SPEAKER_01: Hey everybody, welcome to another episode of the All In Pod. The notorious threesome is here during the show. So today, threesome.
SPEAKER_02: Thruple, it's a thruple. It's a thruple, we have a thruple.
SPEAKER_00: I think it's more like a cuddle cuddle.
SPEAKER_01: Okay, the dictator, Chamath Palihapitiya, Rain Man David Sacks, Sultan of Science, Dave Friedberg. Happy to be here with you guys today. We are absent. JCal, taking the week off. Any other housekeeping?
SPEAKER_03: Let's do it, let's jump into it.
SPEAKER_00: Well, you announced that we're gonna hire a CEO, right?
SPEAKER_03: Oh, let's talk about that. How's it going, Friedberg, in our CEO search?
SPEAKER_01: Okay, I gotta admit, I've had a few conversations, but I gotta get through the list. There are 240 applicants so far. Wow. Wow! And there's some really great people in there, so we need to figure out how we're gonna manage this, but I think we're pretty excited. I can't believe so many people wanna work for us.
SPEAKER_00: That's insane.
SPEAKER_01: There's some really great folks. Chamath, you posted it, and people were pretty positive, right? Generally positive, not everyone, but generally.
SPEAKER_03: It was really positive. Yeah, I mean, I think that people were very excited about the fact that we were gonna try to kind of professionalize this a little bit more.
SPEAKER_01: So let's just talk about that. We did the All In Summit in September. We thought it went really well. Folks really enjoyed it. The survey data, the folks that attended, was really positive. So we wanna do that and do more of that live in person. And that stuff, we all have full-time jobs and other things to do. So we need someone to come and run this as a business and organize it and carry it forward a little bit for us. And so we're really excited to hopefully get someone that can scale this. No ads ever, no subscription fees, nothing's gonna change about the pod.
SPEAKER_00: So it's a media and events business, and it might become a CPG business as well, meaning was it CPGs consumer packaged goods?
SPEAKER_01: That's about the right tags. You are, you have.
SPEAKER_03: That is the correct use of the acronym, David. Congratulations.
SPEAKER_01: Your first product would be what, tequila?
SPEAKER_00: I would do like a tequila or like a hard seltzer or something like that. That seems to be a big growth category. Or we could figure out something very orthogonal. I mean, Mr. Beast did candy bars, and we found out at the All In Summit that he's doing something like 250 million a year in revenue, growing very fast.
SPEAKER_03: Yeah, we could do sacks nuts.
SPEAKER_00: The sacks nuts would be too big to eat. You wouldn't be able to fit them in your mouth.
SPEAKER_02: They'd just be old and salty. Yeah.
SPEAKER_01: Yeah. I'm going all in. We'll let your winners ride. Rain Man David Sacks.
SPEAKER_03: I'm going all in. And it said we open sourced it to the fans, and they've just gone crazy with it. Love you, West. I'm the queen of Kenwa. I'm going all in. Well, I think the other thing that's worth figuring out is this idea of like, what does the community really look like? I think that's the biggest upside for the CEO is like, is it physical places like Zero Bond? Or is it virtual sort of like community oriented things? Is it some combination of the two? I'm really interested in trying to figure that out and what answer they come up with. Then the other thing that I would really like to experiment with quite honestly is if we could do a little bit of a tour, I just think it would be super fun to kind of go to like five or 10 cities and just kind of like crash those places and have like a big get together and talk to people and do a bit of Q&A. I think the thing that is really fun is just the interactive Q&A, just because it allows everybody to get involved. And then to be able to do dinners with each other. And like, there's just a really amazing community. So that person should be able to figure this out. I don't know the answer to it, but I'm hoping they figure that out.
SPEAKER_00: We should give a shout out to the guy who did the interview video or submitted. You see that? It's like a four minute video that somebody submitted his application by video on X.
SPEAKER_01: I think I was on his podcast, Sean. You were? I was on his podcast like a year and a half ago, I think. Can we pull it up?
SPEAKER_00: Welcome, welcome to my five minute job application to become CEO of the All In Podcast. This is the American dream, baby.
SPEAKER_03: That's great.
SPEAKER_01: Well, he posted a tweet the day before saying if it gets a thousand likes, he'll submit an application instantly got a thousand likes. And then he put that video together. So great job, Sean. I will be calling you later for your second round interview. I think you're well qualified after that submission. But I do remember like at the All In Summit, I've never been to a conference where I'd say like 95% of the audience was actually in the theater for the entire content session. Like they really sat through it. They was really engaging. So I think that's the sort of product that I'd love to bring out more, which is some of these important conversations with people that can provide a perspective that folks might not be getting elsewhere. Chamath, you also mentioned on Twitter that you're doing more content, like you called it Learn With Me. What is that?
SPEAKER_03: Yeah, I mean, well, I've been doing this for a while, but I just wanted to wrap it up and kind of make it into a clean kind of productized service. So, I have this newsletter that I've been using weekly to just kind of share everything that I read. But then I thought, okay, why don't I actually like really invest just a little bit of time every week to curate that even a little bit more, and then write little summaries of probably the three most important news topics of the week. And I just kind of give an insight into my process. So when I read all of this stuff, usually two to three times a month, but the average is around twice a month, I end up writing an essay. And it's like one or two pages really quick. And I just keep them for myself. And it's like, right now I just finished one, what is the Federal Reserve? And the reason I did that was because Druckenmiller was on TV and he was talking about all this stuff. And I just wanted to remind myself about why the Federal Reserve exists the way it does. But basically what happens is from these quick essays and from what I read, I typically start every month a deep dive where my team and I, we probably allocate at least a month to a month and a half where we figure out something in really excruciating detail and we generate a slide deck and a write-up. And then we take that and we go and we ask a bunch of experts what they think and then we only keep it within ourselves. But then I thought, you know what, why don't we just start sharing it? So the reason I'm doing this is really to keep myself accountable to keep learning. Because I feel like in the last few years, the thing that I lost most when things were going crazy was just the incentive to learn. And I thought if there are other people around me that are also relying on this, I'll be more accountable. And obviously to the extent that this thing can actually be self funding, then I can take some of that revenue, reinvest it in more research associates, maybe publish more content. But it's kind of like all the information I wish I had so that I could make better decisions. I'm just gonna kind of take what I have, share with everybody and kind of go from there. So we'll see. So you're charging for the kind of higher end part of it? At the end of it, it's kind of like, I would say most of it is free. The Twitter spaces obviously is not because the point of these are these X spaces is we just don't want a bunch of bots and trolls, but there's a bunch of people that signed up to be a subscriber. So we'll do Q&A's monthly for subscribers. And then once a month I'll publish a deck. And like I said, if you want the full one, then you can be part of like a paying community. Otherwise you'll get some portion of it for free.
SPEAKER_01: And then you'll have cash to reinvest in doing more content. Is that the idea?
SPEAKER_03: Like right now I have a couple of research assistants that really helped me. And we have a pool of experts that we use, but if this thing picks up some steam and we can have enough revenue to hire three or four more RAs, maybe at some point instead of monthly, we can go biweekly. I don't know. But the idea is just to focus on sort of what I think is interesting so that I can have a general view of things so that I can make better decisions. And like I said, to the extent people are interested now, they can follow along at any level. There you have it.
SPEAKER_01: So people can go to your Twitter to see it, right? Yeah. Okay.
SPEAKER_03: By the way, the other thing is it's kind of cool to be in this like content creator economy. That's the other thing is like, I don't know about you guys, but I feel like I'm on the sidelines looking in at trends now. Whereas before I was in the middle of them, like web 2.0, social, I was right in the heart of it. And I was like, okay, this is amazing. And then as an investor in SaaS and DeepTech, I was kind of in the middle of those as well. That felt great. But this last push in AI, I'm like, wow, I'm really on the sidelines looking in or this content creator stuff. So I think it's a good forcing function for me to kind of learn as well.
SPEAKER_01: To be active in the content creator economy, basically, to understand it better.
SPEAKER_03: Yeah, I don't know how else I'll ever learn. Because I could read all the stuff I want.
SPEAKER_01: Just so you know, you do a podcast that a lot of people listen to.
SPEAKER_03: Yeah, but I think that that's like a, it's the lowest order bit, quite honestly. You know, when you see like what Jimmy Donaldson does, or even like Kim Kardashian, what they do as content creators, it's just an intense process that then creates all this upside. So even if I want to have a more informed view of where all in needs to go, I want to be a little bit more on the ground and actually in the engine room doing it for myself.
SPEAKER_01: Yeah, since we started doing the pod, SaaS has been creating a ton of content too. I mean, SaaS, you wrote a piece this week, didn't you? And on Ukraine, or like the time article in Ukraine, didn't you? Yeah, yeah. Like you weren't doing a lot of content before we started doing the pod, right?
SPEAKER_03: No, he was. He was writing like a lot of blog posts on SaaS. Those are excellent.
SPEAKER_01: He had like an occasional blog post, but he's like super active now, particularly on Twitter now. Like, has that changed a lot?
SPEAKER_00: Well, what basically happened is I would express political views on the pod, on a weekly basis. I wasn't really tweeting much about politics, but then it all kind of bled together. I mean, once you start talking politics on a pod, people were clipping it, they were putting it on Twitter, and then I have to respond to it, maybe correct misinterpretations or respond to attacks or whatever. So all the politics and business stuff just kind of bled together on Twitter. It'd be nice if I just had two accounts and people could just follow me for what they wanted to follow. My substack is just business. And then I'll occasionally write an op-ed on the political stuff. So I've written a few on free speech, and then I've written a few on Ukraine. And so I wrote a piece for Responsible Statecraft this week on Ukraine, which was based on a Time Magazine story that came out, and then I did a version of it on X, kind of a long post,
SPEAKER_00: which I called the Ukraine Wars Cronkite Moment, which described, the Cronkite Moment in the Vietnam War was that Walter Cronkite, who was the top newscaster, America's most trusted man in the 1960s, he went on a fact-finding mission for himself to Vietnam, and he came back and he said the war is basically unwinnable. And that's when the public sentiment really turned against the Vietnam War. It still took us five years to get out of it. But what Cronkite said, there's a great quote from Cronkite, which I've included at the end, where Cronkite says, is increasing clear to this reporter that the only rational way out will be to negotiate, not as victors, but as honorable people who lived up to their pledge to defend democracy and did the best they could. So that's basically what happened in 1968. What happened this week is that Time Magazine wrote a cover story on Zelensky, where the main sources for the story were all of Zelensky's aides and advisors. And what they told the Time reporter was that effectively, this war is unwinnable, and moreover, Zelensky is delusional. That was a word they used. Delusional in not confronting the battlefield realities that the Ukrainian army had been decimated, and delusional in the sense that he refuses to engage in peace negotiations with the Russians. He's utterly unmovable on this idea that Ukraine's gonna somehow prevail. And the troops in the field are basically saying that they cannot follow the orders they're being given. They literally, they can't advance, they're being ordered to advance, and the officers in the field, the frontline commanders, are rejecting the orders because they've been decimated so badly and they consider the orders to be impossible. So I consider this to be the Cronkite moment of the war, when Zelensky's own inner circle is saying that the war is lost. And the only question is, when are we gonna realize that and start negotiating? Are we going to continue until the very end here with Zelensky in this psychological bunker that he's created? Or are we gonna recognize reality the way that Cronkite urged the nation to in 1968?
SPEAKER_01: Do you think these aides to Zelensky proactively reached out to the journalists to try and get this story published? How does a story like this come about that provides this kind of revealing insight on the supposedly inner chamber in Zelensky's operations that can shed so much light on the challenges and with him and with the operation? I think it's a really interesting question.
SPEAKER_00: And I think the starting point for understanding that is that this writer, Simon Schuster of Time Magazine, wrote the in-depth profile of Zelensky for Time's Person of the Year at the end of 2022. So this reporter cannot be accused of unfavorable coverage.
SPEAKER_01: This is the person that profiled Zelensky as Person of the Year?
SPEAKER_00: Yes, yes, exactly. Oh, wow.
SPEAKER_01: So through that, he probably had contacts in Zelensky's inner circle and doing his preparatory work for that article back then. Absolutely, yeah. And maintained those relationships and has a back channel now to be able to get this sort of insight.
SPEAKER_00: Well, he was physically there. I mean, I think he was physically there to write the Person of the Year profile and he was physically there to write this profile. So this is kind of legit.
SPEAKER_01: This isn't some like weirdly planted, this is like a legit source. Well, that's my whole point is that this reporter is,
SPEAKER_00: and Time Magazine obviously is mainstream media, and this writer has given favorable coverage to Zelensky in the past. Right. And I believe that's what led to him having this kind of access to Zelensky's inner circle. Okay. So you have to take all of that into account.
SPEAKER_01: The key question, Sax, is does this change anything? So does this article change the sentiment of political leaders in the US, or is nothing really different, that we still need to defeat Putin, continue to feed the war machine, continue to support the effort against Putin, or does this start to beg the question, hey, maybe we need to look at this tactically and make a change. Is anything actually gonna change from, and you have any reason to think that?
SPEAKER_00: In a certain sense, this article isn't saying anything that's new. I mean, the article basically says the same things that I've been saying, the same kinds of things that Professor Mearsheimer's been saying, Professor Jeffrey Sachs, that all the critics of this war have been saying these things for a number of months, which is the Russians are winning, there is no feasible way for the Ukrainians to evict the Russians from their territory, we are out of artillery and other types of ammunition to give them, effectively, the war is unwinnable and we should negotiate. So a lot of people have been saying that for a long time, but what's different now is that if you believe this publication and this writer, which I do, because of his access, it's Zelensky's own inner circle, are now saying those same things. So in other words, the so-called Putin talking points that we're always accused of are coming from inside the house. And to me, that's what makes this a Cronkite moment. Now, will policymakers in Washington change their tune or change their perspective on this? Probably not. The Uniparty of both Republicans and Democrats still seems to be a majority who want to fund another 61 billion for Ukraine. So is this penetrating the blob? I don't think so. I mean, but again, think about Walter Cronkite in 1968. The country basically came around to his point of view after that, but it still took five years to get out of the Vietnam War. So I think that this week was a watershed in terms of the way that public perception is gonna evolve over the next few months, but it seems like the policymakers in Washington are the last ones to get the memo.
SPEAKER_01: Well, let's see what happens. I mean, I've shared my point of view for a couple of years now. I think the US is in a, call it subconscious, conflict escalatory state that would continue to drive us into these sorts of- It's great for markets. Conflict seems to be. Great for markets. Conflict is great for markets, you're saying?
SPEAKER_03: No, no, no, no. The fact that it seems like there's a terminal outcome and all we're debating is whether Zelensky sees it is actually very reassuring for the market. Oh, you think the markets are recognizing
SPEAKER_01: that there may be an end to the Ukraine conflict? Well, I do think in part,
SPEAKER_03: I don't think it explains why it's up necessarily today. I think that's more because I think I mentioned this before, but the end of the fiscal year for mutual funds was October 31st. And so there was a lot of selling going into October 31 just to capitalize tax losses and tax loss harvest, but that leaves them with a lot of cash. And so starting November 1st, which is day one of the new fiscal year, mutual funds are not allowed to really own cash. That's not why you pay them. And so they're gonna be active buyers. So that's why in the short term, the market is up. But if you think about the overhang of risk that we've had, you had one forever war and now the beginning of what potentially could be another forever war, that's definitely a dampener on market demand and sentiment and investor confidence. But if the story like this is true, it actually takes one of those big risks off the table, which is this idea that now it's like every other kind of a thing, which is it's the reason we spend money there is not to win something that's winnable, it's just graph. It's just typical corruption. And the article says that,
SPEAKER_00: quote a Ukrainian official saying that people are stealing like there's no tomorrow. Right, right.
SPEAKER_03: So that the US unfortunately enables in many places, that's not new. And so to the extent that that's now more of the status quo, that's reassuring for investors, because we're not talking about a war. We're just talking about bleeding more money, which I'm not saying is right, but it's morally more acceptable than the alternative. So there you have it. It's generally good for markets. Now, that leaves, I think, Israel, Gaza has a risk. And I think people and I think the markets still view that as a potential war. And the longer that goes on, I think that there's a very good chance that we de-risk that as well as again, not a war, but part of that cycle between Israel and Palestine, which is conflict, timeout, conflict, timeout, conflict, timeout. And so if what we think is now, this is just the version of conflict timeout and the market de-risks that, then it's actually pretty positive for equities,
SPEAKER_03: for startups, because now the Fed has a reason to actually say, okay, the economy has cooled off, inflation has calmed, it looks like the markets are stable, let's cut rates, let's reintroduce some demand into the market. It's generally a good thing. And if there's no reason to be risk off, people will use that as a reason to be risk on.
SPEAKER_01: Yeah, well, Treasury yields, the 30 year- Cracked. Yeah, it's down 14 bits. Two days. 40 bits in two or three days. Yeah, so-
SPEAKER_00: I think this is because the forecast or the outlook for Q4 or Q1 next year, it's starting to go down quite a bit. The people are starting to see more recessionary indicators. So you had this like peak 4.9% growth rate, and then inflation seems to be tamed quite a bit too.
SPEAKER_03: I think to be honest, the look through on Q1 looks also pretty good, and Q4 looks healthy as well. So for example, Shopify, their read through on GDP was actually pretty healthy. Harley was on, I think it was CNBC I saw this morning, basically saying he thinks consumer spending is still strong and it's still there. So I think in terms of just like economic strength, I think it's pretty decent actually. I think what changed for the market was the Fed's rhetoric. And I think that they were holding on to this option that they were gonna show up out of nowhere with another 25 or 50 basis point increase. And I think that that's fundamentally now off the table. And I think that that's really heartening for the market. That's good for the market.
SPEAKER_00: Grow stocks are ripping, Affirm and Palantir are up 20% today.
SPEAKER_03: Ripping, ripping, ripping, Opendoor ripping, DoorDash ripping. All these companies are up 20 and 25 and 30%. It's crazy.
SPEAKER_01: So are we calling bottom stacks?
SPEAKER_00: Well, maybe, I mean, I don't know. It's so hard to predict the markets. But if you believe that there's more upside to rates than downside, meaning that the odds of a rate decrease are much greater than the odds of a rate increase from here, then there is upside to valuations particularly for growth stocks, also for distressed real estate. Because all these things get more valuable when rates are lower. So if you believe that we're gonna be in a cycle of rate decreases, and that whole thing has played its way out, then everything's gonna rally.
SPEAKER_01: Well, let's talk about real estate because I think that's one of the biggest overhangs right now that hasn't fully been accounted for. There's $3 trillion of commercial real estate loans sitting out on commercial banks balance sheets in the US today. Three trillion, it's an insane number. And we were all talking over texts the other day, as you guys know, about this building that's being shopped and got some attention on Twitter. I think it's 115 Sansom. You guys know this building? I've lived in San Francisco for 20, how long have I lived there? 20 some odd years now. So I know this building. And it's 125,000 square foot building that's gonna likely be fully vacant and call it two to three years. So the guy puts it up for sale, the equity owner. He puts the building up for sale and he's basically like running an auction on it. And the brokers are all saying, hey, it's currently at 199 bucks a square foot, which translates to $25 million. It'll probably get done at 300 bucks a square foot, which is about $38 million for the building. The problem is if you look at the debt on the building, there's 53 million of debt. B of A owns that note. So Bank of America in 2016 issued a $54 million note on this building. If this deal closes at $39 million, the equity owner who's running this auction to sell the building makes $0. All that happens is that money pays down the debt and the debt only gets 70 cents on the dollar. And B of A has to take a write down on the rest. So there's a rumor that in this particular case, what's happening is the equity owner of the building is putting it up for auction to show the bank, hey, this thing's only worth 70 cents on the dollar for you on your debt, you should restructure my debt. So apparently there've been a lot of building owners that have been going to their banks and saying, hey, I wanna restructure my note. I wanna have longer payment terms. I wanna keep the rates lower for longer. I wanna have some of the debt forgiven. Anything they can do to get the cost of the debt down, because the overhang of the debt on all these buildings is so significant, these buildings cannot make money and the owners will never make money. So they're like, why am I even wasting my time? So they have one option, which is to hand the keys back to the bank and say, here you go, you auction it and sell it, good luck. And the other option is to go to the bank and say, hey, restructure my debt, let's figure out a deal. Here's the problem. The $3 trillion of debt that we just mentioned that's sitting on all the bank's balance sheets is all being held at par. They're not discounting it at all and they're not marking it as being impaired in any way. So as soon as they have to start writing this stuff down, the bank's balance sheets all get impaired. And so there's a real risk in the market that I don't think has been fully accounted for that we're starting to see the cracks. And to Chamath's point, this might accelerate either Fed action or as I've mentioned in the past, I think the federal government steps in and starts to issue programs to support commercial real estate developers and owners. Sax, I know you've been following this quite a bit. You know, maybe you could share your point of view and if I'm off on this, in terms of how significant of a problem this is, how much of the $3 trillion of debt really is impaired and by how much should it be impaired, do we think?
SPEAKER_00: Massively, I think it's a huge problem. If you talk to anybody, any of these commercial real estate developers or sponsors, they'll tell you many of them are just kind of hanging on by their fingernails. I mean, it's really ugly. And you know how distressed things are when you actually look at some of these sales. That same account on Twitter that you posted, he's got like a tweet storm here showing about half a dozen of these sales that have happened in the last few months. And buildings are now selling for $200 to $300 a square foot in San Francisco. These are buildings that could have sold for a thousand bucks a foot, you know, a couple of years ago and now they're selling for $200 to $300. The replacement cost, if you were to try and recreate these buildings from scratch given how expensive it is to build in San Francisco and how complicated the entanglements process is, probably be $1200 plus a foot. So these buildings are selling for 10 to 20% of their replacement cost. These are fire sales.
SPEAKER_01: If you look at the loans in the San Francisco commercial real estate market, do you think that the loan value is probably impaired by 40%? Because that's roughly what it would say on that 115 Sansom building, is B of A would probably have to take a 30, 40% mark down on their debt. Do you think that's the right way to think about the number, 30 to 40% of the debts?
SPEAKER_00: You could figure it out this way. A typical commercial real estate deal is about one third equity and two thirds debt. So somebody bought a building, call it $1,000 a foot, they would have had to have put in, call it 333 of equity, 666 of debt. Now, if that building is only worth, I don't know, 200, 250 a foot, there's $750 of loss per foot, right? And only 333, roughly half of it is equity. So the debt is taking a huge haircut there too.
SPEAKER_01: Yeah, that's about 40, 50%, right? Yeah, and no one wants to recognize that loss.
SPEAKER_00: The equity holders certainly don't because they get wiped out. And even the banks are reluctant to recognize that loss because who knows what that could trigger when their balance sheets are so impaired. So what everyone's trying to- Where are these people gonna come from, Sax?
SPEAKER_03: This is my big problem with this argument, is I think that numerically you're right, that there is this bottoming or there is just like a lot of value to be had, right? The problem is, and I'll give you an example of a company that I own. So it's not even a company that I'm just a minority investor in. We used to be in San Francisco and we went virtual. Now, all the salaries are pegged to San Francisco salaries, but now everybody's sort of like everywhere throughout the country. We don't have an office space and I'm really struggling trying to figure out how to actually bring everybody together. And my choices were, I thought, okay, well, let me find what it would cost to actually run this place in San Francisco. And my OPEX would have gone up 15, 20% just for the building. So then I'm like, okay, well, where else can I go? And it's like, well, I could go to a place like Las Vegas and I could put the people there. It's an hour, so it's close by. We can fly there whenever we need to. It's got no tax, so maybe that's an advantage for the employees. And so I'm in this constant hamster wheel as an owner of a business. I can't get people into the office. If I do bring them into the office, it's super expensive and it bloats my OPEX. So I'm just trying to figure out how does that get resolved for people like me so that we wanna go back to San Francisco and rent those buildings that are so cheap. Those buildings are gonna have to get written down first.
SPEAKER_01: So I set up my company in 2006 and I was paying $22 a square foot for my first office in 06. And then we ended up getting a really nice office and I think we ended up paying like 35 to 40 bucks a square foot by the time we moved to a super nice office around 2010. But around that time, which was also when GFC happened, the global financial crisis in 08, 09, and that's when rates dropped to zero. And that's also when all startups and tech companies said, hey, let's start setting up in San Francisco because it's mostly young people that are engineers now. They mostly wanna live in the city, they mostly wanna be single and have a good life here rather than go live in suburban Silicon Valley. And so real estate shot up because rates were zero, all the tech companies were setting up. I mean, Saks, you had Yammer in San Francisco, didn't you? Were you in the peninsula? Yeah. Yeah. And that was like the place to have your company was in the city. And so I would argue, like if you go back to the 08, 09 era, that's really when San Francisco started to take off. And it was almost like a bit of an outlier of a bubble that started all the way back then. And then the ZERP environment kept things moving up and up and up over the years that followed. I do think that this market will likely normalize back to pre 2010, pre 09.
SPEAKER_01: And that's when rates were like in the 25 to 35 bucks a square foot range for tech real estate. But are you saying that I will move back to that building
SPEAKER_03: and I'll move my company back there?
SPEAKER_01: When it gets reprised, yes, I do think so. Are you sure? I don't see how the market stays where it is.
SPEAKER_00: Chamas argument is basically on the demand side, basically saying where is all this demand gonna come from?
SPEAKER_03: I think you could give it to me for zero and I wouldn't bring my team back there. I'm just asking like, again, the math all makes sense on a spreadsheet. But the big issue is, as an owner of a company, why would I ever bring my team back to that place? And I'm struggling even at like,
SPEAKER_01: Oh, you mean because it's a nasty city because it's all messed up. The city's messed up generally. First of all, if you're asking me to blow up my OPEX 10, 20%,
SPEAKER_03: the answer is absolutely not will I do that? Then if you're saying, well, Chamath, how about a zero? Let's just go to zero, right? It's free, take the building. I still wouldn't do it because then these people have to move from all around the country, come back here and all of a sudden just live in a slimy dungeon. So how does that get solved? So that building should be zero.
SPEAKER_01: Zach, you own buildings in San Francisco. What's your answer as a landlord?
SPEAKER_00: Yeah, I only own buildings in Jackson Square, which is like the one decent part remaining of San Francisco, which is actually where people want to be and we've seen pretty good leasing activity there because as people get driven out of Market Street and out of Soma, they actually, they substitute to Jackson Square. Look, I think Chamath makes a good point, which is the demand picture for San Francisco is really unclear. There's something like, call it 30% vacancy. So there's an enormous number of these zombie buildings and it's really hard to understand where the demand is gonna come back to fill them. Now, the counter argument to that is, yeah, but it's so cheap. I mean, these buildings are so cheap. They're basically selling for almost land value. That's Chamath's point. It's like it goes to zero, yeah.
SPEAKER_00: So if there's a recovery, then it's very symmetric, right? I mean, you could get three or four X upside in your money very, very quickly. Rates come down over the next couple of years. You could refi your equity out. So that's the counter argument is, yeah, we're not exactly sure where the demands comes from, but if you are willing to have a long-term outlook, like five or 10 years, then there's a pretty good chance that it'll come back somehow. I think one of the things that has to happen in order to foster that demand is for there to be some fundamental changes in the politics of the city. And the question is, how does that happen? And I think one of the ways it could happen is the city starts facing huge budget shortfalls, which are coming. There's gonna be a huge budget shortfall over the next year and next couple of years, because there's no activity. I mean, a third of the economic activity of the city has just dried up.
SPEAKER_03: And what about the rest of the country? So tell me, like, if this is what's happening in San Francisco, what's happening in Boston, Dallas, New York City?
SPEAKER_00: Well, I don't think those areas are as impaired. They don't have the vacancy rates that San Francisco does. I mean, no other major market is 30%.
SPEAKER_01: So just coming back to my prior question, if you were to assume San Francisco commercial real estate debt is impaired on the order of 30%, what do you think the debt load for all commercial real estate around the country is impaired? Is it 10%, 15%, 20%?
SPEAKER_00: I don't know. I mean, I think that you probably, for San Francisco, I'd say probably half the debt should be written off. I don't know what it is for the rest of the country. There's already half a dozen of these buildings that have traded in the range that we're talking about. And there'll be about 20 more that are coming to market that'll trade in the next year. It's gonna be fire sale after fire sale. And you have to clear out all of this bad equity, and then you've got to clear out all of this bad debt and then the market can reset itself. But look, Chamath has asked the $64,000 question here, which is when will the demand come back and what will it consist of? And that is the leap of faith here that you have to make. Just to finish the point I was making, the city, the politicians are gonna be under extraordinary stress because there's not gonna be any budgets. So what are they gonna do? Are they going to lay off half the city employees, reform pensions and salaries? Or are they gonna start to realize that all of their crazy transfer taxes, all of their crazy regulations and entitlements seems to be stripped away to start fostering real activity in the city? Are they gonna start investing in police again? Are they gonna start cleaning up the city? Are they gonna act as a partner to business? I mean, that's where the incentives are gonna be is for them to start acting like a partner again. And again, that's a huge leap of faith given how crazy left-wing the politics of San Francisco have been. But they may not have a choice because it's gonna come down to, do we fire half the government employees or do we start working with business instead of driving them out of the city?
SPEAKER_01: I don't wanna get too caught up in San Francisco politics and San Francisco as a region. I think we've hashed that one out. But the bigger question is if there's this impairment on $3 trillion of commercial real estate debt across the country, who eats the loss? So who owns all the equity in these buildings? And where does that ultimately flow through to? What are the second order effects? And who owns the debt? And where does that all flow through to? We know the debt sits on the commercial banks. Do the bank stocks get beat up? The market's been cognizant of this. Folks have been shorting and selling regional bank stocks. And then Bill Gross, the well-known bond trader used to run Pimco came out this week and said, ''Hey, I've been tracking all these regional bank stocks. They're down so much. It's insane. They're trading at a huge discount to book. I'm gonna start buying.'' And then this morning he put out a tweet saying I'm buying these stocks and he listed the names of the bank stocks. He's like, ''The bottom's been hit.'' Do you buy that? I mean, has this already been priced into the market that this debt's gonna be written off at some point and all these balance sheets are impaired? Because these banks are trading at a big discount to book value. So, you know, yeah.
SPEAKER_03: Book value is a term that you need to put in quotes. So my question would be, what are the rules around the real mark to market? Because I think that when we talked about the banking crisis, the biggest problem was these guys were playing fast and loose with valuations. And so are these things actually valued to market? And do they have to?
SPEAKER_01: They're not yet. No, that's the point. That's why they're trying to avoid these sorts of transactions. These book values are legitimate.
SPEAKER_01: Yeah, and that's why they're trading at a discount. But Bill Gross is now saying they're trading at such a discount to whatever the accounting is that they're like now well below the fair value. Yeah, that's the argument for real estate.
SPEAKER_00: I'm sorry that at least for these fire sales that are happening.
SPEAKER_01: Yeah. Let me ask you one more question. So I mentioned the Biden program. Biden announced this program, which is effectively $45 billion in federal money to convert commercial buildings into condos and residential buildings. He basically relies on a 1998 transportation and infrastructure bill that provides authority to the federal government to issue low interest loans for specific infrastructure projects. If you're a developer, is it realistic that this money is going to unlock potential for increasing affordable housing density in urban centers by converting office buildings into residential buildings? People talk a lot about these office
SPEAKER_00: to residential conversions. The problem is it's easy to say and much harder to do. Most commercial office buildings don't meet the structural requirements. Or architecturally, they're not really suitable. If you think about most commercial office buildings, they've got really big floor plates. And if you think about like restructuring them into apartments, there's not proper window coverage, there's not proper utilities. So it's a lot harder than it sounds. And I'd say most office buildings don't meet a lot of the requirements for this. But I think what's good about this executive order, even though I don't really believe this is a great use of 45 billion, is that it's sending a signal to all of these cities, all these local governments that we need to get with the program here. In other words, you've got a blue executive sending a message to all these blue cities and states that commercial real estate is in distress and you need to loosen up your entitlements, you need to loosen up your regulations. It's sending a message to the city of San Francisco and all these other cities that you guys need to start doing positive things. And this is my point about will San Francisco start acting like a partner for real estate development, which is how you make real estate work, or will they continue to drive all of these crazy regulations? So I mostly see this Biden program as symbolic. I see. But the question is whether the symbolism will actually drive better behavior by these blue cities.
SPEAKER_01: I personally think they're just trying to find more ways to pump money into supporting commercial real estate markets because of the issues we just highlighted. And I think this is the first of what will likely be several programs to support, framed as things like affordable housing, but really designed to support the economic loss impairment that's gonna be inevitable at some point. Right, but you can't convert an office building
SPEAKER_00: to a residential building without rezoning typically. Totally, yeah. And this is where you need action by these city governments. They've gotta rezone, they've gotta reduce the regulations, they've gotta eliminate these transfer taxes. Good luck. They have to make these projects economically viable.
SPEAKER_03: I think that we'll be able to look back and San Francisco will be an incredibly measurable experiment on the return on invested capital. So many things. On the return on invested capital of progressive left ideology.
SPEAKER_03: And it will be a great case study. Now, if it works, it will prove that all of these ideas that were kind of talked about in kind of like high intellectual circles has some value. And if it fails, which it looks like it's failing, it'll never be tried again for a very long time. Either way, you're gonna have a very clear answer. And the good news is we're probably another five or 10 years away from that bottom.
SPEAKER_00: Well, actually, can I ask you a quick question, Jamal? So there was an article here saying that the city controller's office for San Francisco has released its projected budget shortfalls for the coming years. It's almost half a billion for 2024, 25, reaching 1.3 billion in 27, 28. So what do they do about this? I mean, they don't have the money.
SPEAKER_03: They'll borrow money. And you can look at all of these other municipalities around the country as examples, but counties and municipalities and cities that are in much worse fiscal shape than San Francisco was able to stay incompetent for a lot longer. And so that delta T of incompetence tends to be about five to 10 years. I would say the midpoint is eight. So if we're starting now, you'll probably see some rationality by 2032, 2033. Right.
SPEAKER_03: That's how much borrowing, David, I think you can tap in the muni market. Because, again, this is sort of the double-edged sword. Like when you're a triple tax-advantaged borrower, you can paint the case for being in San Francisco, which is part of California, et cetera, et cetera, et cetera, and your alternative is to own something in a state that's not nearly as economically vibrant. It's a pretty easy case to make to be able to borrow the money, I think. And so the problem is that it'll take, like I said, another probably eight years, 10 years, so before the spigot gets turned off and they have to make some harsh changes. So they'll keep running this experiment for at least, I think if you wanna be conservative, for at least a decade, another decade.
SPEAKER_00: So they'll just pile on the debt until it just breaks? They'll just pile on the debt, absolutely.
SPEAKER_01: I don't wanna keep harping on San Francisco. Let's move on to WeWork, because WeWork feeds into this real estate piece. I don't know if you guys saw this article that Wall Street Journal reported that WeWork is gonna file for Chapter 11 as early as next week. They have a significant debt burden owed to SoftBank Vision Fund as part of their GoPublic. They've signed leases in office buildings in San Francisco and elsewhere around the country, $10 billion in total lease obligations due starting in the second half of 2023 through the end of 27. And after that, an additional $15 billion starting in 2028. And as of June, WeWork had 777 locations, including 229 in the US in major cities. The business made about, call it 840 million bucks in revenue last quarter. So that works out to call it a three and a half billion dollar revenue run rate with $10 billion of lease obligations starting next year. So the business is just drowning in these lease obligations to restructure 777 lease obligations in this environment that we're talking about while doing what Chamath is saying, lowering rents to attract employers to show up and actually rent space from them is obviously causing the business model to distort even worse than it has been historically. They burned $8 billion of pre-cash flow
SPEAKER_03: since Q4 of 2019, $8 billion of free cash.
SPEAKER_00: There's no question that WeWork has been a capital destruction machine. That being said, I actually think that some private equity player is gonna buy this out of bankruptcy and make a fortune.
SPEAKER_03: I agree with that too.
SPEAKER_00: Because out of those 777 locations, a lot of them are good locations and have good tenancy. They probably generate good revenue. The problem is that the leases are just bad and bankruptcy gives you the power to break those leases or renegotiate them. So a really smart private equity player would come in here and say, okay, we're gonna take these locations, we're gonna divide them into three buckets. Bucket number one is we're gonna get rid of them because they're just bad locations, we don't want them, there's just no occupancy. Bucket number two is we're gonna go to the landlord and say that, sorry, this lease doesn't work for us, we will be willing to work for you as an operator of the space and you'll pay us a fee and a rev share on whatever it makes, but we can't pay you a guaranteed rent. So that's bucket number two. And then bucket three, which will be the best locations, they'll go back to the landlord and say, here's 60 cents on the dollar, we're willing to pay you this in rent, that's it. If that's not good enough for you, we're breaking the lease route. And those landlords are gonna have to accept it because who are they gonna get who's any better? And they don't even have the TI's, they don't have the capital to put some new tenant in there. And even if they could put someone in there, it's not gonna be at a rent that's much higher than 60 cents on the dollar. Because we work made a lot of these top of market leases. So I think the landlord will take the bird in the hand. So think about it, some private equity player goes in there, renegotiates all these leases, sheds the bad ones, and all of a sudden the business is gonna make a lot of money. And the reason why it's gonna make money is because WeWork poured all of this capital into renovating these spaces and making them really nice. I mean, if you go into a WeWork, they are really nice spaces. And the reason for that is because WeWork spent billions of TI dollars making these things incredibly nice. Was that a wise investment? No, it was a terrible investment. But that money has been spent and already lost, that capital has been wiped out. So whoever buys this thing out of bankruptcy now is gonna be the beneficiary of all of those absurd TI dollars that were spent when Adam Neumann-
SPEAKER_03: Oh my God, you just convinced me, let's go buy it. Let's put it in a bid. Is it filed? Is it filed?
SPEAKER_00: The brilliance of Adam Neumann was somehow convincing. Wow. He was trying to convince these investors to put in billions of dollars into TI money on the theory that it was a software business. This was never a software business. It's a real estate development company. It was Regis. It was Regis.
SPEAKER_01: It was Regis. So I got SoftBank put in a total of $16.9 billion in equity and debt into WeWork. Oh my gosh. Isn't that incredible? Who doesn't?
SPEAKER_03: Oh my gosh, SoftBank.
SPEAKER_01: Which is mostly through the Vision Fund, which is, as you guys know, 45% Saudi money.
SPEAKER_00: It was Regis with much better design, but that design came at a huge expense, which was, again, this overinvestment in TI dollars, combined with the fact that they had no discipline around signing leases, and they have so many top of market lease deals. But again, that's all fixable for someone who comes in. Old saying in real estate, that it's the third owner who makes all the money. The first owner who does all the ground up, they lose a fortune and they get blown out. Then the second guy comes in and thinks that they're gonna make it work, but they can't make it work either. So then they get blown out. And it's finally the third person who comes in who makes all the money. And that's gonna happen here too.
SPEAKER_03: Oh my God, that's just fantastic. This is a story of the ages.
SPEAKER_01: Let's transition from one bubble to the most recent bubble. So AI regulation, given the frenzy and frothiness and fear-mongering on AI destroying the world, which I would personally argue is largely fear porn. The Biden administration took it upon themselves to try and be leaders in regulating AI and published an executive order on October 30th. This long anticipated executive order covers a very broad range of matters in 111 page order document. Covers very specific actions in very detailed terms. It uses technical terms of art. And I think it creates as much confusion as it does provide clarity. It's an executive order, so it's not legislation. And there's much in here that some would argue needs to be legislated. As an executive order, it can be overturned very quickly and easily by the next administration. It largely demands voluntary action from technology companies to submit their models, infrastructure and tools for review, for proof of safety.
SPEAKER_03: Don't forget the equity and inclusion.
SPEAKER_01: There's an equity inclusion component, which is that your models have to account for- Diversity, equity and inclusion. Diversity, equity, inclusion. There's a phrase from the executive order. The term dual use foundational model means an AI model that is trained on broad data, generally uses self supervision, contains at least tens of billions of parameters, is applicable across a wide range of contexts. And that exhibits high levels of performance and tasks that pose a serious risk to security, national economic security, public safety, or any combination of those matters. None of which ultimately describes end points. None of which describes loss or applications. To me, this is the biggest problem I see with the executive order and with the approach to AI regulation broadly, particularly with what's being developed and has been leaked in terms of what's being developed out of the EU, which is that many of these government agencies, government actors, are trying to define and regulate systems and methods rather than regulate outcomes and applications. For example, if you were to say you cannot commit fraud and falsely impersonate someone using software, you can rightly say that it follows the rule of law and we should be able to adjudicate that cleanly in courts.
SPEAKER_01: Instead, to have government agencies and have what this executive order describes as a chief AI officer in every federal agency responsible for regulating the systems and methods of all the actors and all the private companies that are building software to say this is the scale that your software can get to, you can have a certain number of parameters, if you're bigger than this number of parameters, we have to come in and check your software, creates an outlandish standard and one that makes absolutely no sense, particularly in the context of the pace of AI's progression. Remember, the paper that was foundational to transformer model development, which is what a lot of people call AI today, which has developed these LLMs and so on, came out in 2017 and wasn't really widely adopted until 2018 as a standard. We're five years into this. So the way that we're making models, the types of models we're building, the scale of the models, the number of parameters being used, the pace at which these things is changing is staggering. We are only in the first inning. And so to come out and say, here are the standards by which we wanna now regulate you, this is the size that the model can be, these are the types of models, it's gonna look like medieval literature in three years. None of this stuff's even gonna apply anymore. I'm just really of the point of view, as you guys know, that the market needs to be allowed to develop. If we don't allow our market to develop in the United States, India and China and Singapore and other markets will get well ahead of us in terms of their model development and their capabilities as a nation and their capabilities as an industry. And the more our government actors step in and try and tell us what systems and methods we are allowed to use to build stuff, the more at risk we are falling behind. That's my general statement on the matter. I'll pass the mic. I mean, Chamak, you were advocating for AI regs a couple months ago, I think, right? I mean, where does this fall with respect to what you were advocating for and what you were concerned about? Well, I had a very specific lens
SPEAKER_03: that I viewed this stuff through and they didn't really address it. I think that this was a little bit of a kitchen sink EO. And I think what probably happened was depending on... Look, I mean, I think the thing is like when this process first started, it started in the Senate and it started with the majority leader, Chuck Schumer. And I met with Chuck and then I met with Chuck's team and then it morphed into this much bigger thing. And I think it morphed into a lot of people trying to do the right thing, meeting with a lot of very important and very famous people. And I think somewhere along the way, it just became this convoluted and confused document because I do agree with you that it's not super coherent. There's a lot of arbitrary requirements. I think there's a requirement here that as a certain number of parameters, you have to self-report yourself to the government, which is like, what does that even mean? Why is that even important? So it's just a lot of random stuff. So it just seems like anybody who had the ear of the people writing this had a chance to write something in. So it's a little confusing. It's not going to do the job. And I think that you're right. In two or three years, we're gonna look back and this is gonna look medieval.
SPEAKER_01: I'll just say, I'll point out another point, just one of many that I could highlight in this document. I read most of it. They say, there's gotta be legislation on watermarking AI content. Think about that for a second. What is AI content? We've been using Adobe Photoshop for 30 years to change photographs and change documents. We've been using various tools for doing audio generation and music. I mean, there's no music that doesn't run through a digital processor of some sort. There's no video, there's no movies that don't have some degree of CGI elements or some degree of post-production digital rendering integrated into the video itself. What makes something AI? Is it the fact that 100% of the pixels are generated by software? What if it's only 98%? Is Pixar AI? Because all of Pixar is made on computers. Is the auto-tune hip hop artist AI? Because his voice isn't coming through on the audio track. So what is AI in this definition? The fact that any piece of content needs to be watermarked if it's AI, I think is one of the most outlandish infringements on First Amendment rights I've seen and doesn't really understand in any sense how software is generally used in the world today, which is frankly everywhere. And to say that now there is a certain definition of a certain type of software that we're gonna arbitrarily call AI, we wanna watermark this stuff and we wanna get a stamp on that content so the government can track it and audit it, I think is absurd. Sax, over to you.
SPEAKER_00: Yeah, okay, three quick points here. Number one, AI has been convicted of a pre-crime. This EO, it describes this litany of horribles, this parade of horribles that's gonna happen unless the wise people in the central government like Joe Biden and Kamala Harris guide its development. So that's what the EO says it's gonna do is guide the development of this technology because if we don't, it's gonna result in all these horrible things happening. Steven Sinofsky, who was a key executive of Microsoft I think going back to the 80s, wrote a really interesting blog post about this where he was there at the beginning of the PC revolution with the dawn of the microprocessor in the 70s and 80s. And he pulled a bunch of books off his bookshelf from that time period, which were sort of these sci-fi books like forecasting doom, infringement on privacy, one was called the assault on privacy and the other one was called electronic nightmare. Another one was called the rise of the computer state and so on. So it was also predicting all these horrible things that would come from the birth of the computer and it would put all these people out of work and so on. Totally. But nobody allowed these fears to guide the development of the industry. There was no executive order at that time saying that we're gonna guide the development of the microprocessor to avoid all of these harms that haven't occurred yet. And instead, we're taking a different approach here and he makes the point that if the industry had been guided in that way, then it never would have achieved the potential that it ultimately achieved. And furthermore, he makes the point that a company like IBM would have been more than happy to work with the regulators to say, yeah, let's define a bunch of these rules to make sure that it doesn't go in this dark direction that everyone thinks it's gonna go in. And you would have gotten very extreme regulatory capture.
SPEAKER_03: Can I pre-cog one of the crazy lines in this thing? Here are the pre-cogs. Here's one. When a foreign person transacts with an infrastructure as a service provider, so Azure, Google Cloud, Amazon, to train a large AI model with potential capabilities that could be used in malicious cyber-enabled activity, they propose regulation that requires that IaaS provider to submit a report.
SPEAKER_02: So if you have to know, you have to know if a foreigner is using your AI model or APIs on AWS and then file a TPS report. Oh my God. Somewhere, what is going on?
SPEAKER_03: I have a clarifying question. What happens if you're a foreigner that's on an H1B at Facebook or Microsoft? Good question.
SPEAKER_02: Well, and then Chamath- You are technically a foreigner.
SPEAKER_00: Right, and then Chamath, meanwhile, remember when SpaceX is now being sued by the DOJ because they haven't employed enough foreigners? So it's like,
SPEAKER_00: they outlawed both sides of it. I would say that you're in non-compliance just by existing. If you-
SPEAKER_02: Right. You know what I mean? Compliance is by death.
SPEAKER_00: If you employ foreigners in the creation of these very sophisticated technologies, you're creating a national security threat. If you exclude them, you're violating their civil rights. And these regulations are promulgated by two different parts of the government. So the government is basically getting to a point where no matter which side of the regulation you choose, you're gonna be in non-compliance somewhere. And this is just a recipe for the government to basically take action against anybody who they don't like politically.
SPEAKER_04: Yeah.
SPEAKER_00: Now, on this pre-crime point, one of the crazier stories that came out, and I think this was in Variety, is that Biden grew more concerned about AI after screening the most recent Mission Impossible movie, in which the villain is a sentient AI that sees control of the world's intelligence apparatus.
SPEAKER_02: Is that true?
SPEAKER_00: That's not true. Well, that's what the story said.
SPEAKER_01: Didn't the press reporter ask the press secretary this and this was the response? Who said this?
SPEAKER_00: The White House chief of staff, I guess.
SPEAKER_01: Said Reid, who, yeah, wow, unbelievable. The crazy thing is that I think the reason
SPEAKER_00: they're putting out this story is they don't wanna admit how the EO really happened, which is a bunch of lobbyists came in. And like you said, a lot of powerful people from big tech, they're all clamoring for regulatory capture. They're all clamoring to define the regulations so that they can benefit themselves and keep out new entrants. Because one of the big targets here is gonna be open source software. So if you are, for example, open AI, which is no longer open, it's closed source, the number one thing you wanna do is pull up the ladder before open source software can get a lot of momentum. And a big part of the regulation here does apply to open source software. I think one of the most problematic things about this, just to move on to the next point, is the way that it's not just this 110-page EO that's being promulgated. The directive is for all these other parts of the federal government to start creating their own regulations. So it says here that the National Institute of Standards and Technology will develop standards for red team testing of these models. It directs the Department of Commerce to develop standards for, like you said, Freeburg labeling AI-generated content. It directs explicitly the FTC to use existing regulation
SPEAKER_03: to go and legislate. It requires the FCC to think about spectrum licensing rules through this lens. You're absolutely right. It activates every agency of the government to create more bureaucracy.
SPEAKER_01: More importantly, it creates authority for agencies of the government to go into private servers and run audits. You're allowing the government for the first time ever to have access to private information, private computing infrastructure, rather than do what the job of the government should be, which is to regulate the outputs, to regulate the outcomes, to regulate illegal and illicit activities, rather than regulate systems and methods that, as Saxx pointed out, are pre-convicted of a crime. There is no crime until a crime is committed. And so this idea that the government can come in and regulate and keep a crime from being committed by auditing and managing all the systems and methods that software companies are using puts the United States at an extraordinary and unfair disadvantage. On a global stage, by the way, and by the way, LAMA 2 is out there. Hardware is out there. All the tooling is out there for others to start to get well ahead.
SPEAKER_03: Good news about the immigration thing. They actually, on the other side, do streamline the immigration process for people with AI or other critical technologies. So on the one hand, we should be able to hire them, but then on the back end, we'll have to file a TPS report about what they do.
SPEAKER_00: Let me just finish my point about all these different agencies being directed now to promulgate regulations. And by the way, there's some new committee or council that's being created of 29 different parts
SPEAKER_00: of the federal government that are now gonna coordinate on this AI stuff. So it's gonna be a Brussels-style bureaucracy. What's gonna happen is that with all of these different bodies issuing new regulations, it's gonna get more and more burdensome on technology companies until the point where they cry out for some sort of rationalization of this regime. They're gonna say, listen, we can't keep up with FCC and Department of Commerce and this NIT standards board. Just give us one agency to deal with. And so the industry itself is eventually gonna cry uncle and say like, please just give us one. And you already hear people like Sam Altman and so forth calling for the equivalent of Atomic Energy Commission for AI. This is how we're gonna end up with a Federal Software Commission, just like we have a FCC to run big communications and we have a FDA to run big pharma. We're gonna end up with a Federal Software Commission to run software, big software. And the thing to realize about AI is that functionally, there's no way to really say what the difference is between AI and software in general. Every single technology company in Silicon Valley has AI on its roadmap. It's a new computing paradigm. Everybody is incorporating it. Everyone is using some elements of AI. So this wave of AI is just becoming software. So we're gonna take the one part of our economy that has been free market and relatively unregulated, which is software. It's like the last bastion of true entrepreneurial capitalism and we're gonna create a new federal agency to manage it. That's where we're all headed here. And we're gonna end up as an industry in the same place that pharma has ended up or telecom has ended up, which is you go for permission to Washington.
SPEAKER_03: No, Nick, can you just put this up? So I did write a blog post sort of asking for this AI regulation. And I do think like the model of the FDA is probably the best one where in certain use cases, I do think that you can create a sandbox where these things can be tested and I think can be evaluated. The problem is that this legislation or this executive order doesn't really do that. So the way that I wrote this was, well, what are the arguments against what I'm proposing? And unfortunately I have to say every single one of those arguments is now valid. So I think that we should have gone in the direction of like a simplifying assumption, which is that most of this stuff is just software. And there are going to be some very specific kinds of businesses that before you take it to market, you should do something that's equivalent to sticking it in a sandbox, letting people see it. And I think it's easy to define what those are actually. And the fact that we didn't do that and we have this overly generalized approach is gonna create more chaos and people will not know whether they're in violation or they're in support. They're gonna be sort of pre-guilty, as you said, sacks of a pre-crime. And it's just gonna be chaos.
SPEAKER_00: So I think the answer is- But this is a smorgasbord for politicians because everyone's gonna be lobbying them to try and shape the regulations the way they want.
SPEAKER_03: I think it's gonna be a smorgasbord for lawyers.
SPEAKER_00: Yeah, I mean, everyone's gonna hire lawyers and lobbyists and policy people to try and shape these regulations.
SPEAKER_01: Good time to bet on India. Thank God for Mark Zuckerberg and the open sourcing of the Lama 2 model.
SPEAKER_03: It's not entirely open source, right? I mean, I think the biggest thing with Lama 2 that I find problematic is that it has these arbitrary thresholds on the number of users one can have before you have to go back to Facebook. So before- Yeah, it's 700 million, I think, right?
SPEAKER_01: Yeah.
SPEAKER_03: Yeah, before I give all the credit to Facebook, I'd rather say that I think there are a lot of open source alternatives, including Mistral, that I think are much better and free and open and in the clear where you can have unencumbered growth not dependent on anybody else.
SPEAKER_04: Yeah.
SPEAKER_00: Friedrich, your larger point about US versus India versus China, I think this could have a major impact on our global competitiveness. Of course. Because as you look around what's happening in the American system, there are so many things going wrong, right? Our fiscal situation is untenable. We're mired in massive debt. We have tremendous internal division in the country. Many of our cities are rife with crime. You just look at the number of people living on the streets. It's not good. I mean, there's a lot of indicators that America is in decline. We're involved in way too many foreign wars. So there's a lot of bad things happening. However, the one bright spot that America has had going for it now, I think for decades, is that we've always been the leader in new technology development. I mean, we're the ones who pioneered the internet. We're the place where mobile took off. We're the place where the cloud took off. And everyone else has been playing catch up with that. And I think we are in the lead in terms of AI development. I mean, other countries are doing it too, but I think that we are in the lead and it's not because of the involvement of government. It's because we have this vibrant private sector that's willing to invest risk capital where you know that nine out of 10 checks that you write are going to zero, but that one check, that one out of 10, hopefully could be a huge outcome. So we've had this incredible ecosystem of software development that is free and unregulated that is clustered around Silicon Valley, but it radiates out to many other places. And the only reason that ecosystem has thrived and survived is the reason that Bill Gurley stated at All In Summit, which is what is it, 2,200 miles away from Washington. And Washington has generally kept its mitts off. And now we are headed to a place where not just AI, but basically all software companies are headed for regulation. And like I said, right now it's 29 different agencies promulgating the regulations, but where this is going to end up is that the industry is eventually going to beg for its own agency just to rationalize all the spaghetti of different regulations. We are eventually going to beg for our federal agency overlord just to rationalize this whole mess. And sadly, I think that's where we're going to end up. And a lot of what is special about our industry, which is that two guys in the garage really can get started in a completely permissionless way, I think that's going to be jeopardized.
SPEAKER_03: If that's the end game, that's genius.
SPEAKER_00: I think that is the end game.
SPEAKER_03: I mean, do you think that they wrote this thing in a way just to create enough confusion where we all just cry uncle and say, just regulate us, give us one new- Yes, yeah.
SPEAKER_00: Look, I don't know if it's that conscious. I think what it is is there's a lot of politicians in Washington and Biden and Harris definitely fall into this category who just think that central planning or the central guiding of the economy or aspects of the economy to avoid certain problems that they think they can do this. They think that they are wise enough to do this or maybe they're cynical and they just know this is a pathway to campaign contributions. But either way, they kind of believe in this approach and they threw the kitchen sink at this, 110 pages. Every agency is now going to be writing thousands of pages. And I think where it's going to end up is with a new agency to manage software.
SPEAKER_01: So I think, Sax, the point you're making is one that some folks in Silicon Valley have felt for a while, is that a lot of the freedom and opportunity that the United States offers pioneers and entrepreneurs has been realized and borne out in Silicon Valley. That's feeling like it's been stymied in a number of ways. But the events in Israel a couple of weeks ago, in my opinion, seems to have shocked a lot of people that are traditionally very liberal Democrats into being red-pilled. I have had a number of calls with individuals over the last few weeks that have historically been very diehard blue liberal Democrats have spent their time with NGOs, with nonprofits, with various efforts to promote liberal causes. And these are folks who may or may not be Jewish, but who have been so shocked by what's happened in Israel and how many liberal organizations have created this narrative around being pro-Palestinian in a way that is being deemed and is coming across as highly, and in many cases is, very much anti-Semitic. And so I've had folks say, I'm giving up everything else I'm doing, and all I'm going to do is change the causes I'm working on now. And I have just been red-pilled. Do you guys, and Shamaf, you shared your story on our show a couple of weeks ago, the clip of you saying that went viral on how you kind of recognize that maybe Trump was a good president in the context of what you're experiencing with the Biden administration now, or seeing with the Biden administration now. You seem to be like the case study that I'm now hearing more from Silicon Valley folks about this shift.
SPEAKER_03: I think that over the last three or four years, my political positions really haven't changed that much. But I think what's happened is that the political party
SPEAKER_03: that I've historically been affiliated with has just kept lurching further and further to the left. And so it leaves me looking for a new home, I think. And I think that there are a lot of people that thought they were signing up for a set of beliefs around free speech, around being pro-reproductive rights, around being supportive of LGBTQ issues, but also supportive of a rational approach to the border and reasonable fiscal discipline. These are all seem to just be totally out the window. So I understand, because I've actually talked to a lot of my friends and my friends, some of them have been huge donors to both elite colleges and the Democratic Party, and they've paused all of it. And it's definitely given me pause, and I'm just trying to figure out where to go from here, because I think the reality is that this is a really crazy situation. So I think that there's just a lot of people that are in the center that don't really belong anymore the way that the Democrats represent themselves. So there's clearly something going on that we just need to get to the bottom of here, because I think it's not probably the Democratic Party that a lot of people thought that they belong to.
SPEAKER_01: Do you have other friends and folks that you know that have traditionally been Democrat donors in Silicon Valley, Chamath, that you see are now maybe considering shifting where they're giving money to Republican Party candidates and causes?
SPEAKER_03: I think it's easy to say that amongst my friends, it's in the billions of dollars that's been paused. That's insane. That's a lot of money.
SPEAKER_01: In fact, you used to be part of a niche in Silicon Valley, a Republican niche. Is your niche growing?
SPEAKER_00: I think so. I actually made a list of, I think, eight issues that have driven the shift. And when you say there's been a shift right, I wouldn't say that there's been a shift all the way to the right, but I think there's been a shift from the left to the center.
SPEAKER_01: By the way, that statement is consistent with what I've heard personally from a lot of folks, which is I consider myself a centrist now that I see that some of these liberal causes are so, they're extreme from my point of view.
SPEAKER_00: Right, so let me rattle off what I think the key drivers are. Number one, reckless fiscal and monetary policies coming out of Washington. As Druckenmiller says, we've been spending like drunken sailors. Number two, the dismal state of San Francisco because of crime, drugs, homelessness, and so on. And we all know that's an extreme one-party government. Number three, the ruinous COVID policies. They botched the science. They harmed the educational development of kids. And they also harmed work culture by making employees feel permanently entitled to work from home. So that's number three. Number four, this long con of regulatory capture in both Washington and Sacramento that we just talked about with AI. People are waking up to that. Number five, the betrayal of true liberal values like free speech and open inquiry. Number six, the way that tech visionaries like Elon have been targeted for harassment by left-wing politicians. Remember Biden said, we need to look into this guy. Raina Gonzalez was even less subtle. She said, simply Elon Musk. Number seven, the growing awareness that wokeness has gone way off the rails. We saw this even before the Israel Hamas war, but now I would say number eight is this war. It's really throwing gasoline on the fire by showing that wokeness leads to the simplistic breaking up of the world into oppressor and oppressed categories. And what we're seeing is that there's a lot of people on the woke left who are basically cheering for a terrorist organization and they're able to rationalize atrocities because of this simplistic woke dichotomy. That being said, I do think it's possible to support the desire for a Palestinian state and a two-state solution without falling into that bucket. I wanna be clear about that. But I think that there's been way too many people on the woke left who have blithely disregarded the atrocities and were basically cheering for Hamas from day one on this thing. And I think that has woken up a lot of liberals, both Jews and non-Jews who saw Jews as allies on the left. And when they see Jews being attacked this way, that has led them to really, I think, question their priors on this.
SPEAKER_01: What did you think of the Kamala Harris announcement yesterday that they're launching a program to combat Islamophobia in the US at a time when, my understanding is many of their Jewish donors are up in arms about their lack of action on anti-Semitism. I mean, it just seems like- It just seems tone deaf.
SPEAKER_00: I mean, look, I have not seen, in this particular case, I don't think I've really seen outpourings of Islamophobia. To be clear, I'm against Islamophobia. I'm against hatred towards any particular group, including Muslims or Jews. To me, any outpouring of hate towards a particular group is bad. But yeah, this seems like a problem that we really haven't seen. So it seems a little bit tone deaf. And look, this administration's been stumbling around on this whole issue. It seems like they don't really know what to do.
SPEAKER_01: I don't know how to quantify it. I just think it's an anecdote. What do you think? No, like I'm saying, I don't know how to quantify it, but I think the anecdote is a lot of folks-
SPEAKER_01: No, no, I'm saying what do you think?
SPEAKER_03: What do you feel?
SPEAKER_01: What do I feel? Yeah. I mean, I'm not a party guy. Taking a step back, this is gonna get a little esoteric, but I think humans organize into social systems. One social system is a family, one is a company. And I think that the government is a social system. The point of a social system is to get influence to achieve the things you want to achieve by aggregating together, by creating a tribe, by creating a system. And that's what a government is. It lets a lot of people pool resources to get things done as a group that you wouldn't otherwise be able to get done individually. Same with a company, same with a family, to support each other, et cetera. And I think that the problem with democratically elected governments, or all governments for that matter, frankly, is like any other system, and I've said this in the past, they have a natural incentive to grow. I met with a government person the other day, well-known government person, and I was struck by the tone. I've been struck by the tone on multiple people I've met from the government, on here's all the next things I'm gonna get done, and here's how we're gonna grow and do more and be bigger. Just like if you're running a company, that's your incentive, that's your model of thinking. And like with your family, you wanna grow the balance sheet for your family, you wanna have another home, you wanna take care of, you wanna build security, et cetera. So governments as an organizing system are no different. And so I think that in a democracy, over time, there is, as Sax points out, a group of folks who get elected, and as a result, like a philosophy that endures in that system, that is all about overcoming the power that is, that we all view there to be powers that are keeping us from doing the things we wanna do. And I think that this is the ultimate manifestation of what happens, is that you push the government to be as big as possible with no end, and you push the government to destroy any system of power that gets in the way of those who are able to vote these folks in. And now a lot of folks who thought that they were supporting liberal causes to help those in need are realizing that you're actually repressing minorities in the process, that there are minorities that are viewed to be powerful, like Jews, that there are minorities that are viewed to be unfairly advantaged, like those in the tech industry, that there are minorities who are viewed to be unfairly advantaged, like billionaires. And I know that this sounds insane to say that, those terms, but that's the objective, is to destroy any system of power, any individual of power that has any form of leverage over us. It's also why I think we've generally been technopessimistic in the West since the late 1960s, early 70s, is because technology has been viewed as this point of leverage for creating a power system for a minority of the people. So I generally view this as part of a longer arc and a natural kind of conclusion to this stuff. And I'm not trying to be super pessimistic about where things are going, because I do see that a lot of folks are now waking up to this reality, and they're like, so my anecdote is I've had a lot of folks tell me in the last couple of weeks, we have to be thoughtful about how we elect and how we govern, so that we create a more balanced, more thoughtful- What's the endgame in your framework?
SPEAKER_01: My endgame is socialism. I think that's where things go, ultimately, long-term. I think that there's a recapturing and a redistribution of power and value. I think that there's some degradation of the system that erodes to looking like something like France. It's not like a nasty, and it's like a slow whimpering, like you end up looking like France or something. And so that's my endgame in that framework. I believe strongly, this is why we talked about this with Dalio, that there are political actions, decisions, voting, mechanisms that hopefully we can put in the place to stall out and to stop that from happening, because I do think that human progress is critical for the majority of people that are disadvantaged, and we need to enable it.
SPEAKER_03: Okay, so I'm guessing you're on the I don't want to be France side. 100%, that's right.
SPEAKER_01: And so what is the- I want to be the Wild West. I want to be the early 19th century.
SPEAKER_03: What do you think that we should do in America right now?
SPEAKER_01: I think we should unwind a lot of laws. And I think we should have as a mandate, the objective is how do we get more of our economy and more of our people in this country to be supported by and progress through private industry rather than public support? The federal government and the role that the federal government has in funding industry, in hiring individuals, in pumping dollars into markets, I think has gotten so far beyond the tell that we, as we know, are being sloshed back and forth based on the decisions being made by the Federal Reserve. That should have never been the case. The free market should have always been allowed to operate. Progress should have always been allowed. The government should have stopped people from being hurt, should stop negative outcomes. But the idea that the government should come in and start to run things and employ people and get to the scale that it's gotten to, this is the largest organization in human history, the US federal government. It has got the highest dollar spent, the highest budget of any organization in human history. Even accounting for the Roman Empire, there should be accountability standards for every law, which is how do I know that this thing did what it was supposed to do and how do I measure if it didn't? And by the way, if it doesn't, and the dollars aren't returned to me, it's a multiple, we shut that law down, we shut that department down, we move on. There should be an accountability standard for every dollar that's spent. But we don't describe any outcomes. We don't say, here's the standard of measure and here's the accountability. And if this doesn't work, and if this dollar isn't returned to us, we don't spend it anymore. And we don't keep doing this thing over and over again and then layer something else on top and layer something else on top. And then you've got 10 layers of nothing accountable to anything. And the thing costs 10 times as much to do half as much. I am optimistic still. I'm always an optimist.
SPEAKER_03: Make sure you put in that caveat, good. Yeah. Yeah. What's going right in your view?
SPEAKER_00: I feel like we just killed the last good thing.
SPEAKER_03: Yeah. What is going right in your view?
SPEAKER_01: Well, the AI thing is what really pisses me off, man. I mean, this whole idea that we're gonna come in and tell people how to run businesses now. No, no, I hear you. Just go back to- It's nuts.
SPEAKER_03: But do you think AI is going well right now? We have nothing to really show for it yet. So it's hard to say that. It's cute and it's cool, but there's nothing really substantive. What is AI?
SPEAKER_01: I don't get the term. When I started my company, I had people that I called math people and statisticians. Then it was called data science. Then it was called big data. Then it was called ML. Now it's called AI. At the end of the day, it's software-based algorithms that use three things, data, software, and statistics. And the statistical tools and the approach to the software algorithm development have changed with the transformer model, that was paper that was described. But it's the same thing we've been doing since the 1960s, which is creating packages of software that make predictions and that do things for us. And all that's happened in the last two years is we've seen a piece of software that can communicate well with us based on these LLMs. And we're like, oh, intelligence is here. You know the first time a computer in the 1960s said hello world? Everyone was like, oh my God, we have AI now. AI's are sentient. It just said hello world. Well, the same thing happened when Big Blue,
SPEAKER_00: which was a big IBM mainframe, beat Kasparov in chess. People were like, oh my God, AI is just about here. Because at one time, being great at chess was considered to be only a human capability. And if a computer could ever get that good, the theory was that it would have to be an AI. But we actually found out that computers could do chess. But that didn't make them an AI. It just meant that they could acquire that one narrow capability. I think kind of what you're saying is that computers now, thanks to language models, have some ability to interface with us using language and to understand language. By itself, that is not artificial intelligence in the way that is portrayed in science fiction movies.
SPEAKER_01: There's two key things that are happening. One is a new modality in human computer interaction through chat, which is incredible, and opens up lots of new software applications and markets, which I think can be transformative and worth trillions of dollars, no fucking doubt. And then the other one is in generative tooling where you can make art and you can make video and audio and all this other sort of stuff. So you're creating digital outputs that are not necessarily text, but other forms that also start to represent the expectation that you might otherwise have. And so that is really powerful and opens up all these new models for media, content, exploring new business models, et cetera. So both of those are really important new software capabilities that have emerged. But this notion that I think people confuse AI as being this like, we've now got humans in software that can do things, is almost like back in the 60s when the computer said, hello world, and they said the same thing. I think that what people are awed by right now
SPEAKER_03: is that a computer's ability to statistically guess has gotten several orders of magnitude better than it ever was before. And so these guesses seem human and lifelike. But you'll find the edge cases where this stuff fails and we'll be asking ourselves yet again in a few years what the next leap is. But the thing that is different is that there is a level of investment multiplied, and Nick, I tweeted this so you can just show the math here. There's a level of investment multiplied by a level of improvement in the underlying hardware, multiplied by a level of improvement in the underlying models that's creating a 400x improvement from the baseline every year. And so the thing that I think is different is that we are taking this statistical guessing, if you wanna just call it that, and we're getting exponentially good at it. So there is an efficient frontier at which point you're like, oh my gosh, this is as good as certain humans. Maybe not the smartest of the smart humans, but certain humans. And I think that that's what's really, really crazy and intense right now. So I can understand why people are like, we need to get a handle on this. But it may kill the golden goose, although I would just say there is no golden goose yet. There's just a lot of really interesting stuff that people can say is novel and it's inspiring to see. But by no means has there been just a proven use case that is 10x in productivity. That hasn't happened yet.
SPEAKER_00: That's the reason to wait, is this whole thing just seems very premature. Let the technology develop a little bit. Let the problems become a little bit clearer, more manifest. Let the ways- Let the cake bake. Let the cake bake. Let the problems emerge in a way, instead of we're guessing about them, we can actually see them. And also allow there to be time for solutions to be developed by the industry on its own.
SPEAKER_00: And we don't need Kamala Harris's help or guidance to do. Okay, there you have it folks.
SPEAKER_01: Thank you for joining us for another episode of the All In Pod. We hope that you walk away with the utmost of optimism, enthusiasm for the world around us. There's awe and wonder outside. Go take a walk and enjoy it. There's so much more than what is on Twitter. I leave everyone with blessings and love. Gentlemen, anything else? Final words? David, you better fucking be there.
SPEAKER_00: Oh, for poker. Yeah, I will, I will. I'm coming.
SPEAKER_01: Last week, Sax RSVPs to poker. Then texts, he's supposed to be at dinner at seven o'clock, texts at 7.30, I'm on my way. 11 o'clock rolls around, no sax. No idea what happened to you. You disappear into like the Bermuda Triangle of the Bay Area. I don't know where you go, but you just disappear.
SPEAKER_03: He gets in an Uber, he has him park in the airport, and he just plays chess.
SPEAKER_01: Get down out of the house. All right, boys.
SPEAKER_04: Bye bye.
SPEAKER_02: Bye bye. Bye bye.
SPEAKER_01: Bye bye. We'll let your winners ride. Rain Man David Sax.
SPEAKER_00: I'm going all in. And it said, we open sourced it to the fans and they've just gone crazy with it. Love you, Westies. I'm the queen of Kenoah. I'm going all in. I'm going all in. I'm going all in. Let your winners ride. I'm going all in. Besties are gone. Go for it. This is my dog taking a Oh, man. Oh, man. Oh, man. My haberdasher will meet me at the... We should all just get a room and just have one big huge orgy because they're all just useless. It's like this like sexual tension, but they just need to release them out. Wet your beak. Wet your beak. Wet your beak. Beak. Wet your beak. We need to get merch.
