all of these liability obligations. So there are three ways to some.

I to me to me, that's the long term. The medium term is gonna this tax stop cap that is very high tax stop cap. And then the short term is going to be all the shand ags that we're talking about OK.

I'll go to you in the second sex. So just to read, there is actually a third way too. There are three ways. Productivity, as you very study point out, and we we just highlighted some of the ways productive we can help with. There is energy AI extent.

The second is, of course, increasing taxation on the people who are at the top of the pile, uh, would be the likely solution. The third is also austerity, cutting spending in some way. But let me also propose one thing here as we look forward to what do people want out of a bank and how should start ups or just individuals deal with bank runs and they're trust in banks?

To trim's point, I was thinking about this over the weekend and in the discussion that we would have based on a lot of injaz sacks, which was people just deposited their money and they don't have the ability to assess if a bank is solving because the F, D, I, C, he had do IT and it's their full time job. It's their Mandate to make sure these banks are solving. So how is a consumer going to be able to do that or even a start of founder or even a sophisticated investor like action or any of us if we in a sophisticated so let me pause your second here and positive something.

We don't want a bank. We want a bank vault. Consumers do not want their deposits to be used for shenanigans, just like many people would rather pay for a social network than have their privacy data sold.

So I think we should buy for cate banks into bank fault s and banks. Banks can do what they want with your deposit. You get free checking, but what I wanted in a bank, what I want my startups to use, what I want my venture firm to use, is I want to pay the bank for services. Whether it's ten basis points, twenty five basis points, five hundred dollars a month, I would rather see M.

I, startups pay a thousand dollars a month and banking fees, two thousand dollars a month on banking fees for two million dollars, whatever is, and pay for each check, pay for wires, pay for White glove service, whatever they choose, but not allow the banks to take that money and loan IT out or do things with them. I just want to fault, and I think of vote service is what the majority of consumers want. And given what we're seeing with two insane bank run bailouts in our lifetimes as adults, for those of us were in two thousand and eight, and now we would rather pay for services. And I leave a to u sex.

Is this a potential solution? Because I don't know anybody saying, give me a bank fault. And why does that service not exist in the world?

Yeah, look what people are really want are they want a service provider who gives them the ability to make payments, which if you are small businesses, payroll and payables things like that, they want a money market fund to basically earn interest and um and they want all that to be safe. I mean, it's it's very the idea that when you go open a checking account at a bank that you are making an unsecured loan to that bank, that is not something that any consumer or small business understands. That whole model, I think, is completely obviously not dated.

And what I heard so many people say, and I think this is not sincere, I think this is because they hate tech, is that depositors should take IT on the chin, because somehow they made a stupid decision when they open to checking account, is like you, are you kidding me? Listen, what do you want the process to be? You want consumers and small businesses, when they open a bank account, have to have review the financial statements of that bank, try to figure out all of their disclosures where their assets are, whether they have toxic assets on the books, and if they don't do a good enough job doing that, if they are not smart enough to do that, then you want them to be discipline. This is the word that I kept her being used.

As we need to disappoint .

the depositors, the depositors are not in a position to a value the baLances sheet of these banks. That's what the feds are supposed to do. That's what the regulators supposed to do. That's what may is supposed to do. And you're killing me that a bank that had an a rating from mood the week before her and had an fc c of approval, that somehow they got IT wrong and the feds got IT wrong. But the I mean, come on, it's ridiculous.

In related news to math, I would like an airbag in my cars to protect my family, but I don't want to evaluate the airbag technology and unpack IT and make sure that it's got the right right now.

yeah, check me finish. The point is about consumer protection here. And I don't care who the depositor is if the banking system is going down because the feds haven't done their job. I mean, power, two days before the bank failures was testified that he didn't see stress in the banking system. So either he was lying or asleep .

at the wheel.

said the feds had given the seal approval to sb and all these other banks, they had all passed the regulation exams. And so to now put IT on the deposit when the fed screw up and the regulator screw up and washington screw up by printing all this money and creating this inflation that we've had, again, out of all the six parties that you could blame, I just think it's the the least culpable to math.

Should there be a service. That provides no interest but is just a custodian of money that is absolutely protected. Where is the bank volt product in the world? Does IT exists? Because I can't seem to find IT.

Some people seem to say, I think freeburg you will looted to this maybe in the group chat that if you have a broker account that kind of similar to what i'm saying, but IT doesn't have that. I don't want any interest. I don't need any interest for are putting this money in the bank for a startdb p they're not in the business of making one to five percent and optimistic for that. I have founders. We are now sending me five page .

number if they can if we think if ah if the bank can use your money, they're gonna charge you. So remember.

I want to be charged that the service I know.

but but I I think this this is an important point. A bank is a service provider. They spend a lot of money building technology, having people that worked there providing service and infrastructure. So for the services that they're offering, if you're not going to let them use your money to make investments with your money and they can participate on that game, they have to charge you.

They charge you. And I have service provider under the current laws. You understand how works now is that what we're being told is that when you went to the bank thinking you are just getting a service provider and Frankly, largely a commodity .

service service you're being to and you're .

being told that you actually made a risk y investment decision. Think about that when you open a checking account, you are just trying to know, again, use a vender. You are actually making a risky investment decision. That's what they're trying to say. And you deserve to lose your money if you chose poorly, even though nobody else can we talk .

about the the chAllenges of your system to someone who lives in an argentina. It's far worse in other parts of the world. And we've come a long way.

In the last hundred years, we talked about five hundred, six hundred bank failures on average per year in the nineteen twenty years. So i'm not saying that, hey, that's not the case, but there's always been to some degree, risk when people are giving their capital over to someone else. Um and we've certainly made huge strides and progress. But I think jack, out to your point, you know there is a point of privilege now that people are saying I want to have a position where I know that my money is not going to get used, not going to get move, going to be completely safe.

What would you pay for that? What's the Price freeze? What would you pay for that? Because right now, we're basically giving every crypt T A L entrepreneurs valid, you know, basically in the high grown, because they could make this product.

I would pay ten basis points, literally ten thousand dolla year per million. Is that right? yeah.

Remember when you thought gf bezel was gonna president? I think stinting possibility. Anyway, what would you pay for this problem to mah? Or like bloomberg basis.

I don't want to speculate on new products is kind of a dumb tangent. I think think that you're bringing up though .

is dumb tangent. okay?

Why doesn't a product like this exist? And I think I said I was very well explained, it's that every four profit business is in the business of making money. And there are physical costs that you have to bear.

In the case of a bank, there is physical infrastructure, literally bricks in order that go into making the branches. There are lots of people, there is lots of software, there is lots of complex back office and middle of things that banks have to do in order to accept money that has a cost. So I don't see how that would be very easy for somebody to create a bank that just stores your money for you without you being charged quite a lot of money.

Unfortunately, I think that there has to be a different way to solve this problem. And I think that what we did after the great financial crisis was the regulators wrote down all kinds of new rules. But the crazy thing in two thousand and eight were those rules were on paper, and now we're two thousand and twenty three.

And these rules can be written in software. And so I think what IT requires is some amount of tactical real time intelligence that regulators need to have over those that they regulate. And I don't know why we're so afraid of demanding that the next time some of these complicated real time laws are written in law, that they also need to get writing in code.

And I think that that's a practical solution. IT should be the case that every bank that supervised by the fed has a dashboard that has all of the key levers that allows what you said, Jason, to happen, which is a real time market market. Should those or should those be disclosed? Should they not be disclosed to shareholders? That's a different discussion. But the regulator should have a hundred percent transparency to help these organizations run because the sax said they are an enormously critical institution that at best case after this fiasco, what we realize is very poorly misunderstood by consumers and that at at the worst days is being missing to us. Yeah and I think that that shouldn't be love.

We're also missing the other side of the baLance sheet. We weren't talked about IT at all, but banks play a really critical and important role as lenders. Banks act as the channel for lending capital to small businesses, for lending capital to individuals, to buy homes. It's the primary place where capital is provided to help fuel economic growth and prosperity, uh, particularly in the united states where we have such a liquid fluid and available mortgage market to support home buying in america.

And the absence of, you know, Jason, what you're talking about, having the ability to use deposits to make loans and have what banks have fundamentally been in this country for over a hundred years, which is taking short term deposits to make long term loans and making sure that there are some degree of baLance and availability of liquidity to support transactions. And ultimately, mortgage security came out of the need to generate more liquidity by banks to support depositors. And obvious ly, there is all these inflationary things that happened in the market and bubbles that happened, but it's an important role that banks play. And the lending aspect of banks, if he gets stifle too much because we swing too far the other way, they can actually have a really adverse effect on economic growth and prosperity and the ability for people to to afford homes in this country. So that's the other side of the corn and where .

things can go back. So this is where I find like the the current banking models sport of like weird and maybe obsolete and definitely not what consumers expect. So for example, if you go to a bank and you put your money in deposit account and then they learned out to make mortgages, do you realize that you an investor in those mortgages as as the depositor? I don't think you do.

I think what they do is they take those mortgage sax, they package them up, they sell them and they get an origination fee and they get the money back.

not. Not so before they well, fargo, for example, they do a lot of that. But if you look at first for public, they have ve a ninety billion dollar long portfolio on their value that they have not packaged up and sold.

So the packaging and selling of mortgages generated the liquidity that the bank needed, but there's a cost to that. So a lot of banks will try and baLance out. They're one portfolio where theyll pack some of IT up and sell IT. But when they do that, they take a loss.

They they maybe they should be required to do that because they look to the point about market. Market assets is very hard to market an asset to market unless it's liquid and publicly traded amic point.

I think that there's about seven trillion dollars and deposit and banks. So what you guys are saying happened, you're basically sucking seven trillion dollars out of the system that's being used to fuel purchasing in the form of loans, and you're taking that step or all IT a ten percent discount that so about call IT six trillion dollars and you're saying we got to go find a market for six trillion dollars of loans and then we're going to have six trillion dollars of cash sitting in a bank account doing nothing and that that chAllenge is the way cash were .

going to money market funds. So in other words, like you package up all those mortgage bonds, you create a mortgage bond security. And then if consumers, if depositors .

want that product, ends up being the same thing where money is you earn interest on cash is being used to make investment elsewhere. So ultimately, believe if you want to earn interest on your cash, IT has to be loan out somewhere to someone.

I understand what i'm saying is I I look, i'm just brainstorming here. I have I yes, exactly. I'm not saying this is what should be done asking whether IT might make more sense. What if on the deposit side, all of the things you put your money in our money market funds and then when the bank goes out and doesn't learning business IT does ultimately at some point after packages this up and they get turned into securities.

you sexy, but money market funds, you know where that cash goes. When when you invest in the money market fund you, you're giving the money to someone who's using IT to make alone .

like IT is also, I think that .

market to market sex is point.

I just want to give you're .

shifting the risk equation to the fund manager, the money market instead, the manager of the bank at .

the and just the just the owner of that security, that money market fund that would take the hit.

okay. Just as we rap up because I want to talk on some other issues as well there. There's two things that are super tangible that founders can do right now or people who want to mitigate against these kind of issues.

There's something called I C S. In short, cash sheets. These are accounts that automatically will put your money into multiple f di insured institutions.

Two hundred fifty at a time. We talked about this previously. There's a bunch of folks doing that in fin tech. I won't give anything free plus here, but you you can just go look in search for ics.

There is also maybe some thought here that the fdc two hundred fifty eight limit, maybe that's outdated IT, certainly for businesses IT is. So maybe that should double a triple. And obviously that cost would be spread out.

And then finally, you can go to treasury direct that cover right now and by short term government debt. And I literally have startups doing this who have major treasuries. They're going there in buying short oration stuff themselves.

holding IT themselves so they go hard to worry.

This is part is provided by the government, is my understanding. And the people are buying direct from the government.

I personally am not a fan of start of spying tea bills because of the duration mismatch prom. The always underestimate when they're going to need their cash. And so I don't like hanging up.

This is if you had a giant treasury, yeah, everything.

But the joy is always get wrong. I see this all the time. Whatever they tried to to say when started trying to create latteiner ord portfolios, they end up doing the money sooner than they thought.

What I, much rather he started to do is by a hundred percent U. S. T.

Bill backed money market fun, run by the absolute biggest of the big financial solutions because you can get in and out of IT at any time you want and without paying a fee. And that's so much Better than trying to manager on bond portfolio. Let a professional .

fund manager do IT. Well, there are people who do provide these kind of bond letters. I'm just telling you what .

the best practice voice through like a broker account.

sure. Or multiple ones, right? And and but now this is, I think speaks to chamar the fact that we have start up founders of people having to measure, manage a treasury, this granule.

Is this a failure? Or is this what should be happening? Should we have to have treasury's in the ten million or twenty million dollars be this manually manage? Or should this just be, if I F D I C rates, you know, tribe, just text.

Well, in the absence of regulatory changes that protect this money, you need to have a financially sophisticated actor on the board. And again, I go back to that should be your venture capitalist. And that person should not have conflicts of interest with the banks that they direct you to. But I mean, I don't think that that's a very controversial statement.

Yeah, just not happening. And I I am just flabbergasted that people are not even doing the basic blocking a tackling here of having three or four counts. I've always had three or four banking relationships, always had split.

Should we move on to some of the other pressing issues? There was a really interesting founder fund story about them breaking their a latest funded half. And then there is stripe closing their funding. Which one would you gentlemen like to go to? Or a different story on the docket.

I think there are there are four things that are very interrelated. Okay, in start up blind. So founders fund took their just to make the math simple because I i've going to get the numbers not exactly, but like a two billion dollar fund that they're onna break into two one billion dollar funds. I think that's one point .

eight billion dollar fund. They onna break IT into two nine hundred million dollar funds is their eighth fund is being cut in half and it'll become eight and nine.

I think what that speaks IT is valuations and the Marks that we think we have for existing companies and the future value that smart investors like to see. All roads lead to. This is worn for a slog. And so trying to put a two billion dollar fun to work doesn't seem to make a lot of economic sense to some of the smartest people in the room. So that's that's that.

The second thing is there is a according to x IOS Peter till LED discharge. And he is a the the contrarians contrarian. He was the one according to actors that let that cut of the fun size with summa founders. Fun.

according to the reports opposing, say, the more important thing, which in Peter I in the same, we're the largest of peace in our funds. And so, you know, as the largest of peace in our funds, I think this is a no brainer decision. Number two, strike basically takes a fifty percent haircut, which is the single best run, most highly value companies. Silicon valley, again, that's going to inviolate company.

A lot of T, V, P.

I, and a lot of people's purple lose a lot of theoretical money that L, P, S were going to get. I think the third thing is there is a person that went and filed a foyer request that you see burkey to get scores, returns and IT. Turns out that the best invest in the game, caught on, quote, since twenty eighteen, has not really done that well.

And I think in the university of california invested over eight hundred million dollars in sickos since twenty eighteen, and I think is returned, but some forty million box on that number. And then the fourth, which just came out today, is that tiger wrote down the value of their private book by thirty three percent for twenty twenty two. And so, you know, I think tigers in U. N. Basically has gone from one hundred billion to fifty billion in a year.

This one more note to get to that. Why see basically lack of their growth team this week. Why combination for people didn't know how what was called the continuity fun they were doing late stage investing and that I cut h which is a signal.

And the seventeen employees are gone now in garreton, I think is making the right decision. You they have to focus on what they're great at, which is the earliest stage of the company. And they had comfort to with this one.

This is the most interesting thing for me in the following way. I think the y combinator unicorn hit rate is six percent, right? So every hundred companies that come out of yc, which costs only about ten million dollars to seed, right? Six of them become worth a billion dollars or more, and obviously some become as much, much more.

And so if you see how difficult that is, even for a growth fund that's attached to that funnel to be successful and make money because obviously, if this thing was running cash, you would not have cut IT. I I don't think anybody would do that. So I think IT was a very chAllenging strategy at a chAllenging moment in time.

And so I applaud these guys were having the discipline to do IT. But if you take them all in totality, IT is a complicated place in venture capital. Start a plant holy macro like it's a recept.

A it's tough to make money. B, A lot of folks may not know exactly what they are doing. C, A bunch of valuations are totally wrong. And d, we're going to have to start doing the clean up work now. Resetting all of IT, which just takes years, as you guys remember, into took us five years to fix this is a hard reset sex.

When you look at these in totality, what we just say, why agree with what charmoz to said.

I mean, is going be your heart period with a lot of resets, a lot of restructuring, a lot of captor's, a lot of up. All of that being said, I think i'd rather be in an investor today than an investor two years ago or one year ago because at least evaluations have corrected to some degree.

And then also, we have this really interesting AI wave happening now, and there's a lot of opportunities to invest in that knew you know cycle, so at least is like an interesting product cycle, getting me excited to go to work and see these new demos from all these different companies. Whereas you know, you go back to year to and just. The prior innovation distinct seem as world changing as IT does now. So I think that as bad as things are, my guess is that the new vintages, A V C R and be Better than you call IT twenty twenty one for sure.

That's not gonna .

a hybrid. It's not a high bar. But still that actually this is the .

trash contradiction .

is that IT felt Better to be A V C in twenty twenty one. But in high insight, we know that the vintage is gonna be not good where I told, but today he feels not great to be A V, C, but I think the vintage.

this will be a lot Better. But anybody would tell you that at some point you're gonna have to divorce yourself from emotion to be a reasonably good investor over long periods of time. How many data points do we need to realize that too many people were put into this game that may not have known what they were doing.

And we're gonna to go and work through all of those excesses. And I think it's just gonna. A lot of time us limited partners are in a really difficult spot.

European investors, I think, approve in a prety difficult spot. There are a couple of right bright points around the world. The folks that are still optimistic in doing well, I think mill least is one, southeast asia another.

But other than those, it's just the whole group of folks that the sap to get completely, we underwritten from first principles, even when you have an incredible platform like zoia, five years of no returns on eight hundred billion dollars for somebody like you see berkeley. What IT really means without commenting on scores performance is that U. C.

Berkeley is effectively out of business in being a limited partner for the first able future, right? And I think that, that has that has implications. So even if you think these vintages are great, I don't think they're open for business. And and Frankly, if even if they wanted to be open for business, how do you go to an I see when they look at all of the totality of those dollars that have not made anything, how do you justify the next eight hundred billion? I just think it's very hard .

while I agree that lpas are out of IT, I think the story was garbage because IT all funds go through a jay curve and they're literally talking about the majority of the funds and advantage two thousand and eight, two thousand and thousand and two thousand and two thousand and twenty one. They're all in literally the definition of the jake er of the third.

fourth fifty year. One of the most important things you need to be able to do is measure how long does IT take the delta t to ninety percent of calling committee capital and how long does IT take the delta t to return one X D P I. I can tell you decision, if you are reasonable, good fund, those numbers should be between five and seven years for both.

which none of those funds have had.

The average for a Normal venture fund is around five to seven years to call ninety percent of the capital and around five to seven years to return one X, D, P, I. I'm just telling you that's what the averages.

And if you talk to firms, so all i'm saying is there is a period of time where in the absence of getting money back, again, this is not a square thing IT just means that there was an entire cohort and years of capital allocation that is not necessarily in a jacket ve. It's impair because if after five years, after five years, you return nothing. Sometimes you just have to see the writing on the wall.

Sax explained the J R of one more time for folks. And then what is your analysis of that social story?

The jr of the theory behind IT is that when you start to playing a new fund, you're drawn fees down on to pay for the firm and the investments we've made of not been marked up yet. So the value of the fund is actually going down because some of its getting eaten up in fees and you haven't really had a chance for any those investments to be successful. 对。

that would happen early.

Even know about that. I just think it's a chance can marked up. And then what happens is you start getting Marcus are now, at least on paper, the value, the fun goes up. And then hopefully those Marcus eventually turn into the ribulose. Dp, I like to maths talking about, yeah, we have advantage two thousand and seventeen two thousand eighteen fund that's actually fully returned at this point.

You exited some secondaries, ies or acquisitions.

some we just some max. But luck. I think that is a on the early slashed lucky side, but we haven't really seen much of the jay because, you know, you should be getting mark ups within two years, I think on your investments if the companies are looking good, at least history.

that was the case freeburg. Any any thoughts on this collection of stories with venture basically having great venture reset, the end of the super cycle, the begin of the next? It's happening. Okay, we're in the fuck of IT.

But by the way, I I go back to the point that with all the promised maths is talking about the reset and the wipe out that needs to occur, I think this is still I think that's part of what makes this a Better time absolute to be an investor.

This is what i'll say about that sex. I think I agree with you. I disconnect asset values and asset Prices from fundamental business value being created. So the market and stuff up, Prices went up.

That doesn't really mean that businesses aren't fundamentally good, that there aren't amazing technology businesses being built today that are going to affect billions of lives tomorrow. If you are attracting a public company stock and you like the business, you spend time with management, you see what they're building. You see the revenue is growing.

The profits are growing. They're making great products. People are happy with what they're doing, but the stocks really expensive. You don't buy the stock. Suddenly the stocks drops by eighty percent.

Nothing about the business has changed is just that the market is paying less to own shares in their company. That's a great time to buy that stock. I think that's the moment we're in, in silicon valley.

Everyone's like, my god is over. There's things are terrible. Just because the asset Prices of the shares in companies has gone down does not mean that the quality of the businesses has changed or that there isn't fundamental value being created in silent valley.

In fact, the contrary point to sexes comment is that IT is a great time to be buying these shares, and IT is a great time to be investing. And IT is a great time because as we talked about countless times, there are extraordinary technologies, from A I to biotech, becoming software to fusion, to novel applications with A I and set and on and on and on. Many of the amazing things we've talked about that I think can and will affect many industries.

And billions of lives are being built today and are not gna. Stop being built, and you can now buy the stock at eighty percent off. So you know, if you're investing today and if you're builder today, as long as the capital keeps flow to support the building work, which I think to some degree at will because they're still enough of the sitting there, you are going to have a lot of these crazy growth y rounds with high Prices and all the nonsense that went on the last couple years. But there is certainly a lot of opportunity to great real business value and right now and opportunity to buy shares is pretty ap and participate meaningly in the valuation ation.

I'll say the thing i'm seeing on the field and like playing the game on the field, there's something we ve been talking about for the last year. We started a prom call founder dot university and it's very like a twelve recourse. And I had to build your MVP.

We had three hundred fifty people join the this can use no, this profoundness the founders into the twelve weeks. But anyway, what I did was I said, no, it's father, that university because it's a extension but but in the words of a of sax, let me finish how? Please let me finish. What we did was we just said anybody who gets to an M V P and its two or three builder cofounder ers will give them a twenty five k check.

And I did two or three of these twenty five k checks in the last couple of months of just the founders right now who had been laid off by other companies, their dogged, pragmatic, absolutely customer centric, product centric founders, where as the last five years have been filled with the atri s and White papers and ico s and just nonsense, and we absurd valuations and people want credit for work not done. And now people are actually building MVP. And their dogged red product driven founders, customer centric, mission driven founders. And IT feels to me like the .

first part is so well said people wanted all this credit for work not done and for progress not achieved. That game is over.

finished, finished. Which means if you are a product, let C, E, O and your emission driven CEO who actually built something, you stand out so much in this ecosystem and have people begging for money, sending me long emails and decks and totally dressed market. And like, can you build product and show me that you can actually deliver a product? And then we will start the process of the rewards base system here.

You know, the world base system in silicon valley is so magical. When IT works, you you get money from found university or you know text stars or why common or then go to see fun, then go to serious n that milestone base funding was so broken and now it's back and it's so functional when it's working. It's is a magic of silicon values when people work and get rewards, work and get rewards.

And that just creates this great pace and dynamic that i'm glad to see. Just as we rapier, everybody's been begging for a science quarter enough about the chaos in the world. Everybody wants assault of science to tell us and educators about something.

And sex needs to use the flu anyway. So let's do a science corner here. Room temperature superconductor. You send me a link.

I read the abstraction of this paper, and I I don't know which language I need to put this into google translate, but I couldn't understand any of them. So please, I little ally, read the action, action. I was like, I could not get to the first two, said he is.

without having start to researchers. I'll start was just like the simple explainer on superconductor. You know, materials that conduct electricity are called conductors.

So conductor is electron's move the room like a copper wire. That's how electricity flows. And all conductors have some amount of resistance, meaning not all the electron's kind of flow through at a perfect, great.

They bump into the atoms in the material, in the wire, and they generate heat. You know, you ever felt a wire while extricated flowing through? He gets hot, right? So that's because the conductor has some resistance, which means the electron's bump in to the walls of the Adams. In the material, they generate heat, and you lose electricity, lose energy, you lose power.

And so in one thousand nine eleven, he was discovered when mercury was reduced, a very, very cold temperature, that there was a point at which the material conducted electricity with absolutely no resistance. So the electrons flowed through the material, completely unbounded on, you know, not bounding into the material, not generating any heat and having no resistance mean you're losing no power in transmission of that electricity. But a number, number of other super interesting effects occur.

Number one is that magnetic fields now reflect off of that metal perfectly. So if you put a magnet, you ever see my image of an and make, we could probably pull on up in the youtube video, we put a magnet on top of a superconductor actually floats because the magnetics feel like the north and the north pushed against each other, and IT looks up. So superconducting materials kind of became this fascination in the early twenty of century, that, oh my god, if we can actually make materials that super conduct, there are all these amazing benefits.

One of the benefits is you could have no loss in electricity being transmitted. Today, fifteen percent of power is lost in the transmitted from the power to your home. You can also do interesting things like create maglev or friction with trains that float, you know, like magnet ts floating off the ground on top of a superconducting track.

And by having no friction, you could push the the train once, and you wouldn't to use any energy and move IT along. You could have basically powerless transportation. You could have really powerful new micro processors.

So is a superconductor microprocessor instead of a traditional semicon or micro processor, would use just one percent of the energy of the semicon r micro process. We think about that. All the A I stuff were talking about, all the chips that we're talking about, dropping the energy needs by ninety nine percent if those chips were made from a superconducting material.

And one of the more interesting applications of superconducting materials could be infinite battery storage. So you could take a superconductor, turn IT into a coil, and the electricity would just flow through IT infinitely, because I would never turn into heat. And then when you're ready for the power, you just plugged in and you get the power at the actual loss of energy in a superconductor battery, less than five percent.

And that's compared with, you know, significantly more energy loss using chemical systems. And you wouldn't need to kind of get all the materials that we're strugling to get now to generate batteries ies. So the idea of generating like superconductors and industrial scale has always been super interesting today.

The way that we generate super connection materials as we have to make a material super, super cold in one thousand nine hundred eighty seven, a physicist name to develop one of the first ceremony, superconductors, where they discovered a new way of generating super conductivity wasn't just taking a metal and cooling IT down very, very cold. Because when you get a very, very cold, the atos stop moving, and the electrons inside pair up and is called oop, preparing, and they flow through. And he said we could actually do this with a hotter temperature.

And he demonstrated this in a ceramic irian berrian copper oxides, super confusing name. But basically he took up unch materials and victim and another, and they turn into this really interesting material that became secretive. And then the race was on, because what he did is he made a superconductor that could super conduct at the temperature of liquid nitro gen.

And liquid nitro gen is really cheap, so we can just use. And that's actually how all M R I machines running today, as you have superconductors that reflect the magnetic fields in the in M R I machine and they're using liquid nitro gen to stay cool. And so there's a lot of industry applications today that use superconducting materials using liquid nitrogen.

But in order for us to do all the stuff I mention, like maglev trains and infinite battery storage and superconducting microprocessors, we have to get superconductors. We have to discover a material that can super conduct at room temperature so that we can sit with IT in a computer on our desktop, or we can have a run on a railroad track, or, you know, we can put IT in our backyard to store energy. And there has been this race, and there's all these different classes of materials that physicists and material scientists have spent decades trying to figure out what can superconductor room temperature.

We started with medals of copper, and we tried carbinol tubes. And following tubes, we had all of these different ceramics like, like was like I talked about. And there have been literally tens of thousands of ceramics that people bake in Evans and try and see how superconducting may are.

Basically, you take the material and you cool the temperature and you measure the resistance. And as soon as I hit super conductivity boom, there's a magic moment where IT drops to zero and IT becomes superconducting. And there is a big change over effect.

So everyone's trying to find that temperature, which I can happen at room temperature, and people have found super conductivity on the surface of DNA and organic molecules. But you can't scale that. People have found you super conductivity and all these weird kind of material on the surface of things, but no one ever been able to industrialized IT in twenty and fifteen.

There is a new kind of material called a hydride, which is basically taking A A thin metal and putting IT in hybrid en gas and kind of baking IT for for a couple of days and the hydrogen sticks to the metal and then you would use this hydride as a you kind of um uh conductor and hydride that turned out had really good superconducting potential. They would super conduct at room temperature, but they needed super high pressure. So you d actually have to leave them in like something that's like hundreds of times the pressure of the atmosphere.

And so that that's not really technically and industrially feasible either. So this guy named wrong ideas, publish the paper. A couple weeks ago.

we've got a toner press .

and a toner controversy and basically he said, look, i've got this new hydrate and uh i've got this really you know weird metal that no one ever talks about and I picked IT with this um with hydrogen gas and this highlight can actually super conduct at you know room temperature and at only one gig of pascal e, which is still greater pressure than room temperature.

But IT basically starts to show on the chart of are we getting there, can we actually get there that maybe we are. And so this paper was published in nature a couple of weeks ago, and I got a ton of A A toner coverage because everyone's like, oh my gosh. The problem is this particular individual.

You know the the the lead research wrong a ideas on the on the paper he's pretty controversial because he made a room temperature superconducting claim back in twenty twenty. And the paper he published nature and after he made that that claim, a lot of scientists tried to replicate what he did, and they were not able to. And then the journal retracted his paper, and he had a method that he took data noise out of the measured system he was using.

And the way that he took the data noise that people said actually screw the results and made IT look like IT was superconducting when maybe IT wasn't. And he actually had to a talk that he did that was published on youtube a year later, where he said he raised twenty million dollars from sam alt men and Daniel lack and a bunch of other investors. And he turns out that also wasn't true.

And then he came back and said, well, I didn't actually raise the money. I was talking with them without raising the money. So this guy is kind of a sketchy character in the space, but the temperature at which he was able to generate or claims to have generated and he did get peer review and to get published, uh, a superconductors is at room temperature is a slightly high pressure.

But if it's real and IT does get repeated, it's one of the next steps that were almost gonna getting to this point of true room temperature, super conciliating. And then this whole industry will blow up transmission lines, battery storage, maglev trains, superconducting micro processors. You know many new industries can and will emerge from this material discovery if it's proven to be real.

So you know it's a super interesting storyline. A lot of people in the material science world and scientists, chemists, physicists are kind of going crazy about this. And there was a um a survey done by quantum magazine and half the scientists were like, this is bullshit and the other half was like, this is going to change the world.

So we don't really know yet where this is all onna settle out. But I thought I was worth kind of talking about and bringing IT up because if room temperature super conductivity is really realized in the next decade, it's another one of these kind of black swan technology discoveries that we, none of us are thinking about right now. But I totally transforms all these markets and very quickly, kind of increases like we are time out earlier productivity, renewable energy, super, super cheap, makes computing power ninety nine percent less power intensive.

AI chips will explore using this technology. So a lot of super interesting applications, if room temperature, super connectivity comes to light. Super interesting story. I thought we should share .

IT and talk about, yeah, cheap. I would love to get your insights on IT and then sax. I would like to understand how many emails in what your order front weber eats during that segment.

Catch ma van kt. This Nathan, who runs a battery group at carnegie melon, introduced me to rona two years ago. Me in my partner, j, we were like, holy shit, this is outrageous.

And we tried to spin IT out into a natural company, but the university of rochester blocked IT. And so we've been following this guy for two years and all the trouble tribulations. But it's a really, really exciting thing.

If if you got ital blocked, explain why you would get ital blocked in a situation like that wouldn't IT is interesting .

because like typically universities have a tech transfer office and you can do these deals pretty cleanly. So you know when you go to stand for the tech transfer office is quite optimistic, cater and M I T is quite sophistic. Ted, there are these pretty standardize deals and world ty percentages.

What is the standard deal? How explained the audience how a tech transfer al would work? And how does the university make money for metal .

if you're a proof and you invent something or even if your student is technically owned by the school? And so if you want to commercialize IT, you go to them and you basically say, here's a capital partner of mine and we wanted go and start a company around IT. And what they will Normally say is, okay, great, give us a piece of equity and give us some royalty.

In some cases, depending on one, the equity tends to be in the mid single digital percentages. The royalties tend to be in the mid single digital percentages. IT defines on now OK quality five, five, six, seven percent.

But I can be a lot when you think about you know, a school like stanford who is spinning out hundreds of these things a year. But if you if you are a school that doesn't historically ally, do a lot of tech transfer or has a lot cutting at R N D, you wouldn't have that team. And so project did necessarily have IT now look wrong is probably getting bombarded by thirty other people who pay ten times more than what I was trying to pay eighteen month ago. It's a really interesting thing. And I think to be .

the really does anybody know what the top tech transfers of all time were like? Was google a tech transfer freebody out of?

no. yeah. Larian circuit gave stanford.

I think stanford, yeah, they give a percent. yeah.

And because background.

because backup .

is written while there was A P H D there. So technically they had some part of IT car.

Nigg melon ranked as top tech answer. University embassy here in terms of the rankings. University, florida, colombia, stanford, harvard.

so much, some of them are terrible, like, and and some of them more ronis. M so like you got some of the universities and the tech transfer offices have deep relationships with certain VS and investors that the only work right and they always get first pigs and first tips and their super tight with them. They don't run a real market process.

And then some tech transfer officers just give away the the farm for nothing. And then some tech transfer officers think that they own that they should get paid sixty percent royalties for the thing. It's all over the map. And some of them are sophisticated and some of them are not. Um so it's it's actually quite surprising J K L, how different all the universities are in terms of their level of sophistic tion and the types of deals they'll do.

But I will say this work in superconducting research, it's another good example going up to going back to the point a couple episodes ago about the importance of fundamental research and the importance of um you know uh the support from academy institutions and governments and aspects when you're still not sure what the technology is that to do that fundamental discovery work I think is a good collective social benefit. And then the industrialized and commercialized that requires, I think a market face approach, which is you take that cape, 你 to build business， find customers, make money. And that really how you get IT, to be funded, to be scaled because you never get you ouldn't to put you know government and academic money behind that sort of effort.

But private market participants should. And so you know it's it's interesting. I mean, I think I am not holding my bread.

I've you know I did a science project in one thousand nine hundred ninety three, when I was probably twelve, over thirteen years old, on superconductors, and I got a italian barium cop oxide, and I got some liquid nitrogen from U. L. A.

And I ported on the this, and I floated the magnet above, and I had a poster board and a computer presentation, and I was super and thrown about the future superconducting ers. And exactly what I said today is what I said back nineteen and ninety three. So, you know.

thirty years ago he was so busy dating, I didn't t think you had time for super .

doctor experiments. Yeah look, I I think stuff has really uh, it's been it's been like fusion. It's always been a promise around the corner.

Physicists have always had hope. We have taken incremental steps towards IT, but it's always felt like one of those things. We are always getting fifty percent closer to the wall.

It's like you never actually reaching the wall. And so it's a dream one. yeah. By the way, I will say one area that that that a lot of people think holds a lot of promise for superconducting research is in quantum computing, because you can actually model on a molecular level what might be going on right now.

The B, C, S theory is the theory on cook preparing that happens in serenity. s. Is the only way that we really understand how superconducting actually works, why IT works, why there is no resistance at certain temperatures for certain type of materials.

For most materials, we have no frequent clue why IT happens. We don't understand the physics of IT. There's something going on on the quantum mechanical level that we just don't get.

And so if we can understand the Better through quantum modeling, using quantum computers, all of a sudden we may be able to actually start to come up with ideas for molecules and Crystal structure that would allow IT makes you protective material that we simply don't have enough time in our lifetime to run all the experiments in a lab today, and we can simulate IT. And so that's why quantum computing could play a real role in advancing our ability to discovery in superconducting materials. And like I talked about, these are like not just one, but like two or three order of magnitude improvements in the efficiency of certain systems of industry on work today.

So IT shows how the compounding benefits of technology and things you cannot see around the corner can suddenly cause these explosive growth moments in technology and industry. I don't know what when quantum computing gets here, when IT gets here, you might discover superconducting. And then when that gets discovered, boom, energy cost rop by ninety nine percent.

Computing goes up by one hundred fold. So there's these amazing things that are still like in front of us that each one of which could be, you know, really great expansion al trigger ing events. And we're seeing a little milestone today.

but I know tax reaction sounds good.

Sex, how many moves did you play in your .

twelve .

chess games with.

Oh, sex I I listen this is a been a great px thanks .

to the best of comment on the atlantic article that says brand .

descanted st has peak to go to do why you to show them I can see .

that but it's in the atlantic. Um you know know why the atlantic suddenly has turned on him is because you're the biggest barkers of the war that those guys have all these like neocons over there and so he gave a statement saying that, you know, our support for ukraine shouldn't be a blank check and other comments expressing the, say, skepticism of what we're doing over there. And that was told an acceptance to them. So all these neocons are registering disappointment. But I would argue that the electoral asset, not a liability.

I have a prediction, give IT what's going on with these banks and what's going on in this kind of I think we all agree, the soft landing concept is over. We're going to be in a recession. The war is going to end there because we're not funding this in american. The american public is not going to want to see tens of billions of dollars going to ukraine and to defend this war in year two, hundreds of billion. I just say that every months.

yeah, I know this spending run rate of this war is actually greater than what we did in afghanistan. Afghani, an being a twenty year multi trillion dollar Operation that just flushed all that money down the drain. So yeah, I mean.

there were a greater run rate in afghanistan. Yeah.

did we know what the monthly run rates for this?

Oh my god, how we appropriated .

over hundred and thirty bill afghanistan, we ent two illy over years. So one hundred billion a year run rate. You know what a monumental waste of money that was.

And now look at the financial crisis were in. Can you imagine if we could have two trillions back? I mean, all these trillions that we are.

as always.

trillions and trillions we squander on stuff that didn't matter and now paying the Price .

for IT that could be education, could be universal health care.

can be paying on the dead, have paying down the debt of inflation?

exactly. Let's think logically here. The number one issue for this country in the next election I am with freeburg is great prediction from the year and show is we need a president and we need an administration that is fiscally responsible and controls the baLance sheet in a logical fashion like the last two administrations have not seem capable of doing. I, with freeze english of voter baLance the budget, get spending under control, austerity measures, hashtag, right for the sult of science.

Sorry, what's that? Can you please?

What I wanted to show? extreme. Is there, are there any plugs for the remaining part of the episode? mr. Bee is curing blindness and buying people shoes. Has he been cancelled yet?

X, aren't you excited about superconductors and the benefit for ai energy storage and energy costs and humanity? Yeah, what does he do to burn rate of a ash?

Yeah, but i'm not i'm not like an expert assessing like hard science or hard tech. I'm a thorn .

investor alright.

everybody for the rain man himself, David sax, the dictator tram, poli hop, tia and the sop in of science, the principle panic attacks no more mr. David freedman on the worlds greatest moderator, undisputed. Congratulations everybody on another successful episode.

And freeburg, when are we locking in the date for all in some of twenty, twenty three? My replies, my dms are filled. People want to know .

you have the day and we had a parking. Is he where they don't want us parking there so soon as we, everybody. So now they ve got back to the committee to get approval for us to out uber.

uber. Ber.

好 OK。 How many shuttle do .

we have to take you?

Yeah, exactly. How am I the prince of panic attacks? I think you're the king of caps locks at this point.

They were called me j caps. Js was the best I heard .

talking about panic attacks. J, hell, this weekend.

Panic, panic.

I was a sheer terror car. I have literally gotten rid of the caps lock. Everybody relax. You can follow me twitter outcomes.

as jon see on the time .

your winter.

We open sources to the fans and just .

got crazy with.

Should all just get a room big, huge or because like actual tension .

to release dear.

we we just get more.

I'm going 努力。