Aswath Damodaran

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 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. I don't think you'd find a single person on the face of the earth who will tell you The US budget system works. If The US were a small country in Latin America, we'd be bankrupt. Right? The reason The US has got this buffer to do things that other countries can't do is it helps to be the largest economy in the world to begin with.

You have a population that consumes more than any other population in the world in terms of percentage of total consumption, and your currency is the global currency, the US dollar. So what it has allowed The US to do for the last forty years is break the rules of macroeconomics and get away with it because in a sense, they're too big to fail. But if you keep doing this, eventually the system will buckle. You'll take the global economy down with you if you're not careful. And that's why I describe this process as broken.

On today's episode of the Puck, I have the honor of sitting down with Aswath Damodaran, a professor of finance at New York University and a well known author of several books on corporate finance, valuation, and investment management. Our conversation covers a range of important topics, but perhaps most timely is his take on the recent stock market volatility. This is an important conversation, so let's get to it. Azweth, welcome to the Puck. Thank you.

Glad to be on. We're excited to have you. So can you tell us a little bit about yourself before we jump into the meet? I'm a dabbler. That's the way I like to describe them describe myself, and my passion is teaching.

I'm not a finance guy, an investments guy, a valuation guy. I'm a teacher. And I love teaching valuation and corporate finance because to me, it's a melding together of both numbers and storytelling because every company's valuation. I'm also more of a micro guy. I tend not to think about macro issues because they're a distraction.

When you value an oil company, the last thing you want to think about is the demand and supply for oil because that's gonna distract you from having to value ExxonMobil. So when I look at much of the world, I look at through micro eyes. What does it mean for companies? What does it mean for investors? What does it because that's where my strength lies, and that's what I teach in my classes.

So how did you get the nickname, the dean evaluation? Interesting story. I mean, about a decade ago, I was in CNBC, and the anchor had trouble pronouncing my name. So after about the third or the fourth attempt of trying to get my name right, he finally gave up, and he said, I'm gonna just call you Dean. And I said, Dean what?

And he said, Dean evaluation. The name stuck. So every time I get on CNBC, it gets reinforced by somebody else using that term. I absolutely hate it because the other thing I've developed in aversion to is experts in every field. Because I've discovered that experts often have self have inflated egos.

They think they know more than they do. And they often have tunnel vision, which is they're experts on one topic, but they have no perspective. I don't want to be an expert on any area. That's my end game. And being called dean of valuation makes me sound like an expert in valuation.

I'm anything but. Interesting. Well, so so as before we get into this, let's let's take a minute and set the table. Yeah. I mean, this has certainly been a crazy couple of weeks.

Can you give us a 30,000 foot view of where you think the market has been? I I think you have to you know, when you look at where the market has gone in the last two weeks, you cannot but talk about where it started. Coming into this year, the market was at all time highs. Now it might not be the exact high, but all time highs. Highs on every dimension in terms of overall market value, in terms of the multiples of earnings we were paying.

And it was driven by this odd mix of optimism about taxes being lower, the economy being stronger, and inflation coming down at the same time, which struck me as internally inconsistent. Because if taxes go down, the economy gets stronger, how does inflation stay down? So something about the triangle that didn't make sense. So start of this year, I actually valued the S and P 500, which I've done every the start of every year going back in time. And I said it's overvalued by about 12 to 13%.

So at 5,800, I said it's about 52. 50 is where I think it should be. And I wasn't taking any daring views of the world. This was based on, hey. I'm gonna take your estimates of earnings.

What you tell me will happen, put them all together, and I'm still coming in 12 to 13% less than what you're paying for stocks. So even if you took Trump and tariffs and all the rest of the stuff off the table, the market started the year having to defend almost an indefensible position. And whenever you get into that position, you're always waiting for a shoe to drop. Something to trigger people saying, oh my god. We've overpaid.

And I think the last two weeks, tariffs have given people a reason to first get scared, but also revisit why am I paying 80 times revenues or 50 times earnings for a company when in fact there's so much uncertainty about the future. It's almost like we need reminders that we live in an uncertain world to reexamine what we pay for that world. If you take from what you just said, which was you came into the year with a little overvaluation, and now you start looking at where we are with tariffs and some of the uncertainty, I've been worrying about a recession or worrying about it since 2019, and that recession still impossibly hasn't fully hit. From your perspective, why have we been able to avoid a recession for so long, and and is it sustainable? I think the reason we avoided a recession in 2020 and 2021 when it seemed inevitable, how do you shut the world down and not have a recession, is we printed checks.

Right? We basically made up the difference, and we survived it. I was surprised we came out of it as intact as we did because it's true inflation went up in 2022, but it went up to only seven or 8%. It could have gone up to 50%. So part of it is we printed our way out of that problem, and it looked like we found a solution.

We looked back and we patted ourselves in the back and said, hey. You know what? We survived that, and we survived with relatively little damage. And the question is, how do you avoid the real damage that's been created to an economy that's gone through a year of trauma without having catch up to you sooner or later. So in terms of time, we've been due for a recession now for three to four years, and, eventually, it might actually be coming here now right now because you've taken away some of the things that put it off.

Right? Government spending, they're making up the difference. You take that away. Can it can this economy kind of breathe on its own? And the answer, we're gonna find out very quickly is it'll breathe on its own, will be a lot more painful.

It's going to have to take some correction to clean up. And the longer a party's less, the worse the hangover. So I think we've had this party that stretched for a while, and I think we're gonna get some hangover left from it for, you know. I tend to agree with you, but to try to make sure I fully understand the picture we're in right now, you started by saying at one point that you don't like to rely on experts. And we we know there's a lot of pundits out there that make more money when they say the market's gonna go up, and we know the term bond vigilantes and when they step in.

And I guess my question is, from your perspective, forget the experts, from your perspective, are we in the early stages of a beginning of a recession? I think we're slowing down. I think that recession is an economic term for two quarters of negative earnings growth. I think you're going to see, you know, a slowing down that is going to feel personal. You're gonna have a tougher time getting a pay raise out of your boss.

You're gonna have a tougher time finding a new job when you quit an old job. And I think that to me is enough of of what would qualify as a recession that people's behavior changes. Behavior changes in what sense? You start thinking about, do I need to take that two week vacation that's gonna cost me $15,000 even though I've lost not lost my job? So what the fear of a recession does is it changes the way we consume and spend.

And that, I think, is going to be the first casualty. Consumer spending is going to take a hit because people are going to pull back saying, I've been spending for four years now. Maybe it's time I put some limits on what I do. So I think the first effects are going to play out in consumer spending. Business spending might continue because they might have global sales that they can justify, but you and I, we'll be looking at our checkbooks a little more closely and thinking about what we spend on more carefully because the fuel factor has kind of reared its head.

So one of the things we try to do in the park is anticipate where things are going to go. And we know historically in recessions that the stock market typically goes down and that PE ratios start to compress a little. And one of my questions, as you just said was earlier was, I I think what you were basically saying is excessive behavior in any direction leads to the opposite result. And so we've had this long party, and so it may be painful. One of the other observations I've made as as somebody that's watched the market is that there's a lot of money that is automatically deducted from people's four zero one ks's that goes into the market on a steady basis, and people have to change their allocations to have a big change there.

I also note that when I started out as a young lawyer, that there still were a lot of margin requirements. And so debt, whether or not it was in crypto or in the stock market, you know, really was not a big issue. When you look at swings, right, capitulation, the the things that cause a market to move more dramatically than otherwise, if you're trying to anticipate what will be different this time than o seven or o eight or o one, What do you think is gonna happen to the overall market over the next couple years as the reality that the Fed put may not jump in and save the day? No. No.

I do think that there was a Fed put. I don't think it was as decisive or as game changing as you you I mean, you no. You might have to we might have to disagree with that. I think markets have their way of finding a new steady state. And, you know, what you said about markets and recessions, actually, I would I would defer on one sense.

Markets actually go down ahead of recessions. They start to come out of it while you're still in a recession because markets are anticipatory processes. They expect something to happen. So I think what you're seeing here is the market saying, you know what? The economy is going to slow down, so you're gonna see that upended.

But the second thing I want to talk about, which I think has got, you know, a shift that has occurred over the last few decades is momentum has become a stronger force than ever before. Part of it is what you talked about, your four zero one k. Part of it is the fact that more than 50% of the money now in The US invested in stocks comes from passive vehicles, index funds, ETFs. What they do is they feed into winners because you're not picking stocks. The money goes where it already is.

So NVIDIA's worth 3,000,000,000,000. You send money to an index fund. NVIDIA gets more of your money than a smaller company because it's just automatic. So what that means is when you go up, momentum pushes you up even more. And when you go down, momentum is work going to work in the opposite direction just as decisively.

So I would not be surprised if this correction were more decisive and shorter than previous corrections because that's a nature momentum, is you're gonna compress what took six months to happen into six weeks. It's gonna be a traumatic six weeks. But I think 2008 was far more speeded up than 2001. 2001. So in a sense, we've been moving towards this over time, and I think you're gonna see far stronger swings in the market in both directions.

So when you hit the bottom and the correction happens, don't be surprised to see a 2,000 day in the Dow. People say, I've never seen something like that before. Well, this is a market where you're going to see far bigger swings and a far quicker adjustment to a norm than you did before. So I would be surprised if this market actually bottomed out well before we actually are technically in a recession. Because market movements are so decisive, you could do in two weeks what used to take six months to do.

So that is really fascinating and not something in all that I've I've thought about. So what you're saying is that the the last two weeks and and what you mentioned, six weeks, do you do you think there's a possibility we're in that beginning of that six week cycle? Yeah. Interesting. And but my advice to you is going to be contrary because people are saying, should I sell now?

My advice is just sit it out because any time you sell, there are two problems. One is getting the timing right. Right. The second is once you get out of stocks, it is really, really, really difficult to get in. Right.

I know people who got out of stocks in 2008 who are still not back yet because that action of bringing your cash back into the market is psychologically incredibly difficult to do. So one of the problems even getting a correction right and selling, let's say, two weeks into a six week correction, is five years from now when I look at your portfolio and I look at mine and I let my money right and you went, I would be surprised if I ended up with more money in my portfolio five years from now than somebody who tries to play the market get get out of it because they're scared. So I know it's counterintuitive that if there's gonna be a correction, not getting out, but the nature of corrections are unpredictable. And once you get out, getting back in is really difficult. So I'd suggest that people can afford it.

People clearly, if you can't afford it, you're retiring next month, you need to cash out, you have no choice but to kinda cash out. But if you have a choice of cashing out, just leave the money, turn off CNBC, don't read the financial papers, don't check the the the because all it's going to do is create psychological damage. Come back weeks later and track the market then. Well and and I think there is sometimes a herd mentality, and I and to the extent people follow your advice, I think it will make the correction less extreme because if you keep panic away from it, the statistics as you articulate show that, you know, staying in the market and doing what Warren Buffett did over a long period of time, you're gonna come out better than if you're trying to time things. And and again, especially for those people that, you know, are gonna pay tax on it, you know, there's there's different costs and so forth.

So Yeah. I think that's great. In fact, I took the Shiller PE because, you know, Robert Shiller has talked. I went back to 1871. It's day that it goes back.

Right. And I actually tried because everybody talks about the Shiller PE working in terms of predicting the market. I said, okay. I'll take you at your word. Here's what I'm gonna do.

I'm going to buy when you tell me it's cheap on a Shiller PE basis and sell when you tell me it's expensive. Let's see how much money it have made over the last one fifty years following your market timing advice and actually underperformed somebody who would have stayed in the market through the one fifty years. Market timing is the impossible dream. We all aspire to do it, but converting it to actual returns is really, really difficult to do. So when you look at technology in in particular and you look at the S and P, for instance, do you see any particular vulnerabilities out there where certain sectors or indexes are more at risk than others?

Well, obviously, the companies that benefit the most from the run up are the ones that have the most to give up. Right? I mean, you take the Mag seven. Each of them is a trillion dollar plus company. Collectively, they're worth $1,520,000,000,000,000 dollars.

They're about one fifth of the entire market right now. So in terms of money being given up, obviously, they're gonna come out of those seven companies first. Companies first. Because you could wipe out the entire value of Coca Cola, but it'll be less than 10% of Nvidia at this point in time. Right.

So at this stage, the companies that are going to give up the most are the companies that gained the most. Right? Because that's where you and I think people need to have perspectives. So when they complain about Nvidia trading down $25 from its peak, they have to remember that if you bought Nvidia in 2018 like I did, my adjusted stock price is a dollar 80. I mean, that's pretty greedy of me to complain that I bought it a dollar 80, and now the stock is worth only a $100 rather than $130.

Sometimes having perspective and stepping back and say, look how much money I made on the way up is actually a good way of keeping perspective as you give up some or a chunk of those profits on the way down. We shoulda got your investment invite back in 2018. So when you're looking at things like Doge and tariffs, how does all of that fit in to what we're seeing with the market and the overall economy? I I'm just writing a piece on it. And I think that right now, people are focusing on Trump and tariffs and Doge, and they're thinking about it's and it's you we're being reactionary.

We're saying, how will the Canadian tariff affect companies? So I decided that this wasn't getting me anywhere because we can talk and talk in circles about this. And I said, let me step back and think about why we're looking at what we're looking. And I see two huge forces from the last four decades kinda come into play. One is globalization.

Now I when I started teaching in 1984, for the most part, I was teaching to people who lived in localized economies. They went to companies. The companies, for the most part, they were multinationals, but they were the exception, not the rule. My students went to work in Mumbai. They looked at Indian companies that sold to Indian consumers.

They went to work in Tokyo. Japanese companies are linked to Japanese consumers. Clearly, globalization was a force. And for a while, it was an unstoppable force. Companies globalized.

Investors globalized. We create institutions of globalization. You can actually argue NAFTA, EU, all of those were forces of globalization. And to be 2008 was the cresting of globalization. The reason 2008, I think, took the globalization project and put it at doubt was globalization essentially was us saying, we trust these global institutions because they have really smart people.

Look. They're PhDs from Harvard. They're experts. They know what to do, and we're trusting them. And 2008 said that that trust was misplaced.

We lost trust across the board. We being consumers, investors, citizens, we lost trust in governments, in regulators, in experts, and we lost trust in globalization. You can in fact, if you trace what's happened since 2008, you can trace almost everything to that that cresting of globalization and the pushback. Now even Barack Obama's first election in 2008 came about because people said, well, he's going to bring in a different perspective. We've had this business friendly and but it turned out that he was pretty globalized as well.

So they were disappointed. So they tried again in 2012, disappointed again. And, of course, in 2016, they said these guys are not the people who will create change. That was Donald Trump, the first round. But it turned out that Donald Trump, the first round, played the globalization game after, you know, there were few, you know, things in the side that he tried to do, but, ultimately, he was in the globalization game.

And then he got COVID, and globalization tried to come back in a different format in terms of public health. And I think people are no. Globalization, I don't think is coming back in that form or the glorious form where people thought this was going to solve our troubles. Has globalization had winners? Absolutely.

We can list them. Right? China. Clearly, if you look at the last thirty years, the biggest winner from globalization has been China. You've had global institutions, and we could talk about all the institutions that came out of globalization.

Experts showing up in Davos or in, you know, Aspen showing or telling you what to do with the world. And globalization also created losers, and we don't talk about them enough. The losers include no. Let's face it. Europe, in particular, has lost its central gravity status in the global economy because China's sucked away.

US less so because it's a second force disruption that I want to talk about with The US benefit from. Europe obviously lost. Workers, blue collar workers, factory workers in The US and Europe were clearly the losers. And I remember experts telling them, you know, insulting things like learn to code becomes I mean, how does a 55 year old steelworker who has a high school education learn to code enough to become a software engineer. Right?

And I think that one of the reasons we are seeing the blowback to globalization is the power of globalization centered in cities like New York and London and Tokyo, the financial centers, because globalization also aided markets. But you look at the losers, you're going to see, you know, you're going to see fact and, ultimately, these losers said we're tired of being told to just suck it up. We're gonna fight back. And whether it's Brexit or the Trump election, you're seeing that blowback to globalization. That's the one big force is the is that.

So you could think of the tariff story as kind of Trump second time around is saying, this time I'm gonna try to fight globalization for you guys because you elected me. The other major force is disruption. For the last twenty five years, it's Silicon Valley said, We're going to take existing businesses, and we're going to do them better. Now to do them better, we can debate. But their rule book was a very simple one.

Here's what they did. They took businesses that were fat, lazy, and sloppy. Right? Businesses like the cab service business, a 150 years old and you have these strange rules, and they disrupted them by basically entering the business, breaking the rules, asking for permission later, and then scaling up. So by the time the regulators and the rule makers got back to you, there was no alternative.

There were not enough taxi cabs anymore that you could be banned. Right? You could ban Uber early on, but you can't ban it once it's scaled up. That was the disruption playbook. And let's face it.

It's changed the retail business, the advertising business, the car service business. You see, what's this got to do with what's going on? When I look at Trump and Doge, to me, I see them trying to take this company disruption playbook to the US government. I mean, I describe the businesses targeted as fat, sloppy, and lazy. The US government, in a sense, is fat, sloppy, and lazy in the term in the ways it does things.

So it looks like a ripe target, trillions of dollars. And they're doing what they do with companies. You know, break the rules, ask for permission later, you know, look for the legal opinions to come in later. Scale it up. Do it on everything at the same time on a major level so you can't really you don't even know where to start.

And I have mixed feelings. I, you know, I I I told you I described the world in shades of gray. I agree with you that the US government is broken. I am not sure that the disruption model is going to work on the US government because the US government is not a company. It's not a business.

You can't break it and rebuild it. And if it doesn't work, you said not a big deal, guys. Because there are millions of people whose Social Security checks and Medicare coverage come from the US government. So if you break something and you're not able to build it back up again, you're potentially catastrophic results. So what you're seeing with the Doge, you know, experiment in with the US government is can you take an entire government, break it down, and build it back up more efficiently, a better way of doing things, or will that not work?

I mean, I think the originator of this idea was Javier Millet in Argentina or, Nick, you know, Naki Bukele at, in Nai Bukele in El Salvador where they did the same thing. But the difference is Argentina and El Salvador were such incredibly broken systems that in a you said, what do we lose by breaking the system? The US is a broken system, but it still works in many functioning ways. People depend on for their living. So I think it's a it's an incredibly large experiment that's being run with potentially huge consequences, and I'm not sure the people running the experiment have thought through what to do if you break something and you can't fix it.

Now what do you do if you break the Social Security system and you can't fix it? That means checks don't go out of mail. So I want Trump no. Doge to succeed. I want the US government to be more efficient, to spend less money.

But I think that I am I'm holding my breath saying, I'm hoping this works, but I'm not sure it'll work. You know? And so that's where I am right now. So I probably have you know, I see Trump tariffs and dough just part of this larger construct of two big forces coming into play at the same time, anti globalization and disruption. And that's a pretty potent mix to bring to, you know, perhaps a larger system in the world, the US government.

So let's stay with that for a second, the government. And then I I do wanna shift to maybe the private sector. Yeah. But staying with the government for a second, you've got a desire to keep defense spending up because we're in an arms' range with AI, and we're we're pivoting to the Pacific and there's some real concerns there. We have an aging population and we have, you know, the sacred Social Security and Medicare that, you know, cannot be touched other than fraud and abuse.

Mhmm. I mean, are we being lied to? In other words, if if you don't break it in your best case scenario and you get a trillion dollars of savings at the same time you're doing these tax cuts and heading into a recession, potentially, where tax revenues go down, I mean, with $37,000,000,000,000 of debt, how does the government manage all of this wave as it's coming? Can you kind of put perspective on that? If The US were a small country in Latin America, we'd be bankrupt.

Right? The reason The US has got this buffer to do things that other countries can't do is it helps to be the largest economy in the world to begin with. You have a population that consumes more than any other population in the world in terms of percentage of total consumption. So what it gives you is the leeway. And your currency is the global currency, the US dollar.

So what it has allowed The US to do for the last forty years is break the rules of macroeconomics and get away with it because in a sense, they're too big to fail. They're too big to kinda go down. And I think it's been their defense. But if you keep doing this, eventually, the system will buckle. You'll take the global economy down with you if you're not careful.

And that's why I describe this process as broken. I think I don't think you'd find a single person on the face of the earth who will tell you The US budget system works. In what universe? There's a legacy problem where you start with trillions of dollars in spending, And even with a congress that says we're gonna cut spending, you fiddle with the edges. I mean, I'm reminded of Obamacare and health care.

Health care in The US is broken. It's broken. To me, a broken system is nobody's happy. Hospitals are unhappy. Doctors are unhappy.

Insurance companies are unhappy. Patients are unhappy. The government is unhappy. And still we spend 20% of our GDP. How the heck do we spend trillions of dollars and leave this many unhappy people?

The system is broken. We've known that for twenty years. Obamacare didn't fix the system. It tweaked the system. It played with the edges.

It tried to fill in the insurance, but the basic system was left with its legacy problems. And my concern is if you don't fix the legacy problems, the problem will keep coming back. The US government has legacy problems, you know, whether it's defense spending or Social Security or Medicare or Medicaid. I mean, we all agree that the people who cannot afford the help need to be helped. Right?

I mean, that's part of the premise of having a democracy. But that doesn't mean the money spent in Medicare and Medicaid is actually doing what it's supposed to protect the people who are most vulnerable, who need the help. But the problem with legacy systems is breaking it is going to create consequences. In many ways, you already see the the the doge attempts to break legacy systems. USAID, which is a far smaller, you know, player than Medicare or Social Security, where the pain is actually fairly limited to the people served by USAID.

Think of how much pushback there's been on trying to break down that system and say, where did the $23,000,000,000 that you spent go last year? Right? That's a breaking of the legacy system. Courts are pushing back. You know?

The you know? Of course, senate and house are not always ready to go along. That's with the $23,000,000,000 side sys side part of the US government. Imagine doing this with the defense budget, which is trillions of dollars with, you know, you have money being spent in lots of different house districts with people in both parties and each of the districts. It's I mean, the pain is going to be immense, and the backlash is gonna be so much great.

And the question is, do now Doge can try to do this, but somebody has to have the stomach politically to say, I can live with the pain. And that's the experiment we're gonna see played out is when that pain starts to show up. How much stomach do the people the decision makers have to actually deal with that pain and try to fix it? Totally makes sense. If you're looking ahead a couple years and the pain is intense and people are pushing back, the normal thing that both Democrats and Republicans have done for the last twenty years is to, you know, go to quantitative easing and printing money, which I think there's been losers and winners.

And those that didn't own property didn't benefit from the asset inflation and saw their health care and housing and schools go more than double. So there's consequences to easy money. But if you're playing this out and the pain gets tough, what are the tools that the the Trump administration can use to help navigate through this process? I think, initially, again, the size of The US economy will help them out. Again, you've got tax revenue.

I mean, even in a recession, you're gonna the the government has never had trouble collecting trillions of dollars in taxes. The only problem is they spent several trillion dollars more. So in a sense, we're not Argentina or El Salvador where the tax receipts dry up to zero because that's basically what causes our systems to break up. You will still have tax revenues. You can decide where the pain is greatest, and you can say, look.

We're gonna alleviate the pain for Medicaid patients because they have no other choice. So they will have to then make choices about where the money goes, where the pain is greatest. And that might mean that extra defense installation you have in Alabama because some house member there wanted it there, that might be the thing you allowed to go off the book saying, the pain there is less. We can live with that. It's not gonna be easy.

Somebody's going to have to sit up there gauging where the pain is greatest and making the right judgments. And we'll see it. I mean, when we see it play out, we'll see if they're making the right choices. If you're looking at options, you're talking about the option of slugging it through, which makes a lot of sense to me. But, again, when that discussion was had in 2010, the decision was not to slog through because deflation was so dangerous.

And if you look at what's going on in China right now where they're experiencing real deflation, right, there's a lot of discussion about what are they gonna do to try to get back to a growth. You look at Japan and and their inability to, quote, grow. I I would think there's gonna be a lot of pressure on the politicians and the Fed to take interest rates to zero again and to somehow, you know, monetize this. Do do you see that as a risk? No.

I don't think it'll help. I'll be quite honest. They can try. I don't think that I mean, I didn't think as I said, I don't think it helped that much even after 2008. I might be an outlier on this.

I don't think it helped that much because what allowed the market to come out was there were other things happening. The US market survived because you had technology become this wild card that allowed The US to I mean, we're blessed sometimes by what other countries do. Europe basically sat out the technology revolution. Why? Because it was so intent on protecting the status quo.

The US, in a sense, let technology play out. We've been bailed out by technology. So If you ask me what's bailed us out over the last decade, more than the Fed, it's been technology companies picking up the slack and essentially making up for the rest of the economy. Seven technology companies accounted for 20% of the increase of market cap of all US stocks. There are 7,000 US stocks.

Seven accounted for 20%. And the names are all familiar. Amazon, Apple, Tesla, they carried The US the markets, and they carried The US economy. Now I I ask people to play a thought experiment. Take these technology companies out of the mix and ask yourself what the market and the economy would look like with our technology.

And the answer is we'd probably be in a deep recession out of which there would be no exit because we'd be like, you know, Europe, essentially an aging economy that's fighting its way to get to positive growth, let alone, you know, strong growth. Technology bailed us at last time, but I think it's out of gas. You can do this only so much. You add $15,000,000,000,000 in market cap over ten years. You can't add another 15,000,000,000,000 on top of that because that first 15,000,000,000,000 came from all of us spending more on technology.

I ask people to take a typical day and think about how much time in a day they spend on one of the platforms or more of the platforms of the tech companies. You wake up, you check your iPhone. You know? You you go to shower, you ask Alexa what the time is. I'll wager almost every waking moment of the day, we were caught up in one of these tech company platforms.

So this money that came to them was not accidental. It came from our changing our consumption patterns. However, we've all changed. We all have all of our lives on those platforms. There's not another 15,000,000,000,000 left on the table.

So technology companies can't fill in the gap. The question is, what else can do it? That's where we are right now. For a brief moment, people sold us in this notion that AI would do it. Right?

AI would fill the gap. And the problem with that is it's all promise, but nothing on the ground. I mean, ask people when they talk about AI and the promise of AI, ask them a very simple question. How much money did you forget about, you know, other companies and meta and faith. How much money did you spend last month on an AI product?

I've ChatGPT. Every time I use ChatGPT, I get this option of, do you want to upgrade to ChatGPT plus or whatever they call it? It's $20 a month. Zero chance of my doing it. I have an Apple Mail, and I have this little AI button.

And for $3 a month, they will sort my email. And I said, look. It's not worth $3 a month. And with every AI product and service, I see my reaction is that's neat, that's cute, but I'm not paying money for it. And if you see this play out on a major scale, we have a problem.

Why do we have a problem? Because everybody will have AI product and services, but it's not monetizable. If it's not monetizable, then what have we spent $500,000,000,000 building data centers and AI chips for if you can't so we've gotten a little ahead of the game with AI. We've assumed that people will pay for all this neat AI stuff, but the promise that people want to use it and even businesses want to use it, but they don't want to pay money for it. Because right now, that will change.

I would assume that AI products and services become more attractive to us. We're willing to pay for it. But I I feel that at the consumer level, AI products and service are gonna be commoditized. They're either being going to be offered as freebies by the big tech platforms. Are they gonna be neat little things you pay for an app?

Right? $2, $3, $4. It's a business to business AI, which I think is going to be potentially lucrative, but that can't create enough value to carry the entire market. And, again, we're we're doing some, you know, short term pain, and and and we're I wanna move back ultimately to some optimistic stuff. So I I do think the world I don't think the world will come to an end, but I think what we're trying to do is help people plan for the fact that, typically, we've had recessions every seven years, and we've gone fifteen years.

And so we're gonna have some adjustments here. And as you said, we we may be a little ahead of ourselves on our skis. So staying with that for a second, I wanna, you know, shift to the private sector. And I do restructuring for a living. And so I go in with the banks and with tech companies and real estate, and I kinda help them navigate in terms of restarting the company or cleaning up their balance sheet.

And and when I look at what happened in o one with the .com bust, there was a few million dollars that had been invested in these companies, and they got washed through. Then what happened in o seven and o eight, you had 5 or $10,000,000 invested in these companies, and the money got washed through. And then all of a sudden, you started loans getting made with non covenants. You started seeing an addition to the SVBs of the world of, quote, non banks get into this. And I saw LA go from having two VCs to a 100 VCs.

I saw New York having 500 non banks. I think there's estimates now that over over $1,000,000,000,000 has gone into venture capital, however you wanted to find that over the last ten years. And I believe on top of that, there's another trillion dollars of what I call non bank financing that's gone into these companies. So that when I'm shutting down an AI tech company that has no revenue or a biotech company that has no revenue, we may see $300,000,000 washed through in a single company. Mhmm.

These numbers are staggering to me. And when you look at the commercial real estate that has not yet washed its way through the system. I'm wondering switching to the private sector. We talked about the public sector, but there has been a lot of easy money. Right?

And there's gonna be winners and losers. And these companies in the past were able to get new rounds of financing. Mhmm. But people are over allocated into venture capital. There seems to be a nuclear winter in terms of companies' ability to get new financing.

So how does all of that figure into the type of recession we're gonna have? I think, you know, I wanted to take rather than call it, you know, easy capital, I'm gonna call it risk capital. I divide the world of capital into risk capital and safety capital. Safety capital is capital that goes to high dividend paying companies. You you're trying to make money on your money, tradition.

Risk capital is money directed towards the riskiest ventures, high yield bonds, risky stocks, startups, IPOs. In a good economy, you have a balance of both. If you have preponderance of one, then you have a prompt. So you're all safety capital, no risk capital. Middle East is a classic example.

Nothing gets started. Status quo is stuck. No businesses get founded. The economy is stagnant. If you have all risk capital and very little safety capital, then that money starts to chase not just ideas, but fairy tales because the money has to go somewhere.

In the last decade, we had risk capital run amok. It showed up in lots of different forms where VCs would go to Silicon Valley, back a start up, and tell them to scale up. Not even build a business, scale up, because I can sell you to somebody else at a it was like trading on steroids. And for a decade, risk capital had a great run. Risk capital kind of hit the rocks in 2022.

So even before this correction, risk capital got a a lesson saying because part of the reason so much money went risk capital is safety capital became so unattractive. At the limit, if you think about the safest of safety capital, you put your money in t bills. It's liquid. It's riskless. And for a decade, that return was close to zero.

It's almost like I was asking you to leave the safety capital zone by making it so unattractive to you, and you did. Eventually, you said, I'm sick and tired of making nothing on my money, so I'm gonna take my money and go where everybody else is making money. So we create the system where really low interest rates push money from the safety capital side to the risk capital side. 2022, we partially fix that problem. How do we fix that problem?

Very painfully. Inflation went up, interest rates went up, and all of a sudden, safety capital could now make four and a half percent without taking any risk buying a tea book. Risk capital hasn't come back. Now one of the interesting things about last year is even as the market soared, IPOs were not showing up. Venture capitalists were not pouring money in the way they did before 2022.

Something fundamental shifted in 2022, and I think it was healthy. I think there was too much money chasing too few risky deals creating bad businesses that scaled up, and I think we didn't. The question is whether this version of the correction is going to have and I think it will. It'll make risk capital even more cautious. I do think you're gonna see even more of a shift to safety capital.

And, again, it's gonna be painful. It's going to be but but the the the upside of this is while you get caught up in the market going down, there is a redistribution of value that'll occur. Redistribution of value from young growth companies with no business models to more established companies that make money. In a strange way, the Mag seven, a way you want to put your money in, not one of those young tech companies that are starting up because the Mag seven are money machines for the most part. They make immense profits.

Facebook, you know, Amazon, Apple, maybe not not so much Amazon even though it started the game, but at least Facebook, Apple, Google, basically are money machines. So it's not that tech is going to be punished, but segments of tech are going to be punished because if your risk capital is leaving, those are the companies who can where you're leaving from. Where are you going? You can talk about the traditional places safety goes. Right?

Utilities, banks. Unfortunately, those safe places don't look so safe anymore. Banks? Safe in what universe? Right?

They're being inundated with, you know, competition from non banks and from digital technologies and currently knows what. Utilities are being affected by climate change restrictions and what's coming in in terms of fossil fuel restriction. So we're in this strange place where we're looking for safety, but the obvious places you go for safety are no longer so safe. So for a while, I think you're gonna see the surge widen. Where is the safe place to be in this market?

And we'll find it. And it might not be any of the places we picked ten or fifteen years ago. But I have a sense that once this clean and those cleaning up in the market goes through, you're going to see a reshuffling of money from places that benefited during the risk capital days to places that'll benefit from safety capital. So that leads me to a question about cryptocurrencies. And so you've got risk capital.

You've got stores of value. You've got conservative, as you said, capital intensive industries where you're doing long term growth. Where do you see, for instance, Bitcoin in all of this? Now before Bitcoin existed, we had a place we went. Right?

When we were scared, we'd lost faith in governments. When we did not think, it was gold. Yeah. Since Bitcoin's beginnings, the question I've asked is, is it millennial gold? Is it the kind of thing that a 35 year old puts his money in because he has lost trust in every single institution?

And I think there's an argument that Bitcoin is millennial gold. The only problem is and I call these collectibles, things you hold on to because they hold value through crises. They hold value and the rest of the world is melting down. Gold has a history of doing this for thousands of years. It predates actually paper currency and fiat currency.

Bitcoin has been around only sixteen years, and the most disquieting thing to me about Bitcoin as a collectible, as a crisis, is it doesn't behave like a crisis asset. It behaves like a very risky stock. So my problem with crypto is not the traditional it's it's, you know, the Charlie Munger critique of Bitcoin is be there being nothing there. I can live with nothing being there. But if you're a collectible, you better start behaving like a collectible, which means when stocks go down like they did last week and this week, I want crypto to go up.

But take a look at what Bitcoin has done in the last couple of weeks. It's actually accelerated the fall that you see in stocks playing up. So is there a way you can reframe crypto to be a good collectible? I think there is. But the problem is the people who make money on Bitcoin are the people who trade it.

They want it to be volatile. They don't want it to be a good collectible. They want to make they want it to be a speculative trade. And to be a good collectible, you can't just be a speculative trade. You've got to build a basis.

And I think if people really want Bitcoin to be a collectible or any other crypto, they need to push the traders out of this process. If their traders make the decisions on how to structure Bitcoin and how to frame it, it'll never be a good collectible, and it's definitely not a great currency. It's too much inefficiency, too much transactions cost in using it. So with Bitcoin, I'm I'm holding judgment on where I think it'll go. But right now, if you say, would you sell your stock and buy Bitcoin?

I definitely wouldn't because the market goes down 20%, my Bitcoin is gonna be down 50%. And that to me is the exact opposite of a safe place to be when financial assets are melting down. So as we come kinda to the end here, if you had to kind of summarize what you would expect for the next couple years, how how would you summarize what you what you think were were in store for? You're in a roller coaster. There's going to be no easing.

You're gonna be up and down. This is going to partly, it reflects Trump's temperament. You know, he's a chaos agent. You're gonna see the chaos play out in markets. You're not gonna wake up to because in a traditional administration after two weeks, like the last two weeks, you know what you do had.

Right? The treasury secretary would have come out with a very, very measured statement about how the government was going to be, you know, more careful about its words. And you're not getting you're not so you're not going to get that buffer in this administration. You're going to get, you know, that that chaos in a day to day basis, which is gonna mean you're gonna have updates and down dates. It's gonna be a roller coaster ride.

So if you're you're a trader that can work to your advantage or it can wipe you out. I'm an investor. So the lesson for me here is I want to follow the market less over the next two years because psychologically, we know what happens when you get too much feedback on what's happening in the market. We do things that actually act against our own best interest. We act emotionally.

So I never watch CNBC, but if I did watch CNBC, I would turn it off. I'll scan the headlines in the Wall Street Journal, but I'm not going and I'll definitely not listen to experts telling me what to do with my money. K? Because I think that you're often going to get the wrong advice. I would say, turn off, accept the fact that it's volatility.

Save as much as you can say, which should be my advice all the time anyway. Invest it for the long term and then move on. No. Outside of that, you know, I have very little advice to offer because you got to find your own sweet spot. I investing, I what I call a sleep test.

If you lie awake at night wondering what's happening to your portfolio, you've already failed the sleep test. I'll wager. Quite a few people in the audience have failed the sleep test in the last seven days. You know what that tells me? You got too much money in equities, too little in safe places, whatever you call safe places.

Find your sweet spot. Something that allows you to earn a decent return but doesn't cost you nights of sleep. And that might be far less invested in risky assets than you have historically, but so be it. You got to do what's right for you. No.

I think that's great advice. And I think what's gonna be interesting in this period is that as somebody who restructures companies and and dealing with different age groups, I see a entire generation that has not gone through a down cycle. And there has been this irrational exuberance, and there hasn't been capitulation. And I think you know, it's gonna be important for all of us to remember that the world's not coming to an end, that that pain is and and adjustments are part of normal cycles, and that AI and a lot of the promises with new drugs and technology, long term, is very exciting, but that you do get ahead of yourself. And as you said, you're not going to be able to monetize this all right away, and so people are going to have to get back to kind of law the farm, you know, pay as you go a little, and and realize that, you know, unlimited debt has consequences.

And and I I think I think it'll actually be a sobering but important lesson for us to learn. Yep. And I think, you know, the the strange thing is even as the market peaked last year, you talk to twenty five to thirty five year olds. I think it's the unhappiest twenty five to thirty five year old generation in this century. Clearly, something is not right in the way that you can't afford a house.

You can't I mean, basically, you're saying your market is up. Everything is good, and you look around and say, why are so many people unhappy? There's a disconnect here that I think is playing out in terms of pain as well. So it's not like things were great a year ago. They might have looked good in terms of the economic statistics, but we were unhappy as consumers, as as businesses even a year ago.

So I think that unhappiness stems from something else being broken in the system, and maybe this is a way of the system cleansing itself. I know it's a it sounds like an antiseptic thing to say, but systems accumulate a lot of junk along the way, and you need that that kind of restart of the system. So that might that's the most upbeat thing I can think is, you know, this too shall pass. The system will find its way back. And as long as you don't give up and do something incredibly stupid as short term in the mean time, you'll be okay on the other side if you can keep your discipline and do what you should be doing.

Let me let me ask you one last question because it's a follow-up to kind of things being broken and and the fact that young people were upset to begin with. You know, recently, Gavin Newsom has made it pretty clear that he wants to run for president, and so he's trying to move to the middle. If he's gonna run from California, he's got a few issues that are hugely challenging. One is our homelessness. Two is our housing crisis.

And three is the inability to build high speed rail because, you know, California has really been stuck. From an economics perspective, from a fixing things perspective, do you have advice or optimism in terms of what could work in California to be able to demonstrate that we can, you know, become efficient again and start growing? See, this is the problem with legacy systems. The reason transportation didn't catch on California is you're trying to build on a legacy system and saying, we're gonna build high speed rail. Doesn't work that way.

Right? As long as we have a a state that was built around freeways and the automobile This is not just built I mean, I remember when they built that long branch line in LA, and my reaction was, what exactly do you think this is going to accomplish? Because I've got to drive to a station to get on a train to get somewhere else. So the driving is there. I need parking lots.

You can't take a city built around highways and put in a train system, say, we built in a mass transit system. San Diego, we spent probably billions of dollars building this train line. I'll wager less than 1% of the population uses it. That's what legacy systems do. Your legacy decisions kind of bind you, and California's made a lot of legacy decisions that were great fifty years ago.

Right? We love the freeways. It got us, you know, from spot a to spot b, but those freeways might actually be a problem in terms of even talking about a building mass transit. So there's a lesson from California is once you built a system that works, when it stops working, it's much more difficult to build a new system. That's why China has an easier time building high speed trains.

There is no legacy system. India will be ahead of us in ten years in many mass transit systems because the legacy system there, the more successful you've been historically, the more difficult it becomes to create change because a legacy gets it in the way. So as Gavin runs for the for for for for president, which I think he will, his biggest problem will be California. Because, you know, if you want to make the rest of the country like California, that'll make him $4,000,000 homes in Montana. And the question is who's gonna be able to afford them?

Right. So I think that if he's gonna run housing, I'd put housing on that list. Right? My daughter is 30. I have four kids all with and I think about how the heck are they gonna be able to afford to buy a house, a starter home in LA or San Diego, and the answer is they cannot.

That's a fundamental problem. And I'm not sure how you fix it because of all these legacy issues that bind it. Maybe he needs his own version of Doge in California where you break legacy systems. It'll make him incredibly unpopular. But remember, he's not running for governor again.

This is his chance to do something that actually changes California, but I don't think he'll do it. Well, I and and I I agree with you that, you know, it used to be that California would do something and say the rest of the country is gonna kinda follow California. Now, the rest of the country is saying, wait a second. Why would why would we wanna follow California? And, you know, when you've got Ezra Klein coming out and and picking on the blue states, you know, and and talking about these challenges, you realize that we can't keep hiding from it.

And so it it really is a challenge. And to your point, even when I was a young student, you know, with with someone like you as my professor, I remember thinking, democracy really only gets big things done in a crisis because the people just won't stand for it. Mhmm. And so I think if the the to me, the optimistic takeaway from what you're saying is things happen faster now. We get through them faster now.

So don't panic. Buckle up. You do on a roller coaster, but we will get through this. We are still the most dynamic economy in the world, and so the people are still coming here. And so we will get through this, but we're gonna have some pain along the way.

And be adaptable. I mean, I think that this is a word where you don't want to prepare for a job of the past. Right? I have students who come into my classes, and they wanna be investment bankers in four years. And I say, are you sure that's what you want to do?

Investment banking in four years is going to look very different, perhaps a lot less lucrative than today. So rather than plan your education and your skill set for a job you see out there right now, Plan your education skill set in a way that you're building a niche for yourself. No matter what the world looks like, you can take that niche and fit into that niche. So I think we have the the word I try to convey to my students that I want them for be adaptable. Learn skill sets that make you special, make you different.

Because those skill sets will sell whatever economy you're in because no. Otherwise, you're, you know, you're one bot away from being replaced, and that's the last place you want to be. That's a beautiful way to end. Again, thank you so, so much for your time today. The POC venture capital beyond is produced by CMVG Advisors.

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