All-In with Chamath, Jason, Sacks & Friedberg

Industry veterans, degenerate gamblers & besties Chamath Palihapitiya, Jason Calacanis, David Sacks & David Friedberg cover all things economic, tech, political, social & poker.

E120: Banking crisis and the great VC reset

E120: Banking crisis and the great VC reset

Fri, 17 Mar 2023 05:16

(0:00) Bestie intro!

(1:35) Recapping the events of the past week

(5:39) Understanding the banking crisis

(32:55) Solving the global debt problem, righting the ship

(54:20) VC market update: Founders Fund splits its eighth fund in two, Sequoia's reported returns, YC cuts its growth-stage team

(1:08:36) Science corner: Superconductors

(1:24:56) DeSantis update, Ukraine spending run rate, bestie wrap!

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All right, everybody, welcome to the all in podcast and with me again this week, the Sultan of science, the principal panic attacks, the queen of Kenwa David Friedberg, the dictator, Trimoth, Polly Hapatia wearing beautiful Mr. B sweater and David Sacks, the rainman himself. Thanks for coming to my Laura Pianodon on Tuesday, Jake Cal. That was wonderful thanks. At least one bestie showed up for you. Wonderful, wonderful dinner. I sat as far away from the Laura Pianod people as possible in the arranged seating. Thank you for that. I guess maybe you were like I'm going to contain the damage Bernard Arno's it put put the all caps got the end and I said okay. Yeah, he still hurt me. So what's the amuse, Boosh, I did her every time he said something he yelled like he was in all. I want another butter Scotch putting the butter Scotch putting is delightful. Sean, Sean's like I'm four feet away from you Jake. How you take the caps lock Sean was so much chef Sean Christen chef Sean Christen, Sean Christen once again. Were you sending alarms when the restaurant like almost ran out of something alert alert alert. Restaurant is running low on coffee. We're dangerous. I just want to make what is a little bit of an opening statement here at the topology and it's not a victory lap in any way. But there's been a lot of attention I think on the last episode of the pod and perhaps some tweeting from two of the four besties this past weekend. I saw and I let you speak for yourself here sacks and we're going to get into the timeline of what's occurred and then what are potential outcomes here in solutions to the banking issues that we've witnessed in. What is a week since the bank run on Silicon Valley bank and 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 movie where like a meteor is coming towards earth and you see it in the telescope and nobody else sees it or only a small number of people in the observatory see it. 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 be exceptionally candid and transparent with the audience. Additionally I make jokes. So sometimes you might laugh during this podcast or you might laugh when you're reading my tweets and that's part of what I do now I also realize that we have an audience now that is larger than I think any of us expected for this podcast I certainly magnitude larger than I expected. And frankly, I didn't know if this podcast was going to make a past 50 or 100 episodes and my Twitter following count doubled since we started this podcast and because you tried to ruin the plot. I think it was because of the caps lock but anyway putting on that aside what I would like to say as well is like we are living in a situation that is unprecedented. I think the alarm bell I sounded you know was because I saw a fire. We'll get into the timeline here but I sounded that alarm bell after Silicon 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 was to inform folks 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 communication style now that this thing is so popular. But I stand by my mode of operating in the world which is I always want to be candid with people I always want to tell the truth and yes sometimes I make jokes about life and. You know dealing with the stressful situations that's it it's not an apology it's more of an explainer and yeah maybe I need to adjust the caps lock 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 capitalists for the bank run that is now systematic and the balance sheets of multiple banks around the world. And I think that should be great for you to maybe just comment on the week that was and the timeline of events yeah as usual you're not apologizing no absolutely not apologizing but will recognize that this platform is bigger and that maybe on the margins I could adjust my communication. Strategy but Chris is a lot of people who don't know that I make jokes and maybe people don't understand when I'm joking and when I'm serious right and so. What would you change. 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. And 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 personally could have done without the all caps. It was a bit. Yeah what you're basically saying is nobody should listen to you because you're not that important and I. I'm saying understand I might make a joke consider me. Of course of course category yeah let's go back let's go back and look at the timeline because there are now serious accusations and I would call it really scapegoating. Of and it wasn't just you it was me and black men in fact the wall street journal editorial board which I respect a lot. Mischaracterize what me and act when we're trying to do in terms of drawing attention to a regional bacon crisis in progress a run on the banks they called it spreading panic I don't know how you tweet or publicly discuss. I run on the bank that's currently happening needs 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 Jake how the wall street journal that robot didn't mention you so you're off the good. They didn't know who you are but thank you. But no but seriously so I went back and looked at the timeline of all of this and so first of all we have to understand that this banking crisis now has swept in five banks five bank failures first or silver gate but everyone dismissed that because of some weird crypto bank then it was SVB but everyone sort of dismissed it because they said it was based on panic Vc's. Rather than the systemic problem in the banking system then it was signature bank which got seized on Sunday which I think utterly refuted the idea that this was just a Silicon Valley problem then you had the Fed step in and backstop first republic which would have been the next dominant of fall if it wasn't backstop and then five you had credit suice basically again avoid an outright failure because they got backstop by this was government so we now have five banks in the US. And these are not small banks are. Chris we see is a is a g-seb a globally systemically important bank and the other ones are top 20 top 30 type banks are talking about hundreds of billions of dollars and deposits so clearly there's a larger phenomenon going on here and frankly it's being caused not by like anything Vc's did because Vc's are just depositors where does one class of depositors and depositors are not to blame for what's going on here what's going on is that these banks have huge unrealized losses on their balance sheet and the losses have come from the Sun spike in interest rates that's what's going on the Sun spike in interest rates is because we've had the most rapid fed tightening cycle in our lifetimes in the last year the fed funds race gone from roughly zero and almost 5% that has broken a lot of things and the banks which have broken first are the ones that had pre existing problems and they had horrible risk management but that's who gets broken first in a stress test test. Right is the most poorly run banks the ones with pre existing issues but just because they went first doesn't mean that others don't have similar kinds of issues now I'm not saying this anyway be panicking with those banks will be fine but there are larger issues in the banking system that are worth talking about in to the point about whether Vc's could have spread this. Jake how you're absolutely right about the timeline I mean I went back and checked I personally never tweeted anything about SVB until Friday afternoon when SVB was already in receivership and the run on the bank had already started with signature and first public and 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 were 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 scapegoats I think is getting 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 it's a mouth and freedberg you know the scapegoat 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 COVID and then the second administration so you had a Republican administration that spent a lot of money and then a Democratic administration should not spend a lot of money so maybe we could even go backwards from fed fund rate going you know what looks like parabolic when you look at the chart maybe you could speak to what got us to the fed making those decisions to mouth or free burn maybe I can just do a little clean up on what sac said I think the issues at credit suites 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 mentioned signature Silicon Valley bank and sober gate all had very traditional liquidity crises 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 suites they have an enormous amount of liquidity what that was was I think a lot of speculation around whether they would default 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 a hand a key reaction to comments from a 9.9% shareholder who just said that they can't put in any more equity but even then I went back this is the chairman of the Saudi national bank he was asked on Bloomberg would you give credit suites more money and he had a very reasonable answer but it was snapshot in a very awkward way the first sentence was under no circumstances would he do that. Okay now if you stop there you could be panic but the rest of it made a lot of sense which is he said look inside of your area if we go above 10% we have to go through regulatory approvals domestically and there are regulatory approvals abroad that's a big hill to climb in all of a sudden it no longer becomes a financial investment it becomes a somewhat political investment and so we're very happy at 9.9% that was a totality of the statement but if you just cherry pick the first 45 seconds and ran with it which people on the internet did this is sort of what caused that second level wave panic at a g-sub and then the Swiss national bank stepped in and I think that that panic has largely gone. Okay so what is the real issue the issue again is I think we have had a bit of supervisory failure here right because we all know this in any industry if you let capitalism go totally unchecked shareholder 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 tech does 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 spreadsheet I mean this is not complicated stuff where assets and liabilities and duration mismatching can be known on a real time basis where the San Francisco fed Mary daily should have a report that's escalated to her when sbbe got over their ski tips which they did in q4 of 2022 so I think the real question that has to be examined is where were these folks for 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 g-sips and I think that's a very important question that politicians need to get to the root of freeberg we discussed this article from seeking alpha which came out on let me get the exact date here December 19 title of this seeking alpha story is sbbe financial colon blow up risk and the summary in three bullet points says bullet point one potential losses in loan portfolio is could severely impair book equity number two unrealized losses in hold to maturity portfolio already equal to book equity number three funding environment for startups were pressured positive base and even more pressure to the balance sheet in other words start up spending money to cover their burn rate freeberg and obviously we had the dog Frank rules lesson or loosen under the previous administration and that specifically was driven by silicon valley bank that a big part in that so looking back on this and people do want to place blame 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 want people in December about this maybe you can talk about the feds 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 going to shut down the economy. There's going to be crazy second and third order effects of doing that no one knows what they're going to 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 expect that you're going to have to cash that check at some point. That's effectively what I think we've been kicking down the road here the way we initially tried to resolve the problem was to drop rates to zero and then spend our way you know back to a growing supported economy and then over shot ended up with you know too much stimulation too much stimulus too lower rates for too long responded too quickly with flashback at the end of the day there was a giant gaping hole blown into the global economy. When we shut down the world from covid there's no blame just what happened and when that happened there was a massive cost that had to be born at some point and it's going to get born at some point and the rippling in a pond you don't know where the rippling is going to hit what part of the pond what leaves it's going to hit that's what's going on still and it's such a dynamical system it's so hard to say with linear certainty this is what should be done and what could have been done and what they do. 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. Stint drop rates 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 it and I think that's a big part of what's being eaten 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 that they hold and these portfolios and the effects of that are obviously you know still being felt. Sax do 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 Dodd Frank loosening under Trump and with Silicon Valley bank pushing them that seemed like a really big mistake by the way I wasn't saying the fed's not to blame for not raising rates fast. That was because you guys remember I was the first person to talk about what standruck and Miller had said that they're not raising rates fast enough that we've got massive inflation we should have been raising rates. I was the first person on the show to be you know barking that so don't don't forget like I was there like pretty early what I was pointing out was like we shut down the economy during COVID. The global main yeah I got just that is the main cause that is the cannonball that got blown through the ship got and everything else is plumbing and patching and work to try and keep the ship afloat 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 360% global debt to global GDP ratio right now. And as that ship has gotten heavier and heavier to have a giant hole blown in the side while you're trying to do all this patchwork with all this debt weighing on it it's a critical challenge and the ship is feeling acutely here they're feeling it in Europe now and we're certainly going to see the global ramifications as we try and fix this economic catastrophe that was caused by COVID 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. Sacks your response the question of who you blame for this banking crisis has really become a political Rorschach test and I've seen that there's six different parties that people want to blame in this situation and there's some merit to all of them but the degrees are very different number one let's go through. Okay 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 blame however and and to mouth is right about these banks they differ in the details but the point is that they're all operating under conditions of extreme stress where do 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 rates that basically has precipitated this larger problem number three. Is I think the Biden administration spending which in fairness started with COVID before Biden the Biden really intensified it and then I think it really compound the problem in the summer of 2021 by claiming that inflation was transitory when it wasn't that allow them to keep spending and keep printing money and kept QE going for the six months that created the bubble of 2021 everything got super frothy and then that made the rate height cycle even more vicious because you started six months like that. You started six months later they could have started six months earlier it could have been more gradual and I think that really what is asked for the economy okay number four the Dreg in 2018 I think Elizabeth Warren. And Rokana have made what I would call a compelling case that the Dreg in 2018 have contributed to this problem I think in hindsight creating a two tier system of banks where one tier are the systemically important banks we're completely guaranteed and backstop by the federal government. And then a sort of lower tier a second tier of regional banks was a poison chalice for the regional banking system because in the short term event they were more lightly regulated which maybe appropriate for you know smaller banks and aren't these mega banks however it has also now I think created a situation where people are less confident about them and so the money flows are going from the regional banks to the systemically important banks the SIP so like I said it might be a double edge sword and I think we're going to have to look at those regular banks. 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 to thriving regional banking system. And so the question is what's the right regulations that get us there and then the final two we can talk about later are I'm hearing wokeness getting blamed which listen I think that the whole fourth of 500 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 a little too often on that critique and I don't want to burn that critique out because I think that this is bad but it's not the key reason why this stuff happened and then the last group that gets we could also maybe frame it as ESG more broadly as the distraction because woke this is charge ESG is real. Yeah what I would say for sure is that if these banks have spend as much time on risk management as they did on ESG or on woke then this crisis would happen so definitely a distraction but not not the thing that like specifically caused it and then just the final thing is VCs and I just can't fathom at this point given the multiple bank failures given that we see the larger problem of unrealized losses on bank balance sheets that somehow any class of depositors would be blamed for this that just makes no sense to me. Jamath I think the VC the critique is specific to Silicon Valley bank because I think and this article was in the Wall Street Journal but what it shows is a really complicated intertwined relationship between VCs and Silicon Valley bank where you know VCs were given very cheap interest rate loans they were given GP call lines of credit they were given LP lines of credit and then those same VCs would be directing their companies to put their deposits inside of SVB who would then take those deposits and buy perhaps and buy risk and while the reality is all of this stuff will come to light because I think it will get exposed as we go through congressional hearings on all of this. But I think the I think pointing the finger at VCs in this specific case is somewhat warranted because there was a little bit of people working in lockstep together and there was a lack of functional responsibility around how to be a true fiduciary so if you come to a board and your founder is 22 years old and you give that person 15 or 20 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 are properly disclosed to that CEO 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 the audience understands this because it is a bit in the weeds and it's a bit inside baseball what you're saying to moth is if I can summarize it there are people who are the adults in the room venture capitalist they have deposits at Silicon Valley bank. They also might have loans that are fantastic with Silicon Valley bank I had a mortgage for this office from Silicon Valley bank and I talked about how on the last episode how great it is they come they open wine with you it's white love service that you wouldn't get it another bank. And then they might have loans against what's called the GP carry or the GP share or they might have mortgages and so there's a conflict there if you're a venture capitalist and you're directing a 22 year old CEO to Silicon Valley bank maybe you're doing that is I guess you're saying could be or the big or conflict of interest and in some cases Silicon Valley bank is a limited partner in all of these funds my point is that all of these things okay hold on we have to explain that so imagine a situation you go and start a fund Silicon Valley bank country and 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 Valley bank. Well let's be realistic more like 25 50 million 100 million okay this a lot of money so a million kind of his white washing this problem so you give them a reasonable amount of money they're like wow I'm I have tremendous loyalty for you thank you well do you need anything else 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 again nothing 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 it would have been if you are more circumspect and you didn't have those incentives to direct people to one institution only in any other part of the market so in the public markets as an example there is such a bar for disclosure okay 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 our like sister or brother or mother may have a transaction with an 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 on toward happen but when people point the finger at VCs I think they are pointing to this whole set of issues and asking the question shouldn't there have been more disclosure and transparency around it and now that this is come to pass shouldn't we explore it and I think that's what the Wall Street journal did they started pulling on the sweater thread and my guess is that you're going to find a whole ball of yarn at the end of it sacks what do you think of this I think she must makes a fair point that if VCs have SVB as an investor and then their directing startups to use SVB that is a conflict that should be disclosed by the way we never did either one of those things we never had SVB as a limited partner and we also never direct our starts to bank at SVB I don't know why we never do that more over I always try to talk founders out of the way that I'm not working venture debt whether from SVB or elsewhere so we be clear about that and to be clear I never directed anybody to a specific bank I know I told people to get two or three banks and have redundancy totally totally yeah totally and look founders have multiple VCs typically on their board so the idea that like anyone VC directs them which bank to use this is not that's not realistically what happens at these startups but look I think chamath is right that when there is a bank failure any kind of failure this big then all the practices are going to be under a microscope and there's going to be some scrutiny of things and maybe there should be but my larger point is we're now operating in an environment in which clearly there's a larger set of stresses on the banking system we've had now five bank failures or near failures more over do any of us believe that this is over or do we believe there are more shoes to 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 we're not the end of this but but but just finished the thought if we believe there will be more shoes to drop then clearly the issues cannot just be limited to Silicon Valley they have to be a larger set of issues there that it's important to understand the facility that the Fed created so what the Fed did this weekend is essentially create a buyer of last resort again now how do they do this so all of these banks basically have assets that they bought for a dollar and are now worth 95 cents and that's what's creating this whole issue or 80 cents or 85 cents you pick the number but they're not worth the dollar that they bought what the Fed basically said is OK give me that asset give me that bond I will value it at a dollar and I will give you a dollar as a loan and you will pay me interest and the interest rate I think is what's called OIS and they added 10 basis points on top so I think it's about 4.9% 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 of A city and well so just ignore those for one second the other and banks if you look at all of the assets that are underwater because of all the rate hikes that SACs 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 your loans and so I think the exposure for the American banking system at a minimum is going to be this two trillion dollars because now the incentive if you're a 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 a loan and now take that and buy different assets different bonds different US treasuries that are yielding much more than what your old treasuries were yielding and I think that's the arbitrage 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 two trillion for everybody else but the top four what's the gap for the top four that looks like it's somewhere 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 freedberg said these checks always come do what do we do in a year the problem is the only way 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 now all of a sudden you're in a position to cover this so it's about their down 15% 10% in book value these longer terms on the security again it depends on what they bought we don't really know enough details so I don't want to guess but if you own these 10 year treasuries you could be off 10 or 15% if you own mortgage back securities it could be off a little bit more if you own short term securities they're off a little bit less but these are with the government you get a loan collateralized by these assets so you still holding them right yes and they mature so if the Fed takes an emergency postry and says okay guys we want to avert a crisis in a year from now and we're going to cut rates these assets that these banks own will be worth more which will allow them to repay the loan as far as I can tell all we've done is we've kicked the can 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 a year from now we have a problem on March 15th 2024 because all the folks that took money what do we do yeah and so a year to work it out free bird would seem like a good idea because the Fed is fighting 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 bird shimuth had one suggestion which was all of these banks should have a disclosure statement mark to market every day week month quarter whatever it is just like circles us dc their stable coin has a page with their disclosures of all their holdings so that seems to be a very productive one we should have them mark to market the the Dodd Frank stuff as sac said you know Elizabeth Warren probably correct we need to reverse that so those are two very tangible suggestions what are your suggestions 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 should the public to ignore it I'm not sure that should be true but they are their supervisors they should see it they should choose to ignore it but they should not not have it free bird what are your suggestions going forward as to how we can learn from the situation forget about the cannonball 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 a cannonball hit it again now we got a hard that's a hard equation to solve we got a lot of asking you that's why I'm asking you a lot of demands for money you guys see I think there's a lot of things that are team 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 Netherlands there strikes on the underground in London when we talk about global debt and US debt we often I don't think account for all the debt which also includes promise or obligations made to a work force global workforce that's been working for decades individuals that have spent their whole lives committed to some company or to some government working with the expectation that they're going to retire and have some benefits paid to them and there's 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 it's 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 the United States and the form of social security and these underfunded pension liabilities that is the critical macro tension in this equation that I think drives the real problem that's going to come to a head at some point we blew a hole in the in the in the boat but we're also forgetting that there's like a massive amount of weight that's going to drop on the bank and I think that it's a really hard equation to solve we can talk about keeping banks solvent and all this sort of stuff at the end of the day the central bank it appears in the United States and probably globally it's going to be one big bank right there is actually going to take on the whole balance sheet themselves and and at the same time you've got a lot of folks saying I want to get paid more I have obligations due to me and guess what you know Jason is going to be a very important statement system about the importance of democracies ultimately you know the members of that democracy are going to say this is a benefit that the majority or and that's going to pull things out I think the only stop gap I'll just say one thing the only stop gap in the next decade is going to be significantly higher tax rates in the United States. So I think that's why you see this slide in proposal we may not like it but at the end of the day it's going to be the only way to create a stop gap that's that's going to avoid massive inflation in the near term reducing the size of the market and the market is going to be a very important factor in the future. So I think that's why you see this slide in proposal we may not like it but at the end of the day it's going to be the only way to create a stop gap that's that's that's going to avoid massive inflation in the near term. So I think that's why you see that by proposal hold on hold on let me just say the only other way the only other I'll just say one more thing Jake on the only other way besides. So I think that's where we can all have a hope in a dream and investment and effort around technology AI automation people think that their energy energy but if you can get energy down below three cents a kilowatt hour and you can scale its production by tenfold if you can automate a lot of labor if you can get AI to do a lot of stuff that we do today productivity will go through the roof the economy will grow fast enough to get out of the debt bubble and meet all of these liability obligations so there are so that's why it's just a sunrise. So that's the long term the medium term is going to be this tax stop gap is very high tax stop gap and then the short term is going to be all the shenanigans that we're talking about. Okay I'll go to you in a second sacks so just to recap there is actually a third way to there are three ways productivity as you very stutately point out and we just highlighted some of the ways productivity could help whether it's energy AI etc. So the second is of course increasing taxation on the people who are at the top of the pile 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 their trust in banks to Tremarts point. I was thinking about this over the weekend and then this discussion that we would have based on a lot of things you said sacks which was people just deposited their money and they don't have the ability to assess if a bank is solvent because the FDIC can't do it and it's their full time job it's their mandate to make sure these banks are solvent so how is a consumer going to be able to do that or even a startup founder or even a sophisticated investor like ackman or any of us before you're in fact sophisticated so let me pause for a second here and posit 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 with rather pay for a social network then have their privacy data sold so I think we should bifurcate banks into bank vaults and banks banks can do what they want with your deposits you get free checking but what I wanted a bank what I want my startups to use what I want my venture firm to use is I want to do it. I want to pay the bank for services whether it's 10 basis points 25 basis points $500 a month I would rather see my startups pay $1,000 a month in banking fees $2,000 a month on banking fees for $2 million whatever it is and pay for each check pay for wires pay for white glove service whatever they choose. But not allowed the banks to take that money and loan it out or do things with it I just want to vault and I think a vault 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 who are in gen X 2008 and now we would rather pay for services and I leave it to you sacks is this a potential solution because I don't hear anybody saying give me a bank vault and why does that service not exist in the world. What people really want are they want a service provider who gives me the ability to make payments which if you're a small business pay roll and payables things like that they want a money market fund to basically earn interest. And they want all that to be safe I mean it's it's very simple the idea that when you go open a checking account at bank that you are making an unsecured loan to that bank that is not something that any consumer small business understands that whole model I think is completely obsolete not dated and what I heard so many people say and I think this is not sincere I think it's 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 it's like 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 review the financial statements of that bank try to figure out all 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're not smart enough to do that then you want them to be disciplined this is the word that I kept. Her being used as we to the positive that the depositors are not in a position to evaluate the balance sheet of these banks that's what the feds are supposed to do that's what the regulators are supposed to do that's what news is supposed to do you're telling me that a bank that an a rating from moody's the week before and had an F.D. I.c. seal of approval that somehow they got it wrong and the feds got it wrong but the in related news was to get it right I mean come on it's ridiculous in related news to mouth 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. Yeah. Yeah. Let me finish the point it's 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 pal two days before the bank failures was testifying that he didn't see stress in the banking system. So either he was lying or asleep at the wheel. Sleep at the wheel like I said the feds had given the seal of approval to SVB and all these other banks they'd all passed the regulatory exams and so to now put it on the deposit when the fed screws up and the regulators screw up and Washington screws 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 least culpable. Chimoff should there be a service that provides no interest but is just a custodian of money that is absolutely protected where is the bank vault product in the world does it exist because I can't seem to find it some people seem to say I think freeberg you alluded to this maybe in the group chat that if you have a brokerage account that's kind of similar to what I'm saying but it doesn't have it I don't want any interest I don't need any interest for putting this money in the bank for a startup they're not in the business of making one to five percent and optimizing for the bank. I have a hundred percent and optimizing for that I have founders who are now sending me five page memos if they can't if we're bank if if the bank can't use your money they're going to charge you so remember I want to be charged that's the service I want but I think this is an important point a bank is a service provider they spend a lot of money building technology having people that work 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 think that's really worth it. Freeberg you're not a service provider under the current laws you understand how it works now is that what we're being told is that when you went to the bank thinking you were just getting a service provider and frankly largely a commodity service provider you're getting a manager. Yes and you're being told that you actually made a risky investment decision think about that when you open a checking account you are just trying to you know again use a vendor 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 could figure it out and on the experts could figure out You should talk about the the challenges of your system to someone who lives in 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 500 or 600 bank failures on average per year in the 1920s 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 and we've certainly made huge strides in progress but I think jc out here 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's not going to get used not going to get moved going to be completely safe in a democracy. And what would you pay for that what's the price freeberg what would you pay for that because right now we're basically giving every crypto entrepreneur and sell it you know basically the high ground because they could make this product I would pay 10 basis points literally 10,000 a year per million is that right yeah. Remember when you thought Jeff Bezos was going to be president I still think it's a distinct possibility anyway what would you pay for this product just a schmoth or like Bloomberg or Bezos I don't want to speculate on new products it's kind of a dumb tangent I think the thing that you're bringing up though is dumb tangent okay. Why doesn't a product like this exist and I think that it was very well explained it's that every for profit businesses 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 and mortar that go into making the branches there are lots of people there is lots of software there's lots of complex back office in middle office things that banks have to do in order to accept money. That has a cost so I don't see how it will 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 eight were those rules were written on paper and now we're in 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. Because are written in law that they also need to get written 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. Should those or should those be this should or should they not be disclosed to shareholders that's a different discussion. But the regulators should have a hundred percent transparency into how these organizations run because a sac said. There are an enormously critical institution that at best case after this fiasco what we've realized is very poorly misunderstood by consumers. And that at the worst case is being mis-marketed to us. Yeah. And I think that shouldn't be allowed. We're also missing the other side of the balance sheet we haven'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 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's some degree of balance and availability of liquidity to support transactions and ultimately mortgage securities came out of the need to generate more liquidity by banks to support depositors. And obviously there was always 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 it gets stifled too much because we swing too far the other way it 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 coin and where things can go back. This is where I find like the current banking model to be sort 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 into a deposit account and then they loan it out to make mortgages. Do you realize that you're an investor in those mortgages as the as the depositor I don't think you do. What they what they do is they take those mortgages stocks they package them up they sell them and they get an origination fee and they get the money back not always. They're not always they should be maybe they should have to be a well as far go do not exactly so be a well as far go for example. They do a lot of that but if you look at first republic they have a ninety billion dollar loan portfolio on their balance sheet that they've not packaged up and sold. So the packaging and selling of mortgages generated the liquidity that the banks needed but there's a cost to that so a lot of banks will try and balance out their loan portfolio where they'll package some of it up and sell it but when they do that they take a loss they pay. Maybe they should be required to do that because because because I mean look to the point about market market assets it's very hard to mark an asset to market unless it's liquid and publicly traded. Let me give you an economic point I think there's about seven trillion dollars in deposits in 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 said we're call it a 10% discount to 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 challenges the way that cash we're going to money market funds. So in other words like you'd package up all those mortgage bonds you create a mortgage bond security and then if consumers if depositors want that product they'll just buy it. They'll just buy it. They'll just buy it. That's what is the money market. Yeah but what is the money market it ends up being the same thing where money is you earn interest on cash that's being used to make investments elsewhere. So ultimately if you want to earn interest on your cash it has to be loaned out somewhere to someone. I understand but what I'm saying is look I'm just brainstorming here I don't you know I don't have the answer. The one for spitballing. Yes exactly I'm not saying this is what should be done I'm just kind of asking whether it might make more sense. What if on the depositor side all of the things you put your money in are money market funds and then when the bank goes out and does its lending business it does ultimately at some point have to package those up and they get turned into securities. You know. But money market funds you know where that cash goes and when you when you invest in a money market fund you're giving that money to someone who's using it to make a loan. Like it is also. I understand but then the depositor would never be a risk. But it would be marked to market as sex is pulling the deposit would ever be a risk of never be a risk of being fairly. I just want to give you're shifting the risk equation to the fund manager the money market instead of the manager of the bank and at the end of the day that money is just the owner of that security that money market fund that would take the hit. Okay just as we wrap here because I want to talk on some other issues as well there's two things that are super tangible that founders can do right now are people who want to mitigate against these kind of issues. There's something called ICS insured cash sweeps these are accounts that automatically you know will put your money into multiple FDI insured institutions 250 K at a time we talked about this previously. There's a bunch of folks doing that in FinTech. I won't give any of them free plugs here but you can just go look and search for ICS. There is also maybe some thought here that the FDIC 250 K limit maybe that's outdated certainly for businesses it is so maybe that should double or triple and obviously that cost would be spread out. And then finally you can go to treasury right now and by short term government debt and I literally have startups doing this we have major treasuries they're going there and buying short duration stuff themselves holding it themselves. So they don't have to worry this is part of this provided by the government is my understanding and people are buying direct from the government I personally am not a fan of start of spying T bills because of the duration mismatch problem they always underestimate when they're going to need their cash. And so I don't like tying up this is if you had a giant treasury. Yeah, but this is for Joe. I always get it wrong. I see this all the time whenever they try to let me just say when starts trying to create ladder bond portfolios they end up needing the money sooner than they thought what I'd much rather see start of do is buy a hundred percent US T bill backed money market fund run by the absolute biggest to the big financial institutions 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 manage your own bond portfolio let a professional fund manager do it. Well, there are people who do provide these kind of bond ladders I'm just telling you what the best practice advice going around here symbol through like brokerage account sure or multiple ones right and but now this is I think speaks to Chimoff. The fact that we have startup founders and people having to measure manage a treasury. This granularly is this a failure or is this what should be happening should we have to have treasuries in the 10 million or 20 million dollar range be this. Granulee manage or should this just be FDI FDIC rates you know should be just a 10x. Well, in the absence of regulatory 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 I mean I don't think that that's a very controversial statement. Yeah, it's just not happening and I am just flabbergasted that people are not even doing the basic blocking attack on here of having three or four accounts I've always had three or four banking relationships always had split up should we move on to some of the other pressing issues there. Was a really interesting founders fund story about them breaking their latest fund in 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 startup plan so. Founders fund took their just to make the math simple because I'm going to get the numbers not exactly right but like a two billion dollar fund that they're going to break into two one billion dollar funds I think that's one story it's a one point eight billion dollar fund they're going to break it into two nine hundred million dollar funds is their eighth fund it's being cut in half and it will become eight and nine I think what that speaks to is valuations and the marks that we think we have for existing companies and the future value that smart investors like this see. All roads lead to it's is we're in 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 one there it's according to that's according to axios peter teal led this charge and he is the the the contrarians contrarian. He was the one according to axios that led that cut of the fun size with some at a founders fund according to the reports I'll say the more important thing which in Peter and I on the same where the largest I'll be in our funds and so you know as the largest I'll piece in our funds I think this is a no brainer decision number two. Stripe basically takes a 50% haircut which is this single best run most highly valued company in Silicon Valley again that's going to eviscerate the company a lot of. I think the third thing is there's a person that went and filed a FOIA request that you see Berkeley. To get sequoias returns and it turns out that the best investor in the game quote unquote since 2018. Has not really done that well. And I think in the university of California invested over eight hundred million dollars in sequoias since 2018 and I think is returned. What some 40 million bucks 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 and you have basically gone from a hundred billion to fifty billion. Any year there's one more no to add to that why see basically let go of their growth team this week why combinator. For people didn't know how what was called the continuity fund they were doing late stage. Investing and that got cut which is a signal and the seventeen employees are gone now. And Gary 10 I think is making the right decision you know they have to focus on what they're great at which is the earliest stage of the company and they had. This is the most interesting thing for me in the following way I think the why combinator unicorn hit rate is six percent right so every hundred companies that come out of Y. See which costs only about ten million dollars to seed right six of them become worth a billion dollars or more and obviously some become worth much much more. And so if you see how difficult it is even for a growth fund that's attached to that funnel. To be successful and make money because obviously this thing was tending cash you would not have cut it 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 and start a plan holy macro like it's a reset a it's tough to make money be a lot of folks may not know exactly what they're doing see a bunch of valuations are totally wrong. And D we're going to have to start doing the cleanup work now resetting all of it which just takes years as you guys remember into that it took us took us five years to fix this. It's a hard reset sacks what do you look at these in totality what would you say I agree with what chamaathe said I mean it is going to be a hard period with a lot of reset a lot of restructuring a lot of cap tables is a lot of messed to clean up all of that being said I think I'd rather be an investor today. Then an investor two years ago or one year ago because at least the valuations have corrected to some degree and then also we have this really interesting a i wave happening. Now and there's a lot of opportunities to invest in that new you know cycle so at least there's like an interesting products cycle. It's getting me excited to go to work and see these new demos from all these different companies whereas you know you go back a year or two and just the product innovation since seem as world changing as it does now so I think that as bad as things are my guess is that the new ventages of VC are going to be better than you know call it 2021 for sure. That's not going to be a high bar it's not a high bar but still that's the question to me to much about this is a contradiction trash trash this is the contradiction is that it felt better to be a VC in 2021 but in hindsight we know that the vintage is going to be not good where I see how many told on but today it feels not great to be a VC but I think the vintage will be a lot better. But anybody would tell you that at some point you're going to 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 going to have to go and work through all of those excesses and I think it's just going to take a lot of time US limited partners are in a really difficult spot European investors I think a probably in a pretty difficult spot. There are a couple of right right points around the world the folks that are still optimistic and doing well I think Middle East is one Southeast Asia is another. But other than those it's just a whole group of folks that just have to get completely re underwritten from first principles even when you have an incredible platform like Sequoia five years of no returns on 800 billion dollars for somebody like UC Berkeley. What it really means without commenting on Sequoia performance is that UC Berkeley is effectively out of business in being a limited partner for the foreseeable future. Well and I think that that has that has implications so even if you think these vintage are great I don't think they're open for business and frankly if even if they wanted to be open for business how do you go to an IC when they look at all of the totality of those dollars that have not made anything how do you justify the next 800 billion I just think it's very hard. While I agree that LPs are out of it I think the story was garbage because it all funds go through a J curve and they're literally talking about the majority of the funds in that vintage 2008 2019 2021 they're all in literally the definition of the J curve the third fourth fifth 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 90% of calling committed capital and how long does it take the delta T to return one XDPI. I can tell you Jason if you're a reasonably good fund those numbers should be between five and seven years for both which none of those funds I've had the average for a normal venture fund is around five to seven years to call 90% of the capital and around five to seven years to return one XDPI I'm just telling you that's what the average is 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 Sequoia thing. It just means that there was an entire coal Hort and years of capital allocation that is not necessarily in a J curve it's impaired because if after five years you've if after five years you've returned nothing sometimes you just have to see the writing on the wall. Sacks explain the J curve one more time for folks and then what is your analysis of that Sequoia story well the J curve the theory behind it is that when you start deploying a new fund you're drawing fees down to pay for the firm and the investments you've made have not been marked up yet. So the value of the fund is actually going down because some of it's going to eat up and fees and you haven't really had a chance for any of those investments to be successful and then what happens. Early right. I don't even know about that. I just think it's they have a chance to get marked up but then what happens is you start getting markups and now at least on paper the value of the fund goes up and then hopefully those markups eventually turn into distributions or DPI like Jamatha's talking about. Yeah we have a vintage 2017 2018 fund that's actually fully returned at this point you exit in some secondaries for acquisitions know we just had some we just had some exits but look I think that is a little bit on the early slash lucky side but we haven't really seen much of the J because you know you should be getting markups within two years I think on your investments if the companies are looking good at least historically that was the case freeberg any thoughts on this collection of stories with venture basically having the great venture recent. The end of the super cycle the beginning of the next. It's happening. Okay we're in the thick of it. By the way I would just I would go back to the point that with all the problems Jamatha's is talking about the reset and the wipeout that needs to occur I think this is still that I think that's part of what makes this. A better time absolutely 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 bid 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 tracking a public company stock and you like the business you spend time with management you see what they're building you see the revenues growing their profits are growing they're making great products people are happy with what they're doing but the stocks really expensive you don't want to buy the stock suddenly the stock drops by 80% nothing about the business has changed it's just that the market is paying less to own shares in that 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 oh my god it's over there's a 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 Silicon Valley in fact the contrary point to sex is 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've talked about. Countless times there are extraordinary technologies from AI to biotech becoming software to fusion to novel applications with AI and SAS 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 they're not going to stop being built and you can now buy the stock at 80% off so you know if you're investing today and if you're a builder today as long as the capital keeps flowing to support the building work. Which I think to some degree it will because there's still enough of it sitting there you're not going to have a lot of these crazy growthy rounds with high prices and all the nonsense that went on the last couple years but there's certainly a lot of opportunity to greet real business value and right now an opportunity to buy shares pretty cheap and participate meaningfully in that value creation. I'll tell you the thing I'm seeing on the field and like playing the game on the field is something we've been talking about for the last year. We started a program called founder dot university and it's basically like a 12 week course on like how to build your MVP we had 350 people just to discount code people can use to this notice count code it's it's free for founders basically if they if it's free for founders if they come to the 12 weeks but anyway what I did was the way you know it's founder dot university because it's an extension but but in the words of of sacks let me finish please let me finish what we did was we just said anybody who gets to an MVP and it's two or three builder co founders will give them a 25 K check. And I did 20 or 30 of these 25 K checks in the last couple of months of just the founders right now who have been laid off by other companies their dog it pragmatic absolutely customer centric product centric founders. Whereas the last five years have been filled with the atrix and white papers and ICOs and just nonsense and read absurd valuations and people wanting credit for work not done and now people are actually building MPPs and their dog it product driven founders customer centric mission driven founders and it feels to me that's like 2010 all over again. That 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's CEO and your mission driven CEO who actually build something you stand out so much in this ecosystem and have people begging for money sending me long emails and decks and total address but market I'm just like can you just build a product and show me that you can actually deliver a product and then we'll start the process. Of the rewards based system here you know the the the reward based system in Silicon Valley is so magical when it works you get money from founder university or you know tech stars or why combination then go to a seed fund then go to a series a fund that milestone based funding was so broken and now it's back and it's so functional when it's working it's just a magic of Silicon Valley is when people working get rewards working get rewards and it just creates this great pace and dynamic that I'm going to do that. See just as we wrap here everybody's been begging for a science corner enough about the chaos in the world everybody wants the Sultan of science to tell us and educate us about something and sacks needs to use the Lou anyway so let's do a science corner here. So I'm going to do a room temperature superconductor you sent me a link I read the abstract of this paper and I don't know which language I need to put this into Google translate but I couldn't understand any of it. So please I literally read the action act that I was like I couldn't get through the first two sentences without having to start to research is all start was just like the simple explainer on superconductors. Materials that conduct electricity are called conductors so conductors electrons move through them like a copper wire that's how electricity flows and all conductors have some amount of resistance meaning not all the electrons kind of flow through at a perfect rate they bump into the atoms in the material in the wire and they generate heat you know you've ever felt a wire while electricity flowing through it gets hot right. So that's because the conductor has some resistance which means the electrons bump into the walls of the atoms in the material they generate heat and you lose electricity you lose energy you lose power. And so in 1911 it was discovered when mercury was reduced to 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 unbounding un you know not bouncing 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 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 that image of it and make we could probably pull one up in the YouTube video we put a magnet on top of a super conductor actually floats. Because the magnetic field like the north and the north pushes against each other and it floats up. So superconducting materials kind of became this fascination in the early 20th 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 15% of power is lost in the transmission from the power station to your home. You could also do interesting things like create mag lever frictionless trains that float like magnets floating off the ground on top of a superconducting track and by having no friction you could push the track the train once and you wouldn't need to use any energy to move it along so you could have basically powerless transportation. You could have really powerful new microprocessors so it a super conductor microprocessor instead of a traditional semiconductor microprocessor would use just 1% of the energy of a semiconductor microprocessor think about that all the AI stuff we're talking about all the chips that we're talking about dropping the energy needs by 99% 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 it would never turn into heat and then when you're ready for that power you just plug in and you get the power out the actual loss of energy in a superconductor battery less than 5% and that's compared with you know significantly more energy loss used in chemical systems and you wouldn't need to kind of get all the materials that we're struggling to get now to generate batteries. So the idea of generating like superconductors and industrial scale has always been super interesting today the way that we generate superconducting materials is we have to make a material super super cold in 1987 a physicist named two developed one of the first ceramic superconductors where they discovered a new way of generating superconductivity wasn't just taking a metal and cooling it down very very cold because when you get it very very cold the atom stop moving and the electrons inside pair up and it's called cooper pairing and they flow. And he said we could actually do this with a hotter temperature and he demonstrated this in a ceramic E3 and Baryon copper oxide super confusing name but basically he took a bunch of materials and baked them in another and they turn into this really interesting material that became superconducting and then the race was on because what he did is he made a superconductor that could superconduct at the temperature of liquid nitrogen and liquid nitrogen is really cheap so we can just use and that's actually how all MRI machines run today is you have superconductors that reflect the magnetic fields in the soup in the MRI. And they're using liquid nitrogen to stay cool and so there's a lot of industrial applications today that use superconducting materials using liquid nitrogen but in order for us to do all the stuff I mentioned like maglev trains and infinite battery storage and superconducting microprocessors we have to get superconductors we have to discover a material that can superconduct at room temperature so that we can sit with it in a computer on our desktop or we can have it run on a railroad track or you know we can do it. Or you know we can put it in our backyard to store energy and there's 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 superconduct at room temperature we started with metals you know copper we tried carbon nanotubes and fuller in tubes we had all these different ceramics like like was like I talked about and there have been literally tens of thousands of ceramics that people bake in ovens and try and see how superconducting they are basically take the material. And you cool the temperature and you measure the resistance and as soon as it hits superconductivity boom there's this magic moment where it drops to zero and it becomes superconducting and there's this big change over effect so everyone's trying to find that temperature which can happen at room temperature and people have found superconductivity on the surface of DNA and organic molecules but you can't scale that people have found you know superconductivity and all these weird kind of material on the surface of things but no one's ever been able to industrialize it. In 2015 there was a new kind of material called a hydride which is basically taking a thin metal and putting it in hydrogen gas and kind of baking it for a couple of days and the hydrogen sticks to the metal and then you would use this hydride as a new kind of conductor and hydrides it turned out had really good superconducting potential they would superconduct at room temperature but they needed super high pressure so you'd actually have to leave them and like something that's like hundreds of times. The pressure of the atmosphere and so that that's not really technically an industrially feasible either so this guy named wrong ideas published a paper a couple of weeks ago that got a ton of press and a ton of controversy and basically he said look I've got this new hydride and it's I've got this really you know weird metal that no one ever talks about and I baked it with this with hydrogen gas and this hydride can actually superconduct at you know room temperature and that's not really good for that. So this is a good temperature and only one gigapascal 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 it got a ton of a ton of coverage because everyone's like oh my gosh the problem is this particular individual. The lead research or on the paper he's pretty controversial because he made a room temperature superconducting claim back in 2020 in a paper he published in 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 measurement system he was using and the way that he took the data noise out people said actually skewed the results and made it look like it was superconducting when maybe we were going to be able to do that. It was superconducting when maybe it wasn't and he actually had a talk that he did it that was published on YouTube a year later where he said he raised $20 million from Sam Altman and Daniel and a bunch of other investors and it 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 about raising the money. So this guy's 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 did get published. A superconductor is at room temperature it's a slightly high pressure but if it's real and it does get repeated it's one of the next steps that we're almost going to be getting to this point of true room temperature superconducting materials and then this whole industry will blow up transmission lines battery storage maglev trains superconducting microprocessors. 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 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. We don't really know yet where this is all going to settle out but I thought it was worth kind of talking about and bringing it up because if room temperature superconductivity 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 it totally transforms all these markets and very quickly kind of increases like we were talking about earlier productivity makes renewable energy super super cheap makes computing power 99% less power intensive AI chips will explode using this technology so a lot of superconducting technology is really important. So a lot of super interesting applications if room temperature superconductivity comes to light super interesting story I thought we should share it and talk about yeah, Shama I would love to get your insights on it and then sacks I would like to understand how many emails and what you order from Uber Eats during that segment catch mom. Thank God this when Nathan who runs a battery group at Carnegie Mellon introduced me to ranga two years ago me and my partner Jay 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 trials and tribulations but it's a really really exciting thing if it does come to us. You got capital blocked explain why you would get capital blocked in a situation like that why why wouldn't they allow you to spin it up. 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 sophisticated and my t it's quite sophisticated there these pretty standardized deals and. And roll the percentage what is the standard deal explain to the audience how tech transfer deal would work and how does the university make money from it. If you're a prof and you invent something or even if you're a student it's technically owned by the school and so if you want to commercialize it you go to them and use basically say here's a capital partner of mine and we want to 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 what it is. The equity tends to be in the mid single digit percentages the royalties tend to be in the mid single digit percentages it depends on how yeah call it five five six seven percent but it can be a lot when you think about a you know a school like Stanford who's spinning out hundreds of these things a year. But if you're if you're a school that doesn't historically do a lot of tech transfer or has a lot of cutting edge R&D you would have that team and so Rochester didn't necessarily have it now look rungus probably getting bombarded by 30 other people who pay 10 times more than what I was trying to pay 18 months ago it's a really interesting thing and I think there'll be some there'll be some what's there is anybody know what the top tech transfers of all time were like was Google a tech transfer of freeberg do you know like yeah because they drank was out of the what it's Stanford take no yeah Larry and Larry and Sergey gave Stanford I think one of the Stanford yeah they give them a percent yeah. Yeah because back rub because back rub was written while Larry was a PhD there so technically they you know they had some part of it. Carnegie Mellon ranked as top tech transfer university I'm just seeing here in terms of the rankings University Florida Columbia Stanford Harvard. It's so much some of them are terrible like and some of them are crony as I'm so like you go to some of the universities and the tech transfer offices have deep relationships with certain VCs and investors at the only work. And they always get first picks and first days and they're super tight with them they don't run a real market process and then some tech transfer offices just give away the farm for nothing and then some tech transfer offices think that they own it and they should get paid 60% royalties for the thing it's all over the map and some of them are sophisticated and some of them are not. So it's it's actually quite surprising J.K.L. how different all the universities are in terms of their level of sophistication 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 you know the support from academic institutions and governments and other aspects when you're still not sure what the technology is that to do that is that it's fundamental discovery work I think is a good collective social benefit and then to industrialize it commercialize it requires I think a market based approach which is you take that capability trying build a business find customers make money and that's really how you get it to be funded to be scaled. Because you're never going to you shouldn't have to put you know government and academic money behind that sort of effort but private market participants should. So you know it's interesting I mean I think I'm not holding my breath I've been you know I did a science project in 1993 when I was probably 12 or 13 years old on superconductors and I got a E.T.A.M. Copper oxide disk and I got some liquid nitrogen from UCLA and I ported on the disk and I floated a magnet above it and I had a poster board and a computer presentation back then and I was super enthralled about the future of superconductors and exactly what I said today is what I said back in 1993. So you know 30 years ago it was so busy dating I didn't think you had time for superconductor experiments yeah look I don't think I don't think the stuff. Has really it's been it's been like fusion it's always been a promise around the corner physicists have always had hope we've taken incremental steps towards it. But it's always felt like one of those things we were always getting 50% closer to the wall it's like you're never actually reaching the wall. So it's a dream one yeah by the way I will say one area 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 BCS theory is the theory on Cooper pairing that happens in ceramics is the only way that we really understand how superconducting actually works why it works why there's no resistance at certain temperatures for certain types of materials. For most materials we have no friggin clue why it happens we don't understand the physics of it there's something going on on a quantum mechanical level that we just don't get. And so if we can understand it 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 us to make superconducting material that we simply don't have enough time in our lifetime to run all the experiments in a lab today we can simulate it. And so that's why quantum computing could play a real role in advancing our ability to discovery and 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 earth 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 went quantum computing gets here when it gets here it might discover superconducting and then when that gets discovered boom energy cost by 99% computing goes up by 100 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 exponential triggering events and we're seeing a little milestone today but yeah I don't know. Sax reaction sounds good. How many moves did you play in your 12 chess games with you guys I got stuff to do. Freeberg was talking about superconducting points did you go up I look I got shit. Oh, Sax. All right listen this has been a great episode. Sax checks for the best comment on the Atlantic article that says Ronda Santas has peaked already. Don't do it don't do it don't do it why you got a troll show that you see that but it's in the Atlantic oh you want to know why the Atlantic suddenly has turned on him is because of the biggest backers of the war they those guys have all these like new cons over there. And so he gave a statement saying that you know our support for Ukraine shouldn't be a blank check and some other comments expressing let's say skepticism of what we're doing over there. And that was totally accessible to them so all these new cons are registering disappointment. But I would argue that's a electoral asset not a liability. I have a prediction given 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 an American the American public is not going to want to see tens of billions of dollars going to Ukraine and to fight to fund this war in your two or three hundred. Billions take every month yeah I know this spending run rate of this war is actually greater than what we did in Afghanistan and Afghanistan ended up being a 20 year multi trillion dollar operation that just flushed all that money down the drain. So you serious we're in a greater run rate than Afghanistan. Yeah. We know what the monthly run rate is for this. Oh my god. How is it possible we've appropriated over 130 billion. We've been in the U.S. for a long time and Afghanistan we spent two trillion over 20 years so 100 billion a year run rate. Yeah this is. Think about what a monumental waste of money that was and now look at the financial crisis we're in. Can you imagine if we could have two trillion back I mean all these trillions that we just squandered instantly we would take. Just all those trillions and trillions we squandered on stuff that didn't matter and now we're paying the price for it. That could be education could be universal health care could be paying down the debt. How about paying down the debts that are all inflation. Let's think logically here the number one issue for this country in the next election. I am with Friedberg his great prediction from the year end 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 am with Friedberg single issue voter balance the budget get spending under control austerity measures hashtag. All right for the Sultan of science. What's that can you repeat that. What I wanted to say is there are there any plugs for the remaining part of the episode Mr. Beast is curing blindness and buying people shoes has he been canceled yet. Are you excited about superconductors and the benefit for AI and energy storage and energy costs and humanity. What does it do to burn rate of his task. I'm just a simple man. I'm just a software investor. All right everybody for the rain man himself David sacks the dictator. Polyhapatia and the soap in a science the principal attack no more Mr. David Friedberg on the world's greatest monitor undisputed congratulations everybody on another successful episode and Friedberg when are we locking in the date for all in summer 20 23 my replies my DMs are filled people want to know. Do you have the date. We had a parking issue where they don't want us parking there so soon as we get the party everybody that's we told so now they've gone back to their committee to get approval for us doing it without parking and just doing so for or walk a shuttle or people. Uber Uber Uber Uber Uber let's get that we should be hopefully if they accept it then we are okay how many shuttles do we have to take to your rings. 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 J caps was the best what I heard talking about panic attacks J. Kell this weekend man panicking panicking I I was a sheer terror shirt I have literally gotten rid of the caps lock everybody relax you can follow me so Jason will see you on the time bye bye bye bye oh you