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#FinanceDaily: Inflation, Debt Ceiling, and VC/PE downturn
Recorded: May 9, 2023 Duration: 1:24:30Space Recording
Short Summary
The conversation highlights strategic partnerships in the crypto space, emerging trends in startup investment strategies, and the growing interest in AI as a potential successor to the crypto boom. Additionally, the discussion touches on the challenges and opportunities faced by venture capital and private equity in the current economic climate.
Full Transcription
The level of glitchiness of this stupid platform, Jesus Christ.
Like, I can't believe that it took me a solid five minutes to get up on stage and become co-hosts.
Like, this is unreal.
Good, good morning, good morning.
Jesus. I mean, like, look, let me just be clear.
This has been the clubhouse killer.
Yeah.
Right, like the fact that this was just a feature and a completely annihilated clubhouse,
which by the way was crazy overvalued.
And we're going to talk a little bit about venture capital today.
But, and what's going on in the VC industry a little bit, just because there's been a lot of talk around.
You know, the pain is still coming, which is fascinating.
And we're going to dive a little bit into it, but not too much.
It's just to tease a...
a broader conversation, but the fact is that this platform still is incredibly glitchy.
And as soon as we get to like five, six thousand people in the room, it just goes nuts.
And so I don't know what to do.
It's just kind of like, do you want to build a, you know, an entire show on this platform?
Or do you kind of keep testing other things?
Yeah.
I know what you think, Justin.
I know you've been saying that they're going to buy call in.
I'm just not convinced.
I just don't think they have the money to buy anything right now.
But, yeah, we just...
Yeah, I mean, I'm pretty convinced that they're at least going to improve it and make it stable
because, I mean, Elon uses it a lot.
So, you know, I'm pretty sure he sees the problems.
I don't want to fix him.
Yeah.
Yeah, this is just...
That was a very painful first few minutes.
But happy that everybody's joining us.
So...
Yeah, you know, we're going to get started in a couple of minutes, but lots and lots of stuff to talk about today.
I just want to make sure that we get through it all.
The reason why I put VC downturn at the end is because just, again, sort of having a deeper conversation around what's happening in the venture capital industry, I think will be helpful.
And then we're going to do, I've been talking to Mario about doing sort of a closed space.
We have full spaces.
I don't know what people think,
where we just invite some of the best people,
come in and talk about what we go on,
like,
capital conversation.
Obviously,
you know,
our investors and my investors and so on,
like other investors that I know
and other investors in the space,
that can kind of give us a sense of what's actually going on.
Would people actually want to hear something like that?
I'm actually...
airtime they're not that important um and i think that we just have to be honest about that but
but i do think that if has anybody else noticed that vcs have been like awfully quiet
like suddenly these celebrities have just gone novo uh there's a point in 2021 where all people talked about
was venture capital and startups.
And that's completely gone now.
It's fascinating.
And so I feel like it's time to get them out of the dark and shine a little light and what's going on.
Sorry, Justin.
Really funny story on that.
There was a, no, they're just really funny story.
There was a, hold on, I'm getting to echo through your channel for some reason.
I have no idea about that.
Let's see. No, it's not, I don't know what it is. Anyway, I'm hearing it as well, by the way.
Oh, you are here. I think it went away. Anyway, there was a VC firm like a couple of years ago, or I think it was a couple years ago that pitched to be on the show.
Because I have a podcast. I think you're aware of that. And I just responded as like, oh, cool, thanks for reaching out.
What's the size of your fund? I think they said it was like a $50 million fund. And after I did a little research, I realized they hadn't actually raised any money for the fund.
So I was like, how much, how much have you raised for the fund?
And they're like, oh, well, we've gotten a few checks.
Yeah, so, yeah, for people that are not familiar, you can call yourself a hundred million dollar fund or a billion dollar fund.
You just haven't had your first close yet.
And so, yeah, no, by the way, am I still echoing Caleb and Justin?
It was there for a second, but.
Okay.
If I'm still echoing, let me know.
Say again?
There's echo.
What did you say?
There's echo.
There is echo.
God damn it.
How is that possible?
All right.
I'm going to have them.
It's feedback coming from, yeah, it's basically feedback coming through your channel.
So anything you hear is going right back to the microphone.
If you have the bottom of your phone kind of pointed towards like a corner or a wall or like on a stand or something,
sometimes it reverbs back into the microphone from the speaker.
So that's what we're hearing.
Yeah.
All right. Can somebody else speak for a second and let's just make sure.
Can you guys, I won't see if the echo is still going.
Do you hear the echo? God damn.
Yeah, it's there.
Yeah, it's there.
I think it'll probably clean up if you start the room.
That would be my guess.
And obviously it's working right now because you have your channel muted.
Obviously, that's a little harder.
But I think it'll get better, honestly.
Yesterday there were some weird glitchings and it went away as the room continued.
I hope to God that somebody, if people can go in the bottom right corner and start commenting like crazy,
they've got to fix this fucking issue.
If a host can't speak.
Like, this is insanely bad.
Please go to the bottom right and tag Elon Musk, tag Twitter, and tell them that their spaces need a fucking revamp.
The fact that two people can't be on at the same time and have this issue.
To be completely fair, I'm on my phone.
I'm in a room.
The room does not have echo.
And so it's fascinating.
This is happening.
Do you have your phone on a desk or something like that?
Yeah.
No, not at all.
Really?
I'm like literally just sitting here a normal spot.
This is like one of the first times I've actually been in a place where I'm not like running around.
So it's fascinating.
But I'm going to get a different spot.
Just give me one second.
It'll be fine if we're all just careful on the cross talk and we just give you that, you know,
it'll be fine if there's no cross talk is what I'm saying.
So we'll probably have to go with hands today.
It would be my guess.
Which is fair anyway.
Hold on.
All right, is that better?
Test.
I'm testing right now.
I can't believe this shit.
I cannot stand this stupid platform.
Just give me one more second, and I am going to switch over to a headset.
So in the interim, Justin, if you can tell another story, that would be great.
What a time to be grinding my coffee beans.
So, okay, so I can talk about the recent interview I did with Allison Braley.
She's a venture capitalist with, she's the head of marketing with Bain Capital Ventures.
And the overall theme there in that discussion was that she was kind of,
she was saying that Series A and early stage founders are actually raising money.
Pretty easy, relatively easy.
I mean, as Dr. Danish can say, raising money is not easy.
But she said that they're a little bit more concerned with later stage founders.
So that's one thing that I've been learning lately is that there is cash for early stage founders,
but not necessarily cash for late stage founders.
And Bain Capital Ventures Act has just finished...
filling their fund, which is like a $1.9 billion or $1.8 billion fund.
So she said, yeah, startups, please pitch us.
We are very interested.
We have lots of money.
Oh, he's gone.
Hold on one second.
I'm going to turn off my grinder now.
So it's interesting because we are talking about how this is like the John Wick economy
yesterday.
And one of my other clients in PropTech is also saying there's like this bizarre market
where it's both a sellers and a buyer's market.
It's almost like we saw that.
same thing in venture capital happening like this dualistic market so all right
sorry to cut you off in a real can everybody hear me now is that better yeah and i'm not hearing an echo
are you guys hearing an echo good i think it's all i think it's all lord it kicked me out i kid
you not it literally kicked me off the spaces i'm going to take a second here and hopefully there can be a clip here uh
Romi, if you're listening on the back end,
please clip this and then let's post this.
Can we please fix the fucking spaces?
Like, this is getting out of control.
You know, we have right now
over nearly 2,000 people in the room
waiting for us to even get started.
Jesus Christ. All right. I'm just going to get started
before I keep complaining for the next hour.
Jesus Christ. All right.
So, thank you, Justin, for telling us.
I mean, we're going to talk a little bit, sorry to cut you off.
You know, we're going to talk a little bit about venture capital today.
But I don't want that to be the only theme today.
The reason why I even put it on the list was because we're going to be doing a state of venture capital event.
We don't have a date yet.
We don't have a speaker list yet.
we are going to be inviting people from across the top tier VCs,
and it will be a space where we're going to let people come up
and have a conversation around different stages.
There's been a lot of data released recently,
as you were mentioning, I think, a little bit before I cut you off,
and I apologize for that, around Series A,
versus late stage, so early stage versus late stage,
and now Series A has been this super weird one
where you can essentially kind of go all over the place.
And so, you know, talking a little bit about what's going on
with the most important part of the venture capital ecosystem
that nobody talks about, which is the limited partners,
the investors within venture capital,
they're actually the ones that are driving
all the decisions that we're seeing right now.
and this the myth of dry powder all of the stuff that's actually happening in VC that nobody's really talking about in detail in our opinion and before I you know I don't know if anybody could even hear me earlier but there's all this issue going on around um
you know, what is actually stopping all of this activity that occurred?
Because clearly a bunch of people raise giant funds,
and they're not deploying the capital.
And I think it's time that we kind of understood that,
what is actually going on.
There's been a lot of talk about it, but we want to hear it from the horse's mouth.
So we're not just only going to have the investing partners, but a lot of VC funds also have partners
whose entire jobs it is, is to go out, especially the bigger ones, to go out and raise from limited
partners to raise from LPs.
And so we really wanted to do that.
And we're probably going to do that.
If that's of interest to people, please message me.
You know, I know we have a lot of VCs that listen in on the space.
Please do message me.
And again, we're going to try to go, you know, and have abroad, you know, some emerging partners, some larger funds.
But really want to try to focus on, please don't show your VC fund to me.
I'm not interested.
I think it's more around.
trying to understand what's going on.
So if anybody who's listening is interested,
please let me know.
Sorry, you'd be surprised how many people are shilling
their VC funds right now.
And also,
there's not an opportunity to pitch your portfolio companies.
You know, if you want to do that,
IBC, our sponsor, incubates and accelerates AI and Web3 companies and partners with
VCs and funds to work with their portfolio companies in return for equity and zero cash.
If interested, please DM Mario and his team and they'll get a call organized.
We're also going to
going to be doing we being not me but Mario and the team are going to be doing shark tank
shark tank style pitches uh they've been doing it for crypto and AI companies but they're also going to
be doing them for other VC back startups and uh any startup or portfolio companies if you want to
chill chill to Mario uh you know they they can help with all of that so uh I've done it
Mario's team and no more need for pushing me on corporate sponsorship stuff.
All right.
I might do it one more time just because they might make me.
All right.
By the way, that was a brilliant blend with the sponsor right there.
Nice little rider.
It worked after segue.
That was darn impressive.
Amazing.
I just got a message saying, do it one more time.
God damn it, Romi.
Stop it.
All right.
Perfect.
I'm going to try my best.
As you can tell, I feel very awkward with all of this.
So...
So I wanted to jump in a little bit.
I know that we have a lot of people up here that are going to talk a little bit about
inflation and debt ceiling.
So I wanted to jump into what's happening this week.
So we're going to be doing a spaces tomorrow dedicated to the CPI print that's coming out tomorrow.
And we're going to be doing, you know, a ton of spaces talking through the debt ceiling issue that seems to be brewing.
And so I wanted to start with actually this morning's data on the NFIB.
So as it has recently, the NFIB data was, again, very...
Very poor.
I guess the point that I'm making is that people are not very optimistic.
Small businesses are not very optimistic.
So to kind of walk through it, U.S. small business confidence actually fell in April again.
This is the 16th straight month that the index remained below the 49-year average of 98.
It dropped 1.1 points to 89 points this last month.
The interesting thing about it is that the two drivers, one of them was business conditions over the next six months, which actually fell two points to a net negative 49, and then inflation adjusted sales that was a net negative 19 and is down four points.
People are clearly saying that, I mean, if you listen to the small businesses, they're saying we're going to have higher inflation and lower sales.
Is this just a mirage at some point where we're going through a sort of flip between inflation and recession?
So like, you know, this hyperinflationary period, then interest rates going up and now a recession coming.
Or is the stagflation narrative kind of seeping into small business?
Wanted to get people's thoughts on this.
I know we've talked a little bit about stackflation.
And also, you know, Caleb would love to get your thoughts on what you're expecting this week from the inflation prints.
Yeah, I'll start with the tail end of the question there for the inflation prints.
I was actually curious this morning to see what median estimates we're looking for for the year over year, year headline number.
Basically, since we got the November data in December, I've firmly been in the disinflationary camp, right?
So, you know, kind of the thing that I've been saying is that inflation has peaked, but prices haven't, right?
So we're seeing a deceleration in the rate of price increases.
And so when I looked at the data this morning...
The headline year-over-year CPI expectation is for 5.0 percent, which is exactly what we got in the March, 2003, data, when we fell from 6.0 down to 5.0.
And so I think it's a gross overestimation that's happening right now in terms of what the year-over-year headline figures are going to show.
The average price of crude oil fell 22% year-over-year for the month of April.
That's a massive decline.
I think, you know, on a month over month basis, it was actually positive up eight and a half percent relative to March of 2023.
But nonetheless, we're, you know, I'm primarily focused on year over year dynamic.
So once again, I still expect to see month over month inflation, but I expect to see month over, excuse me, year over year disinflation.
Right. And so I think from my perspective in, you know,
In consideration of the fact that we have credit creation decelerating very firmly up 8.5% year over year as of last week,
that's down from basically 11.5% to 12% in January and February of this year.
We're seeing credit slow down quite considerably.
We're seeing wage growth continue to normalize, even though it's still at historic highs.
Nonetheless, the trend is generally moving lower.
And so I think that, you know, my outlook has generally been since the beginning of the year that, you know, the shelter and owner's equivalent rent component of the CPI, which makes up 33% of the headline CPI waiting, is, you know, completely detached from the actual housing and rental market.
And...
you know, generally, based on the Fed's own data, they've even come out and, you know, shared this in the past through, you know, years and years of research is that shelter and owner's equivalent rent lags the actual housing and rental market by eight to 12 months.
And so it's a, it's an objective fact that the housing market nationally,
peaked in June of 2022.
So go forward eight to 12 months from there.
My prediction was that shelter and owner's equivalent rent was going to peak and formally start to decelerate in March through June of this year.
So far, we have not seen that yet in the March data.
So we get to swing again here for the April data.
I'm not sure if we'll officially see the decline yet.
That's why I gave the full four month window of March through June.
Nonetheless, you know, the fact that headline inflation has cooled down so substantially,
even though the largest
individual component of inflation is at 40 plus year highs and hasn't slowed down, right?
If you look at shelter, it's just continued to grind higher and higher on a year over year basis.
The fact that we've had disinflation amidst that continued acceleration of shelter is a massive
win, in my opinion. And once we start to formally see that shelter component decelerate, which
like I said, could happen in the data that we get tomorrow.
You know, what's the overall inflation picture going to look like?
It's certainly going to come down.
And so my friends over at Wisdom Tree actually posted some great data on this
where if you supplement the Zillow Home Price Index instead of the shelter component
in the CPI calculation, your over-your headline CPI would actually be at 2.8%.
That's still above the Fed's target, but it's certainly much closer than the 5.0% that we got from March of 2020.
So that's generally my overall expectation.
I would generally expect to see, you know, I'll certainly take the under on that 5.0% year over year.
Really?
Yeah. Oh, for sure. Yeah. I would even go as far to say we could see as low as 4.8%.
So wages have been sticky.
The one thing that was interesting about the NFIB data today was that the number for job openings.
So what they were talking about was, according to small businesses, they were still struggling to hire people.
And so they actually were saying that their only solution is that they have to go and pay more.
So...
I know that the jobs component, as you mentioned, is a large portion.
Housing is a large portion.
Housing rent prices have gone up.
Housing primarily is still lagging.
Your point is just that there's so much lagging data and it's going to come in and it's going to hurt like hell.
Correct, Caleb?
I just want to make sure that I characterize you had a much more nuanced version of it.
But I wanted to make sure that I understood sort of because this print may still not represent the actual data.
It might still be lagging, no?
Yeah, it certainly could be lagging.
But for example, for a subcomponent of shelter, which is actually owner's equivalent rent, that actually did decelerate for the first time in the March data.
And so I expect to see a continued deceleration coming up for the April data.
which may actually ripple through the broader shelter component itself, which like I said, makes up 33%.
That owner's equivalent rent subcomponent, I think, makes up 25% if I'm not mistaken.
But if I am, someone please step in and correct me.
So the fact that we've already seen that come down, you raise a great point here on labor market dynamics.
and even from the small business information that came out earlier this morning,
I saw something from someone out of Bloomberg talking about how less small businesses
are raising prices in this environment. And again, that, you know, that figure is at 33%. That figure is at 33% today.
It was over 60% in Q1 and Q2 of last year. So fewer small businesses are raising prices. It's declining for the fifth
consecutive month. This is good news fundamentally. It's not necessarily good news, Caleb. I will say,
I do agree with you in the macro it is, but I would love to know why those small businesses loan prices.
I know that a few...
small companies that we've got investments in are not raising prices because they're concerned
that the customers will just stop paying altogether and they aren't making money on that.
So it's not necessarily good.
It's good from a macro position.
I just love to know, and I don't know if we know the answer to.
I would fathom it has something to do with PPI.
You know, that PPI figure, even on a month over month basis, has outright been in deflation.
And, you know, it's cooled down dramatically, dramatically, right?
And that's likely going to lead overall inflation dynamics.
And so, you know, if input prices are cooling off, consumption trends are generally tightening
up, then, you know, small businesses and businesses in general have no choice but to also
slow down the pace of their price increases.
Exactly.
Yeah, I think that sounds very rational and I'm not disagreeing with you.
I just don't know if small business owners are actually that rational.
I think it's probably quite emotional.
They're terrified.
Now, this might be good in general for inflation, but I think, you know, because prices may not increase.
I just don't know.
It'd be interesting to see what the data looks like in six months when this is all over.
Well, let me say this all over, but this is like a very different picture.
as to how many small businesses make that during that period.
But I don't know, it's a nuance point.
So I think actually they are less rational and more reactive.
So the NFIB optimism index also showed that sales were declining.
So when sales decline, the first thing a small business does is it starts lowering prices.
And so, you know, Rob, I think that's kind of what that represented.
I did want to get Nancy in here and to get your thoughts.
Nancy, I don't know how long you're up here with us.
But I was going to say, we'd love to get your thoughts on the CPI print.
And also Caleb's, you know, a pretty nuanced discussion around what is happening and
What are we expecting the Fed to do?
But first, I want to hear what do you think the CPI, PPI is going to look like?
What's your base case?
And we'd love to get your thoughts on where this goes.
Yeah, maybe let me focus these comments entirely on future CPI expectations because you can look at the the treasury inflation protected securities are sometimes called tips.
The only way that tips, which are a type of treasury, they reset with the consumer price index.
So again, just one index.
Not the only way to measure inflation, but let me just run you through the data that I'm staring at my Bloomberg screen now and I have all the different future CPI prints put in.
So, you know, obviously the last realized CPI print was five.
But the one year break-even, so that's the implied CPI going forward one year, is 2.07.
The two-year break-even is 2.11.
The five-year break-even is 2.22.
And the 10-year break-even is 2.23.
The five-year forward inflation rate is 2.24.
The five-year-five-year...
is 2.23.
The five-year break-even from the Fed is 2.12.
So my point for dramatically reading all of those numbers is it honestly really doesn't matter.
We're old data because we all know that rents are lagging.
We all know that a third of the CPI is rent.
It doesn't matter because the market is telling you that inflation, CPI inflation specifically in the future is going to be right around 2%.
And so that's when when Powell was talking about all the surveys, all the data, all the financial markets are not concerned about rising future inflation. That's what all markets trade off of. It's not, you know, think about it. I know a lot of people on Twitter are stock people. It's the same principle, right? When earnings come out, it's not what did they do last quarter. It's
What do they expect in the future?
What's expected for the multiple?
What are they estimating for their following quarter?
And all markets work the same way.
So I think the thing I would really, really emphasize is that if you think inflation is going to be higher,
that the highest number that I read just now is 2.23.
you should go buy some inflation because that's where it's pricing in the future.
So it doesn't really matter if the CPI print in real life comes out at 2.5, 3, 6, 12.
It doesn't really matter because it's all priced right around the two bucket to handle in the future.
Fascinating. I'm just trying to think about how we think the Fed is going to react.
Any thought, Nancy, obviously the Fed is seeing the exact same thing you're seeing Nancy.
So, you know, what are your thoughts on how the Fed is going to react to the print?
And again, it's a little early that just changed. We're weeks ahead of the next Fed meeting.
But a couple of people from Fed are speaking today.
What are your thoughts on how they're going to choreograph all of this?
Well, the thing that concerns me is that we have so many cuts being priced into the market.
So the market expectations are definitely for lots and lots of rate cuts.
We have I see using Fed Fund features 69 basis points of cuts priced in this year, so in 23.
And then we have 139 basis points of cuts priced in for 24.
So I think the challenge for the Fed is what if the realized CPA data isn't coming down dramatically?
Like the market, you know, you can buy inflation expectations in the future right around a little above 2%.
So that's probably a good deal if you're an inflationista and you think that's,
CBI will be anywhere above two in the next, you know, one, two, five, ten years. It's a pretty good buy.
But at the same time, the market is waiting for these cuts and really pricing it in.
So I think the surprise to the market right now that I see in terms of what's priced in would be the Fed keeping rates higher for longer.
So they've already hiked. They've hiked pretty quickly 5%. But what happens if they just...
Hiked there and now they just hold and they don't cut and the thing that concerns me is the market is sort of like
You know it's like it's got its handsouts like where the cuts and that might not happen
100% agree that that does seem like the biggest risk
Neely I feel like you would define yourself it should be on your profile as an inflationista
But Neely do you agree with Nancy's thoughts here
I would find a rare occasion to disagree with Nancy Davis.
So she has my full endorsement.
The woman is incredible and I learn from her literally every time she speaks.
So Nancy, it's a pleasure to be here with you.
You know, I think for us, I think inflation in the CPI, probably not exactly what you want to hear, Dr. Downish, but, you know, it's more noise than actual signal right now.
We're more focused on what's going on with the labor markets.
And, you know, the NFIB numbers that came out this morning are particularly worrisome to us because it had such a drop in expectations for future sales.
And that is, it's alarming because that is small business.
And small businesses is starting to repay their EIDL loans, their emergency disaster loans at a time when credit is tightening, as we heard earlier this week from the Sleust Report.
So, you know, I would just say we're more focused on how those small businesses are.
fair because they're actually very difficult to track.
And that's where some of the unemployment risk might be coming out of the out of the gate.
So that's where we're more focused.
And what about inventories?
Any thought on how inventories?
Because it's really hard with large businesses, it's much easier to know that inventories are shit.
and they've got way too many things in inventory.
Small businesses, I don't know if people know this.
They don't do just in time inventory.
They don't think about inventory risk
as much as other larger businesses do.
That's one of my biggest concerns is
when you go to the stores right now,
and again, this is anecdotal,
but the shelves are full.
It's kind of nuts, actually.
And as many may remember,
we had the opposite problem for a very long time.
And so I don't know if it's just...
you know, seeing data about high inventory and then seeing a ton of inventory at stores
and, you know, making correlations that don't actually exist.
But I do wonder if one of the reasons to go back to Rob's original question around why they're
cutting prices has to do with the fact that they're seeing their sales decline and they're
seeing their inventory rise.
And that might be explaining why they're doing the rational thing there, but probably the reactive thing
Right, like they're not sitting here.
Most small business owners aren't sitting thinking about macroeconomics and interest rates and, you know, and so.
I find a point on that, Donation.
I don't know if people know this, but I seem to remember reading, and it might have been the JP Morgan report actually.
but I'm pretty sure the median small cash daily outflows for a median small business,
which makes up 36% of the US economies, the S in SME, had $370 of outflows in the day and $380 of inflows.
So I really don't think they're thinking about inflation risk.
I just don't think people who have got an average of,
a couple of hundred bucks a day coming in and maybe they're making $10, $20 free cash flow are
worried and even talking about the stuff that we talk about. And the truth is, if that $20
for free cash flow is under threat, you're going to lower prices to guarantee 10. That's just
reality, right? So when we're talking these spaces, I, you know, I deal a lot with small business
owners. I'm an ambassador of the Prince's Trust in the UK. There's
there's 10,000 small companies.
I meet thousands of these guys over years at events.
I can tell you now they're very emotive.
They are not thinking logically.
They're very, you know, ends meet all kind of things.
Sometimes they go months without paying themselves.
So if they're now worried that business is going to be affected by a downturn which they're seeing,
they're not going to be making logical decisions that we would be talking about in a macro sense here.
You know, what would be interesting is I feel like we have consensus on stage, but I haven't asked everybody.
So I want to make sure, does everybody agree with Nancy's concern around a surprise?
Yeah.
that the real surprise would be that everybody's expecting cuts and if cuts don't occur.
Does everybody agree?
And if somebody doesn't, feel free to speak up.
I know it can be a little intimidating to fight Nancy.
Just kidding.
But I think it would be worthwhile for people so we can get the other side of the coin.
Is there anybody there that disagrees?
that we that cuts are not coming that we are going to hold for longer not tiger i saw you on
you got to do it okay well the market front ran the rate cuts right so i i also i also don't believe
that even if you get a cut that that's particularly
a super bullish sign right like you know you you never buy the first rate cut because that's
kind of a precedent for things to get significantly worse right so uh the fed isn't going to cut
until they see things start to a deteriorate significantly at least by their measure or whatever that is um
And it's probably, and it probably has to do with unemployment, which is starting, well, hasn't started to ramp up as much as people expected, I think.
But I think in general, like I said, we front ran a rate cut, which is why we saw this nice rally this year.
But that also doesn't necessarily mean that a rate cut is assigned to,
keep moving higher. I actually think we're going to stay higher for longer.
Oh, man. I'd like you.
Yeah, Donish, can I... Sorry, sorry. Sorry.
Go ahead, Scott.
Donish, I also...
Not to give an opinion on whether we will pivot or not, I doubt that...
I do think it'll be at least slightly higher for longer. I think we'll have a long pause and
likely not a pivot. But for the record, there's been this narrative
that I continue to try to dispel that apparently a pivot...
and that change in direction would be good for stocks.
But we have a long history.
I just actually tagged an old tweet of mine from February in the nest that shows that we get the yield curve version generally.
Then the Fed pivot, then stocks go down and bottom, right?
And there's a long history of that happening.
So this idea that just because there's a pivot that stocks are now going to go up,
is not generally the case, right?
It's a long history of that being a fact.
So whether they pivot or not, as he just said before,
that pivot can end up being a bad thing in the short term.
So, I mean, you can see it's, you know, for the last,
I can't see the chart right now, but 20 years and in the past,
the pivot usually precedes the sort of tail end of the bear mark.
How is it possible that the entire market is pricing and cuts, yet we don't have a single person on stage here?
And this was going to ask Nancy in that sense.
Can we see an erroneous pricing mechanism within the markets in that sense?
Because I definitely think that Jerome Powell has an idea and potential claims to saying, I need to substantiate
my my policies monetary policies and allow and not allow sorry a third party fiscal authority to
come in as a preview specifically when we're looking at let's say world bank conversations
there is a lot of uh a precedence in the sense that monetary policy will lose its bipartisanship
And I think that this is a potential fear that General Powell might have here.
So my question to Nancy would be how much of this discrepancy can we see and we establish within the mispricing of markets and future rates?
You know, it's definitely we're heading into a, you know, potential debt ceiling issue over the summer.
We have the presidential election coming up quickly.
There are a lot of issues out there.
I would definitely agree strongly with the comment about the yield curve coming out of inversion.
That typically is when equity so off is typically as an unlawful.
It's still very negative, but it's uninverting. So it's still, you know, if you look at the two's
10 swap curve, it's still lower now than it was in the, when the swaps data started in the late
80s. So I have data on my Bloomberg terminal going back to, um,
88. That's the farthest. You can get treasury data further, but the derivatives market really weren't. There was no swaps market, which is the unfunded market back until the 80s. And currently the 2s 10s swap curve is negative 72. So it's even lower now than it was in the late 80s in the spot space.
But it started to uninvert, and that typically is a really bad sign for equity markets at uninversion.
So I would agree, you know, honestly, I think there are a couple of things that you can control and a few things that you can't control.
I think the one thing you can kind of control is have your portfolio control.
as diversified as possible.
The thing that's impossible to control,
and I think we've all experienced this in real life,
is, you know, at least I'll raise my hand.
I didn't think Jerome Powell was going to hike, you know,
interest rates 5% in about a year.
I mean, I didn't see that number coming,
but now we have such extreme cuts being priced in
that, you know, the yield curve can be a really great tool
for whether it's a risk-off event and equities,
and the curve uninverts because of Fed cuts,
or it's more of a, you know, the rest of the world demands,
more yield for our debt. Like, it is pretty wild. Like, let's just look at the numbers. The Fed
has hiked the overnight policy rate to the 5-525 band. But the 10-year Treasury bond right now is
under three and a half percent. You know, that's pretty whack, right? People are loaning
Janet Yellen money, you know, the U.S. Treasury money for 10 years and getting paid
a percent and a half less than they would get loaning it to the Fed overnight.
So, you know, I'm just thinking, you know, just think about how bizarre that is.
And so the yield curve steepening can be a really nice trade for investors either way,
because whether it's cuts, because we're having a recession or more term premium because, you
you know, the rest of the world is saying, oh, the U.S. is going into stagflation or the U.S.
is having a debt ceiling issue.
There are a lot of ways for that to work without taking one specific macro environment.
And then going back to our conversation earlier about tips, you know, tips are future CPI inflation is not very expensive.
It's all right around that 2% target.
And so, you know, I'm not...
this is not financial advice, but for
those of you that are interested in the yield curve,
you can look, I'm the portfolio manager for the
eyeball ETF. That's a quadratic
interest rate volatility and inflation hedge
ETF. It owns tips, which have
future CPI inflation,
and then it owns, you know,
essentially they're not called call options, but they're kind of like call
options on the 2s-10s
swaps curve. And
And that has been moving quite a bit on down days in the equity market in particular.
So it's really, I guess what I'm saying is it's very hard to predict exactly what policymakers are going to do.
But they're all tools out there, whether it's using portfolio construction, using different strategies that could help at least smooth the ride regardless of what the Fed does or doesn't do.
Yeah, to add to that just on the chart that I shared before, she's completely right.
That yield curve uninverged generally right at the pivot, which then precedes sort of the sell-off
in stocks.
Now, I think everyone up here is talking about the idea, obviously, of whether they'll start
to cut at the end, and nobody necessarily believes it, the idea of hire for longer.
But I think the case that is probably being made for potential cuts, if we're being honest, is that
people fear that the Fed is already overtightened or will continue to into a recession and
will break something. And when you get a black swan or a breaking, then all bets are off. And
Fed plans go out the window and they immediately react. And sort of saw that in 2018 and plenty
of times in history. So my assumption is that the reason that people are pricing in those cuts
is for fear that the Fed is going to weigh overstep or already has. Something will break.
And then they'll basically be forced.
to go in the other direction.
So if we stay on the path
and we believe that the Fed can sort of thread this needle
without fundamentally breaking something,
then there's really a reason to believe
we stay higher for longer.
Now that I'm really thinking about it,
I think we're going to start to see things break
and maybe that's why we're seeing that.
But that's nuts.
Think about how crazy it is
that the base case is expecting a black swan event.
Like, how is it?
Yeah, yeah, it's nuts.
Black Swan may be an excessive...
But really...
Depending on how people depend on it.
But yes, I think that something fundamentally breaking
and I think that maybe Smart Money believes,
sorry to interrupt again, Donish,
but I've sort of hammered this point home,
A, we talk about unemployment numbers in the labor market, of course, and how it continues to be strong.
There's a few arguments to be made there.
One is one that I steal often from my friend Mike McClone at Bloomberg, who says if labor is as historical lows, there's only one way for it to go.
Right. I mean, unemployment. So obviously, if unemployment is sitting in historical lows, unemployment is going to rise based on what the Fed has already done over the past six months to a year and not what they're going to do in the future, which lends the idea that the Fed is operating on lagging data and not leading data.
But also, I think, you know, sort of in the same, to draw a corollary, right?
Nobody expected bank runs to be this fast in the world of fast information and social media.
Things have changed, right?
You can't calculate the same numbers and ideas in the past.
And I think that the way that they calculate unemployment now and a lot of the data that the Fed is using is just...
misleading, right? I mean, we have people who have three or four jobs, gig economies, people who aren't reporting.
Anecdotally, we're seeing massive layoffs across the boards. You have to imagine that that's going to rise.
So maybe, you know, a break in the labor market, a break in more banks. That's what caused it.
To kind of piggyback on that, the FOMC, the rate odds,
hike odds were at basically a 99% chance of, of,
the the overnight rate being here at five and a quarter percent at the end of the year on march the eighth so before all this regional banking issues came up there there were no rate cuts from this level from the from the five and a quarter percent priced into the markets at the end of the year but once we hit march ninth
Those odds went down and now there are now there's 99% chance obviously of a rate cut from this level by the new year and it hasn't changed even though, you know, sometimes the, you know, the regional bank issues have come out of the news.
The odds haven't changed back up to where they were before they started.
So if we're talking about what could be that break,
you know, obviously it's been in the news already these issues.
And according to these futures markets,
I don't think those issues have necessarily come out of the markets yet.
They're still, I think they're still pricing in the fact, like you've said,
But the federal have to cut rates and not for obviously, not because of the same idea like in 2019 where they have their, you know, quote unquote, their mid cycle adjustment at the time.
And they cut rates a few times in that summer of fall of 2019.
It will be a lot of different reasons, you know, that are already percolating out there.
I guess the natural question then becomes how much does the Fed actually care about the banks or how cognizant are they of their...
Not a slight bit.
Collapse.
Right.
Because I always say, you know, their mandate is jobs and inflation, obviously, and banks really isn't the mandate of the Fed, even though we would love it to be.
But it seems like...
And this could be rhetoric and not what's happening behind the scenes, of course.
But we've heard repeatedly from Powell and other Fed governors that...
this was mismanagement at the banks and has literally nothing to do with what's very obvious,
which is the change in the aggressive rate hiking cycle and the fact that it's locked in all of these,
all this effectively bad bonds.
So, you know, if the Fed were made...
Well, we can see that they don't care because they knew about problems in the banks months ago.
They've had...
I apologize to my voice.
I've lost it a bit, but...
They've had, yeah, months ago they had information that the banks were in trouble.
They continue to height rakes.
They've now had four major bank failures and they hyped rates again.
So they don't give a shit.
Yeah.
And they shouldn't, honestly.
Yeah.
No, because it's protecting shareholders.
They've done the deposit of it.
So why would you protect a shareholder?
That's not their job at all.
And so, you know, talking about Black Swan events, I know that people don't think the
debt ceiling is a big crisis, but I think it's actually the crisis that could move the markets
the most.
Yeah.
So wanted to pivot the conversation over to death ceiling for people that aren't paying attention or living under Iraq.
Currently, you know, Janet Yellen has recently came out and said that Facebook
Failing to raise the debt ceiling will cause a steep economic downturn in the U.S.
She revised her date to June 1st for when we will no longer be able to keep up with our bills.
And everybody believes no one.
everybody's like, this is no big deal.
Like, not a big issue.
I know I'm very much in the opposite camp.
Just so people know that experts across the border saying that the current crisis could differ from the 2011 standoff,
as people may remember, the U.S. had a credit downgrade, which led to crazy amount of market issues.
And...
You know, there's an article in CNBC this morning that kind of walks through this in detail.
But the issue that I have, and I will keep repeating the geopolitical issue, is this is a fundamentally different situation politically than we've had ever before.
As a reminder, it took 15 votes to get the current Speaker of the House elected.
And for people that don't understand what that means,
for people that don't understand U.S. politics,
this hasn't happened in decades, decades and decades and decades.
Like, I don't know if it's exactly 100 years,
but it's been a long time since something like that has happened.
And it tells you about how divided the Republican Party in the House is.
So it's going to make it really, really difficult for people to stray away and put together
a clean debt ceiling
well to interject
one thing into that
Dr. Donish is that
a lot of people were rumoring
or talking about the fact that
to get Kevin McCarthy into the speaker role
he had to make a lot of concessions to do that
and so a lot I don't know if this was confirmed
by the way but a lot of the rumors were
that one of those concessions he had to make is to hold firm on the debt ceiling discussion.
That's what the concerns were that in order for him to get that little,
I would just call him a renegade team in the Republicans,
just like the Democrats kind of have their little renegade team.
In order for them to go along with pushing him into the speaker role,
he had to make some concessions.
This is one of the concessions that you're alluding to that a lot of people are concerned with.
is that it, you know, are they going to hold firm on this debt ceiling indefinitely?
That's the concern.
Yeah, especially going into an election year.
I think that's the other big issue is that we're going into an election year.
No one's going to want to budge.
No one wants to look weak.
And...
hilariously the CBOE volatility index which measures you know expected market volatility over the next 30 days uh it shows that the markets aren't even worried uh you know they've seen this movie before it always gets right up to the cliff and they never go over it but like
What if they, what if they do get downgraded again?
We saw what that, what happened before?
Is there anybody up here who's as worried as I am or is everybody just like, eh, it's not a big deal?
I want to hear the other side.
I am concerned.
I am concerned more, not that it won't be increased, I think it will be.
I think my concern is that they fuck around the edges, right?
So it just takes too long.
You threaten a shutdown or you have a problem with payments.
There's a temporary extension.
That then doesn't resolve that.
that's my
my worries the markets
are great until they're not
so they're solid as hell until they're not
and so the
the sensitivity for me comes in with
they haven't priced in because they think it's going to be
resolved. How much closer
towards the deadline do we go before they start
wondering if it's going to get resolved and what
does that look like? I don't know the answer to that
and if we get right up to the edge
I can't believe there won't be any reaction
and what does that look like? And so
I do, I'm sort of sitting a bit on the fence where
I am concerned with it. I don't know if we're
heading towards a default, we're not. I don't think
we are. I don't think we are. But
At the same time,
you know, how much does this affect the market if we play this right up to the edge with temper extensions and God knows what else?
I think that's going to have a negative effect.
Scott, do you? At least in the short time.
I mean, I think that, yeah, I think that it will probably get resolved.
But, Dottes, you're right to agree that there's a much bigger than non-zero chance that it doesn't,
especially in this political environment.
But I think then it's also important to keep in perspective that even if...
that does happen, we would see furloughs in a shutdown, which we have seen in the past,
which would likely put political pressure and compel them to solve it relatively quickly even after.
So I think that even thinking if they don't resolve it in time is the big disaster may not be the case.
Help me understand the politics here.
So, um,
Surely every politician knows that they're in a Ponzi scheme and you have to increase the debt ceiling. There's no alternative. And so are the people that are fighting against it because they know it's going to happen but they don't want to publicly be seen to support it.
and do their
They want concessions on the budget
They want concessions on Biden's
The Republicans are not going to agree to it
Because they want concessions in Biden's budget
They think that he's overspending
He probably is
And they're going to be
Victiolic and try and get their own way
with their budget.
And they're going to be
And they think this is the way to do it, which in fairness.
It's like a last minute game of chicken to.
Yeah, it's literally chicken.
I think it's, I think there will be some form of compromise where Biden has to compromise the most because he's approaching the primaries.
He's not very popular.
And the last thing he needs at the moment, I saw a ABC Wall Street Journal, or might have been Washington Post, poll, where he's the most unpopular president at this point in this first term in his case.
So he's got to resolve this.
And so I wouldn't be surprised if he folds a bit and just comes out ahead of it and says, I've solved the problem we're moving on and then just try and...
Is it just me or did everybody else really enjoy two British guys talking about the US government?
Not in a bad way.
It actually like an incredible way.
It was like sort of like.
You know, it's really funny for me because I'm a taxpayer without representation in the US.
I pay more tax to the US government than I pay to the British government in taxes.
And so I sit there very, very interesting in what your government is doing.
How does that work?
How do you end up in the US?
Because he uses Fiat, Simon, as you always say.
Sorry, but I was going to...
Yeah, no, I'm a theater.
Rob, do you have dual citizenship?
No, no, so...
When I say me, where I have holdings in companies, I pay more tax.
But it's fascinating just to kind of get back to the point that I was making,
which is the bewilderment that I'm hearing from you both.
Just like, hold on, what?
What are they doing?
And it's just like this craziness that we have a system.
Well, because we don't have it in England.
So, like, Europe doesn't have this problem.
We just sort of willfully put up the debt and the government just tells us what they've done.
And we all sort of nod and go, fair enough.
In the US, you actually made it a thing.
I don't know if it's overly helpful because it doesn't actually change.
It's from what I can see, it is a political posturing non-event.
But it actually has some ramifications where Folo becomes a thing.
and people generally can't feed themselves for no reason.
And every time it resolves itself,
you wonder why you did the last 30 days of this rubbish or 10 days of this rubbish or whatever.
And so it doesn't seem to resolve itself.
What I am concerned at is that because this exists,
and because we know it's all going to be extended and we kind of all agree to the Ponzi scheme,
at least not necessarily in ideology, but in principle, you know, we kind of agree the show has to go on.
This constantly coming up is creating a situation where in future, and it might be this time, it might be 10 times from now, the debt ceiling doesn't get increased.
And that's a risk.
And so that for me is the most bewildering part of it as a European looking at it,
but also as a business owner in the United States,
that the US government in its power on the world stage puts itself into this public showdown
where it shows itself how weak it is every couple of years when it decides to raise the debt list.
That is bizarre.
Well, especially since the US dollar is a confidence.
Especially since the fact is that every time any of the,
the people that represent the party that always pushes back to raising the dead ceiling,
whenever they're in power, they forget about that entire talking point.
I mean, that's the thing that completely throws me off,
which is that people only remember the debt ceiling when it's the other party that's in power.
It's a whole, it's an incredible...
100 freaking percent.
That's, I think that this topic is, I mean, yeah, like you said, the party's always flip-flop when the other one's in power.
So the Republicans right now are really concerned about spending, but then you quickly remind any Republican that Trump spent, I don't know if he hit a record, but he was a pretty big spending president, maybe one of the biggest spenders in history.
Yeah.
But then as soon as if a Republican gets in office, those talking points will completely change.
It happens every time.
And I think the reason for that is because, well, I think the reason for that is the reason rooms like this exist because most Americans don't really understand economy.
They don't really understand economy.
I mean, heck, they don't even understand their own household budget.
Clearly, Congress doesn't understand budgeting either.
And so this is a really good issue where your political leader of your choice can say it's the other party's fault.
Here's my cherry-pick data to convince you, and it drives that wedge deeper, and it polarizes the base, and it drives voting.
So it's one of those other states and in reality.
You've got a treasury secretary.
You've got essentially your finance minister going out onto the world stage,
saying the US government is close to defaulting on its debts
and proclaiming that to the world as if it's a really positive fucking thing to do.
It's so dumb.
Like you've never see that in any other government.
It's such a weird thing.
I would be entirely supportive of getting rid of it,
apart from the fact that I'd be massively concerned
that Congress would then triple the debt to 90-20.
What is absolutely dumb is that this is at the same time that people are talking about
potential, you know, America's dominance as a reserve currency, America's ability to be the dominant financial power in the world.
And to do this at that time in what I would consider a political stunt would be impossible.
I think, and I know that this is crazy, and maybe I'm falling for the trap, but I think that the Biden administration is legitimately concerned.
I think there is legitimate concern that we might actually default.
Otherwise, there's no world in which this makes sense to have Janet Yellen go on the news and say something so...
what I would call irresponsible.
I mean, it's incredibly irresponsible what's happening.
And it's showing up, you know, and how people are looking at this.
And if people are not reacting to this, that might even be a scarier thing.
The fact that people are not reacting to this.
As I mentioned, the CBOE volatility index is showing that people are not worried.
And, you know, when you look at it, as of, you know, as of today, the one-month treasury is paying 5.411%, which is above the 5 to 5.25% federal fund rate.
And the two-month treasury is giving 5.134%. So in the short term, the market is assuming nothing is going to happen and this is all going to resolve itself.
Neely, would love to get your thoughts.
I'm just going to maintain this soundbite a fact.
It's of their own doing.
By allowing the state of California to pay their income taxes till mid-October, a sixth month...
extension when, you know, the rest of us during 2020 had a mere three-month extension in the
middle of a global pandemic, right? Like, to me, that is still the biggest curiosity I have is
the IRS and the Treasury are like cousins, right? You know, in terms of the reporting lines. So how in
This beautiful blue earth, did someone think that was okay to allow California a solid six-month extension to pay their taxes because of a little bit of rain with respect to anyone who actually had massive damage?
But that is still the biggest curiosity because had they not, had they not done that, and maybe it only gave a one-month extension, call it, you know, April to May or even May to June, we wouldn't be having this conversation.
Right.
This wouldn't be an issue on the debt.
As always, California.
I'm in favor of our state not paying our taxes for two years.
I'm totally in favor of that. Let's get that going on.
I'm going to sound a bit callous, Neely, but to agree with you,
and it's really kind of in the name of buying votes, and candidly,
it's probably votes they don't need to buy.
I mean, so as an interesting thought experiment,
imagine if they don't raise the debt ceiling.
and we understand the fragile nature of the banking system at the moment.
It may be an interesting thought experiment to just work through that.
So let's say they can't issue more treasuries.
They have to start contracting debt.
That has a massively deflationary spiral,
but then the secondary market for treasuries
may start to actually have an interesting impact on some of these unrealised games.
It's an interesting thought experiment. I mean, it's so disruptive in so many ways.
But it would be interesting to think about that in terms of the banking side.
And one thing to say, ever since 2010, the Pay As You Go Act, you know that it doesn't matter which party is in hand.
Essentially, fiscal deficit is going to be compounded and essentially limited to their actual deficits.
And so whether you're a Republican or Democratic, it's just where the actual stimulus is going to underlie within the economy.
Going back to, let's say, prior sections of, let's say, debt ceiling and...
1999 to 2010 we had roughly 2063 bonds through non-government defaults in that sense.
It's non-general obligationary bonds.
So if we're looking at Treasury and or tips and other forms of like FRN notes, most of these
are going to be insured and 100% backed.
And the limits to these non-monetary defaults are actually quite high.
And it's a specific type of default that we'll see.
non-monetary in the sense that they're going to be swamped immediately through a swap line,
and immediately the liquidity is going to be redeemed for these higher issued bonds.
Now, when we go to, let's say, local bonds and non-general obligations,
obligation bonds, this is where the danger comes into play in the sense that you don't have the same abilities to have and or hedge or non-monetary losses.
And the second that you see monetary losses within the actual bond, municipal bonds and other forms of local government bonds, specifically corporate bonds as well.
This is where it becomes a, how can I say, a snowball effect where essentially the credit compression is going to underlie within the actual bond compression.
And you see more risks to defaults in these rates.
I mean, looking ahead, so I think everybody's on the same page now, again, which again, if anybody disagrees, please go down in the comments on the bottom right and tell us why this issue is not a non-starter.
It's not a big issue.
Everything is fine.
everybody's good we're just being big doom and gloom people tell us if you have a compelling
argument I will bring you up and make you say it out loud or I will read your message
I want people to tell us why we're wrong it's okay so one if you think that rate cuts are
coming please go on the bottom right and say why
I'm not sure that rate cuts are coming.
I think multiple people have said that rate cuts are likely,
it's going to be holding and pausing for longer,
and we're going to see that.
That's number one consensus on stage,
but that might also be selection bias.
Maybe I just like to bring people up that agree with me.
I don't know.
So if you disagree,
please go on the bottom right and tell us why.
If you think that there are going to be rate cuts,
why the hell is that going to happen?
you know, explain your reasoning.
Number two, the debt ceiling.
I think people are sleeping on it.
I've had multiple people that listen to us
who contribute on incredible places like CNBC and others
that are messaging me, I kid you not,
and I can't share it because they're doing anonymously,
but they're messaging me saying,
Hey, a lot of people are pretty worried about this debt ceiling issue.
And it's as if no one cares.
And so there are a lot of people that agree.
But if you disagree, tell me why.
Go on the bottom right and tell me why.
And we're going to, you know, our team scans all the comments and then puts them up in the nest and then we bring people up if they want.
And then the...
The last topic that I wanted to touch today was sort of this issue on the,
and I switched from just VC to VC slash P-E downturn.
You know, there's been a lot of talk around what's happening in this part of the industry
and this part of the industry for people that are not.
So for people that don't know what venture capital and private equity really is,
and that's okay.
You know, we all act like everybody knows what it is.
But essentially...
Think of it as private investors that use money from institutions and ultra high net worth individuals
and invest that money on their behalf.
Along the way, they have two ways of making money.
One is they charge management fees.
So they're like sort of professional investors that charge management fees to invest that money.
Those management fees are fixed usually.
And then on top of that, they get a percentage of how much ever that investment increases.
I hope that was clear, but that's how I think of VC and PE, and they invest in alternative assets.
They don't really invest in public equities or things like that.
That's more on the hedge fund side.
On private equity and venture capital, they invest in small businesses and startups and even private large businesses.
But really the idea here, and again, I'm generalizing.
And if.
People want to add nuance we can.
But ultimately what that means is that they are working outside of the regulated system that exists.
They are under a lot less regulation.
And more importantly, we don't know what the hell they're doing.
We have no idea what's going on in that entire industry.
So for example, and I'm happy that Amy's up here, a lot of them invested in
commercial real estate. There's a lot of commercial real estate investors that are investing in this,
and we have no idea what their business looks like. A lot of them invested in other income generating
assets. You know, they've invested in franchises and things like that, that we have no idea what's
happening there. And then startups, I don't know if people have been watching, startups are in a lot of
pain right now. And if you are in the business of investing in companies that are not profitable and
suddenly the entire equation changes where access to capital becomes really hard the banks that you used to actually loan to these businesses are gone they're gone so SVB was the largest lender to startups that were in growth phase um and you know when you're in growth phase your company is built differently compared to when you're sort of in profitability phase and
a lot of businesses were on their way to growth.
And again, the reason why they want to focus on that is because a company like Amazon
wasn't profitable for the large majority of its time because what they were doing was getting
market share.
And by getting market share, they got network effects and they got network from network effects.
They were able to essentially be a winner take all market.
Same thing for Google.
Same thing for Facebook.
We can talk shit about it, but it's a model that worked.
So we are now at a place where suddenly Twitter no longer has, you know, 80% of its tweets from VCs.
Suddenly they all went quiet.
We don't know what the hell is going on anymore, you know, and...
But we do know what's going on.
They've got no money.
Well, they have a shit ton of money, actually, Rob.
So the data shows that they have a shit ton of drive out.
It's not new inflates.
Venture dollar volume is down.
But what's fascinating is that we have never in the history of venture capital
had this many funds that have had closes.
So again, for people that don't understand,
the way it works from the venture capital side
is that they don't actually hold the money in an account
they get commitments from limited partners,
and then they have to actually do something called capital calls
and get that money in.
So this is not truly dry powder.
It's not like they're sitting with a giant bank account full of cash,
that they're just not investing.
They haven't called their LPs for additional money.
And that is a very...
It's because there's no deal float, that's my point.
We've got, I can tell you now,
Between myself and my business partner, we're getting 20 emails a day from VC funds calling for capital.
And that's because they've got crappy and the deals are awful, honestly.
Like compared to three years ago, the deals were pretty good.
They're now really terrible.
And if you took that year over year change involved at dollar volume,
I think it's down like 50%.
But if you took that included like Open AI in Stripes rounds.
So if you take them out, it's probably 60.
There's no market for it because all the ideas are drying up.
They weren't that good before anyway and money's now not free.
You're going to get better returns, not investing that.
You're not going to respond to a call.
And then the VC funds, there are five or six out there of the top guys who have actually
got decent ideas and brilliant people.
And then of medium and lower tier ones, there's more.
But as a percentage of the overall market, most of them were copycats.
And so there's not a lot.
There's some brilliant VCs out there.
And I'm not just, I'm not going after the industry.
Yeah.
But they were rare.
And what you found is that a lot of these VC firms,
I had money in a fund.
It's hilarious, right?
Because they keep on ignoring my email.
I've sent them 15 emails for an update on when they expect me to be able to draw down from the fund.
in September
and I was like, great, can I get an idea of value?
Well, expecting that to be down
because they haven't spoken to me
and I can tell it's going to be down
because they're not speaking to me.
And I have a funny feeling
that's going to be true across the board
and that's fine.
That's the tail of the market
but the truth is
if people don't feel confident
to start businesses
it's
And businesses that are out there are struggling so their books don't look good.
And they're still stuck in their old rules of trying to apply capital.
They're not going to apply capital.
And that whole thing dries up.
I think the party for now is coming to a bit of a close for all but non, you know,
non-outstanding feces of which there are some, you know.
Andres and 16 order that.
Actually,
interestingly,
and I'm not going to speak about
specific VC fund,
but the larger VC funds
have actually been doing pretty poorly.
The data is showing
that the larger VC funds are,
like,
you know,
the psychology has the A16s and so on.
They've not been doing great.
And it's largely because...
they over-invested their 2021 vintage year is pretty crappy and so you know they were investing very
heavily in a market that was clearly very overvalued and whereas other people that started investing
last year actually have better have lower markdowns and so emerging managers actually are doing
better today than some of the larger funds I do think
I just want to see what that looks like when you actually capitalise and sell.
Yeah, sure. DPI versus DDPI. I agree.
Yeah, like, so yeah, the portfolio might be doing badly now, but like are those companies more or less likely to survive a recession at which point what's the percentage?
What's the probability that your fund's going to do better over 10 years in that?
Probably higher would be my guess.
And I think that...
And so, you know, we have the PE world
and then we have the VC world,
and they're very, very different.
We're going to be doing a much more of a deep dive on this,
and we're going to be doing a state of VCPE.
If people are interested in that,
please do message Mario and his team
and let us know if you guys want us to do sort of a big
multi-hour breakdown into what's going on in the industry.
We'll try to bring limited partners up,
you know, people from pension funds and institutions
and fund of funds and try to get them in
to give us a sense of what their decision-making is.
We'll try to get some of the best VCs out there,
at least the most notable ones on Twitter to come in
and tell us the reality of what's actually going on.
You know, I think...
There's a hesitance to make decisions because there's so many economic markers out there.
And there's also been this really interesting growth in AI that a lot of people are trying to figure out, is this crypto 2.0 or is this actually real?
And I think people are waiting on it a little bit.
I think, you know, and so.
We're going to have them.
And then we're going to have a bunch of founders at growth stage companies, probably like pre-IPO type companies.
You know, I can find early stage founders all the time.
So, you know, it's not about that.
It's more about getting people there in growth stage and later stage and getting their thoughts on,
what, you know, what is really going on at that stage?
Why, you know, are they thinking about direct listings?
Are they thinking about IPOs?
You know, obviously, specs are off the table, not very sexy anymore.
But, you know, what is going to happen?
So, you know, and if you are...
I think they're waiting for distress.
Honestly, like we, I played golf with two P.
friends of my business partner a couple of weeks ago.
And between them, they managed 12 billion across BlackRock and Blackstone funds that they control.
And they were like, we're waiting for assets to become distressed.
I'm happy to wait.
So their strategy has not changed.
They're just waiting for these things to become cheap.
Yeah.
And so...
Which is kind of unnerving, right?
Because they know that it's kind of unnerving.
That's, like, awful.
I mean, that sounds like a nightmare.
So I'm trying not to talk about it right now because it's, you know, as a founder.
I'm like freaking out.
I'm like, what the hell?
Are people really thinking like that right now?
Well, yeah.
And also from a founder with IP, right?
If you've got intellectual property, be warned.
Because I own an IP fund.
We don't take the strategy. We're looking for long-term businesses, but several of our investors are looking for cheap IP and distressed companies in order to essentially zero out the companies from their debt positions and take the IP from them. It's horrendous. And they can do that because these businesses might not be able to commercialise that intellectual property quite quickly enough. They might have runways for approvals or FTA clearances or whatever. And they're just going to wait.
until those companies are
two, three, four, five million in debt
buy the IP for five million.
The company zeroes out and they get the IP.
Yeah.
It's kind of, uh,
Yeah, we're definitely in a corporate rating type environment.
If we're going to like the Bill Actman's and even like Warren Buffett's like
proliferary type movements, these are the situations that allowed them to capitalize and say
for Warren Buffett in particular in 1986, they'll say I'll invest in American Express,
understanding that the credit compression is going to allow me to purchase a preferred share
at a minimum 13% dividend increase per 10%.
per year per annum in that sense because he was capping it and because he knew that these
governments were going to subsidize these companies long story short we're definitely walking
into that environment well just to like double down on the Warren Buffett thing so my primary
business is in energy which
one of my company says transmission lines.
We do options on, so we get all the permitting in place, financing, structured and then sell it on.
Berkshire Hathrow Energy is on our case every deal to take the option to purchase at the end of the permit.
They are just like, we've got cash, we're looking to do it for the next century, and we're good for the money.
And we're like, I'm happy to do a deal with them, but nobody else is there.
And he's, that Birchathaway Energy is right there buying options on pre-permitted routes,
permitted routes.
They're buying up the entire thing.
Because they know that seven years from now, they can take another 12% of the market.
And nobody, whilst everybody's fearful, they're there with cash.
It's clever, but it's really like...
But that's actually a very interesting point for the VC and PE side, which is, you know,
there's a saying that, you know, be greedy when everybody else is fearful.
And yet, you know, we're seeing the complete opposite behavior.
And it's actually another reminder that, you know, just because somebody sounds really good on Twitter, doesn't
doesn't mean that they're actually good at their jobs.
And it's a real reminder that we have a ton of people
that are being a little bit overly cautious in an environment
where they shouldn't be.
If there's a good idea, they should fund it.
And don't just fund what all the big people are funding.
You actually have to go out there and find others.
And so...
Well, by the way, private equity is doing fine and energy
because they're doing the...
They're doing awful in other space, though, like really bad.
Yeah, they are.
But essentially it's just real estate.
They're moving their funds around.
So, like, for example, because you've got a guarantee,
basically an option, but a guaranteed payment which you can enact on a sale,
they're happy to finance that.
So they're around. They're not doing commercial real estate multifamily units. That's sure. That's pretty obvious. And an office building stuff. But in other sectors, but we've got battery, and I won't say who it is, but it's a big P.E. firm. We've got 12 battery sites under exclusivity that we're currently doing permitting on that one P.E firm is doing all the financing on because we've got an option to sell.
They're happy to do it.
It's like easy money for them to facilitate.
So it's not so clean cut.
I'd love to know, and in that deep dive, perhaps down as we could look at it, what all of those aspects of those, because some of those P firms are big insurance companies, they're big pension companies, the big commercial real estate, their private equity into companies, there are lots of different things, their credit.
it'd be interesting to see how across the board i know in certain areas they're doing badly but in
others they're they're doing just fine yeah 100% well i wanted to wrap with another reminder that um
our sponsors, IBC, they're incubating and accelerating AI and Web3 companies.
They actually do partner with VCs, despite all the shit they were talking about BCs for the last 20 minutes,
and funds to work with their portfolio companies in return for equity and zero cash.
If interested, please DM Mario and his team,
and they'll get a call organized.
They're also doing a Shark Tank style pitches.
They've been doing them on AI spaces
and people have been loving them.
And so any startup or portfolio company for the VCs, please,
hit up Mario for to learn more about the process and on that wonderful note thank you everybody for
joining us today uh appreciate you all we'll see you tomorrow i think maybe at 7 a m eastern in prep for
the cpi print but i would love to have all of you up thank you so much everybody for joining us
and i still let's see how many jesus still 3 000 plus people in the room okay uh well thank you for
listening to us ramble for a little bit love you all talk to you later
