Yen Carry Trade, Recession odds grow, Buffett cash pile, Google ruled monopoly, Kamala picks Walz

1. 0:00 – 3:55

   Bestie intros: Jason is back from COVID!

   1. JCJason Calacanis0:00

      Sorry, everybody. I wasn't here last week.

   2. CPChamath Palihapitiya0:02

      So, what's your bit, J Cale? Ju- jump into your bit.

   3. JCJason Calacanis0:05

      No, there's no bit. I'm just... I'm, uh, you know, triple vaxxed. I took the Paxlovid and I'm back, everybody. I know everybody was very concerned about me, and thank you to everybody. But I can take my mask off, right, Friedberg? Do I need a mask in 2024?

   4. DFDavid Friedberg0:18

      You're good. You're clear.

   5. JCJason Calacanis0:20

      Okay, so let me take one of these off. Let me get that off. (laughs)

   6. DFDavid Friedberg0:24

      (laughs)

   7. CPChamath Palihapitiya0:24

      (laughs)

   8. JCJason Calacanis0:25

      It was getting uncomfortable.

   9. DFDavid Friedberg0:27

      You're in the clear for one.

   10. JCJason Calacanis0:29

       Okay, you know what? I'll take the third mask off. Totally free. No... Mask-free. I hope I don't get you guys in custody with my COVID.

   11. DSDavid Sacks0:33

       The CDC says we can treat COVID like the flu now.

   12. JCJason Calacanis0:35

       I mean-

   13. DSDavid Sacks0:35

       Did you see that?

   14. JCJason Calacanis0:36

       What happened?

   15. DSDavid Sacks0:36

       They finally admitted after two years of shutting down schools, the economy, everything. Like, "Oh, it's just the flu." We can treat it like the flu.

   16. JCJason Calacanis0:43

       Yeah. (laughs) Well, it's interesting, you know?

   17. DFDavid Friedberg0:44

       (laughs)

   18. JCJason Calacanis0:45

       I got the COVID, just to explain to everybody, I went to Billy Joel's final concert with my daughter. She... We had a great time. It was his final MSG-

   19. CPChamath Palihapitiya0:52

       Nick, timestamp the end of this so everybody can just skip to the end of... Go... Sorry, go ahead, Jason.

   20. JCJason Calacanis0:57

       There's no bit here. I'm just saying, I- I'm letting people know that I think I got COVID at the last Billy Joel show. It was a great show. Um, shout out Billy Joel. But it was 48 hours that were very intense, and then I took that Paxlovid and I came right out of it. But, so apologies to everybody. But man, it was no joke.

   21. DFDavid Friedberg1:12

       Yeah.

   22. CPChamath Palihapitiya1:13

       Great story.

   23. JCJason Calacanis1:14

       Great story.

   24. DFDavid Friedberg1:14

       Great story. Great story.

   25. JCJason Calacanis1:15

       Well, I mean, listen-

   26. CPChamath Palihapitiya1:17

       Jason got a cold and now he's better.

   27. JCJason Calacanis1:17

       ... a lot has happened since I've been gone.

   28. DFDavid Friedberg1:18

       I sneezed earlier today.

   29. JCJason Calacanis1:20

       Did you guys sneeze too?

   30. CPChamath Palihapitiya1:20

       Oh, my God.
2. 3:55 – 27:22

   Yen carry trade unravels, Japan's unique economic issues

   1. JCJason Calacanis3:55

      will get his red meat at the end, for all the MAGA lunatics in the comments. Don't worry, he's gonna get his red meat, but we got bigger fish to fry in the markets. Markets were down big on Monday, due to something called the yen carry trade. Uh, the DOW was down 700 points, NASDAQ was down like 6%. It was unsettling. Social media went crazy on Sunday night, that it was gonna be the end of the world, the beginning of a recession, maybe a depression. And this all happened because Japan's central bank raised their interest rates by a whopping 15 to 25 basis points, uh, and we'll explain why that's important in just a moment. We'll get Chamath to give us a little overview here of the yen carry trade. Uh, but this is a big deal because Japan has had its interest rates at near zero, even negative since 1999. So, this little blip on the chart is, uh, you know, the interest rate going up, uh, you know, there in Japan. So, quick explainer, and then Chamath will have you go deeper. The yen carry trade is a pretty basic concept. Investors borrow at 0% interest or close to it due to this 0% interest rate, uh, and then you convert your yen into another currency, or perhaps a stock (laughs) like NVIDIA, and you take the spread. So, um, you know, the goal is obviously to return a higher rate than the cost of borrowing the yen. And so here's an example of it, um, if you just wanna look at the flow. You borrow some yen at 0%, you invest it in stocks, whatever, you get some appreciation, and then you liquidate the stocks and you pay back your bill. Of course, this can all go horribly-

   2. DSDavid Sacks5:25

      Well, the safer... Yeah, but a, a safer way to do this is just to invest in a US T-bill that's paying 5%.

   3. JCJason Calacanis5:31

      Sure.

   4. DSDavid Sacks5:31

      You don't have to take the risk-

   5. JCJason Calacanis5:32

      Or what people are doing. Yeah. People are doing the Australian-

   6. DSDavid Sacks5:34

      ... of the market going down.

   7. JCJason Calacanis5:34

      Yeah, so you have like-

   8. DSDavid Sacks5:35

      So, you borrow at... You borrow yen at 0%, invest in T-bills at 5% and you pocket the difference.

   9. JCJason Calacanis5:41

      Yeah, and you just have to pay back the loan. Of course, Chamath, this can all go very wrong if a number of things happen. So, maybe you could give us an overview of this kind of trade. Have you ever done something like this? What do you think of these type of trades, these, quote-unquote, "free money trades," you know, picking up free money off the ground trades?

   10. CPChamath Palihapitiya6:02

       I mean, I think these kinds of thi- so I've never done them, and part of the reason why is I think these things look genius, and they work until one moment in time where they stop working, and it stops working so severely that it becomes almost impossible to unwind yourself. And so you can get caught-

   11. JCJason Calacanis6:22

       Okay, explain unwinding. Yeah, yeah.

   12. CPChamath Palihapitiya6:23

       Yeah, so I, I think typically in these situations, the thing you have to remember is you don't really make a lot of money in this trade. The way you make a lot of money is by leveraging this trade up, so meaning it's not like borrowing a million dollars in yen and then swapping it to US dollars and then putting it in T-bills is a real moneymaker. You're talking about 50K. That's not really gonna move the needle. So what people try to do in these situations is do it on a billion dollars and then lever it up five or 10X. The problem with that is that you're posting all kinds of collateral as margin to these banks to give you that leverage because then all of a sudden, capturing 150 basis points on 10 billion or 15 billion, now we're talking about real money. And so when these things go wrong, and they happen very suddenly, what it does is it puts pressure on all other asset classes because people are scrambling to make sure that they don't get margined out. And what you saw over the weekend was th- mostly a lot of that happening, which was a lot of these folks were putting this trade on to the tune of tens or probably even 100 billion-plus dollars-

   13. JCJason Calacanis7:43

       Wow.

   14. CPChamath Palihapitiya7:44

       ... of which they had maybe five or 10 billion of equity and 80 to $90 billion of just margin. And that's what caused this very quick cycle.

   15. JCJason Calacanis7:56

       Mm.

   16. CPChamath Palihapitiya7:57

       Then it looked like it unraveled itself, and so people thought, "Oh, we're probably mostly past this." I actually think we're not. I've said this before, I think one of the most interesting things I've learned in the last few years about the stock market is the stock market is owned, by and large, by these algos, right? Meaning there's these large, kind of murky, grayish hedge funds that have these computer trading algorithms that are allowed to be levered to the tune of, you know, 13, 15, 20 times about $50 billion, so these folks are swinging around a trillion dollars each, okay? And we all just live in their world because when these algorithms make a decision, and they react to these kinds of events, that's when the real volatility starts. So I think the most important thing was summarized by friends of ours from Goldman Sachs. I just wanna, Nick, if you wanna just throw up the picture that they sent me. So they, they sent, they sent some really good market insights whenever these things kind of happen to a bunch of their clients, and one of the interesting things that they observed is a couple of facts. The first is the algorithms, in the middle of all of this chaos, sold about $41 billion of global equities. Okay, no big deal, except that it actually causes everybody else to have to react, and then they sell billions and billions more. The other thing that they noticed though is that there, we're in a moment in time where you can see how these algorithms will behave over the next month, and right now, if there's relatively minimal volatility and not much changes, y- the algorithms will have to sell another 160-odd billion dollars of equity. And that'll pull through many hundred billions more from everybody else. So I think we're in a little bit of a delicate moment where the preponderance of the market action will be to continue to sell, and I think it's just going to be, when we look back in hindsight, another reason why getting levered on these things is very dangerous. There's no free money basically.

   17. JCJason Calacanis10:12

       Yeah, there is no free money in this free money trade, and just to translate a little bit of this on the margins for the audience who's not familiar with it, margin is a loan, fancy way of saying a loan. Margin call, you have some asset that backs it up. You know, in your case it might be, uh, you know, a civilian, it might be your house, whatever, your bank account. In these cases, these big companies, uh, and these hedge funds might have cash or equities, and if they come down and they have to pay the loan, they are forced to liquidate it, and in some cases those assets are controlled by the person giving the loan, and they will just start programmatically selling your shares in whatever, Apple, Google, whatever, NVIDIA you own-

   18. CPChamath Palihapitiya10:52

       Whatever you own.

   19. JCJason Calacanis10:53

       ... to pay down that margin. And this is called a margin call, thus the name of the, uh, movie. And so it's incredibly dangerous, and the leverage is you and I can, or like any civilian could borrow, you know, $500,000 against their $2 million house and home equity. Rich people and these big banks, they can borrow 10 or 20 times the value of the assets which then could lead to absolute chaos. Freeberg, let's go to you next and just talk a little bit about what's going on in Japan because they have had a rush of people buying their stocks, uh, the population declining. It's a very unique economy. Maybe you could talk a little bit about it.

   20. DFDavid Friedberg11:34

       One of the biggest challenges facing Japan is the level of debt that they've accrued. Their debt to GDP ratio is currently 263%. They have about 1.3 quadrillion yen of public debt on an annual GDP of about 591 trillion yen. They're currently, at the federal level, spending about 20% of GDP per year, 5% of GDP is being spent per year just on servicing the existing debt.And that's at interest rates set by the central bank of roughly 0%. So, you know, or whatever the market is trading it at, so slightly above 0%. But if the central bank had to start to raise rates because inflation started to run away because there's so much yen in circulation, there's so much debt outstanding, the federal government would not be able to actually service this debt. So as of March of 2024, the Bank of Japan, the central bank, actually holds 53% of Japan's outstanding government bonds, which is equal to about 100% of Japan's GDP. So their central bank has bought the debt that's being issued by the federal government to fund their budget, a large chunk of which right now is being spent just on paying the interest on the debt while interest rates are close to 0%. So imagine if interest rates bumped up to one, two, three, four, 5%, as we're seeing with US treasuries. We were recently at a nearly 5% handle on the, on the 10-year treasury, it would become an unsustainable debt burden for the Japanese government to be able to handle that. And a large part of this is being driven by a number of crises that Japan has faced since the early '90s. So there was the financial crisis in '08, there was the nuclear, uh, meltdown, there was a couple of earthquakes, tsunamis, and a lot of debt has been taken on to support the country after those crises. But really importantly, and Nick, if you could just pull up this age chart, is the aging of the Japanese population. So this chart shows that... And you can kind of see back to 1950 when the average age in Japan was 21 years old, and today the average age in Japan is around 48. You know, in the next decade, it'll be 50, then it'll be 52. So that means more and more people are relying on public pension. Today, 33% of their government spending goes towards their social security programs. In the US for comparison, social security is about 20% of federal spending. So that number's only getting bigger and bigger. As the population ages, the Japanese government has to continue to service their older population, and they've had to face several crises. Their debt has ballooned to a level that is well beyond any other industrialized nation, and the only way to continue to service that debt economically is to keep interest rates low. And the problem with keeping interest rate low? Inflation. And that's the big driver that caused them to say, "Let's uptake the interest by 15 bps or 25 bps," is to try and tackle the inflation problem they're facing just like our central bank recently tried to do the same. (dog barking) But clearly, the market can't have it. So Japan is in a real pickle, and I think that it shows how much having a large amount of federal debt can impact the ability for a nation to maneuver itself during difficult times. And ultimately, debt payments come due. They come due either in the form of economic contraction or massive taxes or inflation, and currently Japan is paying for it in terms of inflation.

   21. CPChamath Palihapitiya15:03

       Sorry, you're saying Japan has inflation? Japan has no inflation.

   22. DFDavid Friedberg15:06

       The government raised rates to tackle inflation. I'll pull up the inflation chart. Japan's inflation hit a 40-year high, and this just shot up in the last 18 months. Inflation is running at, uh, close to 4% a year.

   23. JCJason Calacanis15:20

       And so they're setting, Friedberg, the interest rate in the country, and they own the debt. So they are basically in control of, or they're manipulating the economy and trying to control it. Correct, Friedberg?

   24. DFDavid Friedberg15:34

       Well, their central bank has to buy most of the debt, and their central bank sets the rates. So they have a large amount fif- you know, 53% of their feder- of their public debt is held by their central bank.

   25. JCJason Calacanis15:45

       And if they don't pay a high interest rate, then people don't buy future bonds. If they do raise it, they have to pay that rate. So this is the conundrum, Friedberg, if I were to summarize it.

   26. DFDavid Friedberg15:54

       Well, yeah, while rates are low, you see this, you know, particularly in a, a market like we're facing today where there's global inflation, they need to raise rates in order to reduce inflation. The problem with raising rates is this, this, you know, this currency problem.

   27. JCJason Calacanis16:09

       But also buying the debt, Chamath, is... You know, who's buying debt if they're, you're not getting anything on the coupon, correct? That's another challenge they face in Japan is that-

   28. CPChamath Palihapitiya16:18

       There's a famous quote from an economist, Simon Kuznets, who said there's four kinds of countries in the world. There's developed countries, undeveloped countries, Japan and Argentina.

   29. DFDavid Friedberg16:27

       (laughs)

   30. CPChamath Palihapitiya16:29

       And I think the reason he said that is that J- Japan has been in this state since the '90s. So they had a massive property and equity bubble collapse, and they've not had to deal with anything that looked like typical economic issues since then. And part of it is because the government plays a very big hand in the Japanese economy. There's a lot of price controls there. So I don't know, I'm not sure what it is that we can learn there that you can extrapolate to the rest of the world.
3. 27:22 – 45:46

   Recession odds growing, is the US already in a "lowkey recession"?

   1. JCJason Calacanis27:22

      could be bumpy to soft. July's job reports was, uh, pretty bad, which is good in some ways when you're thinking about inflation. So the new jobs added were way down, uh, growing 114,000 here in the US in July. And a bunch of these estimates have been reported downward, uh, over the past year. Uh, just so we make a note of that. And this was below the Dow Jones estimate of 185,000. There's your chart. It just keeps ticking down, you know, since the Fed started hiking rates. And you hear anecdotally about all of your friends, 88% of millennials right now are actually preparing to be laid off, according to a recent survey. Unemployment is way up in the short term here. We're at 4.3% in July. That's the highest since October of 2021, up from 4.1% last month and 3.5% in July. So you take that July number to now, it's pretty significant. Here's your chart on the jobs. Obviously, historically, it's low, but it's ticking up pretty quickly, which is what you would expect with the rate hikes. And we had this great moment of hourly earnings growth, uh, going up. So how much people make on average per hour was going up. And, and I think that was causing a, a decent amount of the consumer enthusiasm in the economy. Here it is. It's coming way down from almost 6% down to three and a half, and so that means Fed rate cuts are coming. Here's your chart, uh, from Prediction Market of the chances of how much the Fed cuts rates this year. Looks like 75 to 100 basis points is the majority. About 60% of people believe it'll be one of those two numbers. I'll stop there. There's a lot more to talk about here and we'll get into specific companies and the NASDAQ. Yeah, let me pull up this last chart before I go to you, Chamath. It's been a strong year for the market. Uh, S&P and NASDAQ both up 11% year-to-date as of Thursday morning, but obviously a massive, I guess, do we call it a correction when it's... Yeah, 20% is correction territory, Chamath? So your thoughts on the wider US market and the selloff?

   2. CPChamath Palihapitiya29:33

      I think we're in a low-key recession. So I think that we're gonna probably go through a couple of very difficult revisions of old data. The thing to remember about non-farm payrolls isn't as much what the number is, but if you actually look to the number of times it then gets revised, the reality is that these things get revised constantly. And right now, we're in this trend where we are overestimating and revising down. Sacks mentioned this, that that was the same with GDP. So we are, I think, in a tough situation. And then what you're seeing is folks that run very cyclical businesses are telling us in very plain spoken English that demand isn't there. So the one that was interesting this past week, Jason, you mentioned millennials, but like Airbnb where you think all these young people are running around YOLOing what, whatever cash they have.Airbnb had a massive warning on demand. So when, I think the excess capital, whether it's the STEMI check or what have you, has been exhausted, you're now starting to see it bear out in these cyclical businesses. I don't think the demand is there. I think we're in a recession. It probably becomes more obvious in Q3 and Q4, and so Powell's going to have to cut. The question is, will he overreact to the pressure and cut 75 to 100 versus 25 and take it slow?

   3. JCJason Calacanis31:05

      Okay, Friedberg technical definition of a recession is two quarters in a row of negative GDP. We haven't had that, but we're sort of bouncing along that possibility. Is the recession baked in or if they cut rates at the extent the prediction markets are predicting and they're signaling, do you think we have a nice rebound? How do you feel about the overall US economy?

   4. DFDavid Friedberg31:28

      Obviously you have to account for inflation and government spending. How much of government spending is driving economic growth? Today the US is proposing to spend $7.3 trillion next year out of $25 trillion GDP. So the US go- federal government is roughly 30% of GDP and we obviously still are tackling inflation. The real question is how much of the economy is growing because of productivity gains in the sector of the economy where people are making things and doing things versus the government using its ability to tax and borrow to drive growth in the economy by inflating numbers, by pushing revenue onto businesses, by pushing capital into the markets, by creating levered trades in the markets using their, um, borrowing capacity and their taxing capacity. So that's the thing I remain concerned about. I, I mentioned this last week. I remain highly concerned about many sectors of the economy that are deeply challenged right now. Particularly the industrial sectors, manufacturing sectors, the agricultural sectors, but um, services and software sectors where you can raise prices and you have a nice high margin business, you can continue to, to grow and, and look good. But there are many parts of the, uh, the global economy and the US economy that are pretty challenged right now.

   5. JCJason Calacanis32:56

      Sax, let's talk about, uh, this soft to bumpy landing. Uh, consumers are definitely weakening on the low end. Airbnb and Amazon are an example of bargain hunting, people who are looking for discounts, who want to save money with those services. Higher end services that have a bigger price tag like Uber and some of the high-end retailers are showing actual growth, and they're saying that consumer's strong. So it was a tale of two cities during this earnings season with a bunch of the high-end folks saying strong consumers on the high end, weak consumers on the low end. What are the chances we go into a recession? And, you know, a second question for you. Elon was recently on Lex Fridman for I think, uh, eight days or something. It was like a record podcast of how long he was on. But one of the things he talked about was that he had discussed with Trump, and Vivek has been very strong about this on our podcast and other places, uh, and he was a leading VP candidate of making the government more efficient and radically cutting the amount of spending, but there would be a reaction. So does the, uh, potential GOP administration have a platform to cut costs massively or not? And do you think that, you know, that would have been maybe too unpopular to, to sort of unveil that plan now as a, as a presidential candidate in either party?

   6. DSDavid Sacks34:12

      I don't think they have that plan specifically because I just think that you would need, you would need a supermajority in Congress to do something like that, and I just think that this election's going to be too close regardless of who wins to provide that kind of mandate. I mean, sadly, I think we do need to get government spending under control, but I think it's a long-term political problem and I just think our political system doesn't have the will to fix it. I, I do believe Republicans will be better than Democrats on that, but I think that's the truth of it. To go back to your first question on the state of the economy, I had lunch with a very prominent investor yesterday who's very plugged in with the hedge fund community, and he said that the sentiment shift, you know, I'd say again within hedge funds, professional investors, public market investors, had been very sudden, that people were now very worried about the risk of a recession. And, and I do think that the Airbnb revenue that Chamath cited is a big factor. Airbnb stock went down 15% in, in one day on soft demand. And what's driving all of this is, is consumer weakness or at least fear of consumer weakness. You mentioned the rise in unemployment. It went from 4.1 to 4.3% month over month. So 4.3 is still a pretty low number by historical terms, but to jump so much in one month, that's a pretty big increase, and then of course it's up from 3.5% a year ago. So we're seeing pretty big increases in unemployment-

   7. JCJason Calacanis35:41

      10% year over year, 5% month over month is very significant. Yeah.

   8. DSDavid Sacks35:45

      Yeah. So these are big changes. There's real evidence of, of consumer weakness and I think professional investors are, are getting quite worried about, uh, the risk of a recession. And I guess just one last point on this is that if you were to remove the impact of government spending, it's pretty clear the private sector is in a recession. I mean, like we've been talking about, government's been going hog wild with spending. We have s- the, the government is running 6% of GDP deficits. Uh, the, the latest Q2 growth number was something like 2%. So if you force government to live within its means and to cut its way back to balance, we would definitely be in a recession. We'd have a negative growth rate. Uh, so I do think that the economy is looking pretty shaky all of a sudden. Uh, whether we actually tip over into recession in the next few months, I'm, I'm not sure.

   9. JCJason Calacanis36:34

      All right. Well, listen, I wanna corner everybody here with a question. You gotta answer the question. You, you can't, uh, avoid the hard questions here on The All-In Podcast. Chamath, sitting here a year from now, market up or we experience a recession defined as two quarters of negative GDP, which one is the more likely scenario? Market up or a recession? Give it a percentage or just which is more likely? Freyberg, you're next, so just put your answer below.

   10. CPChamath Palihapitiya36:58

       Well, those are not- those aren't- those are not opposing things. So you're saying-

   11. JCJason Calacanis37:02

       Okay.

   12. CPChamath Palihapitiya37:02

       ... in a year from now, I don't- I don't honestly know.

   13. JCJason Calacanis37:05

       Okay.

   14. CPChamath Palihapitiya37:06

       But I do think that we'll probably be in a technical recession.

   15. JCJason Calacanis37:10

       Okay. So you lean towards... I'll just go recession, no recession in the next year.

   16. CPChamath Palihapitiya37:15

       Um, but I also think that there's a pretty decent chance the market will be up.

   17. JCJason Calacanis37:19

       Ah, got it. Okay, so we could have a recession, but the market goes up. So to unpack that, I am with you on that same prediction because I do think people are addicted to efficiency. They're gonna lay people off and earnings are gonna keep ripping as these companies become managed so well.

   18. DFDavid Friedberg37:33

       That's a small percentage of the economy, J-Cal. That's a few tech companies. But much of the manufacturing sector, the industrial sector, the ag markets, like there's a lot of markets where you don't have this option to just cut knowledge workers. The knowledge worker economy, the software economy has the ability to do that. The tech economy can do that, but much of the rest of the economy doesn't have a lot of maneuverability like we do in this- in this fast growth-

   19. JCJason Calacanis37:55

       Well-

   20. DFDavid Friedberg37:56

       ... high margin kind of industry we work in.

   21. JCJason Calacanis37:58

       I think it's a good point, but I do see McDonald's, Starbucks, and some of those consumer retailers are taking steps right now to rightsize their businesses and offer $5 meals or $3 coffee. So I do think there's a shift in management in how they run these companies.

   22. DFDavid Friedberg38:14

       That's about reduced forecast, right? So when their revenue decline- when their revenue forecasts have to be cut, they have to cut headcount, that's different than creating more efficiency in the operation.

   23. JCJason Calacanis38:22

       Well, but they're also cutting stores and they're cutting-

   24. DFDavid Friedberg38:24

       I mean these are- these are-

   25. JCJason Calacanis38:25

       ... things and projects-

   26. DFDavid Friedberg38:26

       Yeah, yeah. But- but that-

   27. JCJason Calacanis38:26

       ... that are inefficient. So I just think there's gonna be massive efficiency in all sectors. That's gonna be the theme for the next year. But I mean, it's obviously-

   28. DFDavid Friedberg38:32

       But that's- that's a loss of jobs-

   29. JCJason Calacanis38:33

       ... we're gonna debate this.

   30. DFDavid Friedberg38:33

       ... and a loss of growth, right? So just to be clear, when you cut stores, you have less growth. When you cut jobs, that's because you don't have as much revenue growth. So those are about contraction.
4. 45:46 – 55:54

   Why Buffett is selling Apple and massively increasing Berkshire's cash position

   1. JCJason Calacanis45:46

      uh, here's your virtual flowers. You predicted, I think, absolutely correctly that the less Berkshire Hathaway and Buffett talk in their documents, in their letters, and at their, uh, events about a, a trade, the more they're falling out of love with it and I understand Berkshire Hathaway has sold half of their largest position, which is Apple. Some people are saying because they don't have faith in the company, some people are saying because they're over-weighted, other people saying because they, Freyberg want to get more cash on the books to make other acquisitions. So Chamath, you're... Maybe just take your victory lap and then we'll, I think, Freyberg double clicked on this and did a deep dive.

   2. DFDavid Friedberg46:30

      I don't have much to say. I mean, I think it's been a trend in their letters when he stops mentioning a company in his letter, it's because he's selling. It's a great, uh, great read.

   3. JCJason Calacanis46:42

      There it is.

   4. DFDavid Friedberg46:42

      Yeah. And that's what happened here.

   5. JCJason Calacanis46:44

      Okay. So Freyberg, take us through this.

   6. DFDavid Friedberg46:47

      Well, so it looks like since the start of the year, they've sold 55% of their holdings in Apple and if you look at the end of the year... Nick, if you could pull up this image with the pie chart. This is what Berkshire's stock holdings were in their non-majority owned, uh, businesses. So businesses that they don't own the business outright. And 50% of their portfolio was in Apple at $174 billion. We obviously saw Apple's, uh, stock price peak, highest level ever, just a few days ago. But it has since come down as it was reported that since the start of the year now, Berkshire sold 55% o- of this position. So some people are arguing that they've got a point of view on the company's strategy and compe- competitive kind of landscape. Some folks have argued that the valuation multiple has gotten too high, trading at nearly 30 times earnings. The stock has risen 900% since Berkshire bought the stock in 2016.

   7. JCJason Calacanis47:44

      Nine bagger. Nicely done. Yeah.

   8. DFDavid Friedberg47:46

      And some people would argue that the percent of the portfolio is too high at, at over 50%, as you can see here, at the start of the year. But, you know, I'll kind of provide some of the counterarguments. You know, Warren Buffett does not do much analysis on corporate strategy when he provides reviews of the stocks that he's picked. He often finds and talks a lot about great managers that generate great returns and he sticks with them, and he sticks with them sometimes for many, many decades. The management in this company has not changed. The return profile on cash invested and cash returned has only improved since he put money in. They're generating more cash flow, they're offering more dividends, they're doing more stock buybacks, and he's happy to be concentrated. Over the years, he's made large bets on single companies to the point that sometimes he just outright buys the entire company like he did with GEICO in 1996. He always talks a lot about finding a company that is run by great managers, that has a premium product with a nice high margin, and a durable moat, strong brand value. As I look at kind of-What's really gone on here, it feels to me like the difference between Apple and some of the other big holdings in its portfolio is that many of those other businesses are regulated monopolies. So BNSF Railway is regulated by the Federal Railroad Administration. Berkshire Ener- Energy, which owns MidAmerican, is a regulated utility. The prices that they charge consumers are set by the government, so they have a market that's locked in. The prices are set, they have locked in distribution, they have locked in utility value, and the same is true in the insurance business. Geico's rates are approved and set effectively by state regulators. Berkshire has a moat because they've got the largest capital base and they've got this machine that just keeps generating cash and the rates are publicly set by government. Apple however, is not regulated and it is very clear that Apple is facing very deep and severe financial impact from the regulatory authorities that are overseeing the business. So if you look at the Google antitrust ruling-

   9. JCJason Calacanis49:37

      Right, we're gonna get into the Google deal in a second.

   10. DFDavid Friedberg49:39

       ... which we're gonna get to in a minute, yeah, there's a real regulatory risk there because Google's paying Apple $20 billion a year to be the default search engine. Apple also has a very deep relationship with China. They have a lot of manufacturing being done in China and they sell a lot of product into China. So as regulators t- start to take a harder look, as they've said they're going to, at companies' relationships with China, that's a real risk to Apple. Advertising, tracking users, and then the subscription fees that are charged to consumers, and most importantly, we've talked a lot about the 30% vig that Apple takes on their app store and how regulators are now stepping in and take a look at this. So because this business is not yet a regulated monopoly, it may be a monopoly in many senses of the word, it's not regulated yet, and that transition could be financially painful for Apple. Once they get to the other side, it starts to look a lot more like a large scale Berkshire type business. So that, that's my kind of summary take on what's going on with Apple, I don't know if you guys-

   11. JCJason Calacanis50:30

       Awesome, well-

   12. DFDavid Friedberg50:31

       ... agree.

   13. JCJason Calacanis50:31

       Yeah, no, no, I think it's pretty deft, uh, Sachs, your thoughts on this massive increase in cash and what Berkshire Hathaway is thinking. What is Warren Buffett thinking here? Is it this became, he became overweight Apple or that he's building up cash because the recession's coming and he wants to buy things on the cheap?

   14. DSDavid Sacks50:47

       Well, when we-

   15. JCJason Calacanis50:47

       Or regulation to Friedberg's point.

   16. DSDavid Sacks50:49

       When we had this global selloff on Sunday, Monday, a lot of people were sharing this chart online and pointing out that Buffett was sitting on this gigantic cash pile, by far the biggest cash pile that he's ever sat on. We then had a market recovery, so people aren't really talking about this, but it does stand to reason that Buffett is building up a, a war chest here and he's somewhat defensively positioned. You can see that, you know, what was it? Like, '20, '21, '22, the cash pile went down because he started making a bunch of investments. Now the cash pile's really high, so it seems logical to infer that he thinks that the risk/reward right now is, is not great on public equities and he is, um, again, he's just a little bit more risk off.

   17. JCJason Calacanis51:35

       What do you think of the regulatory risk argument Friedberg is floating here, Chamath?

   18. CPChamath Palihapitiya51:40

       I think that David is right that, Friedberg is right that the China thing could have impacted it, but because he also sold a lot of BYD, which they've owned since 2008, I think. So, you know-

   19. JCJason Calacanis51:55

       Mm.

   20. CPChamath Palihapitiya51:56

       That's a Chinese EV company and so it could be just that, that could have played a part. To be honest, I don't know.

   21. JCJason Calacanis52:03

       So wait, you're saying China dependency, both of those have a China dependency, so he maybe felt the overall portfolio had too much China dependency.

   22. CPChamath Palihapitiya52:10

       Maybe, yeah. I could buy that, that seems like reasonably logical.

   23. JCJason Calacanis52:13

       Yeah. Interesting.

   24. CPChamath Palihapitiya52:13

       I think the thing to remember though is that these decisions, I think have been stewing for at least a couple quarters. Remember, like, you know-

   25. JCJason Calacanis52:23

       Mm-hmm.

   26. CPChamath Palihapitiya52:23

       ... that letter that he writes was not written yesterday, right? That was being drafted-

   27. JCJason Calacanis52:29

       No.

   28. CPChamath Palihapitiya52:29

       ... months and months ago. So these decisions-

   29. JCJason Calacanis52:31

       Three months before, yeah.

   30. CPChamath Palihapitiya52:31

       ... were made or e- even longer. So I think these decisions were made a while back. Another reason, if we're gonna play kind of conspiracy theorist is like, you know, after the death of Charlie Munger, maybe what he's starting to do is consolidate the book so that it can transition elegantly to Greg Abel when Buffett passes away, and so that could be another thing as well because it's, it's-
5. 55:54 – 1:22:41

   Major antitrust ruling against Google, predicting outcomes

   1. CPChamath Palihapitiya55:54

      of years. On Monday, a, a judge ruled that Google had acted illegally to maintain its monopoly in online search. If you remember, this was filed under the Trump administration in 2020, uh, by the DOG. The 277-page ruling agrees that Google abused its search business monopoly by paying billions of dollars to third-party platforms like Apple and Samsung in order to be their default search engine. So, it's not just that you have the monopoly, it's how you maintain the monopoly. Uh, this is called TAC, Traffic Acquisition Cost. We've talked about it here many times. According to the suit, Google conducts around 90% of web searches. I think we all know that. Company's disputing that claim. The ruling doesn't contain remedies yet for Google's behavior. They're gonna decide that in a subsequent ruling. Obviously, Google is going to fight this. It could result in a change in business practices, i.e., they cannot pay Firefox, Samsung, Apple to be the default search engine anymore. That will lead to many interesting possibilities, uh, s- Chamath and I were discussing them on X. And so this is huge news. Uh, this is gonna be great, I think, for the search engine market. I know Apple, from my time doing maha- Mahalo, a human-powered search engine over 10 years ago, when I sent it to, to Steve Jobs, he opened it up in the middle of the night and started playing with it, and there were many rev- views of, or many rumors of Apple wanting to be in the search business 'cause they had a contentious relationship with Google. Obviously, when Google competed with Android, that upset Steve Jobs greatly, and, uh, also, Google created Chrome, which also, Safari and Chrome competing with each other. It's not out of the question, I think, Chamath, that you could see Apple, when they lose this 20, $30 billion deal for TAC, to start their own search engine by DuckDuckGo. Brave has an amazing search engine and a search API, and they've obviously, they've got a crawler, so people who don't know this but Apple has a crawler. My prediction is Apple buys a search engine and they go it alone and expand their advertising network like Amazon, Uber and other companies have. What's your take on this and what we're gonna see in the future? Will this ruling stand up? Oh, my gosh. And then what are the downstream market impacts? I think that this Google thing is the most important thing that's happened in tech since the Microsoft DOJ decision in 2000. Internet Explorer, yeah. Yeah, because if you, if you go back to that consent decree in 2000, it essentially handcuffed this incredibly foreboding company for more than a decade, while all kinds of innovations happened. So they missed out on two huge waves, right? Microsoft essentially missed out on social and then they missed out on mobile, largely as a result of that consent decree and then they were able to catch up and embrace SaaS in the cloud. Amazing. Amazing. But there is this small O outcome here, which is essentially a consent decree, where Google gets handcuffed for some number of years and it creates a couple of big waves of innovation of new companies that can succeed, that may not have otherwise been able to succeed, in the absence of such a consent decree. And a good example of this would be the AI-powered search experiences that you're starting to see, whether it's from OpenAI or Perplexity or a few of these other folks. The big O outcome, though, is more if you go back to the Ma Bell kind of thing where the company gets broken up. Hmm. I think that the odds of that are extremely unlikely. So I think the big O outcome is probably something that you can pretty safely take off the table. I think it's gonna be a little O outcome. But the point is that there's a distribution here between these two things that this judge will be in control of, and I think that, uh, a- again, uh, again, I'm just guessing, I think both the Democrats and the Republicans will really support whatever happens here. And, and that's not- Uh-huh. Because? ... necessarily because, I don't think that's necessarily because they have a bone to pick with Google. I think that, you know, they have bones to pick with other companies more than Google. But I think that it, it starts to set the tone for being able to check big tech in a very meaningful and productive way, and I think that that has important ramifications for Washington. Okay, Sax. Uh, not to make it political, but this is the government stopping corporate America, so it can't not be political. What's your take here and what will we see in the future? More regulation, more rulings like this? Slap on the wrist? Breakup?

   2. JCJason Calacanis1:00:53

      Is this more to come or this is peak regulation, in your mind, of big tech?

   3. DSDavid Sacks1:00:59

      Well, I, I think this is a good decision. I mean, Google clearly is a monopoly. In fact, it's at least two or three monopolies. They have a monopoly in search, they have a monopoly in advertising, and they at least have a dominant position in video with YouTube. And I think that it would be great if the government broke up this company. Uh, I mean, it should be, it should be at least three or four companies. I mean, uh, there should be ... Search should be its own company. Advertising should be its own company. YouTube should be spun out. And then I don't know if G Suite should be a separate company or should get lumped in with Search. I, I, I don't know. But I think there should be at least three or four companies. And I think Republicans will be on board with that because frankly Google's a threat to democracy. If you go to Google and search for search results of anything related to the election, it is clearly so biased.

   4. JCJason Calacanis1:01:45

      Explain that, yeah. Give an example.

   5. DSDavid Sacks1:01:47

      If you wanna get the latest info on Kamala Harris, just search for Donald Trump. I mean, compare the search results. And I've done this and I've posted the results online. If you search for Trump, you'll get a bunch of negative articles on Trump and you'll get positive articles about Harris. And then conversely, if you search for Kamala Harris, you'll get positive articles about her and it's like Trump doesn't exist. It's clearly ... They have put their thumb on the scale here in favor of the candidate they prefer, as 90 something percent of their donations indicate.

   6. JCJason Calacanis1:02:15

      Here's a real time search. I just did Donald Trump. As you can see, the first one that came up was a Harris story about Trump and Harris. Uh, Google has actually addressed this issue. The issue is actually, I think, I'll take a little bit of the other side of it, not bias in the algorithm but bias in media. The overwhelming majority of media is left-leaning and, uh, there's a very small amount of, uh, Republican right-leaning media when compared to the left, obviously. And so when you do a search for Donald Trump, you know, you've got the first three choices, New York Times, left-leaning, Washington Post, left-leaning, Newsweek, left-leaning, CNN, left-leaning, Daily Beast, super left-leaning. Five of five are left-leaning. That really is the issue, is that there isn't enough GOP or right-leaning media to actually make, uh, this work. That's at least my take on it.

   7. DSDavid Sacks1:02:59

      I don't think that's-

   8. JCJason Calacanis1:03:00

      What's your take?

   9. DSDavid Sacks1:03:00

      Well, well-

   10. JCJason Calacanis1:03:01

       ... sucks.

   11. DSDavid Sacks1:03:01

       Okay. Y-

   12. JCJason Calacanis1:03:02

       That's their explanation, by the way.

   13. DSDavid Sacks1:03:02

       Yeah. Okay, fine. But the problem is that-

   14. JCJason Calacanis1:03:04

       And I believe them. Yeah. Yeah.

   15. DSDavid Sacks1:03:06

       They're weighting the publications they want to weight. Why is Daily Beast like some authority on the election? They're the most partisan, ridiculous, untrustworthy publication when it comes to the election, so why should they be top four? I mean, why isn't Fox News in there? Why isn't New York Post in there? Why isn't Substack in there? There's a lot of great publications on Substack. So they are very selectively choosing the publications who, you're right, are in the tank for the Democrats, so th- they are reflecting the bias of the mainstream media, but they are being very selective about what media they show. And even so-

   16. JCJason Calacanis1:03:39

       Here's Kamala Harris.

   17. DSDavid Sacks1:03:41

       I mean, and-

   18. JCJason Calacanis1:03:42

       And let me just give the statistics here.

   19. DSDavid Sacks1:03:43

       Okay. So, so-

   20. JCJason Calacanis1:03:43

       Here. Hold on. Kamala Harris, uh, I just did a search. First five, New York Times, NBC, The Hill, CNN. Is The Hill right or left? I don't know.

   21. DSDavid Sacks1:03:52

       I think they're left.

   22. JCJason Calacanis1:03:53

       Would you say, Sacks? It's left, yeah.

   23. DSDavid Sacks1:03:54

       They're left.

   24. JCJason Calacanis1:03:54

       And then Forbes, which I think would be considered right, and then Fox, obviously right. So, y- I mean, it's just the percentage of news sources here-

   25. DFDavid Friedberg1:04:03

       The Guard- The Guardian, The Guardian's often ... Yeah, The Guardian's often ranked right, so there's another two. But again there's a, there's a, there's-

   26. JCJason Calacanis1:04:07

       Yeah. So it would, it would be like three of eight in this case.

   27. DFDavid Friedberg1:04:09

       By the way, The Washington Post-

   28. DSDavid Sacks1:04:10

       I want you to, I want you to put on the screen this.

   29. JCJason Calacanis1:04:12

       Yeah, go ahead. You can do it.

   30. DSDavid Sacks1:04:13

       I, I tweeted some receipts. Please click on the screenshot so I can show you the side by side.

Episode duration: 1:44:16