E87: Emerging markets, Sri Lanka, 9.1% CPI, market sentiment, NASA's Webb telescope & more

1. 0:00 – 1:41

   Bestie intros!

   1. CPChamath Palihapitiya0:00

      Wait, that's not even a sweater. That's a sweatshirt. (laughs)

   2. JCJason Calacanis0:02

      No, no, no.

   3. DSDavid Sacks0:03

      It's not even cashmere. It looks like polyester or something.

   4. CPChamath Palihapitiya0:05

      Okay, quick. Freeburg, come on the video where you're wearing the same thing as J-Kal so we can make a quick joke and make fun of you.

   5. JCJason Calacanis0:10

      Hey. (laughs)

   6. CPChamath Palihapitiya0:11

      Morons. I mean, you guys are so predictably dumb, the two of you.

   7. JCJason Calacanis0:16

      It's so itchy. (laughs)

   8. DSDavid Sacks0:18

      (laughs)

   9. CPChamath Palihapitiya0:18

      Do you have a rash?

   10. JCJason Calacanis0:19

       Jason made me buy this outfit and I put it on and I'm, like, itching. I'm about to take this thing off.

   11. CPChamath Palihapitiya0:24

       (laughs)

   12. DSDavid Sacks0:24

       Polyester, wool, polyurethane.

   13. JCJason Calacanis0:27

       (laughs) Polyurethane.

   14. DSDavid Sacks0:28

       What's that made out of?

   15. NANarrator0:29

       All in. Let your winners ride. Rain Man, David Sachs. I'm going all in. And I said. We open sourced it to the fans and they've just gone crazy with it. Love you, Vespa. Queen of Quinoa. I'm going all in.

   16. JCJason Calacanis0:46

       Okay, everybody. Welcome back to the All-In Pod, episode, uh, 87. Here we go. Tons of news going on. Thanks for all the great feedback on episode 86. Uh, we're gonna start with emerging markets. Oh, and yeah, welcome to the program, David Freeburg, sultan of science, the dictator himself from his palace in Sri Lanka, uh, his new palace in (laughs) Sri Lanka. He'll be taking over over there. We'll get into that. And Sachs is in a, in witness protection right now apparently. (laughs) Where are you, Sachs, in this white nondescript room? Can you say where you are?

   17. DSDavid Sacks1:16

       This is my soundproof padded room.

   18. JCJason Calacanis1:18

       Yeah. Oh, is that what have ... That's what Biden's done?

   19. DSDavid Sacks1:20

       (laughs)

   20. JCJason Calacanis1:20

       Your Biden derangements into May (laughs) , may put you in an asylum? What do you do? You rock back and forth and say, "Inflation, Ukraine, inflation, Ukraine"?

   21. DSDavid Sacks1:28

       No. We just had the room soundproof for, you know, better podcasting.

   22. JCJason Calacanis1:31

       Oh, look at you, taking the, taking the job seriously.

   23. DSDavid Sacks1:34

       I don't think it looks bad. I think it looks good.

   24. JCJason Calacanis1:36

       Yeah, you could put a little art behind you or something. Just put one of your Monets behind you, you know, the ones you have in storage downstairs.

2. 1:41 – 36:01

   Emerging markets, Sri Lanka break down

   1. JCJason Calacanis1:41

   2. DSDavid Sacks1:41

      (laughs)

   3. JCJason Calacanis1:42

      Okay, emerging markets are facing, uh, some huge challenges right now. Quick mar- quick primer on, uh, three types of markets, developed, emerging, and the frontier market, if you don't know. Developed markets are considered US, Japan, Europe. Their GDP growth is lower, single digits typically. In the emerging market, it's roughly defined as developing but not fully developed. That includes countries like the BRICS, which is Brazil, Russia, India, China, and recently added South Africa. Many other markets are included in that. They were previously called the Third World in the '80s. People didn't like that term. Uh, investors will bet on them having, uh, higher GDP growth, typically two times or three times what the developed world has. China, for example, 2019, 6% growth. US, in 2019, 2.1% growth. And of course, there's frontier markets. These are viewed as small, unstable, illiquid, generally risky. If you look at something like Kenya, Vietnam, those would fall into that category. Uh, Vietnam, 7% GDP growth in 2019 to the US's 2%. Sometimes people like to make bets on them. Here's a nice little chart for y'all to look at. And you can just see China versus Vietnam and the United States, uh, since the '80s. And so why is this all important? Well, the Wall Street Journal reported last week that EMs, the emerging markets, have been feeling massive pressure. We'll get to Sri Lanka in a moment. That's a frontier market, to be clear. Um, but three things. Well, we've got probably a half dozen things going on. Let me just highlight maybe the top five, and then I'll hand it off to the besties. You have high bond and loan yields. The debts, uh, debt rates are increasing in the emerging markets and frontier markets. Think what happens when you got a variable mortgage or you try to get a new market, a new mortgage. In the developing markets, the developing market investors have stopped investing in emerging markets and frontier markets, as you might suspect, during a downturn. And they're even pulling money out. Then you have surging inflation. We all know about that, and we're gonna talk about inflation here in the US 'cause we got the print this morning. And slowing growth. We've also talked about this for the last six months on the program. All these problems get exacerbated when, uh, economic growth slows, and it's slowing globally. And then finally, we have the potential issue of contagion. We don't know exactly what's gonna happen when various countries are facing these challenges, although we did tell you here what would happen with the Ukraine. Shout out to, uh, Sachs and Freebird Fertilizer, wheat oil, all that good stuff. And it's becoming very acute. Perhaps the carry- canary, canary in the coal mine is Sri Lanka. Breaking news. President, uh, Rajapaksa, uh, fled for the Maldives, and it's a state of emergency. Curfews were declare, declared. I think that's been canceled as of the taping of this. Uh, we can get into the state of Sri Lanka. Your thoughts, Freeburg. I know you've been chomping at the bit to discuss this. Yeah, that was a good long intro. I think, um, you know, the, the high level for me, if you look kind of at debt markets around the world, there's about $300 trillion of global debt. And I put this, uh, chart in the, uh, chat here. Nick, you can put it on the, on, on the video. And about 100 trillion of that debt globally is in, um, uh, emerging markets. And so these countries generally have, you know, much more kind of variable, uh, GDP growth, as well as challenges ultimately with their currencies. Most of this debt recently, and, and this has been a trend for a number of years lately, has been issued in their local currency, rather than in US dollars. And so as the currency devalues, it becomes more challenging for an investor to make a return if they're investing from a US dollar denominated base or some other dollar denominated base. So, um, look, the EM, uh, the emerging markets are, are, are heavily saddled. I mean, some of these countries have over, you know, 300% or 250%, uh, debt to GDP. And what's really gone on recently, uh, is that many of them, as net importers of energy and food, are gonna struggle to make the stuff they need to make at home or to feed their people at home because of the rising inflation that's been happening around the world.

   4. DFDavid Friedberg5:59

      ... from the producers of those goods and service, uh, those goods. And so to, to import those goods is more expensive, that makes it more challenging for people to be able to afford food, to be able to afford energy. This is part of what we're seeing happening in, um, uh, in Sri Lanka. What's compounding this is we have rising inflation in the US, so as we've been talking about a lot, the Fed's been raising interest rates here in the US, which means that you can now buy treasuries that yield 3%. If you're an investor around the world, where else are you gonna put your money except US treasuries in a market like this? You wanna buy 3% yield in US dollars versus, you know, getting 10% yield in, you know, some currency-denominated account, some currency-denominated bond in a country you don't really know well or trust as much as the United States. And so as a result, a lot of dollars are moving out of emerging market debt, uh, into US debt, and the price of that debt has collapsed. And so we've seen in the last, uh, couple of months a decline of e- emerging market debt of about 20%. This makes it harder for those countries to issue new debt to fund things, and it's creating this really challenging spiral that may ultimately lead to defaults. Those defaults absolutely have a trickling effect, because if one country starts to default and you're an investor in emerging market debt, you're gonna say, "Hey, wait a second. This, this, this... I just took a huge loss in this position." You're gonna start to sell off other emerging market debt, and then it becomes harder for those countries to raise more debt and fund themselves and it can cause a cataclysmic spiral. So, you know, it's a really scary scenario we're wading into now, and I think we really hope that the US starts to taper interest rates and we find some stability in these markets over the next couple of months, because it's not just a food and energy crisis, it's also a humanitarian crisis, and ultimately could lead to a, a global financial crisis. Uh-

   5. JCJason Calacanis7:43

      And, in fact, the bond issuances-

   6. DFDavid Friedberg7:44

      .... uh, and so it's something, you know, it's, it's highly complex, but it's something that folks are tracking very closely here.

   7. JCJason Calacanis7:48

      What's happening also is the companies that were already at risk are going to start feeling this impact. We can jump into Sri Lanka if we want.

   8. CPChamath Palihapitiya7:56

      Sri Lanka has, I think, a bunch of short-term issues and a couple of very long-term issues. Um, let me set the backdrop, 'cause I think this is really interesting. Let's take, um... let's study Sri Lanka through the lens of two other countries, Jamaica and Singapore. If you go all the way back to 1960, so, you know, roughly when Singapore became a nation, the Jamaican population in 1960 was 1.6 million people. The Singaporean population was 1.6 million people. Sri Lanka's population was 9.8 million. Jamaica's GDP was 700 million. Singapore's GDP was 700 million. Sri Lanka's was 1.4 billion. Now, you fast-forward to 2022, Singh- Jamaica's GDP is about 13 billion. Singapore's GDP has grown to about 360 billion, um, and Sri Lanka's GDP, uh, is 80 billion. So, like, what did Singapore do right, what did Jamaica kind of get right? Because one of the things that they kept in check was their population, even though their GDP didn't expand that much, so per capita income was still quite healthy. And then what did Sri Lanka get right and what did Sri Lanka get wrong? Well, some of the things when you look at Singapore is that they found a way to embrace... despite a very heterogeneous culture and sets of religions inside of that entit- in that, inside that city-state, they found a way to promote multiculturalism yet also promote English as the lingua franca. Why was that small thing so important? Because it allowed them to be a hub for the rest of the world in a way that many, many other countries couldn't do. The second thing that they had was a very low level of corruption because they had a leader, in that case Lee Kuan Yew, and again, some people in the West will paint it as slightly authoritarian, um, you know, he would paint it as Asian values, but the net result of it was very low levels of corruption, a small but highly effective public service, and meaningful investments in education and healthcare to make that country grow over decades. And within a generation, that country completely, you know, exceeded all expectations. Sri Lanka struggled through a civil war. I was a byproduct of that civil war. Um, it was partly religious, it was partly ethnic, and it was 20-plus years in the making and in the happening, and it took a very right-wing autocratic leader, the brother of the current deposed president, to basically root it out. Now, in order to root it out, there were enormous amounts of war crimes and all kinds of things that I don't think anybody would support, except it brought some amount of stability. And so then you would have thought, okay, maybe this is the point at which you can now really start to grow, but these guys yet again found a way to navel gaze and just to infuse so much corruption and graft inside of how the government was run. By the way, and it wasn't just the right, it was also the left. They spent two and a half times more on defense as of last year than they did when they were in wartime. Doesn't make much sense. The public service grew to the largest it ever did in a moment where, you know, you really should have prioritized private enterprise. So all of these things sort of created a situation where they fundamentally didn't know what they were doing.

   9. JCJason Calacanis11:30

      So, uh, the other two issues there, I think, uh, and that's a great summary of, like, really those frontier countries and, and what made them emerge, Singapore also has a great strategic location, which Sri Lanka kind of shares. They're both island countries strategically located for trade, and then I guess the policies, right? Singapore went on a very, very aggressive, uh, tax and business policy effort. Did Sri Lanka do that as well? And then maybe you could speak to just how important those are as islands, you know, uh, and their, and their geography. 'Cause Jamaica doesn't obviously have that.

   10. CPChamath Palihapitiya12:04

       I mean, Sri Lanka has this massive growing importance as China has emerged. The problem in these last few years is that they did everything possible to not just alienate China, but to alienate everybody on every dimension possible. You know, they alienated China. Th- the coup de grace was that there was an enormous shipment of fertilizer, chemical fertilizer, that was sent to the ports, and it was summarily rejected and turned around because somewhere along the way, the leadership in Sri Lanka decided that they, uh, were woke. And so they-

   11. DSDavid Sacks12:37

       Yes.

   12. CPChamath Palihapitiya12:37

       ... enforced every farmer-

   13. JCJason Calacanis12:39

       Oh no.

   14. CPChamath Palihapitiya12:39

       ... to go organic.

   15. DSDavid Sacks12:40

       Yes.

   16. CPChamath Palihapitiya12:40

       The problem with going organic and organic fertilizer was all of the small farms shut down, all of the large farms had 20 to 30% crop yield reductions. The prices of food went crazy. They reversed policies two or three times. And really what they found is that, you know, they tried to go woke, instead they went broke. And all of a sudden, all these other countries who were there trying to help said, "Wait, what is going on here?" So they offended China. They offended the Middle Easterners. Uh, they offended the Japanese by cutting a light rail project that Japan wanted to fund. I mean, in every step of the way-

   17. DFDavid Friedberg13:12

       They de-industrialized.

   18. CPChamath Palihapitiya13:14

       This country found a way ... They didn't de-industrialize. (laughs) They tried to follow this woke agenda-

   19. DFDavid Friedberg13:18

       Well, that, that is, that is de-industrialization. I mean, reversing from, like, the modern techniques of industrial production, like fertilizer and modern systems of farming is de-industrialization. It's, it's, um, you know, it's gonna be a curse ultimately.

   20. JCJason Calacanis13:31

       Sax, to your point, we, we, we just discussed this last week w- with the farmers. You know, if you're in a frontier market trying to adopt the regulations and the strategic goals for the environment of the emerging market is like two giant hops. It's, it's, it's probably insurmountable.

   21. DSDavid Sacks13:49

       Well, look, there's a strong analogy between the populist uprising that's happening in the Netherlands with the Dutch farmers and the populist uprising that's happening in Sri Lanka. Um, basically, they're implementing the same policies. It's just that Sri Lanka is, uh, further down the road and it's a poorer country to begin with. So, you know, like Chamath mentioned, in April of last year, the Sri Lankan government banned the importation of chemical fertilizers and pesticides used in farming. They, again, went with this idea they thought they could encourage organic farming. So the result of that was that overall production, agricultural production fell by a third and rice production fell by 43%. And rice is, you know, the biggest staple in the country. So now you got people there starving or going hungry, you've got massive food insecurity, as well as the whole economy basically has been crippled. And the result of that is society has essentially collapsed. So, you know, now, the question is, why did the Sri Lankan government feel compelled to adopt these policies? A lot of it has to do with the fact they're getting these massive loans from the World Bank and the IMF. And the World Bank and so forth are imposing these ESG requirements. So Sri Lanka has something like a 98% ESG rating, even as their economy and society is collapsing. How is that possible? Well, they're doing a great job following the prescriptions of the global elites at Davos. I mean, this sort of global elite flies into Davos from Brussels and Washington on their private planes, they have panels on ESG, and then they prescribe these policies for countries like Sri Lanka. And this is the result. I mean, it's crazy. They've been telling us for years that somehow there's no trade-off between their environmentalist policies and creating a healthy growing economy. And this is an example of that's not true. There are real trade-offs here. And the crazy thing is that the elites expect poor people in Sri Lanka to make up for their environmental emissions, and it's not really fair at all.

   22. CPChamath Palihapitiya15:45

       Here's another example. In March of 2020, Sri Lanka enforced one of the world's strictest China-esque COVID nine lockdowns, COVID-19 lockdowns, despite one of the lowest death rates and infection rates in the world. And so for nearly three months, it literally crippled the economy and the livelihood of citizens there. But here's where it gets crazy. Then, they actually go against global best practice and they ban the burial of COVID-19 victims, claiming that it could lead to groundwater contamination. I don't even know how they came up with this. But you know what this did was it significantly undermined the small minority of the country that is Muslim, because a religious practice there, you know, is you bury your dead. And then that caused great pain to them. And then it, as in turn, it hurt all these international relationships with all these Gulf nations. So then y- you come all the way around and then you go back to those same Gulf nations a few months later, and you're like, "Can I have subsidized oil?" And they're like, "Mm, no, not so much."

   23. JCJason Calacanis16:47

       And just to give, paint a picture of what's happening there right now, as I mentioned before, it's, it's pretty much a state of emergency. You can see various videos trending on social media. Um, and you always take those with some caution, because sometimes people will take clips out of context or, uh, label them incorrectly or use clips from other moments in time. But what's really happening there right now, and you shared a video in our group chat, is everything is now, uh, being doled out in very small amounts. So there, there, there are lines for basic goods and inflation is, is crippling there. And as Friedberg mentioned, they started to pin, um, their exchange rate and, and their currency to, I guess, the world's exchange rate, and now everything is super expensive and essential imports, uh, like food and medicine and fuel, they don't have the money to pay for it. So this is going to be a complete societal collapse it seems, and they're gonna need to get bailed out.

   24. CPChamath Palihapitiya17:47

       There was a bill that was introduced in the government that said the central bank would be forced to have a discipline on money printing. Sound familiar? In March of 2020, the Central Bank of Sri Lanka began printing money in order to finance a growing budget deficit. Again, happens in many countries.And they did that, in part, to fulfill an election promise that they made that they would maintain single-digit interest rates. Again, sounds really familiar. So, uh, they've printed about 100 billion rupees in March. In the next two years, the Central Bank printed 1.65 trillion rupees, right? So 16 and a half times that first number. And then as a result, what they saw was the highest inflation in post-independence history. So time after time, what you're actually seeing in Sri Lanka is not a microcosm of something that's endemic to whatever you want to call it, Jason, a developing country, a third world country-

   25. JCJason Calacanis18:44

       Frontier.

   26. CPChamath Palihapitiya18:44

       ... you know, a frontier country, a Southeast Asian country. In fact, it actually resembles many of the policies that exist in so many countries all around the world. And what's really important here is that as goes Sri Lanka, so goes Ghana, so goes Pakistan, so goes a whole bunch of countries where you're already starting to see food riots, food insecurity, energy insecurity, rampant inflation, uh, sovereign defaults. And you have to ask yourself, like, "How are we going to really tourniquet this whole thing and prevent a much bigger contagion," like Friedberg just talked about? I think it's a-

   27. JCJason Calacanis19:23

       And we might be at a full-ish Chamath-

   28. CPChamath Palihapitiya19:24

       ... it's a really important issue.

   29. JCJason Calacanis19:25

       ... be- because (laughs) uh, you mentioned COVID. It turns out a lot of these frontier countries were already on debt relief and being given, uh, a moratorium on making their debt payments since they got so walloped during COVID. And then now the other shoe drops, and here we are. The- there's no relief you can give them if they're already not paying their loans in some cases.

   30. CPChamath Palihapitiya19:46

       By the way, here's another thing that happens in a lot of these developing countries. So in the middle of all of this chaos, what do you think happened? The Parliament got together. They passed an a- amendment to the constitution, and it enforced and it gave incremental power to one individual, the president. And typically, in most of these countries that run by a parliamentary system, the president is a figurehead, right? The person shows up, you know, shakes hand, kisses babies. That's it, right? Maybe convenes the Senate, but that is it. Now all of a sudden, the person has control over defense, control over budget, control over the Central Bank. And this person cannot be, you know, voted out in a no-confidence vote the same way that a prime minister can. That happened here as well. So yet another example of if you start to see a bunch of autocrats in some of these developing markets feel like the answer is more power, it's been tried here, it didn't work. So I think that there's a, there's a lot of lessons. I- I am a little concerned and skeptical that many of these other developing countries that are teetering on insolvency will actually learn-
3. 36:01 – 48:15

   9.1% CPI print

   1. JCJason Calacanis36:01

      best. Uh, okay. CPIs, as, uh, everybody who listens to this show knows, is a basket of goods and services and how it changes over time. You can slice and dice the CPI, uh, based on food, energy, shelter, your house, et cetera. Last two months have been just extraordinary to watch, driven obviously by energy, which has been driven by, uh, the Russia-Ukrainian conflict, cue the Sachs rant on Biden's administration.Um, the core index doesn't include energy. And so if you were to look at the core en- index, uh, it... and here's a chart, 5.9% in June, and, uh, it peaked actually with 6.5% in March. So that's been trending down if you take energy out of it. Uh, we haven't experienced core-

   2. DSDavid Sacks36:46

      Energy and food, I think, are, are excluded from core.

   3. JCJason Calacanis36:48

      Yeah. Uh, and if we haven't, uh... we haven't experienced core inflation like this since the '70s or '80s. Here's another chart just to zoom out, and you'll see exactly how jarring this has been, uh, for basically our generation. We haven't experienced this since, if you were born in the '70s or so, that's when it was higher than it is today. And we've had, obviously, goods and services plummet in our lifetime because of globalization and low interest rates. Uh, energy hasn't seen inflation like this, uh, since the '70s and '80s.

   4. DSDavid Sacks37:19

      Well, what i- what is this chart? Is this CPI? What is that?

   5. JCJason Calacanis37:22

      That is the core. So that doesn't-

   6. DSDavid Sacks37:24

      That's core inflation. Okay.

   7. JCJason Calacanis37:24

      That's core. So... and then here's the energy one coming up next. So when you look at energy, obviously, energy, uh, has been volatile in our lifetime, uh, because a lot of the oil in the world is controlled by dictators, Middle East, Russia, Venezuela, yada yada. But the 40% year-over-year, uh, increase in cost of gas and oil and energy has put us back to the mid '70s, '80s in terms of pain. That's this chart. So you see it's spiking all over the place, but generally, it was, uh, under 20%, and now we're back above 20%. It's all about the oil. Chamath, you were... we were talking in the group chat before. You were kind of satisfied with 9.1. Do you think the 9.1 we're seeing, uh, in the inflation print today, which was higher than expectations, what is that gonna lead to in terms of the interest rate hike, 75 basis points, or you think they just go right to one?

   8. CPChamath Palihapitiya38:16

      You know, we talked about this, that this was gonna be a big print, right? I think we all expected this to be a big print. Um...

   9. JCJason Calacanis38:22

      Yeah.

   10. CPChamath Palihapitiya38:22

       I actually also kind of put myself out on a limb there and I said, you know, "I wouldn't be surprised if at some point we print a mid to high nines, maybe even a 10 handle at some point."

   11. JCJason Calacanis38:31

       Yeah. Well, we're getting there.

   12. CPChamath Palihapitiya38:33

       And the reason is because, uh, you know, rents are a little, you know, uh, they lag in how they're reported inside of CPI. So we have a couple more months to go of, of rents, and rents aren't moving or budging a bit. That's number one. Um, we do see a little bit of falloff in, in energy prices, but I'm not so sure that it's, it's enough, frankly, to, to move the needle. So I think that we could be in a sustained period for a while. The more interesting thing I thought today was that Canada surprised everybody and raised, uh, their benchmark interest rate by 100 basis points.

   13. JCJason Calacanis39:11

       Okay. One full point. Yeah.

   14. CPChamath Palihapitiya39:11

       So... and they just came... one full point, 100 bps, and they just said, "We're going for it. We need to tame this. We need to break the back of inflation."

   15. JCJason Calacanis39:19

       They ripped the Band-Aid off. Yep.

   16. CPChamath Palihapitiya39:21

       Yeah. And, uh, you know, and I think if you read the Fed minutes more carefully, I think Jerome Powell is basically ready to do the same thing.

   17. JCJason Calacanis39:29

       Yep.

   18. CPChamath Palihapitiya39:29

       After this inflation print, the expectation for July went to 80 basis points from 75, which means a small percentage of people actually think it's gonna be 100, and September, I think, moved to 75.

   19. JCJason Calacanis39:43

       Hmm.

   20. CPChamath Palihapitiya39:45

       So the question is, is that enough? I just don't know. I, uh, I don't know.

   21. JCJason Calacanis39:52

       And to be clear, this is for June. The data we got on today, Ju- July 13th, is for June. What we did see in July, 'cause we can track oil prices, that's down 20% mo- month over month, and the CPI has been driven largely by oil. So speak to that, Chamath. What do you think it's gonna be in J- July when we get it in August?

   22. CPChamath Palihapitiya40:10

       No, but yes and no, because the... again, the owner-equivalent rents are up so much that they may actually, you know, break even, right? Meaning-

   23. JCJason Calacanis40:17

       Okay.

   24. CPChamath Palihapitiya40:17

       ... rents go up by so much, oil goes down-

   25. JCJason Calacanis40:19

       Yeah.

   26. CPChamath Palihapitiya40:19

       ... by so much, they cancel, and we're still at nine. And I could still-

   27. JCJason Calacanis40:22

       Okay. So that's your prediction for July, which we'll get in August? You think nine?

   28. CPChamath Palihapitiya40:26

       Y- yeah. I'm worried that we're in a sustained inflationary environment. I'm worried about that. I, I hope that we're not. Um, but then the question, Jason, secondarily is in what do the markets do? And what's so interesting today is, like, the markets shook it all off. I mean, like, you could not have had a worse inflation print. Everything was up.

   29. JCJason Calacanis40:45

       Well, 10. (laughs)

   30. CPChamath Palihapitiya40:46

       Meaning, meaning, like, it was-
4. 48:15 – 1:05:00

   Current market sentiments from retail and institutional investors

   1. DSDavid Sacks48:15

      the 10-year T-bill has been kind of floating around 3%. So that is the long-term expectation of the interest rates that's required to have sort of normal inflation. But what if it's 4%, what if it's 5%? If that ends up being the case, it'd be a huge downside surprise to the stock market.

   2. JCJason Calacanis48:33

      Well, how would you define that? 10% pullback, 20% pullback from here?

   3. CPChamath Palihapitiya48:38

      Well, you have a bunch of things. Look, we, we talked about this other issue before as well, which is if you believe the stock market is fairly valued, you have to believe that prices are right and that the earnings are right, right? So, 'cause it's, effectually, it all boils down to the per- price earnings ratio of the S&P 500. And I'm going to still maintain that the E is wrong. The earnings are wrong for most of these companies. So, let, let, why? Well, one is that when these companies start to report their quarterly earnings, starting in the next few days, the year-over-year comparison is going to be to the numbers that they posted in Q2 of 2021, which by all accounts was a blowout number. Why? Because the number before that was 2020 where their business was zero (laughs) , right? So, you have these incredibly tough comps in terms of growth percentages that you have to reach, which I don't think are achievable. Second is everybody's costs of making and selling things is going up, which stands to reason that unless you raise prices quickly enough, your profits will go down. Third, if you actually do business outside of the United States, the US dollar has rallied so much that you actually have less income that you're making in these other countries when you convert them and bring them back to the United States. Now, most people look through that last issue, but the point is if you add this all up, there is a reasonable probability that the all the Es are wrong, in which case we have to reassess what the right E should be, in which case, what is the right PE?

   4. JCJason Calacanis50:10

      Yes, and earnings are a function of what you spend and what you make, so that's why we see so many companies doing layoffs, cutting people, uh, Microsoft, Google, everybody is now putting people on, uh, notice-

   5. CPChamath Palihapitiya50:21

      But Jason, they're not-

   6. JCJason Calacanis50:22

      ... that they have to perform.

   7. CPChamath Palihapitiya50:23

      ... they're, they're, they, they're firing white-collar labor, but they're hiring, you know, blue-collar labor faster. And so, you know, we are actually gonna see a downtick in productivity, right? You're replacing a person that, you know, may sit down at a desk and use a computer eight to 10 hours a day to do something, but you are hiring a lot of people that, you know, may get paid by the hour or may get paid a f- you know, fixed salary if you do the right kind of work. But, uh, that qualifies as, as more contractual blue-collar labor. The difference in that is a productivity difference, ultimately.

   8. JCJason Calacanis50:51

      Yeah. And just so everybody knows, P- for P/Es, price earning ratios over time, here's a quick chart for you. Currently, uh, and this is for the S&P 500, we are currently, uh, at 20 or so, and we have twice in our lifetime kinda hit that f- you know, 13, 14, 15 level. So, we could have a 25% correction from here in the stock market. Um, if you look at the highs, our recent high, uh, in December of 2020, we were at 38 price earnings ratio. So, uh, we've fallen from 38 down to 20, you know, almost in half and, uh, we could still go down 25% from here. And that would basically not even set a new record. That would just hit the last two crises we had.

   9. CPChamath Palihapitiya51:40

      The thing that, the, the, the thing that I think will work against this happening, Jason, so yeah, you're right, the, the, maybe it goes to 3,000 or 3,200, but if you look again today, you know, and what, what I mean by, like, the market has roughly shaken this off, like, the fact that the markets right now as we, as we talk are, you know, are essentially down half a point, uh, you know, the, the S&P is down, you know, 12 points, uh, it means that they are looking for any and all reasons to say, "This is a solved problem. Move on. Nothing to see here." Now, that is a psychological reaction. Most of that, if you actually, I, I called a friend today and I said, "Where are the flows?" And he said, "You know, retail right now is where all the flows are," meaning it's retail that's buying. They're in the 30th, 35th percentile of where they normally buy, which is a pretty healthy signal.

   10. JCJason Calacanis52:31

       Wait, explain what you mean. Who's buying?

   11. CPChamath Palihapitiya52:34

       So, the way the market works basically is you have buyers and sellers and, uh, you know, to, to make it really, really simple, you have hedge funds as one class of buyer.

   12. JCJason Calacanis52:44

       Sure.

   13. CPChamath Palihapitiya52:44

       You have ETFs, but they're, they're not really because they have s-

   14. JCJason Calacanis52:48

       Exchange traded funds, yeah.

   15. CPChamath Palihapitiya52:48

       Yeah, but they have fixed strategies and so, you know, they're hedging, they're moving, but whatever. And then you have retail. Okay? So it's retail and hedge funds. Those are the two main pockets of, of where the flows come into the stock market from. And you can get a real sense of what's happening, what the psychology of the market is, if you see what those flows are. And right now, what we see is that hedge funds are largely on the sidelines.

   16. JCJason Calacanis53:13

       They're waiting.

   17. CPChamath Palihapitiya53:13

       What that means is they are, well, they've been so battered and bruised, in some ways I think they're licking their wounds, but they're mostly waiting. They're, they do not find a compelling reason to buy.

   18. JCJason Calacanis53:25

       Hm.

   19. CPChamath Palihapitiya53:25

       Right?

   20. JCJason Calacanis53:26

       But they have to buy at some point, right, Chamath? This is their business.

   21. CPChamath Palihapitiya53:29

       I ... No.

   22. JCJason Calacanis53:29

       Well, uh-

   23. CPChamath Palihapitiya53:30

       Their, their business is-

   24. JCJason Calacanis53:30

       ... I guess we have to find other opportunities, right?

   25. CPChamath Palihapitiya53:32

       ... Their, their business is to make money relative to their index. And so if their index gets torched, them doing nothing makes them look like geniuses. Um, so they don't necessarily have to buy at any point. They just need to make money at, in the end. So right now, we're in a situation where the markets are looking for a direction. Retail seems to think that direction should be up. Hedge funds don't have an opinion, are saying, "We're just gonna wait this thing out."

   26. JCJason Calacanis53:57

       Okay.

   27. CPChamath Palihapitiya53:57

       Meanwhile, the data, it- at best is a question mark, and I think that's the- that's the tension we have right now in the stock market, is the psychological desire is for this thing to be over, meaning I think people wanna hear, "Inflation is done. We're starting the recession. Give us three or four quarters, we'll be out. Here's a steady state interest rate. Let's go tech."

   28. JCJason Calacanis54:18

       People want to accept the reality. Friedberg, does that mean that we're bouncing along the bottom for the next year and then this is the time or the opportunity to buy? I don't wanna give financial advice, but what are your thoughts if hedge funds and retail are kinda waiting in the wings and-

   29. DFDavid Friedberg54:31

       Are you asking me if the stock market is at a bottom?

   30. JCJason Calacanis54:34

       ... are, are we bouncing along the bottom? Yes. Or, or what would you... how would you describe the next year if you were to look at it? What do you think?
5. 1:05:00 – 1:15:57

   NASA's Webb telescope images

   1. JCJason Calacanis1:05:00

      Friedberg, we saw some satellite images this week, uh, Biden I guess announced them. They looked pretty trippy. Explain to us what the downstream effect of what is, I think, the, the most clear picture we're seeing of the cosmos ever created and what that could actually do for humanity.

   2. DFDavid Friedberg1:05:19

      Well, this has nothing to do-

   3. JCJason Calacanis1:05:21

      In the short and long term.

   4. DFDavid Friedberg1:05:21

      This has nothing to do with Biden, but um, (laughs) like I don't-

   5. JCJason Calacanis1:05:23

      No, I just, Biden showed it on Monday. I just, that's all it was. He made it, he-

   6. DFDavid Friedberg1:05:27

      Yeah.

   7. JCJason Calacanis1:05:27

      They, they specifically had him share it, which I think maybe they were looking for a mini-win or something.

   8. DFDavid Friedberg1:05:32

      Yeah. Good for him. Um, it has noth- he has nothing to do with this program. Um, I, I, I don't mean, I just mean that like, the scientists and the engineers that worked on this for many years-

   9. JCJason Calacanis1:05:40

      Fair enough, yep.

   10. DFDavid Friedberg1:05:40

       ... deserve all the friggin' credit. The James Webb Telescope is a space telescope, just like the Hubble, right? Remember the Hubble Space Telescope? And this is a massive improvement over the Hubble.

   11. JCJason Calacanis1:05:51

       Sure.

   12. DFDavid Friedberg1:05:51

       So imagine you're, you're in a boat and you're trying to look at the bottom of the ocean. You take a bunch of binocu- a pair of binoculars. You look into the ocean and you try and see what's at the bottom of the ocean, how hard that would be, right? There's all this murky stuff in the water. It's gonna be really hard to see it. The, the, the reason that we create a space telescope is so that the same problem that we would have looking at a telescope through the earth's atmosphere doesn't impact the light coming in to the telescope. And so there's so much stuff in the atmosphere, right? There's miles of, uh, molecules and dirt and dust moving around. So by putting a telescope in space, we get rid of all that murkiness and now we can really capture the light that is coming from far, far away, concentrate that light onto really sensitive photo detectors. These are photo detectors that operate at nearly, um, the, the coldest point in the universe, negative 263 kelvin.

   13. JCJason Calacanis1:06:39

       Th-

   14. DFDavid Friedberg1:06:40

       ... and, um, that photo detector makes it extremely sensitive. And using a 20-foot wide mirror, we can capture all the light that's coming in, concentrate onto the photo detector, a- and, and, and read that light. Um, and so why is this important? Why is this interesting? Well, people get really excited by and flip out over the cool imagery that they see, these images, these colorful images of galaxies and stars far, far away. What we're really doing is we're not just looking far away, we're looking back in time. So these, um, these images come to us from galaxies that are 4.6 billion light years away, so it took 4.6 billion years for that light to reach our planet, and we're actually seeing what happened in the earlier part of the universe. And we're seeing how these, uh, galaxies, uh, formed, how they're moving, how they interact with one another, how the plan- planets interact with one another. But what a lot of people miss that I think's the most important thing to highlight, as an astrophysicist, when you're looking through telescopes and gathering telescope data, you're not looking for imagery like we looked at today. That's really good to sell the story and get Biden to do a press conference. What they're really looking at is spectrographs. And a spectrograph is, uh, you know, uh, i- it shows for every wavelength of light across some spectrum what the intensity is of that, that amount of light, that, that wavelength of light. And particularly, the James Webb Telescope has incredible micro shutter arrays and incredible sensitivity that allows us to go from near-infrared to infrared and some visible light and look at that spectrograph. Why is that important? Because if you can capture the spectrograph in a very high resolution way for a sun or for a planet far away, it can tell you very specifically what the movement is and what the chemical composition is of that object. And from that, we can start to do incredible research and infer very important things about how planets form, how stars form, how many places like Earth might be out there, how things are moving, how much mass or matter there is in the universe. And there are two very, very big question- questionable phenomenas in astrophysics right now. One is called dark energy, one's called dark matter. Turns out the majority of matter in the universe is undetectable, and there also is this really weird energy force pushing on everything in the universe, causing the universe to accelerate its expansion. So the universe is expanding, everything's moving away from itself, but it's not just expanding and slowing down, it's expanding and speeding up. And so having this sort of instrument in space that allows us to capture in a very high resolution way using spectroscopy and other tools that astrophysicists use and better map out how this is happening in different parts of the universe starts to give us a better sense, and allows us to kind of inquire and start to develop theories around what's really going on. And I wanna say one more thing 'cause, 'cause a lot of people think that this stuff is just so esoteric and it's, like, super interesting, why are we spending $10 billion on this? Most applied engineering and the technologies that we've developed as a species started out initially as pure research with no friggin' clue where it was gonna go to. Imaging DNA, penicillin, electronics, MRI machines, so many of these capabilities evolved from scientists just querying the universe and asking questions and gathering data. And all of a sudden, they came across something, developed a theory, built an application of that theory, and a technology emerged that changed the course of our history as a species. And that's the reason to do pure research, and that's the reason it's so important for us to put $10 billion into a program like this. We're gonna discover amazing things with this tool, and it will ultimately hopefully yield advances for humankind that we cannot even contemplate today. So I'm really excited to see this.

   15. JCJason Calacanis1:10:16

       Could be energy, right?

   16. DFDavid Friedberg1:10:17

       I mean, understanding dark matter and dark energy-

   17. JCJason Calacanis1:10:19

       Understanding dark matter, totally, and then maybe we can- ... has changed everything and energy, right?

   18. DFDavid Friedberg1:10:22

       Jay Kal, think about it. One day, there might be a, a capability where we say there's a new class of matter-

   19. JCJason Calacanis1:10:27

       Yes.

   20. DFDavid Friedberg1:10:27

       ... and a new understanding of energy that we can then apply in some form of physics on Earth that we can do something interesting with. And we have to be able to query and understand the universe to do that.

   21. CPChamath Palihapitiya1:10:36

       Could we measure-

   22. DFDavid Friedberg1:10:36

       There we go.

   23. CPChamath Palihapitiya1:10:37

       Could we measure the matter from Uranus?

   24. JCJason Calacanis1:10:39

       (laughs) I knew it was coming.

   25. DFDavid Friedberg1:10:40

       (laughs)

   26. JCJason Calacanis1:10:41

       I mean, the Hubble te- telescope actually, uh, if... correct me if I'm wrong here, it actually told us-

   27. CPChamath Palihapitiya1:10:46

       How much dark matter is in Uranus? (laughs)

   28. JCJason Calacanis1:10:46

       ... the age of the universe. How much dark matter is in Uranus, Shamit? A lot. A lot. You're full of it.

   29. CPChamath Palihapitiya1:10:52

       (laughs)

   30. JCJason Calacanis1:10:53

       Um, but we now know... I mean, Hubble told us the rate of expansion, uh, of the universe, and it also told us the age of the universe, and we found all these other planets.

Episode duration: 1:24:57