Latest / TFTC: A Bitcoin Podcast / #792: Insurance Companies Are The Next Contagion with Nick Nemeth

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#792: Insurance Companies Are The Next Contagion with Nick Nemeth · TFTC: A Bitcoin Podcast

• 0:00
  You've had a dynamic where money has become freer than free.
• 0:10
  If you talk about a Fed just gone nuts, all the central banks going nuts.
• 0:16
  So it's all acting like safe haven.
• 0:18
  I believe that in a world where central bankers are tripping over themselves to devalue their
• 0:23
  currency, Bitcoin wins. In the world of fiat currencies, Bitcoin is the victor.
• 0:28
  I mean, that's part of the bull case for Bitcoin.
• 0:31
  If you're not paying attention, you probably should be.
• 0:36
  Nick, welcome back to the show, sir.
• 0:39
  Good to be back, Marty.
• 0:41
  This is third recording in five months, and this is the third different place that I've been in.
• 0:48
  We met in person last, but in the new studio now.
• 0:53
  And excited to catch up because a lot has happened since we met in June.
• 0:58
  at PubKey, particularly around Mark Walter and the fiasco he's found himself in.
• 1:06
  And I think we'll get into it.
• 1:07
  You wrote a piece called The Guggenheim Universe that really dives deep into that and the related parties.
• 1:14
  But before we get into that, I think just setting the stage for any of the audience who may not be familiar with our previous work together.
• 1:22
  I think really starting with the end user of a lot of these products.
• 1:26
  So let's put ourselves in the shoes of someone who bought an annuity because they were done taking risk, buying a premium life insurance policy.
• 1:36
  What is actually standing between them, that retirement check and a loss right now?
• 1:43
  So people typically don't understand they have credit risk.
• 1:48
  At a RAA, they'll say that they do, but they don't understand the risk part of that two word phrase.
• 1:56
  Um, so yeah, they're looking for security, you know, social security isn't enough. Cost of living
• 2:02
  is high. A lot of boomers have, you know, homes and mortgages. They want to make sure it's secure
• 2:07
  so they could pass them off, you know, to their kids. Typically, this is not something you can
• 2:12
  pass off. It's really just for the retirement, but it comes into an equation of retirement
• 2:17
  and ultimately security. Yeah. And so they completely misunderstand this,
• 2:24
  number one and then number two the people that they think they can trust are misallocating their
• 2:32
  their retirement funds and i think again going back to mark walters what's going on he sold
• 2:40
  the lakers overnight to josh kushner and bob eiger there's rumors that he's got to offload
• 2:47
  the Dodgers as well. I think he's got a big stake in Chelsea across the pond. And I guess let's just
• 2:54
  walk through that story from your perspective, because I won't rehash it because I think you've
• 2:59
  done much deeper research than I have. How insane is this? And was there any smoke around
• 3:05
  Mark Walter before this became obvious? Yeah, I would just say that it's not their fault.
• 3:10
  They're supposed to be, you know, a system in place to make sure that people are following
• 3:15
  rules. My view is that the regulators are asleep and the rules are dumb and the framework is awful.
• 3:22
  And since we last spoke, Granado and Prenjal, two graduated from Yale. I think they both went
• 3:32
  different directions. I think Prenjal is still at Yale. Granado's at UT Austin. They wrote this
• 3:38
  amazing piece that just absolutely lit up the world, really, of insurance. And all of a sudden,
• 3:44
  And I'm like, I write in my own way.
• 3:47
  I think it's good.
• 3:47
  I think it travels.
• 3:49
  People tell me it does.
• 3:51
  But they did it in a really concise academic way, talking about how the framework, the incentives, it's all bad.
• 3:59
  It's all bad in the industry.
• 4:00
  And if you're thinking about why asset managers want to buy these insurers or make their own, it's because they get fees, right?
• 4:09
  And in this particular case of Guggenheim, they're using it as a piggy bank.
• 4:14
  When I was on last, I was critical of Athene. I'm still a critical Athene, but just to be honest, you don't see Mark Rowan using it as a personal piggy bank. Athene is Apollo's firm piggy bank and profit center. And there's a huge difference when it comes to circular transactions and ultimately the law.
• 4:36
  Well, let's get into that. How was Mark using it as a personal piggy bank?
• 4:40
  Well, I mean, he originally used one to two billion dollars of policyholder funds to buy the Lakers and the Lakers are worth apparently 10 to 13 billion now.
• 4:50
  But at the time, he bought it for two, maybe maybe maybe a little bit more.
• 4:55
  So he funded the Dodgers purchase with the Lakers in large part.
• 5:00
  You're only allowed to use 30 percent debt, according to league rules.
• 5:03
  You only allowed to use 30 of private equity money because they don really want that money creeping into the game Instead he put up million so less than you would if you were mortgaging a house And he got the rest of the
• 5:18
  money from policyholders. And he's done this through F1. He's done this through the Dodgers
• 5:24
  TV deal, which he negotiated on the side of Guggenheim. And it seems like, allegedly,
• 5:31
  that it was a precondition for the purchase of the team, which was in distress because our former
• 5:39
  owner went bankrupt. But that's one example. And I came out with this huge piece where I'm
• 5:46
  cross-referencing all of these Guggenheim insurers. So if people don't know, Guggenheim is one of
• 5:52
  the big asset managers in the world. We're not talking a trillion dollar asset manager. We're
• 5:56
  talking half a trillion about a dollar asset manager. And they have a lot of SPVs that have
• 6:08
  single names that are just completely made up. And I track them over to the Delaware entity search
• 6:17
  list and they're made five days, seven days before. So they're just a pass through entity.
• 6:21
  And these are literally on the same insurers that you'll see there.
• 6:25
  The two that are under Walter are Delaware Life and Clear Spring, but Equitrust and Heritage Trust.
• 6:33
  It seems like Walter gave originally Magic Johnson money and then potentially their new holding company money in order to buy those.
• 6:41
  Those also invested in the Dodgers TV deal, at least.
• 6:45
  And Salmon's at the bottom was originally and still is a major economic shareholder of Guggenheim.
• 6:56
  So it's kind of like the reverse.
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  But Guggenheim used to be the full asset manager.
• 7:01
  They said they're moving away from it, but I just modeled out their book and it's substantially similar.
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  And these are all related parties.
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  Delaware and ClearSpring are getting investigated for saying that they're not affiliated party risk.
• 7:17
  I mean, affiliate paper.
• 7:21
  And so they had to, for $20 billion, say, oh, actually, all of this is affiliated.
• 7:27
  It's pretty obvious to say that it's affiliated.
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  What's very interesting at this stage is Equitrust still says they have zero affiliate paper and they have the same paper.
• 7:35
  And it's functionally the same ownership. There's also security benefit as well, which does not go to the top.
• 7:45
  It is the other Dodgers co-owner. So this is a huge sports story and it's getting extremely popular.
• 7:53
  If you see Pablo Torre on it. In fact, Jeff Pisan, that was the biggest defender of the Dodgers is on it.
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  And that's sort of ripped the cover off of, OK, affiliate paper regulators need to wake up.
• 8:06
  This could be a major issue as people like myself and Granato and Pringal are talking about the systemic possibly issues here.
• 8:16
  I think they're definitive, but I want to hedge my language a little bit.
• 8:21
  What makes something officially an affiliated party or affiliated paper?
• 8:27
  So there's two buckets for it.
• 8:29
  if Apollo is underwriting the loan and Athene is taking the paper and Apollo controls the marks,
• 8:37
  that is affiliate. But this is a different level of affiliate. And I think that should be
• 8:43
  delineated. But affiliate paper typically is manager underwritten, manager controls the marks
• 8:50
  and manages the asset. And the delineation, what's the other type of affiliation that you're
• 8:57
  Well, if it's for personal gain. So if I, you know, securitize my sub stack and put it on an insurer, that would be like extra affiliate. And that's what we're talking about in the Delaware Life and Clear Spring examples.
• 9:10
  Now, for the SPVs, I thought it was really clever putting it into Claude and ChatGPT and being like, what are these names here?
• 9:22
  And I got flavors.
• 9:24
  And it's probably because they wanted to remember what the hell they were chopping these assets up into.
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  And one of them was Chicago Streets.
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  And I call them all the Chicago Street-style LLCs.
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  And they're literally the cross streets of Chicago.
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  like, circling. I have an image on there of the Guggenheim headquarters, and I went on Google
• 9:45
  Maps and made a picture of that. So it's undeniable. And these are across all of those
• 9:51
  different insurers that total up to be bigger than SVB, and I believe the same size as SVB and First
• 9:57
  Republic and the New York Bank that went under in the regional banking crisis. So that's the scale
• 10:02
  of it. And I can talk about how that's kind of the tip of the iceberg. But it's certainly a big
• 10:13
  pressing issue. And we're talking about something that people are talking about, well,
• 10:19
  did he sell the Dodgers to get out of it Because Kushner can call his brother Kushner and he can tell his wife and wife can tell dad just drop the charges and and that that certainly possible um
• 10:31
  in the insurance world has been extremely lethargic and in the last meeting all of a sudden
• 10:36
  everyone decided hey we gotta pay attention well before we get into the expansion of this and the
• 10:44
  the untangling in more depth just to really break it down to first principles and basics of the
• 10:53
  mechanics of what people think they're buying on the insurance and annuity side and what mark
• 11:00
  walter and these affiliate shell companies and guggenheim are doing with that that money and what
• 11:07
  it means when people actually need to get paid out for their annuity or god forbid pass away
• 11:11
  they need to tap into that life insurance policy. How, how egregious is the mismanagement of these
• 11:19
  funds? What are they typically supposed to be doing? And if they're locked up in a sports team
• 11:24
  or a TV deal, how does that compare to the liquidity profile of historically the, the assets
• 11:30
  that you would invest in? So I'll take it briefly just from the policyholder side. Again, it's either
• 11:37
  take care of my wife after I pass away or my family, because I don't, you know, if, if, if I
• 11:43
  go, they got to make sure they have money or I'm going to take care of my wife and myself and
• 11:47
  retirement or something like that. You know, the assumptions are, these are insurance companies,
• 11:52
  insurance companies are supposed to be safe. Typically there's not been that many failures
• 11:56
  of insurance companies. So they don't even think about the credit risk. Really. They get a 50 page
• 12:02
  document. They say, okay, typically there's a salesman that's taking up to 15%, 10% to sell
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  them the policy and is telling them all these things who the industry has argued is not a
• 12:15
  fiduciary. So you can look on the internet and it's really popular on TikTok right now,
• 12:20
  selling insurance. We're talking about people that are selling a product that they don't
• 12:26
  understand, but they're not acting as a fiduciary, don't need licenses or anything like that.
• 12:31
  They might need licenses, but not security licenses. I have to double check that.
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  So they're getting into this like, OK, you're guaranteeing me this money. Good. That's what I want.
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  They're assuming that it's. There's a reasonable framework into making sure that they get the money.
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  They don't even think about it typically. And, you know, sophisticated wealth managers that might have a thousand accounts,
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  they'll put all of their clients into this because they think it's good. They've been told it's good.
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  They know there's credit risk because they have licenses, but they don't understand the credit risk.
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  So that's like the buyer of it and how they kind of get sold on this.
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  Taking to the other side, the justifications for taking excess risk are these are extremely long liabilities on duration that they know what they're going to be.
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  they can ultimately make the hurdle and then take profit out in the meantime.
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  And sort of a perverse incentive that nobody will admit is this is like the cheapest capital in the
• 13:35
  world, right? If you go to a bank, you're going to have to pay a spread on income. If you sell
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  an annuity at 4.5%, that is barely, probably at the time beating the 5 or 10 year, it might not
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  even, that's your hurdle rate. So they're able to take that money and invest it, collect fees off of
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  it in a lot of cases. But in particularly this case, it was used for personal gain. And there
• 14:06
  are examples of this and there are examples of people going to jail. Lindbergh is a good example.
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  He's getting sentenced, I think it's 12 or 15 years. But the Walter story, people know
• 14:20
  you know, the Walter name before any of this. And if they don't, they know, you know, the fact that
• 14:27
  he owns the Dodgers and the Lakers. And if you're a soccer fan, Chelsea, as a F1 fan, the Cadillac
• 14:33
  team, this guy has come out of nowhere when most, you know, he's like richer than Rowan, right?
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  Guggenheim is, you know, I don't want to diminish they are a big asset manager, but the vast
• 14:47
  majority of their assets are affiliate. So 40% of their revenue is tied to affiliate revenue.
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  And basically it's just been built out of this game plan and playbook of let's, you know,
• 15:00
  take advantage of this. And while the regulators are asleep, let's, let's, let's do our thing.
• 15:07
  Yeah. So the direct, like it makes like for insurance products, like something like a sports
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  on a duration side makes a lot of sense.
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  Long-term asset holds its value pretty well
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  in recent decades has been going up
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  over a long enough time horizon.
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  But the liquidity profile is such where it doesn't make sense,
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  where it's like, hey, somebody is claiming,
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  it's like you can't clip off chunks of the Lakers
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  or the Dodgers to pay out People have bought these insurance plans So that doesn make sense but let dig into the personal gain Because obviously Walter had to sell a stake in the Lakers
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  There's rumors he's trying to offload the Dodgers as quickly as possible.
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  That's where I'm trying to like, it's obvious now that he's caught and he's got to get the money back.
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  um but he like he's been personally gaining from taking the the pool of liquidity in these
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  insurance policies and buying the lakers in his name but at the end of the day he's got
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  creditors um in the form of these people who bought these insurance policies
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  it's pretty pretty insane when you when you break it down like that yeah i mean the dodgers are
• 16:21
  probably his best investment of all time. Carvana has also done well for him. The Lakers was a good,
• 16:28
  you know, quick clip. Like those are probably the best investments he's made.
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  If you look at Aldrich, which is Todd Bowley's asset manager, as well as TWG, which is
• 16:39
  another important part of this. It's Walter's asset manager outside of Guggenheim as he's the CEO.
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  out. They got a lot of money and grew assets in 2021 into super high multiples. And some of it,
• 16:55
  it's been a win, you know, just like everyone, he probably owns Anthropic and SpaceX, but
• 17:00
  there's a lot of losers in there. And, you know, one thing I hear is like, okay, well,
• 17:06
  if he used policyholder money to buy the Dodgers, like what's the problem? And it's the question of
• 17:12
  all of the opaque fabricated entities that, you know, they're legitimized in Delaware, but
• 17:19
  there's no business. It's a pass-through entity. We can't see what the other side is.
• 17:23
  Like, that's where the question to me lies. And then also,
• 17:30
  Sam Bankman-Fried invested in Anthropoc and he, you know, borrowed money and made these
• 17:35
  investments and he went to jail. And I think it's 25 years or something. Like, functionally,
• 17:40
  it's the same thing in my head actually it's a great analog it is i mean he was taking ftx
• 17:46
  depositor bitcoin investing in anthropic and trading with it this is mark walter doing the
• 17:52
  same thing with the insurance side of things now let's dig into like untangling the mess and
• 17:56
  the potential domino effect that could fall because i think a few weeks ago or over a month
• 18:02
  ago now when he sold the lakers people like oh that was weird i remember waking up one day i was
• 18:08
  like, oh, Bob Iger and Josh Kushner and a big part of the Lakers now. It's interesting.
• 18:12
  And then a couple of days passes. I got Mark Walters. Mark Walter did this in a fire sale.
• 18:18
  And then the numbers came out. What was it? A $40 billion hole or $20 billion hole that he needs to
• 18:24
  fill? He has to move $20 billion of affiliate paper. That's probably mismarked. If you're
• 18:31
  thinking about it. There's TWG that is, you know, with approval, we'll take five, five or six billion
• 18:38
  regulator has to approve it, but then there's, you know, a lot more. And then there's what
• 18:42
  Walter is personally already encumbered. I believe that the Lakers were the most
• 18:48
  unencumbered, meaning like it wasn't borrowed against to buy something else. So you sell like
• 18:54
  the one unencumbered thing, it might free something else up in order to help this
• 18:58
  liquidity picture as he's got to move money. And he doesn't have that many friends. I mean,
• 19:05
  sure, every billionaire has a lot of friends. But if you asked around in New York,
• 19:10
  these particular Guggenheim guys are not well thought of as businessmen. They're respected
• 19:18
  in some ways, but definitely have a lot of enemies. So it's the equation of who's going
• 19:25
  bail them out because we are talking about moving a massive amount of assets. And just to fill in
• 19:34
  the duration picture, durations are long unless there's runoffs. And I talked about this last time
• 19:41
  and the surrenders, meaning if you have an annuity, you might pay a fee, but you can typically get your
• 19:48
  money back. And the fee is only maybe 5% in year two. They already paid out the first year to a
• 19:55
  salesman. So they're losing money when you do that. And also it's basically a potential run.
• 20:03
  What I'm seeing talking to insurers and particularly asset manager backed insurers that
• 20:09
  do not like what is happening in the industry is everyone is like, we're not making as much money
• 20:14
  as those guys, but they're taking ridiculous risk. And we just like to bring the competitive
• 20:19
  dynamic back to reason. They're saying that surrenders are higher than they expected,
• 20:24
  even without the reputational risk of like, what is Mark Walter doing with my annuity?
• 20:31
  So right now, people are noticing that with AI, if so, if you think about it as a fixed payout,
• 20:39
  If you got an annuity for 3% or 3.5%, now that the 5-year or 10-year, 10-year is approaching 5%.
• 20:47
  So obviously, you're going to want that money back.
• 20:50
  It's worth it to pay any 5% fee because the equivalent treasury would be trading if it was 3.5% is trading down more today.
• 21:00
  In the past, there was a lot of lethargy and there was a lot of inertia there.
• 21:04
  But today, you can just take the agreement, put it into Chad and be like, should I get out of this?
• 21:09
  And ChadGPT will be like, well, I can't give you financial advice or whatever it says, but here's the math.
• 21:15
  And the math is not favorable.
• 21:17
  These products are built for the unsophisticated unless you're avoiding taxes.
• 21:23
  Because you've got to think about it.
• 21:25
  If you're paying out 10% to a salesman, there's a lot of people, a salesman I talk to that are really upset about what I say.
• 21:32
  But, you know, it's just you don't need to you don't need to.
• 21:36
  Someone doesn't need to be paid to get you into a good investment.
• 21:39
  Right. Typically. So that's 10% off the top.
• 21:42
  Then each year they're clipping 40, 50 basis points.
• 21:45
  There's operational fees, and then they take money out to either dividends, typically even for private equity.
• 21:52
  It's called dividends, if not balance sheet accrual.
• 21:56
  So all of that profit is coming out of somewhere where a sophisticated person could just go and get that yield even in the credit markets.
• 22:07
  But the math gets really bad as rates go up.
• 22:10
  So as rates have gone up, people have a huge spread what they could just buy the risk-free rate on.
• 22:19
  It's like, I mean, not that the government debt is much better, but you know, it's pretty liquid and there's a big market for it.
• 22:26
  The problem is it's based in dollars.
• 22:28
  Yeah.
• 22:29
  Yeah.
• 22:29
  Yeah. Well, and there's another aspect here too, particularly for Walter, like bringing this back
• 22:34
  to his particular predicament is even if he wanted to offload some of his assets, there's potential
• 22:40
  that those assets could be tied up in some sort of lawsuit. So nobody wants to buy that part. It's
• 22:46
  like a toxic part of his book. So he has limited options there as well. Correct.
• 22:52
  Yeah. And even if he moves it, you know, it's like, Hey, I stole from you, but I returned it,
• 22:57
  you know, a week later. That's not really how the law works. Now, how the law works tends to do with
• 23:03
  who your friends are. That's definitely a variable in this. And Walter's tried to flirt
• 23:10
  with the Trump administration. I think once it's broken into sports, I mean, if there's one
• 23:16
  community that's more rabid than the Bitcoin community, it's probably the sports world.
• 23:21
  that's a lot of votes and there's 29 teams that are pissed off at the dodgers and you know the
• 23:27
  owners are trying to go after the players to accept not being paid too much and it's like
• 23:33
  the reason why the balance is messed up is the dodgers the reason why the dodgers have messed up
• 23:38
  the balance is not because we're in a capitalist society where some people have more money than
• 23:44
  others and there's inequality and you know revenue of sports franchises it's because
• 23:48
  the money wasn't even his to a large extent, right?
• 23:53
  When you're making decisions with other people's money,
• 23:57
  as a fiduciary, you're supposed to be even tighter. But in this case,
• 24:01
  when it's just a piggyback, he's using it to fund his
• 24:05
  hobby assets. I mean, you think about the
• 24:08
  Otani contract loan. Was that a billion over nine years and delayed
• 24:13
  payout on the back end as well? So the funny part about that is
• 24:16
  it's very annuitized, right? You know, technically it has to be pre-funded, but it could just be
• 24:22
  pre-funded by the policyholders. Now I haven't found that yet. I'm trying to find that, but the
• 24:28
  problem is that Delaware does a really good job of, you know, having entities you can't see into.
• 24:35
  And it's a major problem, I think, in our system. Prefer that as soon as you get into the public
• 24:40
  domain. Like, I don't care what you do with your trust, how you name it, I don't want to see it.
• 24:45
  But when it comes policyholders or depositors, when that's the part of it, I want transparency, right?
• 24:55
  You're playing in the public domain and the transparency on these insurance assets and broadly the world is god awful.
• 25:03
  There's not even an edgar.
• 25:04
  If stock people or bond people are typically used to looking at financial statements, you don't even – you have to pay for that.
• 25:14
  on the statutory filing. And again, there can be a lot of these misnamed or, you know,
• 25:21
  made up name LLCs. Yeah. And LeBron looks like he was roped into this. So it was at 300 million
• 25:28
  of his Lakers contract was some weird side deal. Yeah. So right before LeBron signed with the
• 25:33
  Lakers, he got $300 million. It's like the timing of this is just, you know, it's quite interesting.
• 25:39
  and we just had the Kawhi story. I've been working with Hunter Brook and chatting with Pablo Torre
• 25:45
  in the DMs and, you know, the salary cap, like the NBA has a salary cap. The MLB wants a salary cap.
• 25:54
  If you just allow them like to go outside the salary cap like what there no there no point and credit to the NBA for cracking down on Balmer on that But on the Lakers side I think you can make an argument that there economic value of
• 26:12
  you know, getting $300 million loan on the devil's advocate side, LeBron bonds are probably money,
• 26:18
  good bonds, right? But that's what we can see, right? And what I encourage people to think about
• 26:26
  is what is chopped up or these small investments in things that are named after Amazonian rivers
• 26:35
  or Chicago streets? What even is that? And if you can't answer the question,
• 26:42
  you have to assign a risk probability to it. Understanding that these products are...
• 26:48
  If you bought it two years, three years ago, five, 10 years ago in the life insurance policy,
• 26:54
  you're getting a really bad deal based on what you can alternatively get outside of it today.
• 27:04
  Yeah. And I mean, that begs the question.
• 27:06
  And we met in June, we were focused on a theme.
• 27:08
  Now Mark Walter, Guggenheim pulled into the mix.
• 27:12
  I'm not going to lie, the last few weeks haven't really been paying close attention,
• 27:15
  but it seems like that whole part of the saga has fallen out of the news cycle quite a bit.
• 27:22
  Where do you think things stand?
• 27:24
  Is the clock ticking for Walter Guggenheim, these related parties?
• 27:29
  And then on top of that, it seems like the regulators are trying to, in retrospect, be like, okay, let's make sure everything's being reported correctly.
• 27:38
  And there's some, I guess, revisions being made to financials that have been released in the past.
• 27:47
  What's the situation there?
• 27:48
  I just came out with an AI piece on where I see the opportunity co-written by Liam Dalton,
• 27:56
  one of my good friends, you know, rock star that I talk to on a daily basis about markets.
• 28:01
  He said something, I think it was his dad that passed this along about shark attacks and how it
• 28:08
  might nibble your calf and then it swims off and then eventually comes for your leg. And,
• 28:13
  you know, you're lucky if it's just your leg because it's coming back for all of you.
• 28:18
  That's how I see the ebbs and flows and attention in markets.
• 28:22
  I can say that I think that the attention is there.
• 28:27
  I think that people are mad and I think people are ready for every next story.
• 28:33
  It's sort of, you know, been festering for a long time and the regulators are awake now.
• 28:39
  So once the people are upset, then all of a sudden the people that answer to the people start actually waking up.
• 28:47
  And they've been told this before.
• 28:49
  I've been yelling it from the rooftop.
• 28:51
  Affiliate paper is an issue.
• 28:54
  A lot of the liquid assets, the allocations to private credit, commercial real estate is a disaster.
• 29:01
  All of this is a problem.
• 29:03
  All of this is on their balance sheet.
• 29:04
  There's many specific examples like permitted practices, which are waivers to not follow the rules.
• 29:11
  I can talk about the ratings agencies.
• 29:14
  Systemically, there are massive problems here.
• 29:16
  and it, but they'd been there, right? So the question is, do the regulators wake up? We're
• 29:23
  going into a mid-cycle election. There's massive game theory. I'm super in the weeds of it. So I
• 29:33
  personally don't feel like the attention's fallen off. I've had the biggest, most busy August of my
• 29:40
  life. And this week, you know, a podcast with you, I got the earnings tomorrow morning and then two
• 29:46
  back-to-back podcasts. Like it's, you know, consuming me, you know, cause I gotta do, I gotta
• 29:53
  do my, you know, normal stuff. I'm not a perma bear. I'm trying to find opportunities, but at the
• 29:58
  same time, like I'm dedicating 60 hours a week to this insurance trade for ultimately no other
• 30:06
  reason, then I believe that it's systemic risk and it's going to be the story of the end of the
• 30:13
  cycle. Whether that comes in the next three months, six months, or two years is a question.
• 30:19
  I think that I could get granular in figuring out what would break what, what the transmission
• 30:26
  mechanisms are. It's a huge process when you're talking about a complex system. But ultimately,
• 30:34
  if the takeaway of people is like there is systemic risk, maybe they're buying more Bitcoin,
• 30:39
  maybe they're buying more gold. It kind of like speaks to the mindset of like, what are we doing
• 30:46
  with $40 trillion of debt, right? You see Druckenmiller talk, you're sad going out,
• 30:53
  oh, I'm the house, like, don't fight me on the end. But like, brother, can you focus on the
• 31:00
  other one, which is yields because yields just keep on going higher.
• 31:03
  Right.
• 31:04
  So we have the Iran war.
• 31:06
  We have just a massive amounts of risk that I never seen in my life Right Never you know maybe when I was 12 you know in 2000 2007 2008 but even COVID like it just happened so fast And then the solution was the solution I think that the
• 31:24
  solution here is really hard because the system is malformed and leveraged to an extent that is
• 31:32
  really hard to unwind. And also for macro people, hard to jawbone if you're the federal reserve,
• 31:38
  like we have you know rotting at the core of what's going on in my view
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• 34:11
  I'm just pulling up a chart to really highlight what you were just saying there. I had a good
• 34:19
  friend of mine send me this chart, which is global bonds
• 34:23
  priced in commodities. And if you just look at this and I
• 34:30
  am bringing up because you said COVID like and his my buddy's
• 34:34
  comment to me in our text read today was
• 34:40
  oh, we started the crisis COVID completely killed bond yields.
• 34:46
  And so if you look at this, it's just like falling, falling
• 34:48
  awful edge right now. I think it's important to recognize that anyone that's investing today,
• 34:56
  besides maybe my grandfather, who's still investing at 95 years old, has only experienced
• 35:02
  a secular bull market in bonds unless you recognize, I believe correctly, that a new regime
• 35:09
  shifted in 2020. I guess that is based in commodities. I mean, huge inflation in 21.
• 35:17
  But if you look at, you know, bonds, they started selling off in when the Fed raised rates in 2022.
• 35:25
  And people think that's like just a retracement.
• 35:28
  They're always going to go back lower.
• 35:30
  You know, it's inevitably inflation is going to drop off because it has.
• 35:35
  Right. Like that's just been the story.
• 35:37
  And the one phrase that I'm stuck on is, you know, when we're five years old in kindergarten or preschool,
• 35:43
  we played a game where we sat around in a circle and we were crisscross applesauce and
• 35:49
  it's a duck, duck, duck. And then it was goose. And all of a sudden things changed.
• 35:56
  Today in the investor's mindset, they're only focused on the duck, right? And they want to
• 36:03
  point back to the past two times that we were bailed out or the past five times that we were
• 36:08
  bailed out and it worked. The whole name of the game is figuring out the goose. And my investment
• 36:13
  thesis is it's okay to be right with the crowd.
• 36:17
  It is not okay to be wrong with the crowd.
• 36:19
  And going against that takes like a significant amount of intellectual disagree agree agreeableness in my view And you know sometimes it turns into personal disagreeableness in my case and I can work on that but it really
• 36:34
  hard to go against the grain because otherwise you're a gold bug kook or you know some Bitcoiners
• 36:40
  might feel that right yeah yeah I know what the feeling's like you you go away for for 10 years
• 36:45
  if you're saying this is crazy well it's a bill it's a bull market you know Bitcoin did well but
• 36:51
  You know, imagine being a gold buck from 2010 to 2020.
• 36:54
  Like that's that's a that's a pretty cranky existence.
• 36:57
  Right. But it doesn't mean that they're wrong.
• 37:01
  So figuring out, OK, what name of the game are we in?
• 37:05
  Is it be right with a crowd or get off the boat?
• 37:10
  That is kind of the question that I think investors should be asking.
• 37:14
  And, you know, I said this on the last episode we did, like cash is the best hedge.
• 37:19
  You know, I know we hate the dollar. You know, Bitcoin could potentially be a great it's not a security. So I can say it's I think it's a good allocation.
• 37:30
  But these liabilities, these credit cards, these mortgages, you know, I think people should be delivering their personal balance sheets and ideally stacking up six months at least of expenses.
• 37:43
  expenses and you could put it in the high yield account or something like that.
• 37:47
  You know, having a Bitcoin allocation, gold allocation, although gold, maybe, you know,
• 37:52
  maybe you tread water. If you put a 5% allocation to gold, you might think like when gold goes up
• 37:59
  30% per year, you're winning, but it's really just kind of supposed to maintain wealth, right?
• 38:05
  That's the idea of gold over millennia. And not everyone can own gold. Not everyone can own
• 38:12
  Bitcoin. If everyone had a thousand dollars in Bitcoin, what would the price of Bitcoin be?
• 38:16
  Right. Be much higher. And to correct myself earlier, my buddy said COVID stimulus broke
• 38:22
  the bond bubble, the Iran, the Iran war sealed its fate, but not completely agree. It's.
• 38:26
  Yeah. The Iran war is like the worst decision any administration has ever met because there was
• 38:34
  like an opportunity I saw where I was like, maybe the administration's right. Maybe we can grow our
• 38:41
  way out of this, but you jack up commodities, you're crushing over time.
• 38:46
  It's not like an immediate, but you're crushing over time, you know, local, local
• 38:52
  mortgages, the household budget, the real economy and how are oil prices going to go
• 38:57
  back down?
• 38:58
  Are we just like, it just, I don't see it happening.
• 39:03
  Yeah.
• 39:03
  And then, I mean, talking about draw your way out.
• 39:05
  I think a lot of that is hinging on the AI build out
• 39:10
  and that landing the plane.
• 39:13
  And this was a bit disconcerting from RAMP.
• 39:16
  They've been doing these.
• 39:17
  This is the second in their AI state of the market report.
• 39:20
  But this chart right here on the far left,
• 39:23
  the top 1% of enterprise AI spend has fallen
• 39:29
  for the first time in quite a few quarters, I think.
• 39:33
  So since December 25, who knows if that's seasonal summer doldrums, but.
• 39:41
  Probably a little bit having to do with the fact that it was August.
• 39:45
  Yeah.
• 39:46
  But I mean, that trend continues.
• 39:49
  I think that's what a lot of people have been saying.
• 39:52
  As long as these AI spends and gains and intelligence are up to the right, the party's still on.
• 39:57
  So this is something I'm watching closely to see if there is some turbulence there.
• 40:04
  I'm not bearish on the technology, but what we have to understand is there's so much debt associated with this buildup.
• 40:12
  And a lot of it's ending up on the insurers, right?
• 40:16
  And we're talking about the same thing, right?
• 40:17
  Where is the easiest money?
• 40:18
  Oh, well, insurers oftentimes, a lot is off balance sheet.
• 40:22
  If you look at Meta's balance sheet, the economics is tough because you have memory prices going so high.
• 40:29
  You have 90% gross margins on memory, nearly HBM.
• 40:34
  NVIDIA is still at 75%.
• 40:36
  To beat that hurdle, the technology has to be better than amazing.
• 40:42
  It has to be better than maybe Millennium Prize solving.
• 40:46
  It has to be we need nuclear energy and probably fusion to come within the next two years.
• 40:53
  And we also need this to permeate every economy in the world fast, because ultimately, I see the ability in an American economy that is $35 trillion of GDP per year, approximately.
• 41:10
  Maybe it's 33 or whatever.
• 41:13
  Two thirds of that is services.
• 41:15
  Services broadly is where you want to look for, okay, well, what kind of economic activity
• 41:20
  could be captured and optimized and productivity increased through AI?
• 41:24
  Like a trillion dollars of revenue, $2 trillion of revenue seems feasible and seems possible.
• 41:31
  But based on the cost and the depreciation schedules and the fact that you have
• 41:36
  not just NVIDIA that's trying to justify.
• 41:39
  that revenue. You have Amazon, you have Google, you have Meta, you have Anthropik, you have OpenAI.
• 41:46
  Apple seemed to mostly stay out of it, but you have Microsoft. You have a lot of market cap
• 41:52
  going for the same opportunity. The risk reward doesn't seem like we're talking about better than
• 41:58
  Amazer. Could it work? I'm undecided on the ROI, right? Even on the credit side, I'm not
• 42:05
  the most pessimistic on the credit side. I'd rather own the equity because if it works,
• 42:10
  you're only clipping a coupon when it comes to credit. I want to own the equity if it works.
• 42:17
  But in that grand picture, understanding that we have a 5% cost of capital nearly for the government
• 42:23
  that's compounding at $40 trillion every year. A lot of that's rolling off and being refinanced
• 42:30
  higher from lower levels before. You have the corporate sector, same things happening there.
• 42:37
  This AI build is compound interest. You have emerging markets as well. You have Europe,
• 42:42
  that's a total disaster. You have Japan and South Korea that are some of the lowest birth rates in
• 42:49
  the world. South Korea and Japan, South Korea on the memory side, but Japan has a lot of
• 42:55
  industrial companies and they're more productive than Europe, that's for sure.
• 43:00
  But if nobody is being born and hasn't been born for the past 20 years, the economic picture on the macro side gets really ugly.
• 43:10
  And then, you know, the hopium is like you have robots and robots come in and do all the work and we're all old and fat and the robots take care of us.
• 43:19
  That doesn't seem super fun to me.
• 43:22
  It seems like sort of a dystopian world.
• 43:26
  The economy that I focused on is the human economy.
• 43:30
  And that is in almost any outcome going to experience a massive amounts of pain.
• 43:35
  And I think better to address it sooner than later, especially as you're looking at the capital being distributed over the past since 2008, the wealth inequality to, you know, use a socialist term.
• 43:48
  It's legit and it's real.
• 43:50
  When it comes to AI, it's like the same thing on steroids.
• 43:54
  You know, do you redistribute that through a socialist policy to the masses?
• 43:58
  I mean, that might be what gets elected.
• 44:02
  Like that's totally an outcome.
• 44:03
  Does that go well?
• 44:05
  Probably not.
• 44:06
  There's bad studies on UBI.
• 44:08
  And I think UBI would be the best way that we would do it.
• 44:11
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• 46:35
  Yeah, I mean, really, this is not straight up UBI, but it has been encouraging to see
• 46:41
  those particularly on the data center built outside
• 46:45
  of the AI expansion become privy to this social dynamic that you just described and begin to promise municipalities like hey we going to pay a ton in property taxes and
• 46:59
  in sale income tax, whatever, my sales tax. And then we'll also reinvest in these communities.
• 47:06
  So there's one, I think it was in Western Pennsylvania that came out and announced
• 47:09
  that they're going to give $10,000 to every citizen. Great. The poorest state in the world.
• 47:14
  Yeah. I mean, in the United States, oh, maybe beat by Mississippi. Like, I'm glad that if a data center goes into West Virginia, the data center can afford to balance out the state. We're talking about a whole country and we're talking about a whole world, right? There's not, that's not how economics work. If it did, we should all be communists, right?
• 47:34
  you need
• 47:36
  you need
• 47:38
  to have economic activity that's
• 47:40
  natural and spurs more economic
• 47:42
  activity and
• 47:44
  the idea that it's all going to come from AI
• 47:46
  and all jobs are going to be solved
• 47:48
  except maybe entertainment
• 47:49
  like that's not
• 47:52
  a good picture in my view
• 47:54
  no it's interesting I had a
• 47:56
  conversation with Michael Every from
• 47:57
  Rabobank last week
• 47:59
  we talked a lot about yields
• 48:02
  and like what is happening
• 48:03
  right now, you made a very good point. It was like, like financialization at this particular
• 48:10
  inflection point is way less important than physical stuff. Like you need to get the commodities.
• 48:13
  And so I think the market is realizing going back to the yields priced in commodities chart that I
• 48:21
  brought up earlier. I think that's expressing that very acutely, which is people saying, Hey,
• 48:28
  U S treasuries, you've been good to us for, for, you were good to us for four decades,
• 48:31
  but now we're in this sort of fourth turning inflection point whatever the hell you want to
• 48:35
  call it and we need the stuff to build out new economies to to be productive in in the 21st
• 48:41
  century and i think that chart perfectly expresses that and like to play devil's advocate too on the
• 48:48
  job front i had a discussion with john arnold who's a partner of mine at 1031. we do a weekly show
• 48:55
  on mondays and we were just talking about if you look at blue collar wages are beginning to creep
• 49:00
  up and so there is like a bit of lag effect to a lot of the economic policies that the trump
• 49:04
  administration has set forth over the last two years um and then on top like like just putting
• 49:12
  the devil's advocate can they thread a needle immigration to like what was a net negative 2.9
• 49:18
  million um immigrants so the first 18 months of the trump administration it's like okay maybe housing
• 49:24
  and rents can come down and that opens up jobs for blue collar Americans who were competing with
• 49:31
  with those immigrants who have since left the country like the question is is yes directionally
• 49:37
  correct but is the impact enough to land the plane and create this productivity growth boom
• 49:43
  yeah I mean economists talking long runs um the blue age is creeping up in this the long view of
• 49:53
  where home prices have gone and where real wages have gone over a long period of time.
• 49:58
  Like if they go up half a percentage point, like what are we talking about? Right.
• 50:03
  And then the question is how long I could blue. If I were telling somebody that wants to, you know,
• 50:09
  start a family, doesn't have, you know, massive, you know, doesn't want to own a hundred foot yacht,
• 50:16
  like go towards that. That's going to last the longest. But, you know, I think the real bull case
• 50:22
  is that robotics ultimately brings the efficiency, physical AI that gets us out of this whole
• 50:30
  on growth that Dorkesh, your peer says, you know, it's going to double GDP every year,
• 50:37
  50% every year. You could talk to Kathy Wood on her estimates. That doesn't happen while blue
• 50:42
  collar jobs are, you know, still around, right? So, you know, you can't have it all, you know,
• 50:49
  that's one outcome. One thing I would think about on the physical side is what's happened with Iran
• 50:55
  and the straighter arm moves. And then again, trying to like expand this, right? Crushing the
• 51:00
  Iranian economy for over a decade, probably five decades. They're left so far behind. They do have
• 51:09
  resources and access to a choke point. They're going to experience pain if they choke the point,
• 51:14
  But they're willing to do that because they're used to being poor.
• 51:18
  If you were to apply that to Brazil, like let's say Brazil sides were not going to sell copper anymore or, you know, whatever grain facility, whatever the price is now, you know, the price of the brick is going up to use the wire terms.
• 51:34
  All of a sudden their price, you know, they're not price takers anymore.
• 51:39
  That's how you see sort of an inflection in commodity prices.
• 51:43
  At the same time, it could happen where people are selling treasuries and don't really want to do with the dollar anymore.
• 51:48
  All of a sudden you know blue collar is going to need a 20 percent you know plus yearly increase in their wages in order to just tread water And that that a scary equation Now the the alternative now let let talk about the alternative there a massive deleveraging right home prices crash stock prices
• 52:14
  crash bond prices probably crash initially um then there's a huge flight to quality in terms of
• 52:21
  treasuries and super high quality corporates that's extremely painful you know every everyone
• 52:28
  thinks that's the worst thing in the world. But there's only two ways to get out of an overleverage
• 52:34
  system. Either the equity goes up or the debt goes down, right? And the debt can go down by defaults.
• 52:43
  And by, you know, devaluation is another way, but, you know, that's kind of just like inflation.
• 52:50
  So if we're talking about inflation, it's either inflating out, that's one outcome.
• 52:56
  It happened in World War II. High inflation makes, you know, it's going to crush the bond market.
• 53:02
  Honestly, yields are going to go up 12 percent. You can build the equity in the system that takes earnings based on real economic activity.
• 53:13
  That has to be widely distributed for society to take it. Or you just have a deleveraging of the system and bonds just go down.
• 53:21
  So I guess three outcomes I would pick the leveraging based on the odds that I see today.
• 53:28
  Wise man once said we need to end boomer communism.
• 53:32
  Yeah, I forgot.
• 53:35
  It's midterm season.
• 53:36
  I got to start campaigning more.
• 53:39
  Yeah.
• 53:39
  Well, I mean, I really like the track that we've gone down over the last 20 minutes, but bringing it back to the insurance world.
• 53:49
  Again, focus on the regulators and what they're doing.
• 53:52
  I wanted to bring it up earlier, but forgot to, again, regulator and leagues being asleep at the wheel.
• 53:58
  I mean, we had another example of egregious for bending of the rules with Matt Ishbia, the Phoenix Suns, where he used basically his stock portfolio of United, what is it, wholesale mortgage to basically get a margin loan to buy the Phoenix Suns and the women's team.
• 54:19
  And then the price of the stock fell like 90% over the last three years.
• 54:24
  And so he's getting margin called.
• 54:25
  and so like you're not supposed to be able to buy these teams with that much debt
• 54:31
  no but what he did was he ended up gambling on rates going down because he was like rates are
• 54:37
  going to go down well the mortgage company did not the whole company did not just him personally
• 54:42
  yeah yeah no but he was using that as collateral and jv morgan i think had um had had the lean to
• 54:50
  that to lend towards. But yeah, you're supposed to only have 30%. There's also ubiquity. Both of
• 54:56
  these are a Hunterbrook stories to give credit where it's due. And ubiquity sending drones,
• 55:01
  or not drones, but like some communication stuff to Moscow. The NBA teams are quite the picture.
• 55:09
  Josh Harris at the 76ers. I mean, I'm a finance guy. The financialization of an economy is
• 55:20
  supposed to just grease the skids. If it is financial engineering, there's really no value
• 55:26
  add, right? You're supposed to make interchange, lower transactions, easier access to capital
• 55:32
  markets, higher, you know, essentially more efficiency to, you know, connecting buyer to
• 55:39
  seller, lender to debtor, I mean, to borrower. It's gotten so far past that. And if that was a
• 55:50
  good thing, Europe would be doing amazing. But it's not. That doesn't lead to growth. And that
• 55:55
  is the problem. It leads to more leverage. And over the course of a really long bull market,
• 56:01
  this is piling into a bunch of different pockets. The federal balance sheet's one,
• 56:07
  the corporate world, the private credit and shadow banking sphere, it fills pockets. It's like when
• 56:16
  the Titanic's going down, the water goes into every room, right? The one that I'm looking at
• 56:22
  very specifically is insurance, because I think, you know, if incentives determine the outcomes,
• 56:31
  that's where the incentives are the worst out of any industry, including banking.
• 56:37
  Well, I'm going to bring up this chart and piggybacking on that. I mean, you have this
• 56:41
  here, the contagion path of Delaware life and clear spring fall or fail. Um, you said the shark
• 56:50
  bit the calf out there making its turn, coming back for the body. Is this one of those situations
• 56:55
  in your mind? So this is just a small little contagion, right? This is a contagion amongst
• 57:01
  one group. And this is just the Guggenheim insurers. You know, they're not, they don't
• 57:07
  I'll have Guggenheim labeled on it,
• 57:09
  but that's what they are.
• 57:11
  And it Delaware Life and ClearSpring the Walter entities gain bridge uh go down and what the effect is on other insurers salmon group not so bad but equitrust and heritage which are under amistad
• 57:29
  group formerly owned by magic johnson who you know magic johnson didn't make that much money in the
• 57:36
  NBA, right? How does he, you know, become an owner of the Dodgers or the Lakers? Well,
• 57:44
  it's through insurance. And those two entities go down as well. If you're looking at the total
• 57:50
  amount of assets and the high risk component, you're talking about like Silicon Valley.
• 57:57
  Now, did Silicon Valley take down the system? No. But what I'm saying is that this is just the tip
• 58:02
  the iceberg and you you have um you don't have the fdic you know it's it's it's not as bad too
• 58:13
  as silicon valley bank just owning you know low yielding long duration treasuries that are hard
• 58:20
  to um that are easy super easy to offload you're talking about liquid assets you're talking about
• 58:28
  private credit. You're talking about commercial real estate as TWG, and I'm using a lot of
• 58:37
  entities, and I hate when people do this to me, but the Walter asset manager and the Bowley asset
• 58:42
  manager, Eldridge, they've gotten into everything. Commercial real estate is huge on the Eldridge
• 58:50
  balance sheet, and I've been tracking that onto the banks. And I see it on the banks,
• 58:55
  And all of a sudden, I'm looking at the values of the properties and trying to do comps on it.
• 58:59
  And the banks take their first lien in real estate these days.
• 59:03
  Their capital charge is lower for that.
• 59:05
  That's just typically where they lend to real estate now.
• 59:08
  And they get the mezzanine from insurers or from asset managers, real estate firms.
• 59:16
  Even the first liens value, like the total debt out in the first lien, the properties and cases I found is way below that.
• 59:25
  You're looking at stories of Brookfield and KKR and they are selling for pennies on the dollar, commercial real estate, office buildings and cities that were supposed to do well.
• 59:37
  And quite frankly, nobody wants to work in the office still to this day.
• 59:41
  And we don't really have the population growth.
• 59:44
  Yeah.
• 59:45
  So what should people be looking at as we round up Q3 heading to Q4 here?
• 59:50
  Um, I think that the AI trade is kind of like holding this entire economy together.
• 59:59
  Um, if that doesn't do well, I think that there's very little chance that anything else,
• 1:00:04
  uh, there's not enough animal spirits to hold that, hold that in.
• 1:00:07
  Um, I would look where rates are going higher or even same level for longer oil, all of
• 1:00:14
  the macro stuff.
• 1:00:15
  Um, and then, you know, follow me on insurance.
• 1:00:18
  I'll be on it.
• 1:00:19
  Um, as if the insurance companies start to go, like, you know, have a game plan for that.
• 1:00:25
  I don't mean like sell everything right now.
• 1:00:28
  Um, you know, if I'm not giving financial advice, asset classes I would avoid would be
• 1:00:34
  real estate.
• 1:00:35
  It would be broadly, you know, high risk credit.
• 1:00:40
  If you want to have treasuries, like do you, um, you know, you're just taking dollar risk
• 1:00:46
  there really.
• 1:00:46
  and duration if you get out further. But duration is what it is. It's a problem when you have a
• 1:00:55
  liquidity problem. And then if you're going to take risks, I still think the best answer is
• 1:01:02
  equity. I think Bitcoin has its allocation, but be very strategic because if you're buying the S&P,
• 1:01:09
  I don't know.
• 1:01:13
  I like just 500 companies
• 1:01:15
  and I don't feel great about a lot of them.
• 1:01:18
  No, it goes back to like,
• 1:01:20
  did somebody just call Goose?
• 1:01:22
  I was thinking about like Bessent earlier today,
• 1:01:25
  raised the buyback to 6 billion.
• 1:01:27
  It was previously doubled from two to four.
• 1:01:31
  Only a couple of weeks ago,
• 1:01:33
  you had that whole back and forth.
• 1:01:34
  Maybe not the back and forth,
• 1:01:35
  but you had Druckenmiller come out and call him out
• 1:01:38
  and say, hey, it's the fiscal side, unless you fix that.
• 1:01:40
  It really doesn't matter what you do.
• 1:01:42
  On the margins with yields, but to your point,
• 1:01:46
  100%.
• 1:01:47
  But if you fix the fiscal side,
• 1:01:49
  the economy goes into a recession.
• 1:01:52
  Yeah.
• 1:01:52
  Well, I mean, it's like damned if you don't.
• 1:01:55
  And then going back to the big question,
• 1:01:58
  has goose just been called?
• 1:01:59
  And even if yields explode even higher than they have already,
• 1:02:02
  if the market begins to turn and the Treasury and the Fed step in
• 1:02:06
  and say we're gonna do whatever it takes at all costs.
• 1:02:08
  Does that even matter?
• 1:02:09
  I think because everybody just called bullshit.
• 1:02:12
  Druckenmiller is the goat at being right
• 1:02:16
  when with the crowd and not being wrong with the crowd.
• 1:02:21
  He's right, right?
• 1:02:23
  Something there is going to be push comes to shove,
• 1:02:26
  even if we haven't felt it in our investing lifetimes.
• 1:02:29
  There's going to be a time where you actually have to choose between the bond and the dollar, the bonds and the dollar, the treasury, the yields and the dollar.
• 1:02:38
  The fiscal equation will be reset if it's not chosen.
• 1:02:48
  It will happen.
• 1:02:49
  The entitlements that we have on a present value basis, Druckenmiller's status, it's $140 trillion or $240 trillion.
• 1:02:57
  dollars, what we've promised is not happening. Right. Um, so at some point we need to experience
• 1:03:03
  pain. I'm on the same side as him for, I think a different way to the, to the problem. Um,
• 1:03:10
  but it's much better to deal with these pains take, you know, I think I said this on the first
• 1:03:16
  episode, a recession is not the worst thing in the world, right? What is the worst thing in the
• 1:03:21
  world is is is a collapsing system and until then uh you know for the boomer communism point you
• 1:03:28
  know we're we're servicing the old and and jeopardization of the on yeah i mean yeah we
• 1:03:36
  discussed this like in new york when we're in person like these these things are cleansing
• 1:03:39
  mechanisms recessions like they're necessary we need that's free market that's risk you're going
• 1:03:45
  to take risks some people taking risks are going to fail you need to let them fail and we've lived
• 1:03:50
  in an economy that is structurally not allowed a lot of waste and zombie companies to fail.
• 1:03:58
  And yeah, it's going to be painful, particularly in the short to medium term.
• 1:04:01
  But in the long term, it's completely necessary.
• 1:04:05
  And to the point about entitlements and tying it back to the demographic issues that you
• 1:04:10
  were alluding to earlier, yeah, I think off balance sheet debt on the federal government
• 1:04:16
  side is like 220, probably like $240 trillion.
• 1:04:18
  Now, it was $220 this time last year.
• 1:04:21
  I bet that balloons faster than the Treasury debt.
• 1:04:25
  If I were to guess without knowing for certain, that is an unfathomable number.
• 1:04:32
  Every year, our politicians vote to increase the entitlements.
• 1:04:36
  And Republican or Democrats, at least the Democrats say they're going to do it.
• 1:04:40
  Well, the demographics don't support it.
• 1:04:42
  whether or not like you, you want to squint and say, we can grow our way out of this with,
• 1:04:45
  with growth and, and bringing yields down. It's like, I don't see it. Like you're not
• 1:04:56
  going to have enough young people to pay into it, to pay back. Cause the money's not there
• 1:04:59
  in the first place. Yeah. Imagine that like, this is the best set, you know, I was, I was
• 1:05:06
  happy about percent. I'm so pissed off at him. He wants yields to go down while growth goes up.
• 1:05:12
  So how does that happen? Inflation goes down. What's happening to commodity prices?
• 1:05:17
  Well, they're not helping because they got into a war with Iran. Right. And you also have an aging
• 1:05:23
  demographic that is inflationary as you have people leave the supply side and go strictly to
• 1:05:30
  the demand side in retirement and demand the labor of young people to take care of them
• 1:05:35
  at nursing homes or whatever. That is taking it out of what the supply is going to taking care of
• 1:05:44
  old people. You might have a college girl, she graduates, she becomes a nurse. Alternatively,
• 1:05:49
  it could be more productive for something that you're doing an economic activity that's servicing
• 1:05:56
  somebody that's also producing in the economy versus just spending down their last 10 Ds.
• 1:06:05
  It's not yet. Demographics are certainly not good. And it's really funny because you see the anthropic commentary for the past couple of days.
• 1:06:15
  Like the engineer is saying it's going to kill us all.
• 1:06:20
  It's going to kill us all. You want to know what the easiest? He's like, oh, but we can't we can't slow down because then opening eye will win.
• 1:06:28
  The prisoner dilemma I mean but basically saying the prisoner dilemma is such we all have to keep going forward Okay But want to know what would slow everyone down a recession yeah a recession and ai is not going away like it here but you want to slow things down you
• 1:06:45
  think it's getting too hot and heavy well what's the answer uh your ipo fails funding dries up
• 1:06:53
  all of a sudden that affects everyone and then we you know slow down like the development of ai
• 1:06:58
  will naturally slow down. The fact that we're avoiding these economic cycles, which people give
• 1:07:04
  a lot of pain to John Maynard Keynes, the original economist of intervention during down cycles.
• 1:07:14
  I've discussed this before. You've got some hot Keynes takes in there.
• 1:07:19
  Yeah. He didn't say you avoid cycles. He would have never said that. If he was alive today,
• 1:07:26
  he would be like, you guys are ridiculous. What are you doing? I, you know, he's, he's the most
• 1:07:31
  undervalued economist and he's also witty as hell if you read his writing. Um, but yeah, I mean,
• 1:07:38
  like we've just gotten so far into this, like, um, it's almost like, you know, we all think we're
• 1:07:46
  special in the economy is a special forces operator that wakes up and takes modafinil and,
• 1:07:51
  you know, is on like all these performance enhancing drugs to, you know, do 48 hour
• 1:07:56
  missions without sleep. Like that's what we're trying to do economically. And ultimately,
• 1:08:03
  maybe they can do that for a 10 year period and then they retire. We, we literally are trying to
• 1:08:10
  do this broadly as not, you know, the most insane people, you know, to creme de la creme of people
• 1:08:17
  that push themselves to the limits.
• 1:08:19
  We're trying to do that to the entire economy,
• 1:08:21
  globally, every economy,
• 1:08:23
  whether France wants to work in August or not.
• 1:08:26
  We're all leveraging up
• 1:08:27
  and trying to avoid economic cycles.
• 1:08:30
  And what do you see?
• 1:08:31
  You see over time,
• 1:08:33
  the people that have ration and reason
• 1:08:34
  typically get crowded out.
• 1:08:36
  And you were talking about
• 1:08:37
  the patient capital last time, right?
• 1:08:42
  Patient capital dies.
• 1:08:44
  And there is a...
• 1:08:47
  There's a significant need for clearing out and leveraging that we haven't gotten since 2008.
• 1:08:54
  2020 was a flash in the pen.
• 1:08:58
  Yeah.
• 1:09:01
  Keynes believed in cycles, but the Austrian view would be that he exacerbates them to both ends with this policy.
• 1:09:09
  I agree with that.
• 1:09:10
  But yeah, the difference.
• 1:09:13
  point he would say their cycles and we're he would he would acknowledge that what's happening right
• 1:09:17
  now is a an attempt to prevent he would have vehemently said that you could not avoid economic
• 1:09:23
  cycles he would have said that you can make them easier through fiscal response right you can
• 1:09:33
  pick up government spending during a down cycle austrians would say that's unnatural you shouldn't
• 1:09:38
  do that like that's where the debate is right instead we're like what if we just never sleep
• 1:09:45
  what if what if we just try that like why we get more hours we like if you live 90 years but you
• 1:09:52
  never sleep that's like having 30 years more life just why don't we just do that yeah i mean we
• 1:10:00
  haven't even touched on china either if you talk about demographic problems uh and they're never
• 1:10:06
  sleep race with the u.s right now it's uh it is very interesting it is sorry um i think china
• 1:10:16
  doesn't want to play the ai game why you say that because i think they would be happy just
• 1:10:22
  i'm operating their factories and keeping power and you know like they're they're good at that
• 1:10:28
  the fact that they have to play ai is only because we're playing ai right so yes if they see the
• 1:10:36
  advantage to kind of cut ahead of us in AI because they know it inevitable But if Xi Jinping had a button where he was like AI is gone forever I think you press it
• 1:10:50
  That actually wouldn't shock me either.
• 1:10:53
  Yeah.
• 1:10:59
  AGI is here though. We won the race.
• 1:11:01
  The models are getting great.
• 1:11:04
  Jensen said, so Jensen said, AGI is here. I believe him.
• 1:11:06
  jensen said so he didn't wake up a loser um he wears a leather jacket
• 1:11:16
  ah nick it is always a pleasure sir what um i mean i feel like we just gave some final thoughts
• 1:11:22
  but any anything we didn't touch on any parting thoughts for for the audience here uh no i'm i'm
• 1:11:29
  excited to see how crypto it does you know i would i would love you know a nasty couple months
• 1:11:34
  so that it bottoms out when everyone knows about it bottoms out it's probably not gonna happen that
• 1:11:40
  way um but but i'm definitely getting more constructive on bitcoin looking good right
• 1:11:46
  now 77 down a little bit today it's doing that it's doing that thing but it does it's where it
• 1:11:53
  lulls you uh lulls you to sleep a little it'll go sideways for a couple months then either
• 1:11:59
  or up.
• 1:12:01
  We just need a flash crash.
• 1:12:03
  Sailor gets liquidated
• 1:12:04
  and then we can rebuild.
• 1:12:07
  He's not going to get liquidated.
• 1:12:08
  That's the.
• 1:12:10
  No, maybe,
• 1:12:11
  maybe an exit call.
• 1:12:12
  Maybe,
• 1:12:13
  maybe he brings his liquidation price up to 50 grand and thinks there's no way
• 1:12:17
  it can break the lows of this one.
• 1:12:20
  I don't know.
• 1:12:21
  I do think,
• 1:12:22
  you know,
• 1:12:22
  our conversations on that people saying,
• 1:12:25
  you know,
• 1:12:26
  oh,
• 1:12:27
  well,
• 1:12:27
  you know,
• 1:12:28
  they're nitpicking.
• 1:12:29
  our last podcast, the end of the last podcast.
• 1:12:32
  And my criticism of Sailor and this sort of digital credit strategy
• 1:12:37
  and the leveraging of Bitcoin in a way that's, you know,
• 1:12:41
  engineering and bullshit made by ChatGPT.
• 1:12:45
  They think like I'm bearish on Bitcoin and like, you know,
• 1:12:50
  we were talking about the game theory and, you know,
• 1:12:53
  I like having conversations where it's like I learned something
• 1:12:56
  and you're talking about the ASICs and the difference between GPUs and what China's got
• 1:13:01
  and what they don't got. Like I was just learning there. I don't pretend to know, you know,
• 1:13:05
  everything about everything. I think that it's a bad force over the next cycle. I would love,
• 1:13:14
  as I said, I would love to see the torch be taken from, you know, Bitcoin engineering to,
• 1:13:19
  you know, meme coin, Trump coin, like whatever. Did you buy a laptop?
• 1:13:25
  No, I didn't. Went to $200 billion. I'm like, $300 grand of liquidity. What are we doing?
• 1:13:32
  Okay. Thank you, Honor Rider. Another good lesson in what not to do.
• 1:13:37
  The next cycle, I would like to see cleaner. The last one was successful.
• 1:13:42
  Well, I think we've talked about this before. This is what I'm investing behind at the fund.
• 1:13:48
  There's a lot of what we're talking about is leverage, right? But bad collateral,
• 1:13:50
  bad results um bitcoin introduced the collateral packages dual collateralizing
• 1:13:58
  credit with big and i know you i think actually now i'm recalling i think the first time i brought
• 1:14:02
  this up you were you were a bit um bearish on the concept but i do think pairing
• 1:14:08
  bitcoin with traditional credit structures creating uh these uncorrelated
• 1:14:14
  assets with different idiosyncratic risk profiles makes a lot of sense, particularly if it's
• 1:14:22
  longer duration. So anything from five to 10 to 15 years. I think if we begin recapping
• 1:14:28
  the terrible debt that exists, particularly in the private markets, I don't think it's
• 1:14:32
  going to come to government anytime soon with Bitcoin in long duration. I think that is
• 1:14:39
  how you can do
• 1:14:41
  I don't want to say
• 1:14:43
  manufacture a soft landing
• 1:14:44
  but that is
• 1:14:45
  how you begin to get
• 1:14:46
  better structures in place You can invent value you can only maintain value through Bitcoin unless you building off a bit and developing in the Lightning Network That my view But I do think that if
• 1:14:58
  you just took a 10-year and offered a pocket of gold, that functionally acts as a tips,
• 1:15:04
  which follows inflation as long as Bitcoin is an inflation edge, which over the past cycle,
• 1:15:09
  it's not been based on just the way it's traded. It's more responsive to liquidity right now. I do
• 1:15:19
  think that changes. That's why I'm bullish amongst other reasons. But making new financial products
• 1:15:28
  and instruments and new ways of doing things is not inherently bad. I just think that it needs to
• 1:15:34
  be assessed. And also what, you know, we were talking about Tether offline last time and,
• 1:15:42
  you know, would love to have another conversation another time about that. But
• 1:15:48
  the idea of this, the stable coin stuff, potentially attaching some Bitcoin to real estate,
• 1:15:55
  which is, you know, real estate debt, maybe. That's real estate's also technically supposed
• 1:16:01
  to be an inflation edge. So maybe that's not the right pair. But I think that there's novel
• 1:16:06
  solutions and it makes sense. And just as if you're considering a personal balance sheet
• 1:16:13
  and saying Bitcoin's a good allocation, that that could also apply to financial products.
• 1:16:19
  But I don't think that's the solution. And ultimately, I think people like Michael
• 1:16:24
  Taylor are going to take advantage of that 100 out of 100 times. And really, I would like to see
• 1:16:30
  more building in the blockchain and creating a system that is better than the status quo,
• 1:16:37
  not just better on a risk reward ratio to current allocations, but like functionally,
• 1:16:43
  the financial system. I would like to see it actually permeate corporate balance sheets and
• 1:16:48
  not just micro strategy. Let's plan to do this. Let's flip the relationship here. I come on your
• 1:16:58
  show and you asked me all the questions about bitcoin and these different structures and let's
• 1:17:03
  do it okay i got many thoughts on this so your audience has to go to my youtube and you'll be
• 1:17:08
  episode four because i got episode three lined up the uh the second one uh where's that guy from
• 1:17:15
  bank of america or who i don't know what you know yeah he was at a bank before but he's not he's
• 1:17:20
  dead serious on sub stack and he was a differing view on software and private credit and i love
• 1:17:26
  having conversations that aren't, you know, us teaming up on the same idea.
• 1:17:31
  It's not very intellectually stimulating.
• 1:17:33
  No, I agree.
• 1:17:34
  I got caught like 20 minutes of that.
• 1:17:35
  I had some time the other day.
• 1:17:36
  It was a really good conversation.
• 1:17:38
  The guy with the glasses.
• 1:17:41
  Asnar, his name's Asnar, but he goes by debt serious.
• 1:17:44
  Yeah.
• 1:17:45
  That was great.
• 1:17:46
  Well, we'll do this again.
• 1:17:48
  Keep, keep crushing on the front line, sir.
• 1:17:50
  And I'm sure we'll talk between now and then.
• 1:17:52
  Sounds good, Marty.
• 1:17:53
  Always good to be on.
• 1:17:54
  All right.
• 1:17:56
  Peace and love, freaks.
• 1:17:58
  Thank you for listening to this episode of TFTC.
• 1:18:00
  If you've made it this far, I imagine you got some value out of the episode.
• 1:18:04
  If so, please share it far and wide with your friends and family.
• 1:18:08
  We're looking to get the word out there.
• 1:18:11
  Also, wherever you're listening, whether that's YouTube, Apple, Spotify,
• 1:18:16
  make sure you like and subscribe to the show.
• 1:18:18
  And if you can leave a rating on the podcasting platforms, that goes a long way.
• 1:18:23
  Last but not least, if you want to get these episodes a day early and ad-free, make sure you download the Fountain podcasting app.
• 1:18:31
  You can go to fountain.fm to find that.
• 1:18:34
  $5 a month gets you every episode a day early, ad-free.
• 1:18:39
  Helps the show.
• 1:18:40
  Gives you incredible value.
• 1:18:42
  So please consider subscribing via Fountain as well.
• 1:18:46
  Thank you for your time.
• 1:18:47
  And until next time.
• 1:18:49
  Okay.
• 1:18:53
  Thank you.