Latest / TFTC: A Bitcoin Podcast / #729: The Generational Liquidity Trap with Jeff Park

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#729: The Generational Liquidity Trap with Jeff Park · TFTC: A Bitcoin Podcast

• 0:00
  Jeff Park, welcome to the show, sir.
• 0:03
  Happy to be on the show.
• 0:04
  Thanks for having me.
• 0:05
  Big fan.
• 0:06
  Thank you.
• 0:07
  I'm a big fan of yours as well.
• 0:09
  And like I was telling you before we hit record, I've been reading, rereading, in recent article
• 0:14
  that you posted, on X, the generational prisoner's dilemma, three certain truths, and the exit
• 0:20
  liquidity trap.
• 0:22
  And I'm not going to lie, it's a bit unnerving.
• 0:24
  a bit unnerving but we'll uh we'll unpack it but before that for anybody listening who is unaware
• 0:33
  jeff is the cio at pro cap financial who's previously the head of alpha strategies of
• 0:39
  portfolio management at bitwise asset management uh and just a sound uh macro analyst in the bitcoin
• 0:47
  space i think uh starting before we get into the meat of the conversation i think you've had
• 0:53
  a pretty incredible journey from Morgan Stanley to Harvard Management to Bitwise and now ProCap.
• 0:59
  And I think just starting there, talking about your experience, what's the through line
• 1:03
  in your thinking about capital allocations for all these different environments and how you
• 1:08
  ended up at ProCap specifically? Yeah, absolutely. So as you mentioned,
• 1:12
  I started my career at Morgan Stanley. I was an exotic equity derivatives trader.
• 1:17
  And I think I naturally fell into it because, one, I'm a big, big fan of numbers.
• 1:25
  And on the other side, the equity options business, I think, has always been kind of more probabilistically set for those who are practitioners than maybe anything else, especially related to like Delta One trading.
• 1:41
  So it appealed to me greatly, but it also shapes a lot of like the worldviews that I have in terms of how I think about not just finance and monetary policies and money, but also just all things in life.
• 1:51
  And it really set kind of the foundation for what would let me think about Bitcoin and crypto outside of the box that at the time, most people were probably not willing to give or underwrite the different tail risks associated with that kind of cataclysmic event.
• 2:05
  But one thing I knew was that it's also very niche, like exotic equity derivatives trading is really small.
• 2:12
  There's probably like, you know, a handful of traders in New York already that we all know each other.
• 2:17
  And it's it's it's it's it's kind of one where you learn a lot, but you also get to see, you know, that the world is a lot bigger than just that.
• 2:28
  And so when I went to the Harvard Endowment, part of it was because I wanted to see what the rest of the investing practice looks like outside of just being a trader in the exotic space.
• 2:40
  And that really opened my eyes to the entire endowment model.
• 2:43
  You get to see the public to private spectrum of investable opportunity set.
• 2:48
  At the time, Harvard was running an internally managed operation as well, kind of like a mini hedge fund within trading its own balance sheet.
• 2:55
  And so that's the team that I joined. And I started trading corporate credit there as well as asset back credit. And so it kind of allowed me to see the big picture capital structure. And I think after that, you just get to see the world moves on credit. And of course, equity is interesting and it's topical and people love chatting about stock tips. But really, the whole foundation of our financial world is built on credit. And I think once you see that, you can never unsee it.
• 3:21
  And it's partially why I think Bitcoin, once I discovered it, was so appealing because it was probably once in a generation to imagine how to re-underwrite the monetary framework outside of the lens of, you know, fractional reserve banking system by notion of credit.
• 3:38
  And if you're a practitioner of finance, I think for me at least, looking outward to see how the world is changing is equally interesting and important as past looking.
• 3:46
  So that's why I spent 10 years in the hedge fund industry and ultimately joined Bitwise as my full-time professional foray into being a professional crypto investor.
• 3:55
  Yeah. And I think one thing that you popularize is radical portfolio theory.
• 4:01
  That framework seems like it's gaining traction.
• 4:05
  And I think understanding, getting an understanding of how you came to recognize that maybe the traditional 60-40 portfolio construction isn't applicable to our modern times, to your points looking backwards.
• 4:19
  may be the wrong thing to do at a time when we're at an inflection point with incredible change.
• 4:26
  Indeed, indeed. And yeah, I think inherently, I'm a slightly skeptical person when it comes to
• 4:35
  the importance of asking why. And a lot of things we're taught in economics 101,
• 4:41
  we take it for face value for what they say is, you know, theory and practice. But
• 4:47
  But I think if you really just kind of start challenging some of the underlying assumptions around all of the things that we learn in school and beyond, you do get to see that the world is a lot more dynamic.
• 4:58
  And it's not a closed system, the way models tend to tell you that things are pretty deterministic.
• 5:03
  And I think a lot of Bitcoiners are at some level, especially those who are early adopters, had that keen trait to be able to challenge outside the paradigm of what you're being told is, is.
• 5:14
  And that doesn't have to be the way things are either.
• 5:18
  And we're living through a tremendous time.
• 5:20
  I think you're right that when I started talking about the radical portfolio theory, it was
• 5:23
  a little bit more kind of niche, even though I think people had intuition for it.
• 5:27
  And by no means was I the first person to ever say 60-40 is broken.
• 5:31
  But now I do feel like it is more common to run across the average person and ask them,
• 5:37
  hey, do you think the world is working as it should in terms of asset allocation between
• 5:42
  equities and bond?
• 5:43
  And I think most people now would say something's weird.
• 5:48
  And there's a lot of components as to why that we're seeing, of course, through the lens of geopolitics, but also labor displacement and maybe on the topics of AI.
• 5:55
  But the reality is the world is ever changing and we all have to adopt a dynamic mindset to be able to think about the future, to protect ourselves and prepare for it.
• 6:05
  Yeah, I think this is a perfect segue into your piece because it really touches on a lot of the topics that would drive an individual to begin thinking seriously, okay, where do I invest during this fourth turning, this inflection point?
• 6:22
  And like I said before, we hit record.
• 6:26
  I was rereading the piece that you dropped last week right before you hopped on.
• 6:31
  And it is a bit unnerving.
• 6:34
  And it's funny.
• 6:36
  I've been saying this on the show.
• 6:38
  In the context of AI for the last six months, it's been playing with it and integrating it into what we're doing here at TFTC and what we're doing at 1031.
• 6:48
  I describe it as equally unnerving and exhilarating.
• 6:52
  Uh, and it was funny because somebody re re shared the, the interview that David Bowie
• 6:59
  did in the early two thousands and some British, um, British, uh, interview show.
• 7:05
  And he was talking about the internet and he described the internet at the time as, uh,
• 7:09
  exhilarating and unnerving or scary.
• 7:12
  And I just thought that was funny.
• 7:14
  Like, oh, we're, we're seeing this play again in fractals, uh, the internet when content
• 7:19
  distribution and e-commerce was being disrupted in the early 2000s. Forward thinkers like David
• 7:24
  Bowie were thinking that way. And now with AI, that sort of feeling is reemerging in earnest
• 7:31
  and probably in order of magnitude more intense than it was 20, 30 years ago. And not only that,
• 7:40
  we have this convergence of multiple themes, not only the technological innovation that AI is
• 7:46
  bring it with it, but in your piece, you talk about three core aspects that we're running into
• 7:52
  right now, which is the fact that we have this sort of demographic inversion that's hitting the
• 8:00
  markets. We're going to have this massive transfer of wealth and potentially wealth taxes. And then
• 8:06
  at the same time, we have this disruption via this technological progression that's going to affect
• 8:13
  labor markets and you have this triple whammy of themes colliding with each other that is
• 8:19
  going to make it hard to really grasp what's going on.
• 8:24
  Yeah. At the same time, I provided that framework because it brings a certain amount of comfort to
• 8:30
  me, at least, to have some knowable truths and certainties in a time of such great uncertainty.
• 8:35
  So the inspiration actually for that article was C. Trini's 2020 Global Intelligence Crisis article that he wrote.
• 8:47
  And I think James is a great thinker and it was very compelling, but it also makes a lot of assumptions about things that people were curious as to how to think about those outcomes in the spectrum of probabilities.
• 9:00
  And everyone is freaking out because there is a lot of unknown uncertainties.
• 9:05
  And so I think what sometimes helps bring peace at those moments is exactly turn the script around and actually ask, what do you know for certain?
• 9:14
  And then take those first principles to build a case bottoms up.
• 9:18
  And that's kind of why I started with that mindset.
• 9:20
  And, you know, we don't know what's going to happen in the future.
• 9:23
  Of course, there's lots of different ways path dependencies will play out.
• 9:28
  But one thing that can help you in at least gauging what is likely or not likely is to know what are inevitably to be true.
• 9:36
  And the three things that you mentioned, demographics challenges, the growing gap in income distribution, and then the third, the change in the cost of labor versus the cost of capital that AI is bringing forth.
• 9:49
  To me, those three things are as good as gold.
• 9:53
  Like there is no debate to be had in many of those dimensions.
• 9:57
  Like these things are by and large going to be factually true.
• 10:00
  And that's the kind of spatial way I think about it.
• 10:03
  If you think like the X axis is the income inequality, the Y axis is the generational inverted population pyramid and the Z axis is the cost of capital question.
• 10:14
  And when you think about all three of these things converging into a moment, there is going to be a big, big inflection point.
• 10:21
  and when that inflection point comes because of those three things what is it that's going to
• 10:27
  basically help you be orthogonal to those risk factors and that's essentially kind of the the
• 10:33
  attempt of the analysis here yeah so let's start with the new demographics and the for distribution
• 10:41
  of wealth among the different demos that exist right now so boomer zone anywhere from 60 to
• 10:46
  trillion dollars in equities in real estate. And obviously, as we know, it's been a growing theme
• 10:52
  over the last decade. You have baby boomers retiring and basically saying, hey, I've done
• 11:00
  my job here in the workforce. I'm going to go enjoy the later years of my life. And that's going to
• 11:06
  create this need for exit liquidity. And just as they're going to retire, you have this situation
• 11:12
  emerging where the younger generationals, particularly younger millennials in Gen Z,
• 11:17
  are finding it hard not only to find work, but even if they do work, that pays well.
• 11:23
  And so you say that there's this epic housing deflation that many people are talking about.
• 11:29
  And again, that's one thing I really appreciate about your piece.
• 11:33
  And I think you described it pretty well, but you were very blunt with people like these are
• 11:38
  certainties. And I think there are many people who say, oh, well, maybe if we do thinker with
• 11:43
  things here and there, like we'll be able to thread the needle and get out of it. But
• 11:46
  just look at the numbers. It does seem like a certainty, particularly how you lay it out. And so
• 11:52
  with that said, it's a bold statement. And when most people look at real estate,
• 11:58
  particularly over the last 50 years as this ultimate store value asset, this piggy bank for
• 12:03
  the baby boomers. Many will question that and say, I don't know. It's worked for the last 50 years.
• 12:10
  Why won't that work? Right. Moving forward. Right. No, that's right. And one of the fundamental
• 12:16
  tenets you'll often hear people trying to explain why it can change in the past. We navigated it
• 12:23
  this way. So we'll navigate it that way again in the future is because the thing that has helped
• 12:28
  solve the problem has always been about duration. So the only way the financial system has worked
• 12:37
  as well as it has is because we kept extending the duration of the forward pull from the future
• 12:43
  to the present. And at some point, you can't do that forever. Like you can't overspend,
• 12:49
  we already know, but you also can't overborrow against the young population, especially if that
• 12:55
  population is declining. And I think that's the punchline. If you keep kind of assuming the past
• 13:01
  will be the same as the future, because we've seen liquidity manipulation and duration manipulation
• 13:06
  be successful, it was only successful because there was a population that can bear it. But what
• 13:11
  I'm trying to convey here is that there is no population left to bear it. And so that is the
• 13:17
  fact that's going to be different in this moment. Take, for example, right, like home prices. Like
• 13:23
  Home prices, the reason it's able to participate in price growth really has a lot to do with the mortgage market.
• 13:33
  If you can keep borrowing forever and justify that present value at nominal levels that extends your duration, you can do anything.
• 13:42
  So when Trump jokes about there being like a 50-year mortgage or like a 75-year mortgage, it's the same extension of how do you just keep bootstrapping the present value to the future that you don't have to deal with, but lower the current burden, the current interest rate burden today.
• 13:59
  But the terminal value can notionally still increase in value.
• 14:03
  So that's why there's so much of these types of things happening in our financial system today,
• 14:08
  where people underestimate how much manipulation is happening across that duration curve.
• 14:13
  Another one I'll throw here, and it wasn't written in the article because this is very topical.
• 14:18
  It's actually related to the latest news you may have seen about NASDAQ changing its rules to allow SpaceX to be potentially a member of the index once SpaceX goes public.
• 14:27
  This is the kind of thing that is happening in the stock market right now that is in some ways unfathomable to kind of why the public market and the private market has always existed the way it has existed in the past.
• 14:41
  And you get to see really clearly that if you just think stock picking is like, oh, here's Albert.
• 14:49
  He's buying this stock and selling this stock because he thinks one is overvalued and one is undervalued, and that is price discovery and efficient market hypothesis.
• 14:56
  We have moved so far from that world where there are things like indexing.
• 15:02
  There are things like interval funds.
• 15:04
  There are things that blur private capital and public capital and weird vehicles that shouldn't exist.
• 15:09
  And all of this paints this continuum of risk transfer that is happening ultimately because the demographic challenge.
• 15:18
  It has to be dumped somewhere, somehow.
• 15:22
  And it's either going from private market to public market.
• 15:25
  It's going from generationally top down or it's happening from other kinds of offshore investors to onshore investors.
• 15:33
  But like the scheme is, how do you get more money into the United States to help asset continue to inflate so it can afford the cost of carry that is promised all its generational investors?
• 15:46
  Yeah. And as it pertains to the housing market, it was interesting.
• 15:49
  just observing that I'm sure you've seen the reports out of Florida, California, Austin,
• 15:58
  other parts of the country where there are significantly more sellers than buyers. And
• 16:02
  you have, why can't I sell my home? Google searches trending at all time highs. And
• 16:07
  it seems like we're at this precipice for real estate in the United States where push is
• 16:16
  going to have to come to shove at some point. Another, I think bar chart reported this morning
• 16:22
  that the average 30 year mortgage rate right now is 6.85. It's creeping up a bit. And then if you
• 16:27
  look at the 10 and 30 year treasury yields, they're remaining elevated. And so if you look at
• 16:33
  housing, there's two parts of the equation. You have the interest rate on the mortgage and
• 16:36
  the cost of the house. And it looks like since beginning, the interest rates are pushing up.
• 16:41
  And so it seems to me that the cost of the housing is going to have to come down significantly to level out with that equation.
• 16:51
  Yeah, no, that's right.
• 16:52
  I mean, I think every metric shows you that labor inflation has not kept up with asset inflation, especially post-COVID.
• 16:58
  And you get to see that the general expenditure the young population is putting to rent and housing is far superiorly larger than it should be from previous generations.
• 17:09
  Meaning these younger generations can't actually accumulate wealth, right? They can't actually accumulate wealth that would otherwise go back into the stock market. And so when you see these Trump accounts being set up so that children have to start locking away money into index funds until they're 18, by the way, the Trump accounts force you into equity index funds.
• 17:29
  You can't buy stocks. You can't buy single single names. You can't buy bonds. You can't do anything but equity indices.
• 17:36
  It is it is a mechanism. It is it is a it is a conduit to kind of permit liquidity that otherwise is captive.
• 17:43
  Now that has 18 years of duration. Right. Because you can't actually withdraw without penalty.
• 17:49
  Housing in particular I think in the U most acutely but everywhere in the democratic world is an interesting asset class because there is the consumption of housing but there also the investment case for housing The consumption of housing is if you in family formation mode you buy a house because generally it comes with different social services and benefits that are important as part of
• 18:11
  growing in your community.
• 18:13
  Schooling, of course, is the big expenditure from property taxes.
• 18:18
  And yet, like people also buy homes because they expect house price appreciation as an
• 18:23
  investment class, regardless of whether schooling is part of their underwrite or not.
• 18:27
  And if you really squint hard enough, you'll see there's something pretty circular here, which is if education is rising constantly in cost, and it seems to be rising a lot because the administrator ratio to the student ratio has gotten pretty extreme over the last 20 years.
• 18:45
  What that's saying is that there are kids now basically overpaying for their education because of the burden of administrators relative to the actual cost of education that then is also letting them go to debt.
• 19:00
  So a lot of these private universities, the biggest challenge and complaint has always been they're way too expensive.
• 19:05
  And they're expensive because the administrators are 10 times the growth rate of student and faculty rates.
• 19:11
  And so the subsidy that otherwise should be coming to students are actually subsidizing these administrators.
• 19:17
  So if housing price is being indexed to the cost of education, which it tends to be because property tax, the biggest spending will be education.
• 19:29
  You actually see that this is a multifaceted problem.
• 19:32
  Still, again, very demographically challenging for the young, because in that a world where you can't actually afford housing, there is no like easy way to guarantee education in a solid way.
• 19:46
  And then you see how it becomes like a pretty circular problem. And I think it's just pretty evident at this point. Like if homes are owned by like people that are like 50, 60 years old plus, which is what like the median homebuyers stats will tell you now in this country, like the median homebuyer is like over 50 years old, meaning they're probably second homes and things like that.
• 20:07
  it's just going to change the calculus from consumption housing as a need for a growing
• 20:13
  population versus like the investment case. And those two things, the fundamental tension is the
• 20:19
  value assignment is different. One needs to be consumed today. The other one has some kind of
• 20:24
  infinite duration into whatever it is that they think is going to happen to housing prices based
• 20:28
  on other kinds of manipulations like long-term interest rate and a hundred year mortgage and
• 20:33
  whatever else that they can concoct in the future.
• 20:36
  I think the connection between university cost and housing is an astute one because I
• 20:45
  actually wrote, I studied econ in college.
• 20:48
  This is back in like 2012, 2013, because I was in the thick of it.
• 20:54
  I think my generation, particularly we graduated high school in 2009, right after the financial
• 20:58
  crisis.
• 20:59
  And I remember just being like, how can they give out all this money?
• 21:02
  And I wrote basically a long paper on it.
• 21:07
  And the messed up part is it's trickling down to from the university.
• 21:13
  The cost of university is trickling.
• 21:15
  Like this is the trickle down economics is the university can get the student loans.
• 21:21
  The government will issue them so they know, hey, we can bloat our administrative layer.
• 21:25
  We can increase our prices because the government's going to give these kids the money anyway.
• 21:30
  And then maybe not necessarily public school, but public schools are probably doing something similar to the private schools.
• 21:36
  But the private school, I went to a private school in the Philadelphia area.
• 21:39
  And when I was a freshman in high school, I think it was $8,500 a year.
• 21:45
  Now it's like $25,000.
• 21:47
  And because the schools are able to like the high schools, the private high schools specifically,
• 21:52
  and I imagine the public schools to a certain extent are saying, well, if you graduate from here,
• 21:57
  we're going to be able to get you into these universities.
• 21:59
  And these universities, their four-year degrees are worth $250,000.
• 22:02
  And so paying a little bit more to get the education necessary to get to the high-priced university ticket is worth it.
• 22:12
  So you have these compounding sort of factors that are – this is like really how trickle-down economics works in a fiat monetary system.
• 22:21
  And it's completely corrosive to the ability for people to actually save and build wealth in the long term.
• 22:26
  Yeah. No, I agree.
• 22:27
  I think besides housing, I think the greatest generational theft that has ever happened at a global level, this is not just about the U.S., is student debt.
• 22:36
  You have basically taken a lot of kids to put on student debt, especially if you went to private universities, because your debt funded administrators' cost of living.
• 22:47
  Right. Again, this is like a like a like a funnel trap of money flowing in a direction where the young is being repressed at the benefit of the older cohort.
• 22:57
  And your education was not worth that much more because you were paying these administrators beyond what the basic tenets of education really should be.
• 23:07
  And so if you basically start your career with incredible leverage to which their market price for your labor is not commensurate to kind of whatever artificial price was put on you, then you start off with handcuffs.
• 23:24
  I mean, forget housing like you have other things that is kind of holding your back as is.
• 23:30
  And so there's an inability to just reach levels of maturity that prior generations, I think, were able to find success in because this liquidity trap, again, is so profound.
• 23:42
  And that's why I think a lot of times now you see pushbacks on that education model, too, where people are more willingly able to talk about trade schools, vocational schools, or actually just going straight to companies like Palantir if they're hiring talented software engineers right out of high school and Google, too.
• 23:58
  I think you're seeing more movement towards that because it ascribes the value of human capital maybe a little bit more in line with market rates than what this artificial rate of college education has been, which has far exceeded inflation and beyond in the past three decades.
• 24:18
  And on top of that, the internet has provided the ability to give yourself a college education if you have the will and the agency to teach yourself.
• 24:25
  um shifting gears a little bit but staying on this sort of inversion uh demographic inversion
• 24:33
  and credit uh you've described private credit which has exploded to two trillion dollars
• 24:39
  estimates say as a time bomb in pensions and endowments and i think over the last
• 24:43
  two weeks uh the market is becoming aware i think people began signaling the alarm bells
• 24:50
  the middle of last year it is private credit thing if you do the math and you look at when a
• 24:55
  lot of these funds raised in 2021, 22, the valuations that they got into and where rates
• 25:02
  were then and where rates are now. Going back to duration, a lot of these private credit funds are
• 25:08
  issuing a five to seven year duration and a bunch of refi waves are hitting the market. And then on
• 25:14
  top of that, I think it's becoming evident to many who are paying attention that a lot of these
• 25:19
  private equity and private credit funds are, were on the search for yield and were doing,
• 25:26
  doing things that many would, myself included, define as, as, as rather risky. And I think one
• 25:35
  of the practices that Steve Eisman had a forensic accountant on last week or the week before,
• 25:44
  and he highlighted that a lot of these private equity funds are buying insurers and reinsurers
• 25:49
  and taking the premiums that they're reaping from those insurance companies and pushing them into these private credit deals.
• 25:55
  And as you point out, a lot of pensions and endowments have exposure to this.
• 26:01
  And sticking on the demographic time bomb that we have, we could find ourselves in a situation where a lot of these boomers are going to retire.
• 26:08
  and some of these private credit funds took some of their retirement annuities and pushed them into some risky private credit deals that could potentially be blowing up right now.
• 26:21
  Yeah, yeah.
• 26:22
  The big shame here is ultimately an agency issue, which is that the administrators of these investment programs are not necessarily the principal risk takers of their own value creation.
• 26:35
  So, you know, as I've had now a long career in finance and in asset management, the big difference between institutional investors and you and me and family offices is that you and me and family offices invest for principal risk.
• 26:53
  It's our money.
• 26:54
  Like we care about how our money is invested because we actually wear the wins and losses of that decision.
• 27:00
  But it's not true when you're an institutional investor managing a pension on someone else's behalf or you're an endowment CIO managing it on someone else's behalf or a foundation.
• 27:10
  And so the kind of construct of the managerial institutional investors is one worth deeply understanding because there is conflicts and room for ambiguity as to what kind of moral hazards could exist.
• 27:30
  The perfect one within private credit is, of course, there's liquidity transformation that is happening like we talked about, but there's one additional factor. It is price discovery that is being manipulated as well. And when you mute price discovery, as the administrator, there's a lot of benefits. You don't have to be responsible.
• 27:49
  You don't actually have to be responsible if something isn't marked down the way publicly traded instruments are.
• 27:55
  If you can wait for seven years to find out and maybe you won't even be at that job in seven years from now and you'll stuff it to someone else who comes next to administer the pension.
• 28:05
  But but that is largely what I think is different about the private credit shadow banking system versus even when banks pre 2008 were involved in a lot of these lending activities.
• 28:17
  You have to remember, the reason the private credit industry grew was because post 2008, there was a lot of noise to prevent banks from engaging in these types of lending activities because they decided that these kinds of lending activities create risk.
• 28:32
  And at some level, it's better to kind of put it off the balance sheet of our strategically important banks and let other alternative asset managers come and wear those risks.
• 28:44
  but here you have to recognize the incentive alignment now is fundamentally different if
• 28:50
  you're like a bank and you have customer deposits that you care about your customers to which then
• 28:55
  you're lending funds out that you know you want to protect well that's still one degree closer to
• 28:59
  the customer than it is to like an asset manager that is collecting a fee every year on whatever
• 29:05
  loans that they're originating whatever crystallizations they're experiencing as a
• 29:09
  portfolio manager versus the institutional investors who literally don't have that much
• 29:14
  skin in the game otherwise, besides just allocating capital that they've been mandated to.
• 29:19
  So this incentive structure is really, I think, important to understand because I think the
• 29:25
  biggest criticism I would share is that post 2008, it's gotten worse.
• 29:30
  And it's gotten worse because private credit has become this $2 trillion asset class, not
• 29:36
  because it's like better than public credit. It's because there's other things at work,
• 29:42
  which is moral hazard at its worst. So the thing about private credit ultimately is
• 29:50
  there's good private credit and there's bad private credit. So what I mean by that,
• 29:56
  there are certain kinds of bilateral credit origination that has to happen on a negotiated
• 30:02
  basis because the underlying risk can be extremely exotic or esoteric. One example of that is
• 30:07
  litigation financing. If I'm going to back a lawsuit on the merits of claims and I have to
• 30:13
  analyze those claims, then I actually have to recognize that's not going to be fungible to
• 30:18
  funding another lawsuit. Each lawsuit stands on its own ground. And as a credit investor to fund
• 30:23
  a litigation, you're underwriting that particular idiosyncratic risk. And you know you need duration
• 30:29
  in that underwrite because lawsuits take a long time. You also know that it's uncorrelated returns
• 30:33
  because lawsuits have merits that will depend upon not where the S&P 500 is. Like it's not a
• 30:40
  corporate credit that moves on what Jerome Powell decides rates should be. It's suing for claims and
• 30:47
  damages in ways there's going to be case law. So that's good because that's credit, like solving
• 30:52
  a function. Someone needs to sue. They don't have the money. Someone funds it. And, you know,
• 30:56
  someone's willing to underwrite that risk. That kind of private credit, I think, is useful.
• 31:01
  The kinds of private credit on the other side that's not useful is basically sponsors wanting
• 31:07
  to do off-market deals at size away from the scrutiny of the public arena and doing things
• 31:13
  where these incentives are being mismanaged. And therefore, you create adverse outcomes for
• 31:18
  everybody. And, you know, the big thing that private credit funds will tell you is like,
• 31:24
  we get better deals because we negotiate one-on-one and so they're off-market deals.
• 31:29
  Well, guess what else happens when it's off-market deals? Maybe you don't get the best price
• 31:33
  because it was never put in comp and it was never put in a bidding war. Sometimes maybe the best
• 31:38
  outcome is actually if it's in a price discovery mode where many investors can participate.
• 31:44
  And so that's kind of the spectrum of private credit that exists. And I just wanted to make
• 31:48
  that point because private credits become this like catch-all phrase for everything that is a
• 31:53
  liquid and long duration. But it's not always the case that private credit comes in lots of
• 32:00
  different forms. And there are some good private credit where it is useful to have. The problem,
• 32:05
  I think, is that the things we're talking about here is not that version of it.
• 32:10
  Do you think this is the private credit complex and the stress that it seems to be under is
• 32:17
  equivalent to the 2008 like real estate collapse? Well, in real estate, at least the idea was like
• 32:27
  you had collateral as like senior secured loan to underwrite value to, right? The problem is the
• 32:32
  home price is wrong, but you are first in line as a mortgage originator and mortgage buyer.
• 32:38
  In private credit, even though sometimes it is loans, it doesn't mean you have the security
• 32:45
  collateral or the covenants to be able to enforce that outcome. So that's the biggest difference.
• 32:51
  In asset-backed lending, you generally have the collateral. When you're dealing with corporates,
• 32:57
  it depends what your security lien itself is. Sometimes it is actually backed by hard assets
• 33:04
  like property, plant and equipment. And sometimes it's actually just a personal guarantee from the
• 33:10
  CEO. And so there's a big spread of outcome that could happen. But the other kind of adverse
• 33:16
  situation is this. You mentioned this, private equity and private credit tends to work together.
• 33:21
  And if you think about it, they're on opposite sides of the coin, right? Because whatever is not
• 33:26
  going to the private equity is going to the private credit and vice versa. So it should be like an
• 33:29
  adversarial relationship. But it's sometimes not because these firms all kind of know each other
• 33:36
  and they're able to kind of engage in practices
• 33:39
  where you might think that there's like
• 33:41
  bigger incentive alignments at play
• 33:43
  as to how they're managing each other's relationships.
• 33:47
  And it's not to say like everyone's a bad player,
• 33:50
  but if you like show me the incentives
• 33:52
  and I'll show you the outcomes,
• 33:54
  like you can imagine that these things can be abused.
• 33:57
  And so that's why you see stories where private credit,
• 34:00
  some of these just go to zero.
• 34:01
  I mean, you have to wonder like,
• 34:02
  how could something go to zero
• 34:04
  If you're a loan and you're first in the capital stack, there should be some recovery value, even publicly traded kind of bank loans.
• 34:12
  Their recovery value is around 30 cents on average. So how does it go to zero?
• 34:17
  How could there possibly be nothing to recover from? And then the question is, what happened to the equity?
• 34:25
  And I think there's going to be a lot of these stories that are going to come out where you're going to see sloppy underwriting.
• 34:31
  but the underwriting isn't like misvalued home prices.
• 34:34
  It's literally like, what were you doing?
• 34:38
  Kind of errors that you were going to start seeing,
• 34:40
  which I think is actually just worse.
• 34:42
  And it really just loses,
• 34:44
  makes you lose faith in kind of the banking system
• 34:47
  and the ways that maybe there were trade-offs
• 34:50
  that policymakers made when they decided
• 34:53
  banks should not be in the corporate lending business
• 34:56
  and you have other asset managers in the game.
• 34:58
  yeah and i think uh the black i mean maybe not a black swan but i think would have been
• 35:07
  unforeseen to a lot of the private credit funds private equity funds underwriting some of these
• 35:14
  deals in 21 and 22 which is i think a lot of it went into uh like b2b software products and now
• 35:21
  AI is here. That's like,
• 35:23
  I've, so when I was at my prior hedge fund before joining Bitwise,
• 35:27
  private credit was a big business of ours.
• 35:29
  And you really would get to see a full spectrum of underwriting standards.
• 35:32
  So sometimes like to these SAS companies,
• 35:34
  you would look at kind of the ARR and think about kind of that value and think
• 35:41
  that is credit like that,
• 35:42
  that is underwritable collateral because these are like long-term contracts.
• 35:45
  And you think like SAS contracts are long, their MAUs are good.
• 35:49
  They're like churn is low.
• 35:51
  So this is like good collateral and you will underwrite it. Well, guess what happens when something like AI comes along and then these things might turn upside down?
• 35:59
  Like it's not collateral the way like physical like home prices can exist.
• 36:03
  And so you know IP is another one I seen lots of loans done on the back of like this IP is worth X amount So the IP value alone is good to cover your first loss And it like well maybe maybe not Like who knows what IP is worth Like depends on who the buyer is right
• 36:19
  And so you would get to see a lot of different outcomes here.
• 36:25
  But the one thing I will say, too, is this.
• 36:27
  When I was pitching Bitcoin to institutional investors at Bitwise, you would hear a lot about people who would be concerned about Bitcoin's volatility or kind of the lack of ability to control for price outcomes because it's exogenous to your own control.
• 36:44
  And these things would give CIOs a lot of fear and uncertainty.
• 36:49
  to consider Bitcoin as a legitimate asset case. Almost always these investors loved private credit.
• 36:55
  There was like almost a perfect one to one correlation. If you hated Bitcoin, you loved
• 36:59
  private credit. Because guess what? They're exactly on opposite end of the spectrum.
• 37:04
  Like one is not about price discovery. The whole point of private credit is to avoid it.
• 37:09
  And of course, there's a coupon that makes you feel like you're getting some kind of gains out
• 37:13
  of it. But it's really your classic case of, you know, that turkey who's like happily living until
• 37:18
  Thanksgiving and then, you know, the happiness goes to a cliff. And so that's why I think I
• 37:25
  enthused the mission of Bitcoin even more in that construct of like, what is this liquidity
• 37:30
  gap that is going to unfold in private credit? And like, what could people choose as an alternative?
• 37:36
  And if you take it to the extreme, the alternative you want is like immediate price discovery,
• 37:40
  lots of volume that is kind of public and discoverable, and one that is like a hard
• 37:46
  commodity that actually isn't backed by IPs and other things that people tell you are worth anything,
• 37:51
  but actually the collateral itself. So I see kind of Bitcoin on the receiving end of the of the of
• 37:58
  that meta. If it were to change, like we need to kind of go find a complementary asset class
• 38:04
  that pairs nicely with that duration mismatch. Yeah, I think. Yeah, the.
• 38:11
  The credit complex needs to be refinanced and needs better collateral in the form of Bitcoin.
• 38:18
  I think that has become abundantly clear to me in the last five years.
• 38:23
  But moving along, I mean, going through your thesis of these free converging themes, I mean, the second is the inevitability of the wealth tax.
• 38:35
  And with the top 1% approaching one-third of U.S. wealth, they hold one-third of U.S. wealth almost.
• 38:43
  You have headlines out of New York City and the Netherlands of insane taxes.
• 38:51
  The Netherlands passed the 36% tax on unrealized gains.
• 38:54
  and then New York, obviously, if you're in the United States following what the Mamdani
• 39:02
  administration is doing there in terms of the wealth taxes that they're portraying that they
• 39:09
  want to get passed, particularly on people who own assets over a certain level. It seems like as
• 39:15
  these, this wealth inequality and this wealth transfer begins to materialize that the governments
• 39:22
  are going to sort of force it if participants don't do it willingly. And that's going to come
• 39:28
  in the form of wealth taxes. That's right. That's right. I think you asked 10 years ago whether
• 39:34
  wealth tax was coming to the US and everyone would have laughed you out of the room.
• 39:40
  But now I think it's, to me at least, fairly inevitable that some construct will be placed.
• 39:47
  And it's because that social contract has been broken.
• 39:52
  We also should make a distinction between income inequality and wealth inequality because they're slightly different.
• 39:59
  Income inequality, I think, is a problem, but it is still based on the construct of productive contribution to earn an income that should otherwise translate into some value creation.
• 40:10
  Right. That's that's hopefully the people can make that assumption.
• 40:13
  If you deserve an income, it's because you're doing something for it.
• 40:17
  Wealth is different because if you're just sitting on it and it's passive and it just consumes otherwise money that should be in circulation for an economy to function, it's actually a net negative if that thing is becoming like a tax in itself.
• 40:34
  Because that's not capital that is otherwise productive beyond just kind of existing in some format as a financial investor.
• 40:42
  And the challenge is when it comes to capital gains, you can only charge capital gains when it's sold, right?
• 40:56
  And you can also sit on a bunch of unrealized gains and not sell and still do things without cash, like that capital, I mean.
• 41:04
  You can take out loans against it or whatever, meaning you don't have to actually ever pay taxes on those gains that are sitting in your balance sheet.
• 41:12
  So one thing that these unrealized capital gains tax solutions are trying to solve, and I don't agree with generally the soundness of what they're doing, because it creates a lot of weird, bad incentives.
• 41:26
  And if you roll it out in a way that is like dysfunctional and not coordinated, it creates more issues and solving issues like wealth will flee to different places and you can't actually contain anything.
• 41:36
  But the fundamental problem that they're trying to solve is a legitimate one, which is if you don't pay taxes on these things because you're not selling it, then how can that money come back into the system?
• 41:51
  And by the way, you're not selling it, which is why the price keeps going up.
• 41:55
  And the young people have to keep buying it at higher prices.
• 41:59
  Right. It's actually the same problem.
• 42:01
  It's the same generational wealth movement problem, which is you have to sell it for it to move to the next generation or to another buyer.
• 42:10
  And so the wealth tax is basically saying you need to sell.
• 42:14
  Like in a perfect world where there is an unrealized wealth tax that you can't escape from, like you can't just leave California and go to like Texas and not pay.
• 42:22
  If it was actually a holistic strategy and you couldn't even leave the United States and you're captive to it as a U.S. citizen, it would create forced selling.
• 42:33
  And that forced selling would be great for those who want to come into the market, i.e. younger generations who haven't generated enough asset and wealth accumulation.
• 42:42
  And it would essentially kind of help price discovery at a point where that flow model isn't being distorted by the fact that there are no sellers.
• 42:50
  um so so even though it's kind of horrible the the the goal i think is is right which is like
• 42:57
  how do you bring some you know velocity to this asset wealth that is otherwise like
• 43:04
  dormant and isn't coming back to market at a price that is like you know discoverable for
• 43:11
  new investors um and this is not like a black and white answer and i don't mean to exaggerate like
• 43:17
  this is the way to do it. But I think that's the underlying tension that everyone is trying to solve
• 43:23
  for what otherwise is becoming a breaking point. Yeah. No, I mean, I think to your point,
• 43:31
  and you highlighted this in the article, if you look at polling out there, it seems to be
• 43:36
  widespread support for some sort of wealth tax, which is scary. And then you have obviously Elon
• 43:42
  Musk and others in the AI space talking about universal high income and they're looking at what
• 43:48
  they're building and looking out at the world and the disruption that may be ahead and saying we're
• 43:54
  going to need to solve this problem by getting money into people's hands. But I think, yeah,
• 44:00
  the thing is, it makes the case for Bitcoin, right? I mean, going back to real estate,
• 44:05
  it's like you shouldn't be using the consumable good as a piggy bank. I think you should take the
• 44:11
  excess monetary premium that exists in these assets, put it into Bitcoin and then let those
• 44:17
  assets find the correct price, which is probably lower than where it is now so that people can get
• 44:23
  into them. And then when it comes to productive assets and capital goods, similarly, if people
• 44:28
  are using those store value assets, it's like just funnel that to Bitcoin, let those things
• 44:32
  price accordingly so that people can scoop them up and put them to work. Yeah. Yeah. No, that's
• 44:38
  right. And I also hear this like punchline that wealth taxes are, you know, un-American or it is,
• 44:47
  you know, non-capitalistic and socialist and whatever. And even though that is probably true
• 44:54
  from like an ideological perspective, the reason it's becoming popular is because, again, the social
• 44:59
  contract has been broken. And if the social contract of capitalism breaks, these are the
• 45:05
  things that ultimately kind of emerge. And I think for capitalism to generally work as well as we
• 45:10
  hope for, we need more sufficient price discovery for which people can transact. If you really think
• 45:19
  about the purest definition of capitalism, it's open markets. We need open markets for price
• 45:25
  discovery and people to act accordingly with information that is symmetrical on both sides,
• 45:30
  as retailers and an institutional. And what we're seeing right now is that, you know,
• 45:34
  We call it American capitalism, but there are so many little features about it that doesn't look like it's an open market.
• 45:41
  You know, I go back to the SpaceX thing where like in the past, like companies had to IPO.
• 45:45
  This is before the Facebook days when you had more than 100 investors.
• 45:50
  That's actually a rule. Like if you had more than 100 investors, you have to IPO.
• 45:53
  And I think that's because, hey, if you found enough like capital to grow at some point, like you just graduate and you become responsible for public shareholders, both from an access perspective to invest in growth, but also like an accountability.
• 46:07
  Like you have higher disclosure rules you have to follow as a real company.
• 46:10
  Facebook changed this when they didn't go public in that timeframe by arguing for different exemptions to it.
• 46:20
  And they succeeded, which is why we've ever since then had giant, giant, like multi-billion dollar companies that can stay private for a very long time.
• 46:29
  Which I think has always been like slightly insidious, but now we're seeing like really weird stuff come out of it.
• 46:34
  So, for example, if Elon Musk is able to take SpaceX public at one point five trillion dollars, that number is like not an insignificant part of the US GDP.
• 46:46
  Right. I mean, a huge number that is all of a sudden trying to access the public market.
• 46:52
  And if you look at the float that they're going to be able to go to market with relative to like what the NASDAQ index can digest as part of being included in there, like shortly thereafter, bypassing like the rules around how you have to wait in season for it.
• 47:07
  You're basically forcing a bunch of index investors to buy SpaceX indiscriminately to get.
• 47:16
  Yes, to provide liquidity for those investors.
• 47:19
  like you tell me if that is a capitalistic open market endeavor like in the deepest of hearts like
• 47:26
  is that construct capitalism or is there something strange going on where like the the financialization
• 47:33
  the hyper financialization of our capital markets has gotten to a point where it's just it just
• 47:39
  doesn't smell correct and i think all of us who kind of look at this and say hmm it smells a little
• 47:44
  funky, our right to have that suspicion. It is a little funky. And that's why, you know, go back
• 47:50
  to the principle of being a radical thinker. Like you have to understand the problem to diagnose the
• 47:54
  solution. And we're just seeing so many more of these types of things coming online, which is why
• 47:58
  people are even going crazy on the other side, asking for something as bad as a wealth tax.
• 48:04
  Wealth taxes are horrible. I will never, I think, defend it as long as we feel like that is going
• 48:10
  to create problems in ways that has perverse incentives. But the other thing is horrible too.
• 48:14
  Like the idea of SpaceX IPO at 1.5 trillion with a forced bid into the NASDAQ index across the entire passive flows industry is also really weird.
• 48:25
  And you could have both of those two truths in your mind and be able to rationalize those two to be painting a picture without being contradictory of having to choose one or the other.
• 48:37
  They're both not great.
• 48:39
  Yeah, that's funny, too.
• 48:40
  I mean, SpaceX, obviously, Elon Musk's company.
• 48:44
  And then you look at what Tesla was able to do for a bunch of retail investors by going public when it did.
• 48:49
  And there's a ton of people that I know that aped into Tesla 10, 15 years ago.
• 48:56
  And they're feeling very good for doing so.
• 48:59
  And it's just funny about dichotomy between SpaceX and Tesla.
• 49:02
  Tesla went public relatively early, and many people have benefited from that.
• 49:07
  And now SpaceX going public 1.5 trillion is like, how high can it go?
• 49:11
  Can it be truly be a three, four or five trillion dollar company?
• 49:15
  Maybe the space thesis plays out, but there's a lot of risk.
• 49:18
  I mean, I think you have to really underwrite, like if our capitalism can create a private company that is worth 1.5 trillion dollars outside of public scrutiny, like that should really be a question we should be asking and go on some deep soul searching.
• 49:32
  Yeah, I mean, and this is a big theme in Silicon Valley.
• 49:34
  I remember the Collison brothers were on All In, the All In podcast, the beginning of the year.
• 49:40
  And they were just flippantly saying like, oh, we don't need to go public.
• 49:43
  There's a ton of that's another thing like private markets.
• 49:46
  There's a ton of funds that have come.
• 49:48
  There's a ton of secondary liquidity that exists that these founders feel like, I don't need to go public.
• 49:54
  I don't want to undergo the scrutiny that comes with public markets.
• 49:58
  And there's a pretty deep liquidity pool here in private markets.
• 50:01
  And this is the shame, right, because they're absolutely right.
• 50:04
  They don't need to go public. But they also have to understand in the construct as business owners and operators is that all of this is based on this social contract of fairness.
• 50:14
  And it's not about what you need to do as much as the moral authority of what you should want to do.
• 50:19
  And I think that is ultimately why the chasm is here.
• 50:23
  we are not asking the tough questions of what is the moral
• 50:28
  morally like right thing to do in the name of capitalism to be able to conduct business in the
• 50:36
  ways that everybody can participate or benefit or feel like they're part of that movement and not
• 50:40
  feeling like they're opted out and I think based on the New York Times survey it's very clear
• 50:49
  Most people feel like they're not participating in capitalism.
• 50:52
  That's why more than 50% across every cohort demographic and race, except for white college educated men, which, by the way, is also thinly over 50%, the rest of them are already gone.
• 51:03
  You know, they're all for the wealth tax.
• 51:05
  Yeah.
• 51:06
  And we should find this to be a problem.
• 51:07
  that's funny i think uh i think it's very prescient that you brought up the uh
• 51:12
  the moral argument because i think that was a one of the uh 24 7 news cycle headlines of the
• 51:18
  yesterday was mark andreason saying that yeah he doesn't really he's not really introspective he's
• 51:23
  just like go go go don't uh don't uh think about what you're doing and think critically about it
• 51:30
  a lot of the commentary around that was like wait a second like all the great men of history have
• 51:34
  thought about what they're doing deeply. Like, is this having a positive impact on the world?
• 51:39
  That was an incredible microcosm of one of the things that one of the mindsets that leaks out
• 51:48
  of Silicon Valley and it's undeniable. All the technology and the progress that has been made
• 51:53
  from that part of the world is undeniable. However, there is, to your point, this like moral and
• 51:59
  societal argument that seems to be pushed to the wayside at times.
• 52:04
  Indeed. Have you had a chance to read Alex Karp's book, The Technological Republic?
• 52:09
  No, I have not.
• 52:10
  I think you'd love it. You would find it really enjoyable based on the comments you just shared with me, which is that Alex makes the case for the decay of moral authority in Silicon Valley being the root cause of a lot of the problems.
• 52:21
  Um, he of course has his own bag, which is, you know, the military complex.
• 52:27
  Uh, and so you, you'll get a glimpse of that too.
• 52:29
  But generally I think what he's saying is that Silicon Valley being kind of consumer
• 52:34
  facing entrepreneurs, um, post the breakdown of the public private partnership of like
• 52:38
  the NASA days and the DARPA days, um, don't fundamentally ask questions about like, what
• 52:45
  should we do in the good for people like good for the country?
• 52:48
  even. He'll go that far. Kind of this patriotic angle of why you should do anything that you do
• 52:54
  for the benefit of your country and others, especially as a business executive. And he'll
• 52:58
  kind of cite the rise of the search industry being at the center of why the moral decay has happened,
• 53:05
  because he'll argue that the search business is basically only successful if it is able to mute
• 53:12
  any idiosyncratic view, because it must have appealed to the widest eyeballs as much as
• 53:17
  possible. So if you're in the Google business or the Facebook business where you're maximizing for
• 53:21
  search revenue, you can't alienate everyone. But in the process of not alienating everyone,
• 53:26
  you actually stand up for nobody. And therefore, you lose kind of the center of gravity as to like,
• 53:31
  what do you represent? What are your values? What do you care about? And a lot of entrepreneurs have
• 53:37
  been raised now with that construct where they don't think about it because of that kind of
• 53:41
  cultural ideology. And so, you know, there are things to like about what he says are things you
• 53:46
  should dismiss about what he says, but broadly what you're saying about this like moral imperative
• 53:51
  question, not being present in Silicon Valley, um, historically has been a problem. I think
• 53:57
  we're making a comeback. I think nowadays you're seeing more of that kind of class of entrepreneurs
• 54:01
  talking about it more openly. Um, maybe it's because the world is becoming more adversarial
• 54:07
  and there your politics and all these things but in the end like all companies have a home and it their nation state that they a part of for which the constituents are its civilians And you need to kind of support that full circle as a company to operate Yeah And I mean this is a I mean a perfect topic
• 54:26
  to dovetail into the sort of third pillar of the article that you released last week, which is this
• 54:32
  AI, the emergence of AI and proliferation of it, redefining capital. And you highlight that
• 54:40
  the labor share of GDP fell from 65 to 55 percent since 1980. Goldman's estimating that 300 million
• 54:48
  jobs are exposed to automation and data and intent are becoming the new capital. And we are
• 54:55
  transitioning into this era where the cost of labor is being compressed towards zero.
• 55:03
  And we need to figure out how to allocate money as that happens.
• 55:08
  Yeah. This is the topic du jour. I think everyone is thinking about it. There's a lot of anxiety
• 55:15
  and optimism on both sides, though I think, oddly enough, maybe one of the most anxiety
• 55:21
  inducing technology for otherwise Americans that tend to love all technology process and progress,
• 55:27
  which begets the question, like, why are people so anxious about it?
• 55:31
  And I think they're anxious about it because instinctively they are concerned about the
• 55:37
  right things, which is that they see that their own labor value changing very quickly
• 55:43
  in the ways that these LLMs have some reasonable ability to reason.
• 55:50
  And without going into like the fullness of what it means to have AGI versus kind of where we are today, the reality is we've seen productivity gains with the current tooling as it is, which is why it's become kind of like a wake up call.
• 56:03
  You also hear about a lot of pundits and spokespeople talking about, hey, you should not be worried because technology has always been the great equalizer and there's always been jobs like, you know, the cars didn't put the horse in.
• 56:20
  you know, carriage people out of business, like there were more jobs created with cars and yada,
• 56:25
  yada, yada. You'll hear this argument. And I think it's partially right, but it's also
• 56:31
  ignoring the complexion of the underlying effects that ripple through when you reset the economy.
• 56:39
  So, you know, no matter how much we think technology has benefited human civilization,
• 56:46
  which it has, we have to acknowledge it happened with this divide of the social contract, too.
• 56:54
  Like they both happened simultaneously. So people who have been displaced because of technology
• 57:00
  is partially why the Rust Belt movement was like as big as it was in the abilities for our politics
• 57:08
  to change. So to ignore that, like there was no down effects to otherwise like great productivity
• 57:14
  gains is like misdiagnosing the problem. Like these things are both true. Lots of productivity
• 57:19
  gains happen. And a lot of people got put out of the labor force as a result of it. Like, and we're
• 57:26
  actually suffering through that now. Like we already see so many of people that were displaced
• 57:31
  already where like they're not participating in the white collar economy that otherwise maybe they
• 57:36
  would have in a different way. So if you acknowledge that to be the trend, then you can easily
• 57:43
  extrapolate that it's only going to get worse. Like, yes, there'll be new jobs, but it keeps
• 57:49
  narrowing the pool of talent that is able to get those jobs or participate at that level.
• 57:55
  Because the bottom is just widening more and more. So I think you have to just acknowledge that
• 58:00
  both of these two things can be true. And the question then is like, what's the fulcrum?
• 58:06
  Like, where is that turning point where like the imbalance in society is just so large that like,
• 58:12
  it is irrecoverably damaged. And I think the reason people are skeptical or worried about AI
• 58:18
  is because it seems like this is the thing that will put us over that fulcrum. Because exactly
• 58:24
  what I talked about, it changes the cost of labor in like a really dramatic way that no other
• 58:31
  technology has. And it also directly competes with the cost of capital because the asset owners of
• 58:38
  these toolings and these technologies too, disproportionately are able to capture a wider
• 58:44
  TAM. And so one thing that's always been true with technology is that it is in some ways an
• 58:50
  equalizer for great access, but it also is become an incredible accelerant for inequality. Technology
• 58:59
  does not give equal access to everyone at the same rate. Some people benefit exponentially faster
• 59:04
  than others. And in that world, we have to imagine society just exists on a curve. And the curve
• 59:11
  question is, how does the median and the mean look relative to the range and the mode? And does it
• 59:17
  look fair? And even if the peak is higher, because technology allows you to achieve higher level of
• 59:23
  productivity on average, if the distribution is like really skewed, it is equally problematic
• 59:30
  beyond the actual peak and the notional value
• 59:33
  because society exists in a probabilistic outcome of distribution.
• 59:37
  And that's the key.
• 59:39
  We all live in a distribution curve.
• 59:41
  And AI can change that distribution curve really dramatically.
• 59:45
  Yeah.
• 59:46
  No, it is insane.
• 59:47
  Like I was saying earlier,
• 59:48
  we've been implementing it in our processes here at TFTC,
• 59:53
  and it is astonishing what it has enabled us to do.
• 59:57
  And we're just a team of five here.
• 1:00:00
  and what we've been able to do with a team of five with these tools.
• 1:00:05
  It would probably need a team of 15 or 20 at least.
• 1:00:08
  So I think it's two to 3Xing our productivity at the very least,
• 1:00:13
  probably 10 to 20X if we're being honest.
• 1:00:15
  And then just observing this and touching and feeling it for the last two or three years
• 1:00:21
  and sitting back and trying to be introspective and reflecting on
• 1:00:26
  how it's going to affect everything else in the economy.
• 1:00:29
  it is once you sit down and actually think through the order of operations and the second
• 1:00:35
  and third order effects, it's undeniable that this is going to be incredibly disruptive.
• 1:00:39
  Incredibly. And yeah, the thing is like, you're a smart guy. And so you're on the right side of
• 1:00:44
  history where you're going to figure it out and you're going to benefit as a result of it in an
• 1:00:48
  outsized way, hopefully. Right. But you have to also acknowledge your benefit is going to come
• 1:00:52
  at some loss towards the fact that the mode of people will not be able to figure it out as quickly
• 1:00:56
  as you can, or there's some kind of change in that distribution of outcomes that is going
• 1:01:01
  to look just remarkably different from what it looks like from the past.
• 1:01:05
  And so I think that's the key.
• 1:01:07
  Like, you know, it's great for like entrepreneurs.
• 1:01:10
  You'll hear how you can now have like, you know, solo companies with AI toolings as an
• 1:01:16
  entrepreneur and create incredible productivity tools and wealth for yourself.
• 1:01:19
  It's all possible, which is great.
• 1:01:22
  We should celebrate that.
• 1:01:23
  but of course not everyone can do it it just makes it better for the exceptional kind of people
• 1:01:31
  and they're just getting to eat a wider tam and and if you accept that most of most of society
• 1:01:36
  unfortunately for better or worse exists again on a curve where no one not everyone is exceptional
• 1:01:41
  you know that's where the problem is going to lie on like like there there there has to be some kind
• 1:01:48
  of ability to let those people who exist at the middle of the curve, not just on the outliers,
• 1:01:54
  but the middle of the curve to be able to feel the benefits of this technology. They have to feel it.
• 1:02:00
  Yeah. And I wanted to pull this up because I thought these two paragraphs really distill what
• 1:02:05
  you're getting at now. We can build on it from here. But the Nash equilibrium will emerge as
• 1:02:09
  all players defect as the rational dominant strategy, regardless of what someone else does
• 1:02:14
  for the price of inaction is too great to bear. So when the moment comes, everyone will rationally
• 1:02:18
  seek exit liquidity at the same time. I think this is getting to the crux of the articles.
• 1:02:25
  How do you avoid becoming the exit liquidity? This Faustian bargain of liquidity must be understood
• 1:02:30
  not as a mere possibility, not as a tail risk to be modeled and hedged against, but as the single
• 1:02:34
  most predictable mass coordination event in the history of human capital markets. Some argue that
• 1:02:40
  in a deflationary world, you want bonds, not only interest-bearing instruments or AI equities
• 1:02:44
  riding the exponential curve, perhaps, but my North Star is simpler and more structural.
• 1:02:49
  You want to own things that will not let you become someone else's exit liquidity. In that
• 1:02:53
  framework, the last thing you want to own in order are housing bonds and US equities. These are
• 1:02:58
  duration manipulation instruments engineered, whether intentionally or not, as the greatest
• 1:03:03
  generational wealth heist in history. What you want to own instead should satisfy the three
• 1:03:09
  conditions simultaneously in reverse. I guess we can get into that. I don't have to read everything,
• 1:03:15
  but I thought those two paragraphs really distilled what's going on here.
• 1:03:20
  Yeah. Yeah. Wow. When you read it out loud like that, it sounds more harsh than I thought I'd
• 1:03:26
  written it. And so negative. So again, I think my point was not to necessarily be negative,
• 1:03:34
  but to hopefully provide an optimistic version of what one can do to be on the right side of the
• 1:03:40
  trade. The reality is that we've talked a lot about this stuff in the context of US politics
• 1:03:47
  and us as Americans, but this is a global phenomenon. It's happening pretty much everywhere
• 1:03:51
  in the developed markets. It's happening in China too. You hear lots of labor displacement issues in
• 1:03:57
  China, even worse than here actually, because their automation is at a level that is probably
• 1:04:02
  beyond what we would find acceptable from like a social perspective. Things have been bad in
• 1:04:08
  generally in Asia for a long time with Japan and Korea leading the way with just birth rates.
• 1:04:14
  So all of this global trend is going to converge at some point where liquidity is ultimately a
• 1:04:24
  function that is self-reinforcing. When everyone wants to sell, they will all sell. And that fear
• 1:04:31
  of not wanting to be caught left alone is very real. And once it becomes obvious that there's
• 1:04:37
  no bid left, it'll just fall off the cliff. And I think that's why so much of what the US is trying
• 1:04:44
  to do is to mitigate that cliff. Like part of the reason I think tokenization in crypto has become
• 1:04:49
  so topical is because in the future, the idea is that it will let offshore investors buy US equities
• 1:04:55
  more easily, right? So look, if we can't buy it here, because we don't have enough wealthy young
• 1:05:00
  kids. Why don't we let foreigners buy it? Because foreigners love American stocks. Foreigners want
• 1:05:05
  a piece of NVIDIA. Foreigners want a piece of Facebook. They just can't access it, tokenize it.
• 1:05:09
  They're going to be the exit liquidity. So like the whole scheme, I think, is like,
• 1:05:14
  how do you create a floor? So the U.S. I think is on the best possible situation amongst the rest.
• 1:05:22
  Like there's a lot of good things to like about the U.S. economy and the talent and productivity
• 1:05:28
  that we produce.
• 1:05:30
  So if you ask me,
• 1:05:32
  which cards do I want to hold in my pocket?
• 1:05:34
  I will always pick the US as my ace cards.
• 1:05:37
  And if I'm wrong
• 1:05:38
  about this generational liquidity trap,
• 1:05:41
  it will be because the US is successful
• 1:05:42
  and is able to somehow emerge out of it
• 1:05:45
  with real productivity gains
• 1:05:46
  that is incredible,
• 1:05:48
  that is unlike anything we've ever seen before.
• 1:05:51
  And broadly shared across the distribution curve.
• 1:05:54
  That is shared across the distribution curve, exactly.
• 1:05:56
  But otherwise, you know, the thing that I always have known, and this is something I've known ever since I was a trader at Morgan Stanley, you know, when I was 21, the market just decided the price is at a point in time for transaction based on supply and demand.
• 1:06:12
  That's it. Price exists as a fixed observation, but it also exists as a wavelength.
• 1:06:18
  It is actually something constantly always in motion based on demand and supply.
• 1:06:24
  And it is this kind of Schrodinger quality about like, what does an asset price represent?
• 1:06:30
  You know, we think Bitcoin is worth $73,000 because that's what it says.
• 1:06:34
  Bitcoin is worth $73,000.
• 1:06:36
  No, Bitcoin is at this moment, $73,000.
• 1:06:41
  But the box in which you open it next time and the outcome can be different is basically
• 1:06:48
  Heisenberg uncertainty principle, right?
• 1:06:49
  Like it exists in a contour of quantity.
• 1:06:54
  Um, and in that world, you just do not want to be left holding the bag.
• 1:07:00
  And I think the demographic trends is very hard to ignore.
• 1:07:03
  That's just math.
• 1:07:03
  Like there's really no kids left.
• 1:07:06
  Like there's birth rate that isn't happening.
• 1:07:08
  And you're not going to fix that overnight because we're not aliens that generate all
• 1:07:12
  of a sudden 18 year old kids tomorrow.
• 1:07:13
  Like we have visibility to this, uh, this car crash that is coming.
• 1:07:18
  Um, the wealth inequality too, I think is really hard to solve because there just is
• 1:07:23
  always like issues with capital flight in the world that like the internet has made everything
• 1:07:30
  so, so easy. And, you know, in some ways, Bitcoin, I think, represents a little bit of that energy
• 1:07:36
  too, which is like, for the first time, you actually can have wealth that is outside of
• 1:07:42
  capital borders, you know, and because of that, like Bitcoin has an extremely valuable trait that
• 1:07:48
  I think people continue to misgage. Bitcoin's most valuable trade is the fact that it is
• 1:07:55
  actually software that doesn't have to physically exist and you can own it in a non-custodial way.
• 1:08:03
  That's it. It's so simple, but it is the exact feature that makes capital flight a real challenge
• 1:08:10
  for the fiat system. So all this to say, you just want to own the things that no one is selling,
• 1:08:19
  and hopefully the things that other people will buy in the future. And if you follow that North
• 1:08:23
  Star, I guarantee you, you'll be in a good, good place. Yeah. Do you buy the thesis that in an age
• 1:08:33
  of compression of the value of labor towards zero and incredible productivity gains from these tools
• 1:08:40
  You're going to have abundance and therefore pairing it with a scarce asset like Bitcoin makes the most sense.
• 1:08:47
  Yeah, I think that's right. I think there's other assets like Bitcoin, too, that can benefit from this tailwind.
• 1:08:53
  And also with the cost of labor going to zero, like I'm also not a doomer about that entirely in subscribing to that narrative.
• 1:08:59
  I do think like as long as humans are needed, which I think humans will always be needed until we truly get to some kind of AGI,
• 1:09:07
  which I think is still very, very far away, especially in the world of like hard physics,
• 1:09:11
  like maybe software and stuff, it's getting easier. But like in the hard world of materials,
• 1:09:17
  it's significantly like underinvested. There are always we demand for some human ingenuity in the
• 1:09:26
  physical world. And so it just means that like the cost of labor is changing between the physical
• 1:09:31
  and the metaphysical too. And we should acknowledge that. And if that's true,
• 1:09:36
  I would almost have to urge everyone to continue to invest towards a world in which you're in touch with the physicality of your own existence.
• 1:09:45
  It's not to say like it's not to say anything beyond the fact that like, you know, you can have thousands of thousands of things created.
• 1:09:56
  But if the bottleneck is not software and if the bottleneck is like hardware or a person doing the physical labor, well, those things go up in value, too.
• 1:10:05
  And you can't create those expertise either. Like the people that can like, you know, do the hard work will still continue to be valuable.
• 1:10:15
  Yeah, I completely agree there. It's. It's an interesting time, I think, like I said, reading it and it's like, ah, it was a bit unnerving, but I think also cathartic in a sense, because I think highlighting what the certainties are,
• 1:10:35
  where we stand and just having a sober recognition of that is the first step to being able to
• 1:10:41
  actually operate within this reality. And so that's why I really appreciated the piece and
• 1:10:46
  was happy at the time. I mean, we set this up before you even wrote this. And so once I read
• 1:10:52
  it, I was like, you know what, here's what we're going to focus on, because I think
• 1:10:55
  the timing of understanding all this can be more perfect. Yeah, yeah, yeah, that's right.
• 1:11:00
  And there's a famous quote from John Maynard Keynes, who I don't know if you know The Economist, but he was also on the other side of the Bretton Woods argument with Harry Dexter White arguing, of course, for the version that didn't win.
• 1:11:18
  He has a famous saying, which is that it's better to be roughly right than precisely wrong.
• 1:11:23
  And that's the spirit of what I'm trying to convey here.
• 1:11:26
  You don't know exactly where the future is going to be, but it's better to be roughly right than precisely wrong.
• 1:11:33
  And what you don't want to be precisely is exit liquidity upon something you know is inevitable.
• 1:11:39
  And if you just hold that, I think it should provide some comfort in adopting a more kind of positive outlook towards what you can do with high agency rather than being kind of captively forced into mechanisms that otherwise the system will constantly try to work against you.
• 1:12:01
  Perfectly said, Jeff. Really appreciate your time this morning. This was an incredible conversation.
• 1:12:07
  Yeah, no, this is super fun.
• 1:12:08
  Thanks for having me and the thoughtful questions
• 1:12:10
  so we can have our good banter for it.
• 1:12:12
  Yeah, we'll have to do it again at some point.
• 1:12:14
  Let's do it.
• 1:12:15
  All right.
• 1:12:16
  Peace and love, freaks.
• 1:12:17
  Okay.