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Big Tech Starts Making Cuts, Fed Incompetency, Global Debt, Russia-Ukraine & More (E98) | All-In Podcast with Chamath, Jason, Sacks, & Friedberg

Check out All-In’s Episode Page & Show Notes 

Key Takeaways

  • It’s an end of an era for Big Tech: they’re transitioning from a phase of unfettered growth into their next phase where they must learn to operate like a cash-cow business 
  • When the growth engines of Apple and Google slow, other tech companies don’t have to offer competitive compensation, extra benefits, and extravagant workplace environments to compete for talent as they once did 
  • “Nobody is talking about a soft landing anymore. In fact, I think we’re all wondering who is flying the plane.” – David Sacks on the Federal Reserve 
  • Financial markets have always had a “Fed Put”, which is a level of pain that is reached that forces the Federal Reserve to step into the market and be a buyer of last resort 
  • “The investments that one makes in this period will probably be the best for many many years to come because they’ll have the most asymmetric upside.” – Chamath Palihapitiya 
  • The Federal Reserve, in conjunction with the last two administrations, printed $10 trillion over the last couple of years which has caused inflation to soar 
  • There is $300T of global debt; if interest rates increase from 0% to 5%, that’s an increase of $15T in annual debt service, which is 18% of global GDP 
    • Chamath sympathizes with Friedberg’s concerns over global debt but thinks perpetual bailouts will continue to negate the consequences of rising debt levels 
  • The rate-setting process should leverage more of today’s technology; humans setting the rate in quarter-percent increments every couple of weeks seems archaic to Friedberg 
  • “If you have these irrational central bankers that are willing to constantly bail people out, you will never get a high-functioning government because the policy is irrelevant.” Chamath Palihapitiya 
  • Europe slept-walked its way into WWI in 1914, which is something David Sacks thinks the United States could be doing today 
  • David’s primary gripe in Should America Go All In On Ukraine is the U.S. media’s narrative that “Putin is bluffing”; we cannot know that he is definitely bluffing, and the stakes of being wrong are too high  
  • Wealthy and powerful people in the U.S. might begin to put political pressure on their representatives to resolve the Russia-Ukraine issue because of the strain the conflict has placed on the markets and their portfolios 
  • “I think that the markets would have reacted much much more negatively to a nuclear incident three months ago than now, and may not even react as much as we think it would three months from now.” – Chamath Palihapitiya on Sept. 30, 2022

Intro

Big Tech Making Cuts

  • Meta announced a hiring freeze and said it would reduce headcount for the first time in its history 
  • Apple pulled back iPhone 14 production after slower than anticipated demand 
  • Google CEO Sundar Pichai: “There are real concerns that our productivity as a whole is not where it needs to be for the headcount that we have.”
    • Google has 174,000 employees 

Chamath on Big Tech 

  • It’s an end of an era for Big Tech: they’re transitioning from a phase of unfettered growth where they were fighting to grow into their valuations into their next phase where they must learn to operate like a cash-cow business 
  • Big Tech’s growth is tapering, and the companies will likely trade on a much tighter earnings multiple going forward 
  • Operating on tighter multiples means they’ll have to manage their expenses better and shrink their surface area of operations: more programs not essential to their core businesses will get cut 
  • Apple, Alphabet, Meta, and Microsoft are most sensitive to valuation because they are the most widely held stocks in the market
  • Chamath says that Big Tech stocks are the equivalent of US treasuries in the equity markets: the safest, most predictable equities in times of stress that have cash-cow, unassailable business
  • The fact that Big Tech has taken measures to batten down the hatches should be a warning to everybody else

David Friedberg on Big Tech  

  • Friedberg’s career began during a deflationary period for Silicon Valley: the 2001 dot-com bubble had just burst, every company was cutting costs, and liquidations were common
  • Out of the ashes, the “Web 2” story emerged starting in 2003-2004, which was a more rational story consisting of new business models for businesses with real traction compared to the time period leading up to the dot-com bubble
  • Google began to offer crazy benefits and created an amazing workplace with a gym, free food, napping pods, etc. 
  • Suddenly, every other tech company was forced to adopt similar benefits to compete for talent, in addition to matching or exceeding Google’s already higher compensation 
  • The year 2022 is the first time since 2004 that Big Tech is feeling a recession actually hit
  • The effects of Big Tech getting hit by a recession: decline in compensation, benefits, value share, and hiring opportunities in general that were taken for granted over the last 18 years
  • “This is going to be a real shock for people that work in tech.” – David Friedberg 
  • The average tech employee has grown accustomed to every company offering great benefits, always having another job to jump to that will pay them more, etc.
  • When the growth engines of Apple and Google slow, other tech companies don’t have to compete with them as much anymore, and this will be reflected in the compensation they offer, benefits, and workplace environment 
  • “It’s the end of an era and a new world for tech and Silicon Valley.” – David Friedberg 

David Sacks on Big Tech 

  • “The big takeaway here is that nobody is safe; it’s not just startups who have to tighten their belts, it’s big companies too. ” – David Sacks 
  • “I think we’re headed for a broad-based recession.” – David Sacks on Sept. 30, 2022
  • David references Stanley Druckenmiller’s prediction that we will see a “hard landing” in 2023 with a possible deeper recession than many expect 
  • “Nobody is talking about a soft landing anymore. In fact, I think we’re all wondering who is flying the plane.” – David Sacks 
  • One of David Sacks’s friends in Hollywood says that deals have come to a screeching halt, whereas last year Netflix and others were regularly signing hundred-million-dollar, multi-decade deals 
    • Netflix’s stock has been hammered, which reduces its ability to finance these deals
  • Netflix knows that Wall Street is watching them, and the company has been forced to question its business model and if it must spend that much money on content
  • The massive asset bubble that’s been deflating since 2021 was not just in crypto and growth stocks, but is now playing out in the real economy too

Chamath on the Market Bottom Forming 

  • Chamath believes that the markets are consolidating, forming a bottom, and that now is the time to deploy capital, saying: “We’re more near the lows than the highs”
  • Markets do a good job of pricing in news and pricing in the forward reality
  • Today’s price is everything we already know; money is made by guessing what will happen in the future 
  • Financial markets have always had a “Fed Put”, which is a level of pain that is reached that forces the Federal Reserve to step into the market and be a buyer of last resort 
    • The Federal Reserve consistently steps in to rescue the markets from financial armageddon
    • The Fed Put always eliminates the last part of the supply-demand balance 
  • Chamath equates the Fed Put to Big Tech’s role influence on employee compensation: it was difficult to know the true market-clearing price of a software engineer, for example, because Big Tech just offered them massive compensation packages that were disconnected from the supply-demand balance 
  • The Blocker Strategy is when a company hires someone to prevent them from creating something that disrupts their existing business, a tactic commonly used by Big Tech that might not be used as much during a recession 
  • “The investments that one makes in this period will probably be the best for many many years to come because they’ll have the most asymmetric upside.” – Chamath Palihapitiya 
    • He cites this being the case in 2002, 2003, 2004, and in 2008, 2009, and 2010 

David Friedberg on Technology and Remote Work 

  • Technology always marches forward
  • It’s bizarre that we refer to “technology” as its own industry: tech companies in Silicon Valley no longer exclusively sell technology to other companies, but to entirely different industries 
  • Every industry is now “technology-led” thanks to the valley’s success 
  • The term “Silicon Valley” is not referencing a physical location, but a category of people and companies working around the world to create products and services that do more for less 
  • Remote work allows companies to access more talent all around the world
  • Companies don’t need to pay for office space in one of the most expensive cities in the world anymore if they can hire a remote team 

David Sacks on Sleepwalking into a World War

  • Europe slept-walked its way into WWI in 1914, which is something David Sacks thinks the United States could be doing today 
    • Of all the things going on in the world today, Senator Elizabeth Warren is going after Roomba for anti-competitive behavior (yes, the robot vacuum thing)  
  • What should have been a minor, regional war that no one should have cared about except the Balkans and Austrians, but instead the entire world got themselves invested in this Franz Ferdinand conflict 
  • “We’re worried about the Roomba when the Administration is sleepwalking its way into the next world war.” – David Sacks 

David Sacks on Stanley Druckenmiller, Inflation, and the Fed 

  • Stanley Druckenmiller has been right about everything for the last year
  • In mid-2021, Druckenmiller called the Fed’s monetary policy “radical” because the Fed continued its bond-buying program much longer than it needed to 
  • Stanley Druckenmiller predicts that the Dow Jones will be in the same place today as it is in ten years from now 
    • Equities go up in the long term, but “long-term” can vary significantly
  • The Dow Jones traded sideways from 1966 to 1982
  • Following the Great Depression of 1929, the stock market didn’t recover until 1954
  • The Federal Reserve, in conjunction with the last two administrations, printed $10 trillion over the last couple of years which has caused this inflationary spiral 
    • Much of the monetary creation occurred post-emergency 
  • The economy had fully recovered and yet the Federal Reserve bought another $160 billion in bonds

Chamath on Central Bank Intervention, Rate Hike Cycles, and UK Mortgages 

  • Central bank intervention perverts a market because it distorts price signals in asset markets and the real economy 
  • The stock market has a tendency to immediately go to the conclusion of a Fed rate hike cycle
    • Chamath argues that the stock market is 9-12 months forward-looking
  • Historically, institutional investors start buying equities as the rate hike cycle comes to an end 
  • Chamath agrees with Druckenmiller’s prediction that we’ll experience a hard landing in 2023 and that something will break, but he thinks the equity markets are already looking beyond that hard landing 
  • Smart-money sellers are selling right now to harvest capital losses for tax purposes 
  • Chamath’s definition of a hard landing: unemployment will get to an awkward and uncomfortable number (5-6%) and more companies will “pull way back” on their spend
  • People on adjustable-rate mortgages will get hurt 
    • 40% of mortgages in the United Kingdom will be reset to much higher levels in January
    • UK citizens on adjustable-rate mortgages will have to spend 3-4x more to keep their homes 

David Friedberg on Rising Global Debt 

  • There is $300T of global debt; that is debt owed by governments, corporations, and households
  • Interest rates are being raised to combat rising inflation
  • If interest rates increase from 0% to 5%, that’s an increase of $15T in annual debt service, which is 18% of the global GDP 
  • Chamath thinks that global debt “means nothing” because central banks can just print more money 

Chamath on Global Debt Not Mattering 

  • There isn’t some law that states debt-to-GDP can’t exceed a certain level 
  • Chamath isn’t saying that he’s a fan of perpetually kicking the can down the road, or that it is the right strategy, but it is a structural reality of the current monetary system 
  • There will eventually be 100-year government bonds; the duration of maturities will continue to be extended 
    • Trump proposed this when rates were at 0% in 2020 and Janet Yellen denied it because it would have severely damaged the strength of the dollar 
  • Chamath sympathizes with Friedberg’s concerns over global debt but thinks perpetual bailouts will continue to negate the consequences of rising debt levels 

David Sacks on Federal Reserve Incompetence 

  • Years ago, the Federal Reserve was spooked by a 1.7% inflation print, fearing deflation; it opened the floodgates of liquidity to engineer an 0.3% uptick to meet its 2% inflation target 
  • The Fed claims to be data-driven but comes up with new jargon to ignore the data, such as “transitory” 
    • There was no data to suggest that inflation was transitory; claiming that inflation was transitory was a political consideration 
  • Members of the Federal Reserve, like all politicians, delay acknowledging bad news for as long as possible 
    • The Federal Reserve dismissed inflation fears when it first peaked its head up in the summer of 2021
  • Just as inflation was starting to emerge in May 2022, David Sacks thinks that Jerome Powell was reappointed by President Biden because he got on board with the administration’s inflation talking points, specifically referring to it as “transitory”
    • This included labeling inflation as “transitory”:
    • Powell was the only Fed member reappointed by President Biden from the Trump administration 

Chamath on the Fed Having Old Data

  • Imagine a CEO using six-month-old data to run his company
  • Jason Calcanis recommends the government start a Manhattan Project for understanding the economy on a very granular level 

Friedberg on the Federal Reserve 

  • Two things can be true: 1) the Federal Reserve’s process for setting rates should be reset and 2) the Federal Reserve is not fully responsible for the dire economic conditions we face today 
  • The world supported the fiscal policy that was passed at the onset of the pandemic 
  • The Fed inflated assets to make people feel good as the real economy came to a stoppage 
  • The rate-setting process should leverage more of today’s technology; humans setting the rate in quarter-percent increments every couple of weeks seems archaic 

David Sacks on the Two Original Economic Sins

  • David Sacks believes lockdowns, and the subsequent fiscal and monetary reactions to those lockdowns was the first “original economic sin” that created the economic conditions of today 
  • The second original sin was the quantitative easing (QE) and zero interest rate policy (ZERP) that began in 2008 
    • The glass was broken for the Great Financial Crisis emergency, and then we kept printing money on autopilot long after the effects of the GFC 
  • “Nothing is so permanent as a temporary government program.” – Milton Friedman 

Chamath on Distortions in the Politician’s Feedback Loop 

  • “If you have these irrational central bankers that are willing to constantly bail people out, you will never get a high-functioning government because the policy is irrelevant.” – Chamath Palihapitiya 

David Sacks: Russia-Ukraine Update 

  • You can’t know that the markets have bottomed out without having a successful resolution between Russia and Ukraine, or at the least a non-escalation of it 
  • As of this conversation, David Sacks identifies several headlines that are escalatory in nature, and ones that do not suggest that a peace deal is likely any time soon:
    • “Ukraine applies for NATO membership, rules out Putin talks”
    • “Putin proclaims annexation as Russian garrison surrounded in Ukraine”
    • “Former Polish foreign minister thanks the US for damaging Nord Stream pipeline”
  • A peace deal requires:
    • Zelenskyy gives up on NATO
    • Putin makes some compromises (likely in the Donbas) 
    • Sanctions get lifted, and the energy flows turn back on 
  • As of Sept. 30, 2022, David Sacks believes the three criteria for a peace deal has been taken off the table 
  • Removing the off-ramps leaves escalation as the only option 
  • David shares his full thoughts in a post titled Should America Go All In On Ukraine
    • David’s primary gripe in the essay is the U.S. media’s narrative that “Putin is bluffing”; we cannot know that he is definitely bluffing 
  • “If his life is on the line, [Putin] is incentivized to use every weapon at his disposal to try and prevent his violent overthrow.” – David Sacks  
  • Jason believes regime-change-by-exhaustion is the preferred strategy to remove Putin from power 

David Sacks on the Dominance of the United States

  • The U.S. is the most safe and secure country in the world today, and in human history 
  • The U.S. has great geographics; it has gigantic moats on both sides of its mainland in the Pacific and the Atlantic Ocean 
  • The Monroe Doctrine prevented any other great adversarial powers from getting a foothold in the Western hemisphere for the last 200 years
  • No country can invade the United States; its only vulnerability are intercontinental ballistic missiles (ICBMs)
  • The U.S. is engaging in a proxy war with the person in the world with the most ICBMs
  • Instead of trying to find a diplomatic solution, the U.S. removes off-ramps and blithely disregards the ICBM threat, chalking it up to a bluff from Putin 
  • The vital question for America: “What’s in it for us and what is the vital interest that compels us to risk our security?”
  • Sacks equate the Donbas region to Franz Ferdinand and believes the U.S. is potentially turning a regional war into a world war 
  • The market could take off like a rocket if the Ukraine situation gets resolved 

David Friedberg on Aggregate Tail-Risks

  • The sum of the portfolio of tail-risk outweighs the potential upside of low-priced opportunities in the equity markets right now
    • Each tail risk scenario is a low probability by itself, but when aggregated together, the expected value of tail risk is material and has an impact on markets 
  • Wealthy and powerful people in the U.S. might begin to put political pressure on their representatives to resolve the Russia-Ukraine issue because of the strain the conflict has placed on the markets and their portfolio 
  • Friedberg is most concerned about “money not moving
  • “The biggest indicator of economic health is the rate of rotation of Chamath’s closet.”  – David Friedberg 

Chamath on the Market’s Potential Reaction to a Nuclear Incident 

  • “I think that the markets would have reacted much much more negatively to a nuclear incident three months ago than now, and may not even react as much as we think it would three months from now.” – Chamath Palihapitiya on Sept. 30, 2022
  • It was a horrendous humanitarian crisis, but Chamath doesn’t think the markets react to humanitarian crises, they react to the second-and third-order economic impacts of crises
  • The most obvious economic impacts of this war have been to currencies, commodities, and energy, and the world has had the last 6 months to address their vulnerabilities as they relate to these three areas 

RIP Coolio 

  • The group pays their respects to Coolio, a legendary rapper who unfortunately passed in September 2022
  • Friedberg says Coolio could have been a politician if he wasn’t a rapper, in a complimentary way 
  • Chamath recommends people look into PCSK9 inhibitors if statins don’t work for them (Not Medical Advice)
  • People over 45 should be getting CT angiograms 

Additional Notes

  • Bill Gurley gave an interview where he said a recession is a great time to start a company, saying that advertising and marketing are the first things to go at the onset of a recession, which levels the playing field for companies that couldn’t afford marketing in the first place 
  • “Fortunes are made in the down-market and collected in the up-market.” – Jason Calacanis
  • The Federal Reserve has never been “independent”; there has always been political pressure on the Fed 
  • Baby Boomers in the U.S. are sitting on $71 trillion; their wealth transfer to the GenX and Millennial generations is the largest in history 
    • There are 76 million Baby Boomers in the U.S., and they control 14% of the world’s assets

Books Mentioned

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