Chamath Palihapitiya Explains Why We’re Entering A Horrific Financial Crisis… #Finance

I have a new appreciation for what’s going on in these major cities I think that all major cities are crumbling and I don’t mean to be alarmist or very dramatic about that it’s just that I spent a lot of time with entrepreneurs that are in Paris and they struggle with the

same things that the people in San Francisco do and then I had a couple of conversations with some folks that are entrepreneurs in London and they suffer from the same things lots of petty crime lots of garbage lots of vandalism lots of drugs and so no place is perfect it turns out everybody is

struggling from a lot of experimentation gone wrong and how these cities run I would say that India has its own vagaries so those issues are not the same I’ve been to Singapore a couple times my kids were just in Japan for spring break so I saw a bunch of the pictures those cities look

relatively the same very orderly well-run clean but these Western cities are a bit chaotic you also had this referendum in California that essentially lowered a whole bunch of felonies to misdemeanor if you steal less than $950 that’s considered a misdemeanor now instead of a felony so

there’s been a huge increase in crime because of that you know shoplifting to doesn’t get prosecuted anymore and misdemeanors don’t get prosecuted anymore we’ve had all these sores daas that don’t want to prosecute misdemeanors when New York City was a chaotic mess in

the 70s and ‘ 80s it took two different mayors and it took almost a decade for that to get cleaned up they hired a lot more policemen and they just really cleaned up all of these really bad areas and then it had this KnockOn effect when I’m staying at a hotel in Paris or when I was

speaking to some of my friends who live in London it’s the same thing it’s like the amount of knife crime is so egregious as an example that they tell you don’t wear a watch Etc I mean I don’t wear we watches anymore when I go out but what’s crazy is they will tell you

that you’ll get stabbed over a phone where it’s like you don’t need to stab me for my iPhone here just take the iPhone that to me was like very surprising and so even when I was walking around Paris I was like should I really feel scared here that stuff in San Francisco as far as

I can tell or any major city in the west hasn’t really been fixed because you haven’t had a shift in leadership yet where they’ve really said okay we’re going to double down on policemen and policing and we’re going to amp up the punishment that hasn’t happened

CPI higher than expected did for three straight months now as we all know the FED did 11 rate hikes in 2022 and 23 and the intention was that we would see Inflation come down to their target of 2% and they would start to lower rates and obviously we’re not seeing that

Inflation is remaining hot things are getting more and more expensive housing is up 5.7% your over-year transportation costs are up 10.7% car Insurance is up 22.2% year-over-year the expectation has been that the market will do rate Cuts Larry Summers came out and

said you have to take seriously the possibility that the next rate move will be upwards rather than downwards the market was expecting three rate Cuts this year which would have been really good news for Biden and I think this latest Inflation print was kind of a dagger to the

heart of that expectation and I think the Wall Street Journal put it best it said here Wednesday’s report had been hotly anticipated because fed leaders had been willing to play Down stronger than anticipated Inflation readings in January and February as reflecting potential

seasonal quirks but a third straight month of above expectations Inflation data erodes that story and could lead fed officials to postpone anticipated rate Cuts until July or later so it’s not just the fact that this Inflation print was higher than expected

it was also higher than expected in January and February but people were willing to kind of Overlook that saying well maybe it was just kind of a quirky reading but now we’ve had three straight months it’s pretty clear that the narrative that we had going into this year which was that

Inflation was on its way down peaked at 9% as the official rate I think in 2022 and then it was going down every month through all 2023 and I think the expectation going into 24 was it would keep going down we get these rate Cuts well after three straight months of

Inflation being more persistent and stickier Than People expected I think that narrative is basically Deb I think the new narrative now is rates are going to be higher longer and I think Larry Summers is reflecting that view Larry’s going further he’s not just saying

that the current rates for longer he’s saying they might actually increase and that’s a risk and I think there could be several other KnockOn effects that we should talk about one is for the consumer this means that the cost of borrowing is going to be higher for longer that makes it

harder to buy a house mortgage payments are higher that also means if there’s fewer home sale transactions that means the price of housing could come down so there could be a correction in that market second if you want to buy a car your car payment’s higher and if you have

Loans your personal interest is going to be higher and this is why I think consumers feel like they’re worse off than the economic data would otherwise reflect and Larry Summers actually had a tweet storm about this about a month ago where he calculated that if you included

the cost of borrowing in Inflation that Inflation was much higher than people thought and that it actually peaked not at 99% but at 18% so Larry had an excellent tweet storm on that and he said that the cost of borrowing which used to be calculated in

Inflation but is not anymore was the reason why consumer sentiment about the economy was depressed he said that that accounted for about 70% of it so people should be feeling better off because GDP growth is good and unemployment is low but they’re not because

Inflation is so high and if you include cost of borrowing the Inflation’s even higher so I think this is really bad news for Biden but it’s a story that’s been going on now for 3 years it’s not just this one Inflation print

the FED Open Market Committee in December stated that they expected three rate Cuts this year and I think the market in some cases we predicting as high as four or five now we may not have any and we may actually see a rate hike but I mean I think Summers gave that maybe a 15 to 20% chance which is

it’s still not the most likely scenario but it’s possible and no one’s counting on that in December Cham if you’re a Fed governor and obviously the Federal Reserve Board of Governors sets rates they make these decisions how influenced are they politically influenced are they

by this election cycle and you know historically this is meant to be a fairly independent board but there’s been a lot of consternation over the last few years that this board acts like almost a political apparatus particularly in election years I think that you’re asking the absolute

right question I think that the FED has become increasingly politicized and I do think that there are actions that foreign governments take to influence the election but I do not think it’s what most people think when I say that most people ideas goes to like some dark room conspiracy theory

and misinformation and I think that’s a little bit naive I think the more obvious way in which other governments can impact the US election is exactly how saak said which is they know that if Inflation ticks high and Interest Rates are up and consumers are

under pressure and meaningfully displeased with the economy they’ll vote out the sitting Administration and so what can other governments do they can do what they’re doing so I love this like explanation in pre- charts this is a core driver of Inflation which is the

price of energy and what you see here is that since the beginning of the year oil prices have gone up which ultimately will translate to into a higher cost of doing business running your factory keeping the lights on keeping your home warm getting from point A to point B all of these things go up

which that ultimately get reflected in prices which is what Inflation is and so that’s a very bad Trend obviously we had a lot of really good stuff happen through the course of last year but it’s largely reversed itself it’s important to double click into this and

figure out well who’s driving this is it just a random act or is it a systemic set of decisions and it turns out it’s systemic so if you go to the next chart what this shows you is what the US has been doing the United States has clearly created an incentive to flood the economy with

oil which the laws of supply and demand would say prices should go down and by bringing prices further down they would have further brought down Inflation and they would have pulled forward these rate cuts that we had been expecting from the fed the problem is that the rest of the

world actually said no hold on and that’s what you can see on the next chart so for every time we were trying to increase production all of these other countries have been cutting production and this is the change in the OPEC plus crude production targets of 2024 for every barrel of oil the

US would pump out of the ground more than that one barrel of oil would get actually restricted by all of these countries on this list which is just to show you that these countries have a very specific view about how they want that energy market and that’s just one market but it’s a key

input into Inflation and rates to work so you’re saying that the OPEC has a price per barrel price Target and they’re able to manipulate production to maintain that price Target so while the US is trying to lower the price per barrel these other countries are able to

have a stronger influence and balance out production when when you make these Cuts Like This prices will go up because OPAC plus is meaningfully bigger than just the United States on its own the United States May amp up a few hundred th000 barrels a day but if OPAC cuts by a few million barrels a

day you see what you saw in that first chart which is the price will go up and that’s largely why prices have gone up I think why this happens is because when they see the United States trying to manage Inflation and manage Global rates right because us rates are not just for

the United States they’re the trend Setter for everything else I think that in part there’s a decision that this rate philosophy the economic philosophy the political philosophy if they wanted to support that what they would do is actually also keep prices where they were or increase

production but by reigning in production what you’re essentially doing is voting against that entire apparatus right so OPEC and all of those countries and those decisions are not made by an oil Minister let’s be honest they’re made by the leaders of those countries whose decision

then gets reflected by the minister of petroleum or oil in all of these countries is a vote against Biden and the United States government and the politicization potentially of the fed and then the last comment is just that when you look at the reverse repo rate which is a fundamental measure of

Liquidity what you also see is Liquidity very quickly getting sucked out of the system which is also generally a system health check that the FED uses to make sure that the system is operating as required so in totality what I see is that there is a structural

disillusionment with the current Administration and where people can make decisions in their own best interests versus the collective interests of the United States in a broader framework that the US may represent are voting against it and so this is why the idea of a persistent

Inflation rate is a lot more credible than it was 6 months ago and I think it’s just what saak says which means that we’re probably now unbalance 50/50 between a hike and a cut and I think if you don’t see this thing change in the next 3 months you’re going

to see 7525 for a hike of at least 25 basis points and I do think David’s right I don’t see how the sitting Administration in any government will be ble to withstand the onslaught of electoral displeasure if rates are 4 and a half 5 and 6% going into November they are very likely going

to come up with a strategy to try and win votes that will likely involve some sort of stimulatory process would be my guess and that stimulatory process may look something like more student Loan forgiveness more Debt forgiveness and here’s the irony the

actions that the administration is likely to take to support themselves in the election cycle are likely going to further fuel Inflation and that’s the biggest concern and worry I have is that there’s almost this inevitable set of behaviors that are coming down the pipe

here over the next few months because of the Inflation report that are actually going to make things worse not better to your point Biden just announced a new student Loan forgiveness plan remember the Supreme Court invalidated his last one so now he’s trying

again and it would potentially give Loan forgiveness to something like 30 million borrowers but look I want to move beyond the political aspect of this and just talk about some more of these KnockOn effects because we talked about the impact on the consumer there’s also an

impact on investors there’s an on the government and there’s an impact on the banks let’s just deal with the banks for a second commercial Real Estate developers are hanging on by their fingernails right now you know they basically borrowed huge amounts of money

to buy commercial Real Estate when rates were really low and they did so at high Valuations now there’s been a huge correction on that market and they cannot pay back those Loans and they can’t get re

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Financed so what’s happening well they’re working with the banks to restructure those Loans to tack on the interest they can’t pay now to the end of

the Loan and then the bank will hope and pretend that they’ll be able to get paid back one day it’s called extend and pretend well the extend and pretend strategy could work if you believe that Ray cuts are coming really soon because you just need to hold on until the

ray cuts are here and then you can get reFinanced at lower rates but if rates are going to be higher longer that strategy is not going to work and you’re going to see

more and more Real Estate sponsors throwing in the tow and banks are going to end up foreclosing on these properties and you’re going to see more and more fire sales there’s a really dramatic example just the other day in St Louis a building that was bought a few years

ago for $200 million just fire sailed at $2 million I mean 99% reduction this is like crash I Su the Equity was completely wiped out they sold it for 3 and half million but it’s also going to be a wipe out for the bank that made that Loan originally or bought

that Loan when was repackaged into cmbs or whatever it was I would expect that if rates stay higher longer that’s going to create tremendous stress on Commercial Real Estate and therefore on the regional banking system that made all these

Loans to commercial Real Estate developers so that’s knock on effect number one knock on effect number two is this the government’s cost of borrowing the 10e ratees already risen to 42% now and if rates stay higher longer as more and more of the

government Debt rolles it’s going to end up getting reFinanced at higher rates and the need to re

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance all this government Debt is going to continue to put pressure on the bond Markets and I

think this is why Larry is fundamentally pretty bearish on rates going down is the government’s financing costs are so huge and they continue to grow we’re adding something like a trillion dollars of new Debt every 100 days there have been some reports of this yeah 7.6

trillion is getting reFinanced of old Debt in the next 12 months that 7.6 is sitting around 2% and now it’s going to get bumped up to close to 5% which

adds an incremental $210 billion a year of Debt Service expense just on the Debt that’s getting reFinanced in the next 12 months not

to mention the deficit not to mention etc etc etc right so the government was extending and pretending as well I mean they were hoping that rates would go down fast enough that when all of this massive government Debt rolls and needs to be re

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Financed it’ be done at lower rates so the interest costs wouldn’t swamp us we’re already I think at over a trillion dollars now of annual interest expense for the

federal government we are yeah and it’s going to rise to 1.6 trillion so it’s going to be 60% greater than our defense budget just servicing the old Debt we’re basically in a classic Debt spiral where we’re borrowing our annual deficit is

we’re at 2 trillion plus now we’re not paying back the principal on the Debt we’re not even paying back the interest on the Debt we’re borrowing money to pay off all the interest and then some on top of that so that’s a huge problem

for the federal government and then I think the last piece of this is investors so what this chart shows is the Fed funds rate basically over the last like 75 years and you can see that it peaked in the early 1980s when vulker decided to break the back of Inflation by jacking up

Interest Rates to like 18% and it was very painful we had a pretty severe recession and I think it was 81 or ‘ 82 but then the economy came roaring back by 83 and Reagan got elected in ’84 in any event that began a period of declining and low Interest

Rates for investors again starting in the mid 80s and it continued all the way through I think the post GFC period and then this Co period where we had zero Interest Rates for a long period of time and you can see the last Spike we’ve had was when the FED decided to

jack up rates to 5% in response to Inflation so the fact that we’ve got this persistent sticky Inflation suggests that this whole you could call it really almost a 40-year period of declining in low Interest Rates may be over and when

Interest Rates are going down it creates a huge Tailwind to the Stock Market and the bond market because the discount rate is lower so stocks and Bonds are going to be more valuable well if we’re in a a long-term environment that’s more

Inflationary and rates have to stay higher longer that’s not great news for investors it hurts the Stock Market and it creates in the private investing world like VC and Real Estate it creates a much higher hurdle rate so it’s harder

for private investors to justify Fundraising so I think it’s too early to say that this 40-year trend is over but I think it could be and the reason for that is just the huge pressure of government borrowing crowding out private investing and this sort of everpresent need to

keep issuing more and more Debt at higher and higher rates to make it more attractive is going to create think very bad conditions for investors so chth let me ask you if you concur given that today the NASDAQ is sitting at an all-time high what’s the disconnect in the market

on why investors are buying equities given that we’re likely going to have persistent higher rates and as a result multiples should compress particularly in growth stocks and why the nasdaq’s kind of firing up I think it’s important to look at what stocks are actually lifting the

NASDAQ just like what stocks are lifting the S&P 500 and we’ve seen this there’s a massive dispersion there’s like seven or eight companies that matter and 500 odd companies that don’t matter much and so the reason why things go up in an environment like that is

irrespective of the economy money managers are paid to deploy money and the global amount of total available equities to buy is shrinking if you think about that what that means is that the number of dollars is growing right linearly and in some years it seems exponentially so then a certain

percentage of that Finds Its way into the Equity Markets but when the Equity text-decoration: none;">Markets continue to shrink and there’s fewer and fewer things to buy prices will still still go up irrespective of the underlying justification so I think that the thing is you can’t look at these things as a sign per se you know if you look at as a different

example Commodities are up broadly speaking 30% since the beginning of the year I think the reality is the following countries are feeling increasingly uncomfortable with the decisions that the United States are making whether that’s its position to keep funding the war in Ukraine whether

that it’s the continued instability in the Middle East whether it’s posturing with China whatever it is and so every country is now making a very different calculation about what they want to do and I think how it gets reflected is that they are optimizing for their own economies and

what that Yields is each of them trying to make as much money as they can in the short term and as a country that is a net importer we are going to feel the price of those decisions as Inflation and I think saaks is right like that’s where we have to start

figuring out how we rebalance these decisions from a foreign policy and economic perspective because if you don’t change something here all of these countries are basically going to be like we’re on our own we’re going to optimize for s these countries are basically voting in a

way that says we are not being led in a way that we trust and that unfortunately Falls at the feet of the sitting president look I’m hopeful as we all are that work in the tech industry that new tools and Ai and other Technologies would have a massive driver on productivity which net net

could help even this out that’s the one last great hope AI obviously viewed as being highly disruptive by non- technologists and deeply concerning and particularly in DC what is that thing that Bill Gates says things are overestimated in the short term and deeply underestimated in the long

term that’s what AI is AI is a bunch of no offense probabilities and statistics today so we should debunk this whole thing of like there’s some glowing brain somewhere that’s capable of doing everything doesn’t mean that we shouldn’t underestimate it being capable of

this in 5 or 10 years which is probably the window in which we have some form of AGI but today it’s not that and so the great leaps in productivity freeberg that you’re talking about are probably a 3 to 5 year phenomenon not a 3 to 5 month so what saak says is Right which is how does

the sitting admin votes today have to make a ton of promises the problem is it can’t really work its way into the economy fast enough come the November election that’s where I think they’re in a really tough spot which means that then and I hate to be the bear or bad news but this

is where you have a lot of these Wag the Dog kind of scenarios that come to mind because then the only way to really Galvanize a populace is to distract the