Mark Zandi of Moody's

Welcome to The Puck, Venture Capital and Beyond, a show that examines the changing landscape of our world. Before we dive in, a quick word about who I am and why we're here. I'm Jim Bier, corporate lawyer and restructuring professional. I've spent the last two decades helping companies navigate their toughest transitions. And about eight years ago, I found myself having fascinating conversations with clients and friends about everything from venture capital to the broader shifts happening in our economy and society.

Those discussions were simply too good, so the puck was born. Now while we started on venture capital, hence the podcast name, the Puck Venture Capital and Beyond, We've naturally evolved to focus more on the and beyond portion of the title. Today, we explore how business intersects with the bigger forces shaping our world. I still run my restructuring practice by day, but now I get to host these conversations by night. It has become one of the most rewarding parts of my life.

Today's guest continues that tradition. These AI stock prices have taken off for fundamental reasons, and now they get supercharged by all the money coming in from the funds. That feels like speculation. It's going there because simply because the price was up before, therefore it's going to be up going forward. If I had to pick something that was worrying me front and center, something that could derail my optimism about the economy in 2026 going into 2027, that probably would be that investors in the equity market are getting over their skis.

What happens when record stock prices meet record government debt and nobody really knows what's under the hood? On today's episode of the Puck, chief economist for Moody's Analytics, Mark Zandi, joins us to talk about bubbles, AI, shadow banking, and whether today's economy is stronger than it looks or more fragile than we think. Let's buckle up for a fascinating conversation. Mark Zany, welcome to the Puck. Hey, it's good to be with you.

Yeah. I mean, thank you. We're going to jump into bubbles and- Oh, bubbles. Yes. Your analytics and non bank debt and so forth.

But this is your opportunity to tell us a little bit about yourself, and then let's really get into the bubbles that you see out there right now. Jason Brett (one zero three:fifty seven): Well, I've been an economist from the beginning of time. I've been a professional economist for thirty five years. I, started an economic forecasting firm thirty five years ago. I was 30 years old.

And, we grew it into a pretty good sized small business and sold it to Moody's in 2005. So I've been a startup small business guy and, part of a large multinational. The big, bright, shiny technology thirty five years ago that helped start my company was the Pentium chip. You remember the Pentium chip? Mhmm.

Sure. Yeah. Not many people do. So that's, you know, that's made the PC a a real tool for businesses and that allowed for a startup like mine to gain footing because before that all the forecasting was done on these large mainframes, very expensive, couldn't enter it, but with the PC that could enter. The other thing that happened was, interstate banking, right?

Before that you were limited to the state you were operating in, but with interstate banking, banks needed the information about the economies outside their footprint. And so we helped with that and combined the PC with that need. And that's where the business was born. And, you know, we're still operating pretty much the same way today. Most of our clients are in the financial system.

Obviously, a lot of big big banks, but, it goes beyond that asset managers, insurance companies, pension funds, sovereign wealth fund, and governments. We help with budgeting and that kind of thing. So and I have to tell you, in the thirty five years I've been doing this, you know, there are only a few other times where I've been more unsure about how things are playing out. So I in particular when it gets to shadow banking, very humble because, you know, there's a lot of moving parts and it's just evolving very quickly and there isn't a whole lot of data. GFC, the global financial crisis, was a very obviously harrowing time.

The pandemic itself was kind of mind numbing, but the world was upside down and now is also feels, you know, a very uncertain time, very difficult to gauge what's going on. A lot of moving parts, a lot of cross currents, and makes it difficult to be a forecaster. But as a forecaster and and with Moody's analytics out there, what do you see as your principal goal right now in responsibility? Well, the most There's some basic blocking and tackling like doing capital planning. How much capital do I need?

Liquidity stress testing, Cecil accounting. And then of course, we do this overseas as well. So, IFRS accounting. So, how much should I from a large institution, you know, what kind of loan loss provisions do I need? Those kind of climate stress analysis and testing, you know, helping with that, helping governments with doing good fiscal planning, you know, in terms of their long term fiscal needs, both on the spending side and on the revenue side.

Helping non financial corps with trying to understand the markets that they're entering into. You know, many large, multinationals are entering into emerging many emerging markets around the world and want to understand, you know, what are the opportunities, but also what are the challenges and the risks and we help them, you know, with those things. So it's a broad array of use cases, but at the end of the day, it's really about the future, the, you know, where are we headed? And, of course, we're, I'm an economist and work, I work with a lot of economists and we use history as a basis for trying to understand where we think the world is headed, you know, where the future lies. And so, I mean, we use a lot of data and statistical techniques to help us do that.

But, that's our mission, you know, to be the very best in providing economic forecast and analysis to a broad array of governments and financial institutions of a non financial corps. And the Puck is here to tell people where the world is going to skate to where the Puck is going. And so- Oh, cool. We have the hubris to try to help people figure out where- Oh, yeah. Things are going.

And I understand if you predict things once, it doesn't mean you can predict them twice. But I do believe you warned about the housing bubble ahead of time. What are you seeing out there now that keeps you up at night? Donald Trump (3nine zero three): Well, it's kind of easy to say. Yeah.

I mean, we were well situated, right? Because we were helping banks with understanding regional economies outside their footprint. And of course, a big part of that is real estate and housing was a big part of that. You know, that's my area of expertise is housing, housing finance. And of course, that was about right before the crisis is we we sold to Moody's.

So we were able to get data that we otherwise not would not have been able to get, you know, because we could see what was going on at the structured deals that were being being executed. And so we were kind of in a fortunate place, fortunate in the sense that we had a good view as to what was going on, therefore had a strong view opinion about that particular bubble, that unfortunate period of time with the GFC. There's a bunch of stuff that makes me nervous now. I mean, let me say just to level set, I do think the economy is the broader economy is on strong enough ground that it should be able to navigate through at least in the next year or two without suffering, you know, a major financial event or, recession. I don't say that with a lot of confidence, and I do think risks to that are elevated and mostly to the downside, but I still think that that's the most likely scenario going forward.

But, you know, there are a bunch of stuff to worry about in terms of you use the word bubbles. And by the way, in my thinking, that's a pretty strong word, bubble. I don't say that lightly. I mean, in my nomenclature, I'm really curious what your how you think about what a bubble is, but in my nomenclature, a bubble is when investors in an asset are simply are buying that asset simply based on the fact that it rose in price in the recent past and therefore have concluded it will rise in the coming future. And no other analysis beyond that, it's simply that momentum.

You know, I view that as speculation. And when speculation begins to creep into a market and you see more transactions based on speculation momentum, that's when a bubble starts to form. I don't know that we're there yet in the equity market, the stock market, but the first step to a bubble is high valuations and that we do have, by any tried and true measure. We have very high valuations. My favorite measure of valuation in the equity market is simply the valuable publicly traded stock divided by economy wide corporate, after tax earnings, kind of economy wide PE multiple.

We've got data back, let's say to 1960, the average multiple over that period is 12. We're sitting at 20, that's more than two standard deviations from the mean, and that's the highest it's been since the Y2K bubble. And that was a bubble. We got to 24, you know, multiple of that in that particular period for a brief period of time. And it goes to, you know, AI, artificial intelligence.

I mean, AI is juicing up a lot of stock prices of a lot of these companies. And, you know, I surely believe that this is a game changing technology. It's a big deal. It's going to be adopted quickly. It's going to be, key to productivity gains and profitability going forward.

It just feels like investors have discounted all of that and then some and then began to speculate that, you know, they're just piling in. And I haven't thought about this deeply, but I'll just throw it out there and then I'll stop. It's almost as if the index funds are kind of a institutionalized form of speculation, right? Because the money just pours in to the companies whose stock price has recently risen because their market cap is now higher, so they gain a larger share of the fund money that's coming in because it's just an index fund. And that, you know, these AI stock prices have taken off for fundamental reasons and now they get supercharged by all the money coming in from the funds.

That feels like what I just described as speculation. It's going there because simply because the price was up before, therefore it's going to be up, going forward. So, if I had to pick something that was worrying me front and center, something that could derail my optimism about the economy in 2026, going into 2027, that probably would be that investors in the equity market are getting over their skis. Jason Brett (zero twenty seven:forty seven): I got nervous with the equity markets in 2019, and my brother said, You're crazy. The government is going to continue to print money and boost the stock market.

And he's been right and I've been wrong. But- Preston Pysh (zero twenty seven:forty eight): Man, nothing worse than saying your brother was right and you're wrong. That's hard to say. You're a better man than I. Yeah.

Jason Sansone zero three:forty seven): Well, I try to be intellectually honest. Preston Pysh (one zero three:forty seven): Oh, there you go. Jason Sansone zero three:forty seven): In fact, I've got money in the market now because my 401 ks contribution is going. So I've actually built up a fair amount, which I've left in because you can't time this stuff. But when I think of PE ratios, historical standards, you say, Well, there are times that you would have higher PE ratios.

I mean, in times of growth, AI excitement, I get all that. What I'm troubled by is the fact that our federal government has printed over $20,000,000,000,000 in the last fifteen years. And so at a time when PE ratios have expanded and earnings have gone up I was an econ major and I understand the multiplier effect, but I also think there's a reverse multiplier. So if the government at some point, and I understand, I don't know where that point is, has to slow down the $2,000,000,000,000 deficit it's running, right? If it cannot continue to put money out there without inflation, then at some point, forget the bubbles coming down and creating a reverse wealth effect, just the fact that you don't have co creditism growing at the same rate that Richard Duncan talks about ultimately has an effect on the earnings of these companies.

Maybe I'm missing something, but that's the part of this that makes me nervous is, it's using debt to juice your earnings. It's like stock buybacks. It works in the short run, but if you don't become more productive, right, and you ultimately have to pay that loan back, it's a problem. David Collum (3nine thirty seven): Yeah. I sympathize with that.

So, I mean, my interpretation of what you said is, look, we've got very serious fiscal issues. High debt to GDP, deficit to GDP, primary deficit to GDP, interest payments to GDP. Pick whatever measure you want. It looks pretty ugly. And at some point, we need to, in that point, maybe sooner rather than later, what you're saying is we need to address that.

And once you address that, then that calls into question broader economic growth and these valuations that we're attaching to these companies. That's what you're saying? Dan Rasmussen (3zero 40: I'm saying that they won't address it until they have to. Yeah. Dan Rasmussen (3zero 40: But if you look at what's going on in Japan today in the carry trade, look at the fact that Japan I mean, if I can borrow one percent and buy treasuries at 3% and pocket this spread forever, that's a pretty good deal.

If China is buying our T bills because they're growing and growing and growing, and their trade surplus with us is such that they can keep doing that. But they're selling our treasuries right now and buying gold. So I mean, at some point, we're having to monetize our debt. I know the hedge funds have a ton of money in the Cayman Islands right now. I know that Jay Powell just talked about expanding the window purchases, so to speak.

We stopped quantitative tightening. So I mean, at some point, this liquidity is going to tighten up. And when it does, the question is, who's it going to affect and how's it going to affect people? Jack Mallers (3zero 30: Yeah. Again, I focus on the equity market bubble, but it does feel like to me the bond market is pretty fragile as well for the fundamental reason you articulate that we're issuing a lot of debt.

I mean, the government has a $2,000,000,000,000 budget deficit. It's at 6% of GDP and the primary deficit excluding interest payments is 3%. And that's extraordinary, particularly when you're at full employment or pretty close, you know, 4.4, you should be, we should be at zero on the primary deficit, even in surplus. And here we are pumping out, you know, a lot of, debt. And then you throw in the mix, the shift in ownership of treasuries, right?

The fed has been exiting out. It's the most price insensitive player in the market. Global investors, institutional investors, they're also pretty price insensitive. They're exiting out for, it depends on the country, China for one reason, Japan for another. And the banks, you know, they're not so interested in certainly not to the degree that they were, prior to their twenty three day bank crisis.

And that leaves those hedge funds you talked about as the now marginal player in the market. And then you throw in this all the concerns about Fed independence and safe haven status of The US reserve currency status, and then you throw in the primary dealers haven't expanded their balance sheets consistent with the amount of debt outstanding because of liquidity capital requirements, that kind of thing. It does feel like, you know, you got you're in a pretty fragile place. So, the kind of my baseline in the middle distribution of possible outcomes is a pretty sane one saying the ten year yield should stay somewhere four, four and a quarter, four and a half percent. That sounds about right.

But I concur, you know, if I'm wrong, we could easily see, you know, the bond market, what's the right term to throw up might be the right word. Jack Mallers (3zero 30: Bond vigilantes come back out. Yeah. Exactly. Jack Mallers (3zero 30: I'm not saying that's going to happen today or tomorrow, but if you look at what's going on with the liquidity in the crypto market, if you look at what's going on with housing, Zillow came out and said that I think 53% of homes that are selling are requiring a 10% or greater price reduction.

So from a liquidity perspective and and a wealth effect, if the people that bought Bitcoin were on margin, had a lot of debt, and it's down a certain amount, same thing in the housing market, you're starting to see the air come out of certain areas. And if you look at the number of companies that are making up a large part of the S and P, there's an awful lot of companies that have gone down, right? So some people are feeling this. And I mean, at least in terms of the consumer spending at Christmas, they were up, but the number of pay later purchases and credit card purchases was up dramatically. So the American consumer was going deeper into debt with these new facilities.

But again, this whole affordability issue and the squeezing of them, it just seems to me things seem a little frothy right now. Jack Mallers (3nine thirty seven): Well, let me push back a little bit. Another way of thinking about this is that some of these asset markets have corrected and it's done it and they've done it reasonably gracefully. Let's take the commercial You know the CRE market, commercial real estate market. I mean, prices are down.

At least we get all the transactions in the country. We produce these price indices, but prices, across all of CREs, they're probably down 15% ish, 20% from the peak. You know, the peak obviously was right before the Fed started jacking up interest rates in 2022. Market seems like it's stabilizing, you know, valuations seem reasonable, cap rates seem more reasonable. Even in housing, you know, housing, house prices have kind of gone flat here for the last couple three years, going sideways.

And that means that's nationwide. That means some half the country is experiencing actual price declines and, you know, still more to go there because affordability is still a problem, but it seems like we're moving in the right direction without, you know, creating significant problems in terms of default. Yes, regulators have shown forbearance and banks have shown some I think you said extend and pretend, that kind of But that's normal fare. That's what they typically do. And here we are, we've kind of navigated through.

And even in crypto, take crypto, you know, there was a crash. When was that back in 2223, kind of made it back. Now, Bitcoin's back down below 100 ks, maybe more to go, but it doesn't feel like any of this is It feels like it's a reasonable, graceful deflating of these potential bubbles in these markets or certainly overvaluation in these markets. No? David Collum (3five thirty three): Sure.

I mean, I do think My challenge with Bitcoin, just using Bitcoin is, what is the intrinsic value? So to me, when people say it's a store of value, okay, but then why does it trade like a speculative asset? At the end of the day, if I buy Nvidia or I buy Amazon, or I buy a piece of real estate, I'm looking at some kind of valuation metrics, cap rate, price earnings ratio. But there's something inherent there. When you're talking about Bitcoin, is it worth a thousand?

When I interviewed William Quigley on my podcast, it was at a thousand. Okay? Was it worth 10,000? When it was at 125, was it worth 125? Is it worth 90 now?

I mean, when do you buy it as a store of value, I. E. Because it's an intrinsic value, versus watching it trade as a speculative asset. That's my concern with crypto. Not that there's not a use case for stable coins or for Bitcoin, but at what point do you have evaluation metrics that you can use?

Yeah. Again, I'm very sympathetic to what you're saying. I'm just saying, it sounds like you're talking about bubbles in markets and that they pose a serious threat to the financial system and the broader economy. And I guess what I'm saying is, I hear you on the bubbles, but I'm saying it feels like at least so far, those bubbles are deflating in a kind of a graceful way, not in a disorderly way. And Bitcoin the same way.

I mean, what were we at? 125 ks or something? We're now at, I don't know, 90. I mean, that's a pretty significant correction. Maybe And there's a lot more to go.

And I By the way, I don't disagree with you at all about Bitcoin. I don't get it at all. There are some use cases, but they're kind of very limited. I don't see it as a store of value. So I'm with you on that, but it just feels like these asset markets are, at least so far, adjusting in a way that means that they're not going to be this existential threat to the system or the economy more broadly, at least so far.

Jason Brett (3zero 40: I tend to agree with you, meaning, even if the the AI exuberance were to fade a little I mean, to me, AI is a catch-twenty two. Morgen Rochard (3nine 40: Totally. Morgen Rochard (3nine 40: If it works faster than people expect, it's going to throw people out of work. If we have, what, a 30 something trillion dollar economy, I'm not saying that we can't absorb these things and that the world's coming to it. Not at all.

I mean, we have a very, very diversified economy. What I am saying is that the notion that there's no pain We used to have recessions every seven years, and there were checks and balances. We had what we've called covenant loans. And a company would get in trouble, and then you'd put a restructuring officer in, and you'd put it through a bankruptcy and you'd write down the assets and you'd reset the debt, or you do an adequate restructuring. What I'm seeing in the economy that's different than any time in the forty years that I've been involved in the economy as a professional is the use of debt for unamortizable loans.

So it's one thing when you make a loan to a company that can pay it off over time because it's growing and it's got earnings. But when Silicon Valley Bank made loans to technology companies, we always said it was disguised equity because they were taking warrants. And even though they were having their loans paid the interest with equity, it was a highly risky thing. It was only SVB doing it, but we all knew really it was equity because they got warrants. I don't know where it's measured precisely, but I believe that there's over a trillion dollars of what I would call these kind of SVB loans now that have been made by non regulated institutions, in some cases have borrowed money from the banks to bolster their capital and their balance sheet.

But I don't know how it's reported, but as that debt comes due and is not paid off, I mean, I do think that is a shock that we'll have to absorb. Preston Pysh (zero twenty three:fifty seven): Interesting. Yeah. I mean, it almost sounds like preferred equity, isn't it? Kind of, sort of?

Lawrence Lepard (zero twenty three:fifty eight): Yes. That's another way- Preston Pysh (zero twenty three:fifty nine): I mean, but it's not on your There is preferred equity on your balance sheet. When I liquidate companies, I pay the secured debt first. I pay the unsecured debt second. And then to your point, if there was anything left for equity, it would go to the preferred equity.

Right. And then the common. What I'm saying is that many companies, many PE companies now, many venture capital companies now, to the tune of over $1,000,000,000,000, dollars 2,000,000,000,000, it's a big number on their balance sheet. They have common stock, as you said. They have preferred stock, as you said.

But they also have secured debt and unsecured debt. Some of it's merchant credit advances that are personally guaranteed. But the secured debt that these companies have When Silicon Valley Bank lends money to a company, it takes a lien on the company's assets. In the old days, when a Finova or a company like Finova lent money to a company, it was based on AR, it was based on inventory or equipment or real estate. When SVB lent money to a company, there was cash on the balance sheet that had been put in as equity that was going to get spent, then the company was going to do another round.

And then and that equity was being used to pay the interest on the loan to Silicon Valley Bank. And the whole idea was the premise was many of those companies would go broke, but the ones that were successful, SVB had equity upside and had warrants. Kind of like the SoftBank model. Right. But it was a fairly limited percentage of our economy.

What I've seen happen over the last fifteen years is that hedge funds, family offices, investors in general have pooled their money. And in the same way people pooled their money and bought mortgages in 'five and 'six and 'seven and 'eight, they pooled their money and they have put those monies into these non banks, these shadow banks, so to speak. And then those companies, instead of lending that money to buy a car where there's collateral or buy a house where there's collateral, they invested in software companies. They invested in apparel companies. They invested in biotech companies.

They invested in AI companies. And most of these companies were either pre revenue, right? They were in that early stage. And when I liquidated companies back in 'one, they were $3,000,000 $4,000,000 equity plays. I've shut down several companies this year that had $300,000,000 in equity washed out, or debt.

And so the numbers are just staggering. I mean, a trillion is a thousand billion. I mean, we didn't have trillions in 'seven, right? 'eight. Now we're dealing with trillions, and so it's it's pretty hard to keep track of it.

Yeah. But the numbers are are pretty big. Preston Pysh (zero twenty seven:forty seven): Yeah. Interesting. Interesting.

I mean, I'll have to explore this in more detail. I'm stuck with the data that I have, and it feels like what you're saying is the data I have is not adequate for truly understanding what's going on in the system. David Collum (one zero three:forty seven): Look, as I mentioned earlier, I asked Larry Summers eighteen months ago if there was exposure to non banks, and he said it was a good question. If you go on ChatGPT or Grok right now and you ask the AI, What are the stories being reported from the World Bank, from PIMCO, from Jamie Dimon? What's being reported out there?

And what's Elizabeth Warren talking about? People are saying that we need more disclosure because we don't have mark to market. We need more visibility into these loans. And I think one of the things that triggered it was someone reported that the banks have lent $2,000,000,000,000 to the non banks in the last year, so that the banks' exposure to the non banks has gone up dramatically, which makes sense to me, because as the non banks are having liquidity problems, and the banks need return, right? It's been a sexy place for them to park their money.

Jason Brett (3zero forty seven): Right. Well, I think that we can see in the data. They do have to report. I mean, unfortunately, the data they report through the quarterly call report information, they don't break down the lending to the non bank system. So I don't know how much is private credit or something else.

I just know in aggregate and it has grown quite a bit and it is much more significant. So they are much more exposed. But I guess they would argue, the banks would argue that look, you know, we are stressing our balance sheet under pretty severe conditions. This goes back to the kind of the CCAR stress scenarios. We've got capital more than sufficient to digest those scenarios and the impact that on the lending that we're doing across the board, including to non bank lending.

So, they say that, you know, we're We're prepared for this. We're ready for it if there was a problem. David Collum (zero twenty three:forty seven): So from your perspective, I mean, you've talked about how recessions can be helpful. David Collum (zero twenty three:forty seven): In terms of cleansing the balance sheet, you mean? David Collum (zero twenty three:forty seven): Yeah.

Bad debt and misallocation. David Collum (zero twenty three:forty seven): Yeah. For sure. David Collum (zero twenty three:forty seven): If you have large fiscal deficits and non recessions, and you don't clear out bad debt and misallocation of capital, and you go fifteen years without that, and at the same time you've gone fifteen years without it, You've taken on another 10 or $15,000,000,000,000 of federal debt that got pushed down into the economy. What would the hypothesis be when you finally get to the end of that cycle?

David Collum (3zero 30: Yeah. I mean, I hear you. But again, it goes back to the data, the data that I'm looking at. The way I think about kind of the economy's balance sheet is government, what you're talking about, non financial corps. So, that's the apples and the metas and the hospital chains and everything else, households and financial system.

If I look at the household balance sheet, and again, these are averages, you know, you do need to be careful about the distribution, but at the averages, the household balance sheet is pretty good, right? It's delevered. I mean, that was a recession. The GFC was a recession. We did see a cleansing of the balance sheet because of all the defaults and the foreclosures and everything else.

A lot of failures resulted from that, but at the end of the day, if I look at the financial system leverage, it looks it's harder to measure as you point out, but it looks okay. If I look at the non financial corpse, it you know, getting an aggregate looks okay. The thing that really stands out is the government's balance sheet and I agree with you. That's where the stress is. But on the other hand, that's a pretty strong balance sheet.

There's a lot that the government can always find a way, at least for a long time. Let's just take a look at Japan, I mean, it is leveraged. There's differences obviously between Japan and US, but you can manage that. So, when I look at it across the economy's balance sheet, yeah, there's things I worry about and we've talked about some of them, but it doesn't feel like it's certainly not screaming to me, we got an imminent problem. I mean, the direction of travel in some cases is disconcerting.

I mean, if things continue down the If private credit continues to grow like it has over the next year or two and it becomes more tied into the retail sector and we don't get any improvement in terms of disclosure and transparency and there's more competition that comes into the market that are more smaller private credit firms come in and start causing underwriting standards to come in. Yeah. I think that's an issue that we need to watch. But at this point in time, looking across the balance sheet, I say, I wish it were better, but it's not screaming to me that I should be sending off red flares at this point. So, when you look at commercial real estate, as you said, eventually it's going to clear out.

And if vacancy's 50% and cap rates come down, I mean, these things are going to trade and there's been reported sales of these buildings at big losses, but it's going to stabilize out. And whether or not it's a trillion dollars of commercial real estate or not, no doubt the economy can absorb that. When you look at, as you said, the numbers of car loans, or you look at and I know auto defaults are a little you look at credit card separately, all of that's fairly consistent with what we've seen over the last twenty, thirty, forty years. I mean, and I understand that. Just like with the housing crisis, right?

You looked at what was different, and one of the big differences was, again, there were a lot of variable rate loans. There were underwriting standards got relaxed. Right. People got criticized for not doing proper appraisals. Because again, you know, it was like, hey, when there's a race to borrow money, right, and you're being criticized for not underwriting the house, right, and everybody's telling you to let more and more people buy a house, people get a little sloppy and we got ahead of ourselves and boom.

What I'm asking in terms of the non bank shadow bank world and a world you're much closer to in terms of underwriting standards and everything else is what checks and balances, if any exist, that there's collateral backing these loans that you say don't look all that alarming. Because we know when a JP Morgan makes a loan or one of the big banks, we look at the collateral and we look at the reserves, And we know that there's some extended pretend going on with commercial, but the fed and people are keeping an eye on this, and there's some checks and balances. But there are non covenant loans, and there are loans being made by these non banks, where there are no requirements for a regulator or a rating agency to come in and look at the collateral. Right. And if you always have somebody coming in to take out your loan, or you always are able to get a venture capital firm to come in and buy you out, the party can go on for a long, long time.

But if you look at the venture capital exits, they're down dramatically. If you look at the private equity market exits, they're down dramatically. People have told me two thirds of the VCs out there are going to go out of business. If you start to look at what happened to SVB and you look at where this money's been invested, is there any way to figure out if there's collateral that are supporting those loans? David Collum (3zero 30: Well, no.

I mean, if it's in the shadow system, there is a clear issue with the opacity and a lack of transparency. No doubt about it. Let me just take a step back and just say, I feel a little weird in this conversation because usually I'm you in these conversations. I'm having to take the other side of, where you are. So, it just feels a little weird because I'm often worrying about the opacity and lack of transparency and lack and the light regulatory oversight of the shadow banking system and private credits kind of the poster child for that at the moment.

So, just as a stipulation, I'm sympathizing with a lot of what you're saying. No doubt about it. The other thing I'd say is everything I'm looking, just saying and thinking about is through the prism of, is it a systemic risk to the broader financial system, is it an existential risk to the economy? Is this the thing that's going to push us in under and push us into recession? I guess I'd say at this point, despite all of the reasonable concerns you've mentioned, the opacity, the lack of transparency, the mark to model, the fact that it's going retail, you're getting away from institutional investors, you get more smaller fly by night shadow institutions coming in, in these different markets.

And it's Gresham's law at work. You know, the the bad is driving out the good because you could be a good lender, but it's a small bad guy comes in. And if you wanna play in that space, you gotta lower your standards. I get, you know, I get all that. And I am uncomfortable with the direction of travel.

Again, if these trends continue for another year, two or three, I might be saying something different. But at this point in time, and again, with a great deal of humility because there is a lack of transparency and the data is poor, It doesn't feel like these the shadow markets that we're concerned about are big enough to do us in. You know, even though you're right, are these things collateralized? I don't know. I mean, I'm not sure But even despite that, they're not big enough and have grown quickly enough to be an existential, systemic risk of the system and existential to the economy.

Take private credit. Again, given the data we have and I admit maybe the data is inadequate, but it says the private credit market is somewhere between 1 and a half to $2,000,000,000,000 market. That's roughly global. That's the size of the high yield corporate market. That's the size of the leveraged loan market.

It's big, but put that in the context of $1,516,000,000,000,000 of non financial corporate debt outstanding. You go, Okay, it's 15% of the amount outstanding. That's a deal, we need to watch it, but it's not existential. It doesn't feel existential to me. And on top of that, I am getting some increasing sense of what's going on because the banks are playing a bigger role in the shadow system.

And I'm now getting some better transparency on what's going on because the banks, you know, they're the most regulated and the most transparent of financial institutions. It's not perfect as we can see with the SVB situation, but it is better, and we're getting some insight into that. So, net, net, net, net, I'm totally with you. I get what you're saying. I just don't I feel like I'm just not where you are in terms of sending off those red flares.

They're still yellow in my mind. Jeremy Schneider (zero fifty seven:thirty seven): Look, there's an old expression, if you're a hammer, everything looks like a nail. I mean, I restructure companies for a living, and I dealth a lot of this private credit. And I have seen it explode from X to a couple trillion dollars. And so I have to remind myself that is among a $30,000,000,000,000 economy.

And you've got healthcare that's been doing ridiculously well, and the stock market that's doing really well, and AI, and Bitcoin, and all this other stuff. When you look at the frothiness of AI, for instance, and the fact that a lot of people are starting to say that we're all in on that, so to speak, and that there are some bottlenecks related to energy, for instance. If there's air in crypto, if there's air in commercial real estate, if there is air in private credit David Collum (3nine 30: No. David Collum (3nine 30: And as you said, I think a dramatic amount of the economy is supported by what? The top 10%.

So that percent. David Collum (3nine 30: Yeah. David Collum (3nine 30: That if there's a wealth effect that wealthy people start feeling You see these In LA at least, the really expensive homes that used to move are down millions of dollars. I talked to the developers here. They're doing lease options.

They are really struggling on the high end. The million, dollars 2,000,000 houses, the young people that are working at Google and Netflix, they're buying those houses. But the $8,000,000 houses are now being offered for $5,000,000 The 12,000,000 There's definitely something going on on the upper end that's where the air is coming out a little. And I'm just wondering, from a cumulative effect, is that going to blow back on the economy at all? David Collum (3zero 30: Let me Because I want to get a better sense of where your mind is.

So, what probability would you put on a, let's say, a significant financial event occurring in 2026? And also if you have a view, what is the probability you would attach to the economy suffering a major pullback? You know, maybe not a recession, but something pretty close. In, In the next year Pick your horizon, whatever horizon works best in your thinking. What probability would that be?

Jason Brett (3zero 40: So to me, what you're talking about is a black swan event. And in any given year, something major happening like that that's unpredictable, 10%. 10%. That's typical. Wouldn't that be typical?

Jason Brett (3nine 30: The only thing I would say is that if you're spinning I mean, again, if you flip a coin eight times in a row and it's heads, right? Mathematically, the next time you flip it, it's still fiftyfifty that it's going to be heads. Right? But if you haven't had a recession in fifteen years- Preston Pysh (one zero four:forty seven): Okay. Yeah.

Eric Weiss (one zero four:forty seven): Is it more likely you're going to have a recession in the sixteenth year than in the I mean, at some point- Preston Pysh (one zero four:forty seven): Yeah. Eric Weiss (one zero four:fifty seven): Again, going back to my brother, he doesn't think we have recessions anymore. And that's true when you print $2,000,000,000,000 in a growing economy. Right? And so if you say to me, Well, Jim, is there going to be a big event this year?

Forget, you know, Taiwan or something like that. People are putting their money Yeah. No, in the system. In the system. Yeah.

People are putting their money in their four zero one ks's every month, right? I mean, people that have switched their allocation out, it's five or 10%. Like, So money's going to continue to go into the market. So when you say to me, the odds of a big event, the only thing that I see that's going to be an issue that would create it is if a lot of this private equity or private debt went bad and the government had to go in and buy a bunch of it up and take the balance sheet up a lot, and the bond vigilantes came in and long bond interest rates went up. But as long as we're financing our national debt with short term treasuries, which we are, right?

And as long as the ten year doesn't move dramatically up, this is going to go on for a long time. Okay. I just don't know how long people are going to be willing to go out thirty years Right. Lawrence Lepard (3nine thirty seven): knowing that if you don't grow out of this, eventually you're going to have to inflate out of it. I mean, I don't know how long you can tell people that it's safe to go out thirty years with 4% money with a deficit that's growing faster than your economy.

At some point, I mean, I'm buying three month bills. I wouldn't buy a ten year treasury right now. You would not? No. Would you?

Well, I don't buy treasuries, but yeah. Okay. Right. I think it's fair value. Four to four and a half percent is roughly where the ten year treasury should be.

You know, if we don't change our fiscal trajectory, it will definitely continue to rise unless there's financial repression, you know, the Fed comes in and buys up everything, which is a real possibility. And that could also happen under certain circumstances, Fed independence and all that. I've been obviously really focused on this private credit stuff recently. And so Yeah. I appreciate your willingness to kind of indulge me, so to speak.

But, yeah, take I mean, look, take a look at it. I mean, I I really am concerned about the bell curve nature, the inverse you know, we got a lot of boomers and and and fewer young people, and we got health care going up. And so, I mean, the numbers just don't seem to work right now, and so Right. And I just I don't know when that judgment day will be. I would argue that we're boiling the frog right now because because if health care and housing and college are measured in the basket of goods, it's more than 2% inflation.

Jim, this was I really enjoyed the conversation. It gave me a lot to think about. Thanks for the opportunity. Take care. The POC Venture Capital and Beyond is produced by CMVG Advisors.

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