E174: Inflation stays hot, AI disclosure bill, Drone warfare, defense startups & more

David Friedberg 0:00 All right, everybody. Welcome back to the All-In Pod, episode 174. Almost up to 175, I believe. There are a lot of folks getting together next week at the All-In meetups around the world to watch the show. Unfortunately, J Cal had an oral incident this week. He will not be joining us. I guess he cracked a tooth and couldn't make it, so he is sitting this one out. Very last minute-

Chamath Palihapitiya 0:26 Specifically-

David Friedberg 0:26 ... decision.

Chamath Palihapitiya 0:27 ... cracked a tooth eating a bison rib at the Salt Lick in Austin, (laughs) which is a true story.

David Sacks 0:33 Freebird, I think we found an image of-

David Friedberg 0:35 Okay, let's-

David Sacks 0:35 ... J Cal at the Salt Lick-

Chamath Palihapitiya 0:36 Right.

David Sacks 0:36 ... cracking his tooth on a rib. (instrumental music plays)

David Friedberg 0:42 (laughs)

Jason Calacanis 0:42 He's, he's coming back. I'm going all in.

David Sacks 0:42 Let your winners ride.

Chamath Palihapitiya 0:45 Rain Man, David Sacks.

Jason Calacanis 0:46 I'm going all in.

David Sacks 0:49 And it said-

Jason Calacanis 0:50 We open sourced it to the fans and they've just gone crazy with it.

David Friedberg 0:53 WSI.

Chamath Palihapitiya 0:54 Quinoa.

Jason Calacanis 0:55 I'm going all in.

David Friedberg 0:57 All right, so we are going to announce the All-In Summit 2024 back to LA. We had such a great time in LA. It was a great location for everyone. We really appreciated the facilities at UCLA. This year we're upgrading the experience once again for everyone. So the event's gonna be September 8th through 10th in LA. If you haven't seen it, please watch the recap video from last year. We put it up on YouTube. And then there's all the interviews from last year are also on YouTube. We're gonna have another amazing lineup of speakers this year, and have a much more kind of upgraded, elevated experience for everyone. Applications are open today, so go to summit.allinpodcast.co to put an application in to join us this year. As you know, we had way more applications last year than spots. And this year we're gonna have all sorts of upgrades. We're gonna have transportation to and from all the events for everyone, a concierge booking service to help you book your rooms and get you set up in LA for the trip. We're doing a full day event on the Sunday, September 8th, followed by two days of content, dine about town on the first night, two blowout parties. It's gonna be awesome. So we're really excited about it. We've got a much bigger budget this year, and we're gonna try and really make the, uh, the experience awesome while also delivering the great content. So really excited to do this again in LA. I appreciate everyone's support of that. We had a lot of debate internally about where to take it, and we settled on going with what we know and trying to make it a little bit better this year. So anything else you guys wanna say about All-In Summit?

Chamath Palihapitiya 2:30 And there's only one kind of ticket this year, right?

David Friedberg 2:33 That's right. So we're not doing like regular ticket and ch- VIP. We're just doing one ticket for everyone and everyone's gonna get this kind of elevated experience, which will be cool. Saks, just show up. Would be awesome. We hope to see you there.

David Sacks 2:46 I want to invite a couple of speakers.

David Friedberg 2:48 Yeah, you've got some good speakers I saw.

David Sacks 2:49 Yeah.

David Friedberg 2:50 It's gonna be great.

Chamath Palihapitiya 2:50 When are we gonna start announcing the speakers, Freebird?

David Friedberg 2:53 We will do that in a couple weeks. We already have a bunch booked and it's gonna be awesome.

Chamath Palihapitiya 2:59 Oh, that's really exciting. That's awesome.

David Friedberg 3:02 Yeah, I know, CP, you wanted to take it somewhere else. I mean, we were in debate on Vegas, maybe going to some other country,

David Friedberg 3:10 but, uh, you went to another country. Where'd you go this week?

Chamath Palihapitiya 3:12 I was in Paris, France.

David Friedberg 3:14 What were you doing there?

Chamath Palihapitiya 3:16 There was like a important AI conference, and Jonathan Ross, the founder of Grok, and I kicked it off with like a fireside chat for like 45 minutes at the beginning, just to get everybody amped up and excited.

David Friedberg 3:30 Cool. Yeah, it was really good.

Chamath Palihapitiya 3:32 Like-

David Friedberg 3:32 Anything interesting come out of it?

Chamath Palihapitiya 3:35 I think the sound bite that made an impact on me was, was, was from Jonathan. So I think he did a very good job of explaining where NVIDIA is really strong, which is really in learning, and where NVIDIA is trying to build the business, which is in inference. But the problem is the features almost compete with each other between learning and inference, and I think that that was a good clarification. And then the second thing is, he said that if he deploys his roadmap, he'll have 50% of the available inference compute by the end of next year.

David Friedberg 4:10 Wow.

Chamath Palihapitiya 4:11 Based on all the needs of like OpenAI and Meta and everybody else, which is a-

David Friedberg 4:15 Wait, but that's a smaller physical footprint. Is that right? And it's just because they can do higher token per second?

Chamath Palihapitiya 4:19 Less power, higher tokens per second across all the major models. So it would, it would be meaningfully less power and meaningfully cheaper. So that was a pretty amazing sound bite. The, his, his whole explanation was actually really good. So I mean, if you listen to the spaces we did, I thought it was good. I thought this was even better. So I'm trying to get a copy of the, of the talk, 'cause it was taped, so that we can kind of post it. At a minimum, anybody who's interested in studying NVIDIA should listen to what he has to say, because I think the, the nuances between us and them are really profound, and they were pretty stark the way that he described them. So it was cool. It was great to be in Paris, frankly.

David Friedberg 5:00 How does NVIDIA respond to this movement or this notion that there is an entirely different chip category focused purely on inference? Do they have inference focused chips in development or a different roadmap that they're gonna have to kick up now?

Chamath Palihapitiya 5:13 I mean, I think it's very hard for them. It's, it is a structural innovator's dilemma. And why is that? Because they've made some architectural decisions around things like HBM, which is high bandwidth memory, or specific kinds of extremely high throughput optical cables, and why these things matter is that they've gone and bought up the world supply and they've basically bear hugged these markets as a structural part of their design. Now, that makes sense and it's very legal. The problem is that if you architect around it and go through a totally orthogonal design process, we're not subject to any of those supply chain considerations. And I think he explained that really well. I didn't understand it in nearly as much detail as I did leaving. So I think that's an important takeaway. It's also really important for all the hundreds of chip startups and for these venture investors who are ripping money into these companies to know these differences, because...... if you are investing in a company that is subject to, you know, HBM in their design decisions or these specific optical cables or a whole bunch of other things, you're going to be in a really difficult spot because NVIDIA's bought them all. So I thought that that was a, that was really interesting. The other thing that NVIDIA does brilliantly is what Intel did in the '80s and '90s when they wanted to kind of choke the market for CPU competition, which is that they were able to define a metric that everybody started to pay attention to, which for them was clock speed. And if you remember-

David Friedberg 6:39 Yeah.

Chamath Palihapitiya 6:39 ... Intel would push Moore's Law and they would push transistor density and clock speed as the measurement of value. Now, for a lot of consumers, none of us knew any better and so every time we saw a new chip, we would go through the Pentium upgrade cycle because we thought that's what we were supposed to do. It turns out that clock speed doesn't really factor into speed the way that you think about it and experience it as an end user using software, and it's the same in AI, and so we talked about that as well. So it's an incredibly important company, NVIDIA is. I think they're performing brilliantly. They're running many of the same plays that Intel did to try to create total dominance, but there are some very important nuances around power and around supply chain decisions and technology decisions that, frankly, some people would think are unsustainable, and the more I understand them, I would be in that camp as well. So, it, it, I thought it was a very important conversation and hopefully we can post it. Yeah. It was cool. It was gr- and by the way, it's great to be in Paris too.

David Friedberg 7:46 What'd you think of Paris?

Chamath Palihapitiya 7:48 I, you know, I have a new appreciation for what's going on in these major cities. I think that all major cities are crumbling. I don't, 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 couple of conversations with some folks that are entrepreneurs in London who were there 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's struggling from a lot of experimentation gone wrong in how these cities run. That was, that was actually my, the biggest takeaway outside of th- the actual AI conference itself.

David Friedberg 8:33 But that's a Western city problem, you're not, I mean, have you visited many cities in China or other parts of Asia and is that, like, a Western problem?

Chamath Palihapitiya 8:42 I have not been to China in six years. I've been to Hong Kong but I've not been into China for six years. So I don't know. I would say that India has its own vagaries, so those issues are not the same. I've been to Singapore a couple of 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 yeah, you're right, these Western cities are a bit chaotic.

David Friedberg 9:11 Yeah. Sax, is this like a Western, social, liberal manifestation how cities are being challenged, generally?

David Sacks 9:19 Yes. Yes.

David Friedberg 9:19 Like Malay's, like Malay has, I think Malay said this, right? He said, like, all these Western, social, liberal beliefs are having lifestyle impacts in urban centers.

David Sacks 9:29 Well, it's hard for me to speak to what's happening in Europe but we know what's happening in the United States. All the biggest cities are blue and they're run by a certain ideology, and in those cities we've had now a decade plus of decriminalization, de-prosecution, decarceration and the impacts of this are obvious. We also, at least in San Francisco, we have subsidies for people who wanna live on the streets and do drugs all day. I mean, it's not prohibited to do that so all of our public space has been taken over by people who are happy to take the, whatever it is, $700 or $800 subsidy and do drugs all day. We also had this referendum in California that essentially lowered a whole bunch of felonies to misdemeanors. Basically if you steal less than $950 that's considered a misdemeanor now instead of a felony and so there, there's been a huge increase in crime because of that. You know, shoplifting just doesn't get prosecuted anymore and misdemeanors don't get prosecuted anymore. We've had all these Soars DAs who don't wanna prosecute misdemeanors. So I think if voters had understood that lowering a lot of these crimes from felonies to misdemeanors meant that they wouldn't get prosecuted at all, I don't think they would've done it but that's kind of where we are.

David Friedberg 10:47 But are we seeing a rebound from that now, Sax? Is democracy working? Because I know that in San Francisco we had an election recently and in the ballots it seemed to indicate that voters were sick and fed up with the, the living situation in the city and they're putting different people in office and have an intention of changing the city charter and changing the, the laws in the city so that we can reverse this trend. Is that not where things are... I mean, like...

David Sacks 11:16 Yeah, I, uh...

David Friedberg 11:16 ... sitting, s- you, you know, sitting where you sit, like, don't you see San Francisco kind of trying to ri- right itself and as a result, doesn't democracy work over time here?

David Sacks 11:24 Yeah. It's just that we live in a one-party state and that one party has been captured by ideologues and so it's very hard to, to change. It is true that in San Francisco there was an election recently and the more radical supervisors were defeated. We have, I think finally, a good DA in San Francisco but these, um, radicals have had a long time to entrench their power and the party machinery helps keep them entrenched. So...

David Friedberg 11:51 Yeah.

David Sacks 11:51 I think you could argue that we've bottomed out 'cause the public has recognized the problem but it's still very hard to fix and it's gonna take a while.

David Friedberg 11:58 I think for the first time in a long time I'm more optimistic than not given the people I've seen that tolerated the conditions historically have reversed course over the last year and have said we gotta act and we gotta...

David Sacks 12:10 Yeah.

David Friedberg 12:11 You know, do our kind of c- civic process, yeah.

Chamath Palihapitiya 12:13 Well, time will tell. You have to remember, like, when-... 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, but it took the strength of leadership. First, David Dinkins set the framework, and then Giuliani really executed, uh, Rudy Giuliani. And between the two of them and I think what people call the broken windows theory, they hired a lot more policemen, and they just really cleaned up all of these really bad areas, and then it had this knock-on effect. The problem is 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," et cetera. I mean, I don't, I don't wear 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." So there's a level of lawlessness and petty crime that's affecting tourists that's, to me, was, like, very surprising. And so even when I was walking around Paris, I was like, "Should I really feel scared here?" And-

David Friedberg 13:26 Mm-hmm.

Chamath Palihapitiya 13:26 ... my reaction was, "Sh- no, I've never felt scared in Paris." But then what's ringing in the back of my ears are these warnings from people that are, that are, that have lived there for 10 and 20 years who had this stuff happen to them. That was really surprising to me. So 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 gonna double down on policemen and policing, and we're going to amp up the punishment." That hasn't happened yet.

David Friedberg 13:55 Well, I was just in Vegas this week, and it doesn't feel-

Chamath Palihapitiya 13:58 How was your trip? Give us the trip report.

David Friedberg 14:00 Yeah, I went to the Google Next conference, but I will say, first off, like, no crime (laughs) in Vegas. Like, Vegas is Vegas. It's, it's a very different environment. But I, yeah, I went to the Google Next conference. I ended up going out because at Ohalo, we did a partnership with, uh, with GCP, so we're moving all of our infrastructure and doing a lot of model development on GCP, and it was great. I think there was 30,000 people at this event, which was insane. Have you guys been to any of these, like AWS re:Invent or the Google Next or any of these?

Chamath Palihapitiya 14:31 No, I have not.

David Friedberg 14:33 What I didn't realize prior to going to this was how much of an ecosystem there is. Like, you go, they, they take over the whole convention center at Mandalay Bay, and there's hundreds of companies that have built services or build services on GCP that are there pitching CIOs and CTOs of other companies. And so it's this real network effect type of business model that I hadn't fully appreciated just how, like, deep the network is and, and how entrenched it is. I, I also got to go to this thing where I spent a lot of time with, uh, CIOs and CTOs at other companies, big companies, and a big takeaway for me that I also didn't realize was how most of them are not on a single cloud provider. Almost everyone I spoke with is on multiple clouds, so they're all on, like, AWS and Azure and GCP, and they use different aspects of each cloud. And there's a lot of interoperability between the clouds now, which I had previously my naive concept of this 'cause I'm obviously not deeply in the space was that a company picks a cloud and they move everything over to that one service provider.

Chamath Palihapitiya 15:38 Mm-hmm.

David Friedberg 15:38 But it turns out that they split, and then they allocate dollars based on the services and the pricing. So it was pretty clear that everyone is, it's like a race to the bottom on pricing for basic commoditizing services in the cloud, like data storage, right? And then whoever has the better higher level services, whoever has access to better models or has a lower price on running models or on running things like inference, that's where the money is made.

Chamath Palihapitiya 16:06 Yeah.

David Friedberg 16:06 And the gross margin on that is quite different, and I think that's where a company like Google probably has a much bigger advantage because of the uniqueness and the quality of the models that they've developed. But yeah, I just didn't, I didn't really appreciate, like, how much there was.

Chamath Palihapitiya 16:20 Well, they also-

David Friedberg 16:21 So, so my other big takeaway was the cloud is a wide open competitive market right now. Like, there is no AWS lock-in in this market. There's no Azure lock-in. There's no GCP lock-in like you got. Yeah.

Chamath Palihapitiya 16:32 The lock-in comes from the developer services that they provide, so both Amazon and Google, and I'm, I'm assuming Azure as well, will give you access to incredibly talented engineers who will help you build production code.

David Friedberg 16:45 Yeah, and the ecosystem on how m- So, like, a lot of the clouds are competing for the consultants who actually do the work for the big enterprises. So Capgemini, Deloitte, PwC, they have these massive booths and facilities and then go and build tools for companies is also a key part of the business strategy. And yeah, I mean, it's such a competitive market. I did not appreciate just, like, how much of an open game this still was.

Chamath Palihapitiya 17:12 Sure.

David Friedberg 17:13 It was a great, great couple of days in Vegas, and I got to see some of our friends. We ducked in and saw Hellmuth in the PokerGo studio for a minute, some big tournaments going on at the ARIA. It was fun. We had a good time. Okay, let's move on. So, you know, on the docket today, we were gonna talk about CPI.

David Friedberg 17:30 The March CPI numbers came in from the Bureau of Labor Statistics yesterday, higher than forecast at 3.5% year over year. This is up from 3.2% year over year inflation reported by the Bureau of Labor Statistics in February, higher than expected for three straight months now. Let's pull up this chart. 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. I pulled together some of the numbers on year over year price increase. Housing is up 5.7% year over year, transportation costs are up 10.7% year over year, and the highest, car insurance is up 22.2% year over year.So, 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." I guess, Sax, let me, let me ask you first for your commentary on how this plays into the election cycle. I know Biden was expecting a rate cut or several rate cuts going into the election, which usually helps the case of the incumbent. Maybe you can comment on where the, the election cycle might be influenced by this inflation report.

David Sacks 18:56 Well, I think it's definitely bad news for Biden, and I was expecting a Fed put this year and the really, the whole market was. The market was expecting three rate cuts this year, which would have been really good news for, for Biden. And I think this latest inflation print was kind of a dagger to the heart of, 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 in 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, you know, 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, that it peaked at 9%, uh, as the official rate, I think, in 2022, and then it was going down every month through all of 2023. And I think the expectation going into '24 was it would keep going down, and we'd 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 dead. So, I think the new narrative now is it's gonna be rates are gonna be higher longer, and I think Larry Summers is reflecting that view. Larry's going further. He's not just saying that rates are gonna be, you know, at the current rates for longer, he's saying they might actually increase, and that's a risk.

David Friedberg 20:45 Yeah, last summer, he said, and this was last summer, so almost a year ago, he was saying, "The market's got it totally wrong. We're actually gonna need much higher rates than the market's anticipating for much longer as well than the market is anticipating," and so did Mario Draghi. They both said the same thing. No one paid attention to 'em. Everyone ignored it and assumed that this was gonna be a quick rebound to normalization. It's clear that, you know, once again, Larry has proven himself to be fairly prescient-

David Sacks 21:10 Yeah, I think the-

David Friedberg 21:10 ... in understanding where things are headed.

David Sacks 21:11 ... I think that Larry Summers has, for the most part, been spot on from this, on this whole inflation question going all the way back to 2021. Remember-

David Friedberg 21:18 100%. 100%.

David Sacks 21:19 ... in Q1 of 2021, Biden's first quarter in office, the big legislative push was for the $2 trillion COVID relief bill, is, the so-called American Rescue Plan, and Larry Summers said that it was, it risked inflation, it was an inflationary bill, it was unnecessary.

David Friedberg 21:35 It was too, too stimulatory. Yeah, too stimulatory.

David Sacks 21:36 Yeah, we didn't need it.

David Friedberg 21:37 Yeah.

David Sacks 21:37 The economy was already coming back, and we didn't need it, and Biden was risking inflation, but of course, inflation was only at 2% at that point. So, the administration kind of pooh-poohed Larry and said, uh, you know, "This is Larry Summers being Larry," or whatever, and sure enough, we were at 5% inflation by that summer. And you have to wonder if Biden had listened to that advice, would he be in a different position right now going into the election? I think probably he woulda been. And you gotta wonder for what? I mean, what did that $2 trillion accomplish? I mean, COVID was winding down. I mean, these were the last bit of STEMI checks and payments to these pharma companies, and I mean, it was basically a grab bag, and it was passed on straight party lines, and it was just totally unnecessary.

David Friedberg 22:23 Right.

David Sacks 22:23 I mean, the economy certainly didn't need it, and so here we are. And I think that a lot of people, including the markets, thought that Biden was kinda out of the woods, that this year we'd see the final leg of inflation going back to normal, but that's not gonna happen. And I think, you know, going beyond the political ramifications, I think there could be several other knock-on effects that we should talk about. I mean-

David Friedberg 22:48 Mm-hmm.

David Sacks 22:48 ... one is, for the consumer, this means that the cost of borrowing is gonna 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 wanna buy a car, your car payment's higher, and if you have loans, uh, your, your personal interest is gonna be higher. And this is why I think consumers feel like they're worse off than the economic data would otherwise reflect. And, 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 9% 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, it's a story that's been going on now for three years. It's not just this one inflation print.

David Friedberg 24:12 Right. It's funny, yesterday Biden said during a press conference with Japanese Prime Minister Kishida that he's sticking with his prediction of a rate cut before year's end, but there might be a delay, uh, which I think is obviously-... you know, based on what the data is showing and what folks that seem to know and have been pretty good predictors are saying is unlikely.

David Sacks 24:35 We were supposed to get one in April.

David Friedberg 24:37 Yeah.

David Sacks 24:37 And we were supposed to get one in June.

David Friedberg 24:38 Oh, yeah, and-

David Sacks 24:39 And-

David Friedberg 24:39 ... remember the Fed, the Fed Open Market Committee in December stated that they expected three rate cuts this year. And I think the market, in some cases, were predicting as high as four or five.

David Sacks 24:49 Right.

David Friedberg 24:49 And that, now we may not have any and we may actually see a rate hike, if you were to-

David Sacks 24:54 Right.

David Friedberg 24:54 ... follow someone.

David Sacks 24:54 Well, if we, if we see a rate hike before the election, I think Biden is toast.

David Friedberg 24:59 Yeah.

David Sacks 24:59 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, uh...

David Friedberg 25:06 It's possible.

David Sacks 25:07 But it's possible-

David Friedberg 25:07 I mean, Chamath if, if you're-

David Sacks 25:08 And, and no one was counting on that in December.

David Friedberg 25:10 Yeah. Chamath, if you're a Fed governor, and obviously the, the, the Federal Reserve Board of Governors sets the, uh, rates, they meet and they, they make these decisions, how influenced are they politically? How, how 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.

Chamath Palihapitiya 25:37 You mean when they're not plagiarizing (laughs) ?

David Sacks 25:41 (laughs)

David Friedberg 25:41 Well, tell us what you're talking about.

Chamath Palihapitiya 25:43 (laughs) Uh, it, it turns out that before I answer your question, that, that was a joke.

David Friedberg 25:50 Yeah.

Chamath Palihapitiya 25:50 Nick, you can please show the tweet, but there was an article that came out that said one of the Fed governors has apparently massively plagiarized most of the work that got her to the position of being Fed governor.

David Friedberg 26:03 Yeah.

Chamath Palihapitiya 26:04 So, the same thing that happened to the president of Harvard. So TBD what happens to that Fed governor, but it seems, you know, my observation there was just more that it's like the preferred method of defenestration now of academics and the apparatchik, right? Before, if you had right-leaning views or centrist views, you'd get run out of town and get fired. Now, all of those folks are using the search engines to basically figure out really quickly that you plagiarized (laughs) a large quantity of your academic work and that your scholarship is, is a little bit more speculative, which then brings into question why do you get the right to, to help set the policy of the most important economy in the world? Well, anyways, so that, that was that joke. But, so 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's ideas goes to, like, some dark room conspiracy theory and misinformation.

David Sacks 27:14 Right.

Chamath Palihapitiya 27:14 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 Sax 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, Nick, I, I love this, like, explanation in three charts. Nick, chart number one, please. What is this? So 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, right? 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 should 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. So 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. So 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, "Mm, 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. So what you see here is 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 as... and that's just one market, but it's an input, a key input into inflation and rates to work.

David Friedberg 29:41 So you're saying that the, that 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, are able to have a stronger influence and balance out production-

Chamath Palihapitiya 29:55 Right. When you-

David Friedberg 29:56 ... to get, yeah.

Chamath Palihapitiya 29:57 When you, when you make these cuts like this, prices will go up because OPEC Plus is meaningfully bigger, the sum of all the parts of OPEC Plus is meaningfully bigger than just the United States on its own.

David Friedberg 30:06 Yeah.

Chamath Palihapitiya 30:06 And so the United States may amp up a few 100,000 barrels a day, but if OPEC 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. So 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, they're the trendsetter 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.

David Friedberg 30:47 Right.

Chamath Palihapitiya 30:47 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.

David Friedberg 31:51 Mm-hmm.

Chamath Palihapitiya 31:51 And so this is why the idea of a persistent inflation rate is a lot more credible than it was six months ago.

David Friedberg 31:59 Well, I'll-

Chamath Palihapitiya 32:00 And I think- and I think-

David Friedberg 32:01 Yeah, go ahead.

Chamath Palihapitiya 32:01 Sorry, just the last point, and I think it's just what Sachs says, which means that we're probably now on balance 50/50 between a hike and a cut. And I think if you don't see this thing change in the next three months, you're going to see 75-25 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 able to withstand the onslaught of electoral displeasure if rates are 4.5, 5 and 6% going into November.

David Friedberg 32:32 Timothe, if that is, uh, I think everything you said makes sense going into this election, rates are high and- and/or going higher, what does the Biden administration do? The fact is, 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-

Chamath Palihapitiya 33:01 Well, Kamala Harris did that.

David Friedberg 33:02 ... more delays on debt forgiveness.

Chamath Palihapitiya 33:03 She had a- she had a whole speech about debt forgiveness.

David Friedberg 33:05 And- and here's- 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.

David Sacks 33:28 I mean, to- 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. So yeah, they're going to try and buy votes, but I think it's already very late in the game to be trying to do that. I think that's what they've been doing over the past few years. I mean, Biden has been a huge spender, you know, he passed the- the COVID relief bill, he passed the Inflation Reduction Act, which was a ridiculous name for was it 750 billion of- of more spending? And, uh, there was the CHIPS Act which- which was more-

David Friedberg 34:04 And the BIL.

David Sacks 34:05 Yeah, and the- there's the CHIPS Act and the infrastructure bill, and then remember, he wanted four and a half trillion of Build Back Better on top of that, and he wanted even more, he didn't get it. Any event, I think that this is a classic case of Biden spent the last three years making his bed and now he's gonna have to sleep in it and if in fact inflation is persistent and sticky and not going away and he doesn't get rate cuts, again, this may cost him the election. But- but look, I want to move beyond the political aspect of this and just talk about some more of these knock-on effects because we talked about the impact on the consumer, there's also an impact on investors, there's an impact on the government, and there's an impact on- on the banks. So let's just deal with the banks for a second. We've talked about on the show how commercial real estate developers are hanging on by their fingernails right now, you know, they- 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 refinanced. 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 rate cuts are coming really soon because you just need to hold on until the rate 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 towel and banks are going to end up foreclosing on these properties and you're going to see more and more fire sales. There was 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 sales at $2 million. I mean, 99% reduction, this is like .com crash level reduction-

David Friedberg 35:59 That's- that's for the equity, right?

Chamath Palihapitiya 36:00 Yeah.

David Sacks 36:01 No, this is like the price of the deal, I mean, I- I assume the equity was completely wiped out. Yeah, I guess they sold it for three and a half million-

David Friedberg 36:08 Are you sure that's not the equity? That's got to be the equity. There's no way that's the-

David Sacks 36:11 No, it's just the price-

David Friedberg 36:12 ... whole thing.

David Sacks 36:12 ... of the building.

David Friedberg 36:13 (laughs) Okay.

David Sacks 36:14 I don't know, I mean-

David Friedberg 36:15 With the debt, it's got to have the debt attached to it.

David Sacks 36:16 Either way, look-

David Friedberg 36:17 Yeah.

David Sacks 36:17 ... I mean, either way it's a total wipe out for the equity holders.

David Friedberg 36:20 Yeah, totally. Yeah. Yeah.

David Sacks 36:21 But it's also going to be a wipe out for the bank that made that loan originally-

David Friedberg 36:25 Yeah.

David Sacks 36:25 ... or that bought that loan when it was re- repackaged into CMBS or whatever it was. So I would expect that if rates stay higher longer, that's going to create tremendous stress on commercial real estate and- and therefore on the re- regional banking system that made all these loans.... to commercial real estate developers.

David Friedberg 36:43 Yeah.

David Sacks 36:43 So that's knock-on effect number one. Knock-on effect number two is, is the government's cost of borrowing.

David Friedberg 36:48 Yeah.

David Sacks 36:48 The 10-year rate's already risen to 4.5% now, and if rates stay higher longer as more and more of the government debt rolls, it's gonna end up getting refinanced at higher rates, and the need to refinance all of this government debt is gonna 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've been some reports of this.

David Friedberg 37:17 Yeah, 7.6 trillion is getting refinanced of old debt in the next 12 months.

David Sacks 37:24 Right, and we're adding, we're adding-

David Friedberg 37:24 And that's, that's seven, that 7.6 is sitting around 2%, and now it's gonna get bumped up to close to 5%-

David Sacks 37:30 Right.

David Friedberg 37:31 ... which adds, 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. So-

David Sacks 37:44 Right, so the government-

David Friedberg 37:45 Yeah.

David Sacks 37:45 ... was extending and pretending as well.

David Friedberg 37:48 Right.

David Sacks 37:48 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 refinanced, it'd 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 expen- expense for the federal government.

David Friedberg 38:03 We are, yeah, and it's gonna get-

David Sacks 38:05 Yeah.

David Friedberg 38:05 ... it's gonna rise to 1.6 trillion. So it's gonna be 60% greater than our defense budget, just servicing the old debt.

David Sacks 38:12 We're basically in a classic death spiral where we're borrowing... Our annual deficit is we're at 2 trillion plus now, so 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, the last piece of this is investors. If you pull up this Fred chart on the fed funds rate over the very, very long term, so what this chart shows, if you just zoom in on this, is the fed funds rate basically over the last, I don't know, like 75 years. And you can see that it peaked in the early 1980s when Volcker 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 in, 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 mean, especially through, I think, the post-GFC period and then this COVID 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 sticking inflation suggests that this whole, you could call it really a f- almost a 40-year period of declining and 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 gonna be more valuable. Well, if we're in a, in, uh, a long-term environment that's more inflationary and rates have to stay higher longer, that's not great news for our investors. It hurts the stock market and it creates in, in the private investing world, like VC and real estate, it creates a much higher hurdle rate-

David Friedberg 40:21 Right.

David Sacks 40:21 ... so it's harder for, for private investors to justify fundraising. So, you know, I think it's too early to say that this 40-year trend is over, but I think it could be, and um... And, and the reason for that is just the huge pressure of government borrowing crowding out private investing and this sort of ever-present need to keep issuing more and more debt at higher and higher rates to make it more attractive is gonna create, I think, just, uh, very bad conditions for, for investors.

David Friedberg 40:54 So Chamath, let me ask you if you concur, given that today where we're sitting as of recording right now towards the end of market on Thursday, April 11th, the NASDAQ is sitting at an all-time high and the NASDAQ is up 1.6% today, following this inflation report yesterday, what's the disconnect in the market on why investors are buying equities given that we're likely gonna have persistent higher rates, and as a result, multiple should compress, particularly in growth stocks, and why the NASDAQ's kind of firing up?

Chamath Palihapitiya 41:32 I think it's important to look at w- 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 I don't know if you guys saw this, but Nick, maybe you can find it. I linked to it in my newsletter last Sunday, which was an article about the fact that the global amount of total available equities to buy is shrinking, right? So if you think about that, what that means is that the number of dollars is growing, right, linearly, and in some years, (laughs) oh, it seems exponentially, but then the... And so then a per- certain percentage of that finds its way into the equity markets, but when the equity markets continue to shrink and there's fewer and fewer things to buy, prices will still go up irrespective of the underlying justification. So I think that the, the thing is, you can't look at these things as a sign per se. You know, if you look at commodities as a different example, Nick, I sent you this.Commodities are up, broadly speaking, 30% since the beginning of the year. There, 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're 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 Sax 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 gonna be like, "We're on our own. We're gonna optimize for ourself." What they're... 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.

David Friedberg 43:58 Yeah. Well, 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 (laughs) even this out. That's the one last great hope sitting here. AI obviously viewed as being highly disruptive by non-technologists and deeply concerning, and particularly in DC. What is... but what is that thing that Bill Gates says, things are overestimated in the short term and deeply underestimated in the long term? I think that that's, that's what AI is.

Chamath Palihapitiya 44:34 That's right. That's right. And so-

David Friedberg 44:36 AI is a bunch of, no offense, probabilities and statistics today, okay? And so we talked about this last time, 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, the great leaps in productivity, Friedberg, that you're talking about are probably a three-to-five-year phenomenon, not a three-to-five-month. So what Sax says is right, which is how does the sitting administration buy votes today? Stimulatory be- methods. It'll 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. Yeah.

Chamath Palihapitiya 45:22 And so that, that's where I think they're in a really tough spot, which means that then... and, and I hate to be the bearer of 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 them.

David Friedberg 45:40 Yeah. Well,

David Friedberg 45:41 look, let's talk a little bit more about AI because I do think that regardless of the near-term and longer-term implications, there is a peaking of fear, peaking of interest, both different spelling of the word peak. Adam Schiff yesterday proposed a bill, sorry, earlier this week, called the Generative AI Copyright Disclosure Act, in response to, I think, over 100 musicians signing a letter saying they're concerned that their copyrighted works are being used to train AI models. And Nick, if you'll pull up the text from the bill that I pulled out here real quick, we can take just a quick look. It's a very short bill, it's only five pages long, and it defines a generative AI model, uh, that's a combination of computer code and numerical values designed to use artificial intelligence to generate outputs in the form of text, images, audio, or video, and that it substantially, uh, incorporates one or more models as a system and it's designed for use by consumers. And what the bill then asks is that anyone developing these models has to submit to a register run by the federal government a list of all of the data that they used that might be copyrighted to train the model, and that this becomes a precursor to being able to legally develop and use AI models, that you actually have to register the training data. So I have a rant on this, which I'm gonna preserve for the end given my rights as moderator here today, but I'd love the reaction from Sax first on Schiff's proposed bill, Chamath, and we'll run this one around the horn pretty quick.

David Sacks 47:21 Well, I, I... first of all, I think it's just, uh, it's too soon for this legislation. I mean, the, the first thing that needs to happen is we need to get the question of fair use arbitrated by the courts. We've talked about this before. People publish lots of information on the internet and I guess technically it's copyrighted, but it's been published in a completely public way, and humans are obviously allowed to read it and, and use it to generate their own work. I think there's a question about whether AIs are allowed to learn from it as well, and I would argue that they should be to some degree under fair use. Maybe if you're talking about copyrighted songs, I don't know if that's different. Anyway, these questions need to be arbitrated and once we know that, then we'll know whether there's a need for a rights clearinghouse of some kind, which may not be a bad idea. I actually got pitched by a founder recently to create a rights marketplace with copyright holders on the, on the one side, or rights holders, could be musicians, could be movie studios, could be anyone who owns content, and then AI companies on the other that wanna license that content for training purposes, and I actually thought it was a pretty good idea. So, my point is just that there are entrepreneurs working on solving this problem as well, and I guess what I'm saying is I'd like to see fair use figured out and I'd like to see what the private solutions are gonna be before we try to legislate...... this problem away from, really, a point of ignorance because we're so early in the development of this market. Now, I think one of the questions you have to ask here is w- why did Adam Schiff introduce this bill, and who is Adam Schiff? Adam Schiff is a powerful California congressman who is the candidate for US Senate right now, and he's expected to win. He's, he's ahead of Steve Garvey, who's the Republican candidate by, like, 30 points. Schiff is, in addition to being a vicious partisan who's known for, for Russiagate, he also is a prodigious fundraiser. And when he's not in front of the cameras, he's very effective in closed doors appealing to the key special interests in California that matter. And my guess is that he's not carrying water here for the hundred musicians who signed that letter. He's carrying water for the big studios, the big Hollywood studios, including music labels but also the movie studios and-

David Friedberg 49:46 He's an LA-based congressman.

David Sacks 49:47 Yeah. I mean, that's who he's representing. Now, at the same time, my guess is that he's run this by the big tech companies, and he's probably got their blessing to some degree because, like Bill Gurley always points out, they like rules like this because of regulatory capture. They can comply with them, but the little guy, the entrepreneur who's trying to create something new has a much harder time complying with these regulations. So, this is basically a big special interest group sort of deal that I think he's, he's putting forward.

David Friedberg 50:18 Do you think this becomes law?

David Sacks 50:19 Not yet, but it's paving the way for something.

David Friedberg 50:22 And it's more like his promotional effort during his campaign, effectively?

David Sacks 50:27 Well, I mean, his- the, th-

David Friedberg 50:30 He'll still try to move it legislatively but ...

David Sacks 50:32 Yeah. I mean the-

David Friedberg 50:33 Okay.

David Sacks 50:33 ... the big LA powers that be like this, and-

David Friedberg 50:37 They love this. Yeah.

David Sacks 50:38 Yeah.

David Friedberg 50:38 Chamath? Any reaction to this bill?

Chamath Palihapitiya 50:43 I think there was an article in The Verge that I posted. It turns out that OpenAI transcribed over a million hours of YouTube videos to train GPT-4. My takeaway when I read this was, well, if Google's not gonna sue OpenAI, then this is a moot point, because you're talking about one of the most valuable companies in the world with one of the most valuable sources of training data in the world. And so if, if that, if it's true that there was a copyright violation and Google just lets this go, what's anybody else supposed to do? What chance does these group of singer-songwriters have? And you know, no offense to Adam Schiff, but he's not gonna be able to do anything. So if this multi-trillion dollar company doesn't draw a line in the sand, then none of this matters, and everybody's gonna train on everything.

David Friedberg 51:37 Mm-hmm. I think, like, my big takeaway on all this is that there is a real deep misunderstanding on what these models really are and what they're doing. The assumption, I think, naively, is that they take in a bunch of data and then they spit that data back out and, in some cases, maybe slightly transformed. But the truth is that the models don't actually hold the data that they're trained on. They develop a bunch of synthesized predictors that they learn what the prediction could or should be from the data, and this is similar to how humans operate. Can you pull up the article, Nick, that I posted? This article is from last May, and you guys may remember this case. I can't remember if we talked about it on the show, but Ed Sheeran was sued by the estate of the writer of, uh, the Marvin Gaye song Let's Get It On for, uh, infringement in his song Thinking Out Loud. And he actually prevailed in court where he went through with the jury how he comes up, how he runs his creative process, how he came up with the song, and how he does his work. And as you know, Ed Sheeran and nearly every musician or every artist listens to other people's music, looks at other people's art, and they synthesize that data. They synthesize that knowledge and that experience into their own creative process to output what, in their mind, is a novel creation. And I think that AI works in a similar vein in that it's not actually storing the images. It's not actually storing the music of third parties. It's learning from that process. We all... Like, musicians learn on classical music. They listen t- and play other pop artists' music, and then they learn things that they like, things that they don't like, things that fit together well, certain intonations, syncopations, and that's how they develop their own tracks. And so I think that the, um, assumption in AI is that it's almost guilty until proven innocent is what's gonna really challenge this technology getting mainstay appeal and being useful, uh, in the way that it could and should be, that the de facto is that its learning and training is copyright-

Chamath Palihapitiya 54:10 I don't-

David Friedberg 54:10 ... infringement.

Chamath Palihapitiya 54:11 I don't, I don't buy that.

David Friedberg 54:12 You don't buy that?

Chamath Palihapitiya 54:13 Let's, no, let's use this-

David Friedberg 54:13 That it stores the data?

Chamath Palihapitiya 54:15 No, that, that just because you're learning like a human, it's not copyright infringement, and-

David Friedberg 54:20 I'm sorry. Let me, let, let, let me make my last statement, which is that I do think that similarity is measurable, and that is copyright infringement. So I would, rather than focus on how you train the model, I would encourage legislators to find, as Sax points out, a better process to define what makes one thing distinct from another, run that analysis, and then use that analysis to determine uniqueness.

Chamath Palihapitiya 54:44 I think it's-

David Friedberg 54:44 And that analysis is ultimately what should determine whether there is copyright infringement versus the how was the model trained exercise, which is wrought with challenges as you guys know. How do you determine weightings? How do you determine whether this was even relevant in the model?We don't even know if the models ignore the data or use the data in their synthesis or in their weightings. It's all very opaque, and so it's almost like, "Hey, here's a list of stuff that I read," but I may not have even paid attention to 95% of it when I was reading it. We don't know. And so I'd rather focus on, is there copyright infringement in the output? Does the output mimic an original copyrighted source? And if it does, then that's where the infringement should lie, not on the how did you do it.

Chamath Palihapitiya 55:25 I think that you're creating an impossible standard. Is it 5% the same? Is it 8% the same? Is that 14%? Where's your threshold? Is it 78%?

David Friedberg 55:32 Well, how is that different than training? How is that different than training? If I'm J.K. Rowling, am I not allowed to read other authors' copyrighted books for fear that by reading it, I will now use their copyrighted material in my novel book?

Chamath Palihapitiya 55:44 (laughs) No, so...

David Friedberg 55:44 To mine ...

Chamath Palihapitiya 55:45 Okay, stick with that example, but we can also use the Ed Sheeran example. Nick, can you play this video?

Guest 55:49 (guitar playing) I could play you every song in the pop charts right now over four chords. You name any song, and I'll play it in the four chords.

Chamath Palihapitiya 55:54 Um...

Guest 55:55 So these, these are the chords.

David Friedberg 55:57 F, C, G, and F.

Jason Calacanis 55:58 Messenger, um, that's your friend, uh...

Guest 56:01 Uh, 'cause you only need the light when it's burning low. Only miss the sun when it starts to snow. Only know you love her when you let her go.

Jason Calacanis 56:09 Let It Be! I'm Walking Away, Craig David.

Guest 56:11 Uh...

Jason Calacanis 56:11 Craig David.

Guest 56:12 I'm walking away from the troubles in my life.

Jason Calacanis 56:17 One last one, Let It Be, Beatles.

Guest 56:19 When I find myself in times of trouble, your other hand ...

Chamath Palihapitiya 56:22 (laughs)

Jason Calacanis 56:22 Keep, keep, I'm telling you.

Chamath Palihapitiya 56:24 Why is that important? Obviously, it's not illegal for Ed to have learned these four chords, but if he tries to produce those songs and calls them something else, that's clearly somebody else's IP. Similarly, I think that if you don't give people the right to say, "Yeah, of course, the letters A, B, C, D, E, F, G all the way to Z are not my invention. It's the alphabet, and I don't control that. I don't control words and their meanings, but when I put one word in front of another, in front of another purposefully, and I create something that has value to me, I should have the right to protect that." And I think that's the fundamental question. Should you not have a right to protect it? Should you allow somebody else to take that, and in some opaque way and undefinable way, make a system that could compete with that thing and have no repercussions? I think that that's what people need to decide, and I'm fine, by the way, one way or the other.

David Friedberg 57:16 Yeah. In the Ed Sheeran case, he was saying the exact copyrighted lyrics, and he was singing the exact copyrighted melody. He was just playing the harmony with four chords. I mean, that was kind of the point he was making. And in the case of all the, the, the copyrighted material you're stating, I want to protect it from showing up in the end product of someone's creative process. I shouldn't care about them listening to my song in their creative process. Everyone always references how Oasis sounds like the Beatles, right? They... Those guys love the Beatles. They listen to the Beatles. So much of their music mimics and, and sounds like the Beatles, but the Beatles aren't gonna file infringement suits against them. They were inspired by the Beatles. That was part of their creative process. And so I would argue that the output should really be where we assess this stuff, and it's gonna take a lot of cases.

Chamath Palihapitiya 58:00 You're creating an impossible standard where no any individual person will have the economic wherewithal to fight this, and so it's basically ceding all creativity to the board. And I don't think that-

David Friedberg 58:13 But I... You... Sorry, what, what, what is, what is the standard of measuring how someone is training their creative process? Your standard is, "I gotta go-"

Chamath Palihapitiya 58:19 I don't think this-

David Friedberg 58:20 ... "I gotta go listen, I gotta go, you gotta tell me every time you as an artist listen to a song, and then I'm gonna determine whether or not you are listening to copyright music and making your own music."

Chamath Palihapitiya 58:31 No.

David Friedberg 58:31 That's basically what we're asking for here with this bill.

Chamath Palihapitiya 58:33 That's, that's not what... I don't... I'm not talking about the bill. I'm talking about this idea that if you train a system that can actually automate a task for you, based on some learning that's unique, you should be able to uniquely protect your ownership. For example, we have a different set of ways in order to protect processes that are unique to you, which is you can have a patent or you can have a trade secret. But if you strip all of this stuff away, where some system can, in an automated way, do anything for you, and replicate a whole bunch of work that it sits on top of to be able to do that without any repercussions, I think that that's a very important explicit decision. And what I'm saying is, you cannot expect individual people to go and fight these little battles against these big multi-hundred billion dollar companies. If the big multi-hundred billion dollar companies and trillion dollar companies don't fight the other multi-hundred billion dollar and trillion dollar companies, what they're effectively saying is, "None of this is worth anything. Copyrights are worth nothing," and I'm okay with that decision, but it should be an explicit one. And it's not gonna happen the other way where some five-page law from a guy who's trying to get elected is not the thing that's gonna make a dec- the difference. The difference is, if Google doesn't sue OpenAI, it means copyright is worthless. And by the way, that article didn't just point the finger at Google. It pointed the finger at Meta, where there were explicit decisions to say, "Yeah, no, let's just violate the copyright. It's, it's okay." And if it's okay, then it's okay.

David Friedberg 1:00:00 Sax, you're the independent arbitrator here. Any summary?

David Sacks 1:00:05 Well, somebody's gonna litigate it.

David Friedberg 1:00:07 Yeah.

David Sacks 1:00:07 Somebody's liti- gonna litigate it. You're, you're right. It'd be surprising i- if Google didn't want to, given how valuable their YouTube content is, and a competitor, you know, slurped it up to train their model. But somebody will, will litigate this. It could be the songwriters. Who knows? And then we're gonna, we're gonna get some messy arbitration around fair use, and it's probably gonna work its way up over the different circuit courts. You'll probably get different judgments. And finally, the Supreme Court will resolve it, and then we'll kinda know where things stand, and then, and then there'll be a legislative fix. I, I don't know where it's gonna end up. I mean, I know what J-Cal would say if he were here. I'm sure he's like chomping at the bit to be part of this conversation. He would say that creators deserve to get paid for their AI rights, and that if you wanna make money training a model on their content, you gotta compensate them. I also... I, I, I buy, I buy your argument too, which is...... you're not really violating their, their rights for the AI model to-

David Friedberg 1:01:07 To train.

David Sacks 1:01:08 ... read their content and analyze it, which is what it's really doing, as long as it doesn't output a violation of their copyright.

David Friedberg 1:01:15 And that's what all artists do. That's what all humans do. The creative process is one of initially synthesis. You learn from other people's works, you learn from the environment around you, you learn from the world that you're exposed to.

Chamath Palihapitiya 1:01:28 But there was compensation in those other models.

David Friedberg 1:01:31 There was not. You don't-

Chamath Palihapitiya 1:01:32 Of course there was.

David Friedberg 1:01:33 Look, O- O- Oasis never paid The Beatles to listen to their music. They, they bought an album-

Chamath Palihapitiya 1:01:37 No, but the radios... No, that's not true. They listened on the radio. They may not have paid, but some advertiser paid for an ad, the radio station had to pay ASCAP and BMI. There was publishing rights, there was all kinds of other rights, so that's not true, what you're saying.

David Friedberg 1:01:50 I'm not... I'm... What I'm, what I'm saying is it's not copyright just because I trained my process.

Chamath Palihapitiya 1:01:53 My point is somebody got paid. So that singer-songwriter did get paid. They may not have getting paid by the listener, but in this example, nobody's getting paid.

David Sacks 1:02:01 Look, I think there's three potential outcomes here, okay? Outcome number one is that Freeberg wins and the courts decide that this is fair use and these AI companies aren't in violation of, of rights-

David Friedberg 1:02:12 And copyright infringement is measured in the work of art that is produced, not in the process by which it is generated.

David Sacks 1:02:19 Right. Okay, so that's solution number one. I think solution, or outcome number two is that the courts throw a big wrench into it or a bill like Schist's bill, which is largely punitive, throws a big wrench into it, and I think what happens then is new AI companies have a really hard time accumulating training data, and so the incumbents who already have all the training data, they may have to pay a fine, there'll be some slap on the wrist, but now you've created a real moat and barrier to entry, and so secretly, they're gonna love it and it's gonna be a big problem, I think, for the open source movement. So that's outcome number two. And then outcome number three is you create some sort of rights clearinghouse, kind of like, uh, exists in the recording industry, where if you wanna cover somebody's song or perform somebody else's song, there's already predefined terms on which you can use those rights and then there's a compensation mechanism for that. So you don't have to go negotiate every single deal that you wanna do, you can just use the song, you can use the rights, and there's, again, compensation for that. That would be, like, the compromise. I could see that alternative number three existing. In which case, the incumbents probably like that because they... Again, they want there to be a barrier to entry. They wanna make it hard for the guy in the garage to pony up the, the capital necessary to create a new model. But at least that would be a somewhat functional system. It wouldn't be outcome number two, which would totally put the kibosh on the use of training data. So in any event, I don't know which one of the three it's gonna be, but those are the three potential outcomes that I see happening here.

David Friedberg 1:03:54 Have you guys seen Udio, U-D-I-O? Uh, no? It's like a new music gen AI system. It is-

Chamath Palihapitiya 1:04:04 Oh, yeah, yeah.

David Friedberg 1:04:05 ... frigging unbelievable.

Chamath Palihapitiya 1:04:07 Is that Vinod's thing or Vinod's another thing?

David Friedberg 1:04:09 Uh, I think Vinod's another thing. This one just came out. It was apparently rumored for a while. Ex-DeepMind employee started Udio. It's been this kind of, like, hot stealth company. For a couple of months, people have been talking about it as rumored to be the best music AI. But here is someone that said "Dune: The Broadway Musical" and this is what it output. Go ahead.

Jason Calacanis 1:04:33 Atreides of Arrakeen. The greatest leader we've ever seen. They say that he's a listen al gaib. Eyes bright blue and hair jet black. You should see him ride on a sandworm's back. Lead us to victory.

David Sacks 1:04:48 That's crazy.

David Friedberg 1:04:49 You can hear the layers of music, the layers of the tracks, the smoothness, the tempo. Obviously, like, there's just so many layers to this. Nick, can you pull up another one? Uh, some of these are just incredible 'cause it spans genres, it spans styles. It's, like, so beautiful, like, the way it's put together. Every, every piece feels somewhat emotional. It's unique. It really doesn't feel like you're just listening to someone printing copyright music.

Jason Calacanis 1:05:16 I feel it coming, move your body to the beat.

David Friedberg 1:05:18 Funky dance pop song.

Jason Calacanis 1:05:19 My hearts a thumping louder.

David Friedberg 1:05:23 Create a birthday song for my friend Irvin.

Jason Calacanis 1:05:28 Oh, I ... Oh, I...

David Friedberg 1:05:31 Create an Irish folk tune with violin and instrumental. It's pretty incredible and I think it shows the state of the art is such now that this is gonna become a real challenging question from a legislative point of view, given how far ahead these technologies have gotten. And I think that musicians, artists, consumers are gonna start to use these tools in a really prolific way, given how good they are now. I heard from someone that just sat for hours creating tracks that they listen to on Udio the other day. (laughs) And so you're basically just playing your own music all day long. It's really incredible. Anyway, exciting times.

David Sacks 1:06:17 Hopefully all the lawsuits and the legislators don't get in the way of all this innovation 'cause it's moving really fast and we should just kinda see where it goes before trying to clamp down on it.

David Friedberg 1:06:26 Totally.

Chamath Palihapitiya 1:06:26 Mm-hmm.

David Friedberg 1:06:27 Guys, I wanna talk about, as you know, this, like, emerging trend that we've been talking about offline about drones in warfare. Recently, we saw small drones controlled by the Houthis attack cargo vessels in the Suez Canal. It led to rather large-scale supply disruptions, economic value destruction. We've seen videos... Zacks, I think you have one, we can pull it up and take a look, of Ukrainian-controlled drones flying in to destroy tanks and large warehouses in Russian-held territories, causing tens of millions of dollars of damage. I think we're seeing the acceleration of the changing face of warfare technology, lots of these small form factor, low-cost, autonomous physical agents, and I think there's a bunch of implications both with respect to war but also...... how we spend money on defense, and how Silicon Valley is involved and responds. Um, Sax, I'd love to hear your, your points of view. Maybe you can highlight for us some of the things you've been seeing in the utilization of these new technologies in, in the war given our, you're our in-house war correspondent-

Guest 1:07:28 Yeah. (laughs)

David Friedberg 1:07:28 ... and you obviously do some work in Silicon Valley. Go ahead.

Guest 1:07:31 I've heard a, a lot about the impact of, of drones just by watching the coverage of the Ukraine war. I was listening to an interview with an American mercenary who's fighting on the side of Ukraine, and he described how ubiquitous these drones were on the battlefield now. He said that you literally can't get out of a trench to go to the bathroom because a drone will basically, uh, get you. And he said they're buzzing around, they sound like mosquitoes because they're kind of just everywhere on the battlefield. Both Ukraine and Russia have them, and several months ago going into this year, Zelenskyy said that this would be the big game changer for Ukraine, they're going to make a million drones. I don't think it's worked out that way. It turns out that as many drones as the Ukrainians have been able to put on the battlefield, the Russians have even more because they're able to mass produce them in factories. They've got bigger drones, better drones. And I think the most important variable in, in the war so far with respect to drones is that the Russians have pretty advanced electronic warfare, and so they've been able to jam a lot of the Ukrainian drones whereas the reverse has not been true for the Ukrainians. So, I would say that drones have been a huge factor in the war but so far, the balance there is tipping towards the Russians as it is in so many other areas as well. But to your larger point, there's no question this is the, the future of warfare and you're seeing that it's creating a lot of opportunities for asymmetric warfare. So f- for example with the Houthis, they've been firing cheap missiles and drones at our, at our ships in the Red Sea, and we've been having to send two million dollar air defense missiles shooting down $2,000 drones. So if, if that continues and we don't have a good response to this problem, it's gonna really change the balance of power.

David Friedberg 1:09:19 I don't know if this was at our summit or if I heard it this later from some senior person in the military who said that aircraft carriers are outdated technology, like they don't make sense anymore, and we're gonna see a shift towards lots of small autonomous drone-like systems on the battlefield taking out targets. And as a result, if you game theory this out, the necessity for defense systems against large amounts of swarming drone-like systems and then, you know, what do you actually have to do with your existing military architecture to play into this kind of new tactical system? And then that's gonna require a massive evolution in technology, and is the United States prepared?

Guest 1:10:06 They should be.

David Friedberg 1:10:07 And should Silicon Valley play a role?

Guest 1:10:07 They should be. We should. I... Maybe, Nick, you can throw up this, the first link that I sent you, but eight years ago I came to this conclusion and I invested in this company called Saildrone which is autonomous drones in the seas. Our customers include the US Navy. The chairman of our company actually is Admiral Mike Mullen who is a former Chairman of the Joint Chiefs of Staff. But these drones are capable of going into some of the most dangerous places in the world and collecting enormous amounts of surveillance data and information that otherwise takes the United States government lots of time and lots of money and is pretty scattershot, and instead with these things you can be constantly in hotspots. And if you go to the next one, so much so that, you know, we've deployed some of these drones in the Middle East and there was a point at which the Iranian Navy intercepted two of our drones and picked them up, and this was kind of like a, a global thing a few years ago. But I really believe in this trend, and I think that we have an enormous responsibility to be funding these things. These are really complicated systems to build obviously and they take lots of time so these are not overnight successes, Friedberg, and they take lots of money which is hard to come by as well. But these are absolutely the right kinds of businesses because eventually at a minimum you are building systems that can measure and collect enormous amounts of really critical data so that people can make better decisions which hopefully is measured in saving life, right? And then over time, you actually get to a military that should be much cheaper, much safer, and has fewer people in general on our side and on our enemy sides on the front lines which means fewer casualties, and I think that that's the whole value of this entire movement. It's cheaper, it's way better, it's much more useful, and it gives the respective armies that use these things, or militaries rather, a fuller picture so that you can make decisions that have enormous consequences.

David Friedberg 1:12:10 Yeah, and in February the Department of Defense on a panel in Arlington, Virginia briefed reporters and industry folks on their interest in growing their partnerships in Silicon Valley to access the necessary technologies that are going to rewrite the face of warfare. I don't know about you guys but I've seen kind of two sides of this in Silicon Valley. A good number of venture capitalists and entrepreneurs and technologists think that it's morally incorrect to support warfare technology, and then there are a few that are going blazing ahead with supporting this new evolution in these technologies. Do you guys see the same and is there gonna be kind of this, this, you know-

Guest 1:12:55 Well it's a, it's a, it's a big step to weaponize these things, right? So Saildrone, we have a very good, big, thriving, successful business. These machines aren't weaponized by any stretch of the imagination and so I think that that comment is more genuflecting...

Chamath Palihapitiya 1:13:13 ... and virtue signaling than it is real because in order to even be legitimately considered for some kind of, like, armed unmanned product, you have to be deep inside of the bowels of the DOD and Pentagon, and have been working with them for years to even be taken seriously. So the startups that are, like, eschewing those deals are not even close to those deals. And the startups that are close to them are probably being much more quiet and thoughtful and hush-hush because the path to do that isn't legitimate unless you've been in business with these folks for 10 plus years.

David Friedberg 1:13:49 Yeah, I think it's- it's more a commentary on the fact that if this is where an organization, the Department of Defense, that has a trillion dollar annual budget is gonna be allocating resources, that technology is gonna need to come from somewhere. And the investors in Silicon Valley that are making these investments are likely gonna outperform those who are not. Does that sound reasonable to you, Sax? That there is this shift underway and that, again-

David Sacks 1:14:20 Well, I think-

David Friedberg 1:14:20 ... folks who have shied- shied away from defense technology are nes- you know, necessarily gonna be left out of a- a- you know, kind of a new industry that's emerging in Silicon Valley.

David Sacks 1:14:29 Well, I guess the way I put it is that the US government spends over $800 billion every year on defense and it's not clear what we're getting for that money because in Ukraine, for example, we've run out of artillery shells. We've actually- we've run out of Patriots, we've run out of Javelins, we've run out of Stingers. So we're spending all this money, we're not getting a lot for it and part of the reason is because the defense industry has consolidated down to these five prime defense contractors who are basically an oligopoly and we have this cost plus procurement system where they just raise their prices every year and the government pays it. So I think all of us want the United States to have an effective defense. I mean, I want us to use our military power more wisely, I don't like all these stupid wars we keep getting in, but I do want the United States, as an American, to be the most powerful country. I do want us to get the best value for our defense dollars and the only way that's gonna change is if the defense industry gets disrupted by a bunch of startups doing innovative things. And there's no question that I think drones are the future of warfare. To your point about autonomy, I think that is where this is going next is that right now, the drones are typically controlled by, you know, somebody with, like, a VR headset.

David Friedberg 1:15:45 They're called tele- tele-operated. Yeah.

David Sacks 1:15:47 Tele-operated and they're FPV, this first person vision drone, and you basically strap some sort of explosive onto it and then you drive it into whatever your target is.

David Friedberg 1:15:58 A target. Yeah.

David Sacks 1:16:00 Those types of drones are easier to disrupt by electronic warfare because if you can disrupt the signal from the tele-operator, then the drone basically doesn't know what to do. And so you're right, the next step here is autonomous systems that can be programmed with a target and can find it on its own, make decisions on its own, and then they also build in some shielding against some of this, like, jamming technology or this EW, electronic warfare, technology. So that's where all these things... that's where the battlefield is... of the future is headed and in a- in a weird way, if you think about humans becoming a smaller and smaller piece of the battlefield and autonomous drones becoming a larger and larger piece of it, these wars become resource wars and-

David Friedberg 1:16:49 That's right.

David Sacks 1:16:49 ... basically technology wars.

David Friedberg 1:16:51 That's right.

David Sacks 1:16:51 Which- which may or may not be good. I don't know.

David Friedberg 1:16:53 But by the way, so- so this is the point I wanted to make. If you pull up this chart-

David Sacks 1:16:56 Yeah.

David Friedberg 1:16:56 If- if that is where warfare is headed is a large number of small autonomous systems that go and find a target and try and execute a mission and, you know, i- in the case of Ukraine saying they want to have a million, China might say, "I want to have 100 million." All of these systems are dependent on lithium-ion battery systems. Today, 79% of lithium-ion battery production comes out of China. The US is only 6.2% of global lithium-ion battery production. And China has talked about scaling up drone manufacturing to a level that the US simply cannot even contemplate in its industrial architecture today. So i- it seems to me that if that is where warfare tactically is headed, that China has a huge leg up and is gonna become a critical point of dependency for the United States to develop a- an arsenal necessary to be competitive in this- this kind of next evolution of warfare. I will say that-

David Sacks 1:17:55 Well, yeah. Yeah.

David Friedberg 1:17:55 ... like, if- if you then game theory this out, like, how do you defend against these autonomous electronic systems? There's a technology called EMP or electromagnetic pulsing where, as you guys know, if you run a very high current electric field, you can actually send out and emit a pulse that then when it hits electronic circuits far away induces a high electric current in those circuits and short circuits them. So EMPs are a- a defense system that allow you to take out electronic systems. And this has been, you know, kind of a- a part of warfare since probably the 1960s, '50s. But targeted EMPs and targeted systems for eliminating all of these autonomous systems becomes a new defense technology that I know several startups in Silicon Valley that have been funded with a lot of capital by folks that we all know very well that are kind of pursuing this.

Chamath Palihapitiya 1:18:48 We don't have a choice because I think the point is that if you... j- just... Nicky just posted this photo. We have an enormous human capital problem with the military which is, there's just not enough folks enlisting anymore, so we don't have any choice except to automate and become drone dependent.

David Friedberg 1:19:03 Just tell us these numbers, Jamal.

Chamath Palihapitiya 1:19:05 This is a chart from the Department of Defense that shows military enlistments looking back from about the 1970s through today and these are two lines that are just going from the upper left to the lower right.And so we're at all-time lows with respect to the number of people that actually want to join the military. And so if we are supposed to, as Sax said, be this very sharp fighting force, then all of the money that we're spending needs to get allocated into things that can be remotely operated. There's, we don't have a choice.

David Sacks 1:19:38 Yeah. I mean, f- so Friedberg, you, you asked the question, how do we defend against these drones? Yes, y- y- there's EMP technology. If you want to use an EMP, you better make sure there's not any planes nearby 'cause it will take them (laughs) out of the sky. You better make sure...

David Friedberg 1:19:51 By the way, there are now t- there's par- you can target EMPs in a narrow cone, which is part of the, the, the, the technology evolution, but yeah.

David Sacks 1:19:57 Yeah, and you better make sure you don't hit any of your own stuff because you'll-

David Friedberg 1:19:59 Right.

David Sacks 1:19:59 ... fire the electronics on those unless you EMP harden them, which by the way will happen. I mean, if, if the US gets really good at, at sending out EMP pulses, then our opponents will start EMP hardening their drones. But in any event, yes, it's a category of defense. So is