Transcript

Andrew Ross Sorkin: How to make sense of today’s market

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1:35 Jeff Berman here this week, we are sharing a conversation I had recently with Andrew Ross Sorkin at our Masters of Scale summit in San Francisco. Andrew is truly a brilliant journalist whose work appears in the New York Times and on CNBC. He's the author of the best selling book about the two thousand eight financial crisis, too big to fail. His new book is called Nineteen Twenty Nine, and it is an incredibly well-researched history of that year's stock market crash, chocked full of parallels and cautionary tales for today's economy. I am so grateful he joined us on stage for this conversation. Andrew shared that he had a an interview where The person you were sitting across from said, throw'em as hard as you can? I was sitting in the back of the stage.

2:37 And a billionaire who you all know. Looked at me and said Throw it as hard as you can. And I looked at him. And thought, what is he doing? Is this some way to screw with me, like to get me off my game? I didn't really know what was happening.

2:50 We do the interview. Yep. I try to throw a couple of Balls as hard as I can. Though I by the way prefer A tennis rally. Okay. I always think we all like to watch the ball go back and forth. You want to see whether they can run and get the ball and hit it back. But anyway, we're backstage afterwards and I look at him and I go. Why did you say that?

3:09 'Cause most people say, you know, take it easy on me, don't ask a hard question, I don't want you know. And he looked at me and he said because if you throw it underhand. Both of us lose. And I thought it was the smartest thing. And everyone here loses. Everybody here loses. Based on the the research you've done about the 1920s, what led up to the crash, what what created the crash. Are we heading for a stock market crash in a second great depression?

3:33 You asked I mean you know, that's my it's my slice. Okay, so the truth is We are right now, there is no question and I will say when I w started working on this, I did not intend To write a book. That mirrored or parallel today.

3:48 There is no question to me now, and I hate to say this. That we are directionally In a bubble. Of some sort. when it's going to pop. I mean we just talked about AI. It's a huge amazing force in our economy. I'm excited about it.

4:01 But along the way something bad is gonna happen. I think that there's a Банч форс плайна. That will probably set us up. For a massive hiccup. На волтап лук.

4:12 Nineteen twenty nine. Well look like nineteen ninety nine. Well look like two thousand eight. I don't know. But I do think that there are a number of parallels today which we can get into

4:22 That Suggest Something is not right. Okay. So so let's let's let's lay the foundation for it then. Let's go take us back to the late nineteen twenties. What are you seeing and by the way, I mean the book is extraordinarily researched. It is especially the second half an absolute page turner. Um you are gonna love this book and get a ton out of it. But take us back to the nineteen twenties. What is happening that mirrors where history might not just be rhyming but repeating. Okay, so here's the thing, and I didn't know any of this really before I began this book. I think I knew that something very bad happened in 1929, but I figured I needed to understand who the people were and what they were saying and what was really happening. So

5:00 The first thing to know about the nineteen twenties was it was this remarkable period. of technological advancement. Actually somewhat similar In a sort of AI ish way. to now, but in the context of Radio.

5:13 Telekommunications By the way, the hot stock back then was R C A ticker symbol was radio. It was like the meme stock would have been like NVIDIA. Basically. And

5:26 It was also a period of time where people took on debt for the first time in America. Ever. So Prior to nineteen nineteen Taking on credit.

5:36 All of that was almost a moral sin. Nobody did that. And it wasn't until General Motors came along and said, you know, we gotta sell more cars. How are we gonna do that? We're gonna start lending people money. And people started to do it. And then Sears Roebuck. said, Oh my goodness, they're doing that.

5:54 We can offer credit as well. And then a guy named Charlie Mitchell. Sunshine Charlie ran a bank called National City Turned into City Group.

6:02 Came up with this idea, we're gonna start lending people money. So they can buy stocks. and brokerage houses across the country started to emerge on the corn of streets the way you see Starbucks today. And you could literally walk in

6:17 To one of these brokerages Put down a dollar. And they would lend you ten dollars. And for a very Nice stretch of time. It was like free money. In nineteen twenty eight.

6:28 The stock market was up 48 percent. Between the beginning of 1928 and September of 1929, the stock market was up 90 percent. And so if you are completely and utterly leveraged It was this unbelievable thing, and all of this. Was Done.

6:44 Under the umbrella this idea that they were gonna democratize finance. We're hearing that in a yeah. And it was this idea that, you know, the elites had gotten there. Fair share. But now we gotta give everybody else.

6:57 the opportunity at the lottery ticket. And I think you're hearing that a lot today. in the context of look we just had a a bill just passed that's going to allow private equity, venture capital. Private credit.

7:09 To show up in our four win K plans. Like this is all happening. Crypto, obviously, and so many other sort of component parts. I think are very reflective. Of that moment. So you're also the too big to fail guy. So do we not learn our lessons here? Like what is it about us that we're not looking at history and going, gosh, this doesn't end well. Given what we know the human condition.

7:32 Іззалмор. There's a great line, uh Wall Street Two, the movie, which was not nearly as good as Wall Street One, there's a a great line where Douglas looks at um And says something like you know, what's your number? And he looks at him and he says, More.

7:48 And I think that that's reflective of what we all want. We all want more. And the question is What are the guardrails? How much speculation Is good speculation.

8:00 And when you layer on credit and debt What happens. That by the way, unfortunately, is the magic ingredient Of both a fabulous Sort of growth period. And what oftentimes

8:12 And And ends it badly. It's the accelerant. It's the match that lights the fire. You could have all the bad actors on stage doing all the bad things you could possibly imagine, but it that is the thing that sets you back. In nineteen twenty-nine, It was margin loans. People were buying stock and they just had way too much debt. In two thousand eight. you'd argue it was subprime bones.

8:32 The question now is it the leverage in the system around the AI ecosystem. And yes, it looks like you know Whether it's Meta or Google.

8:43 They're using cash. But if you look at j meaning to buy to buy the chips in the data system, but if you look at so many of these deals now. To build these data centers, the energy companies, the construction companies, the real estate companies, that is a complete leveraged mess. And if you look even at some of the deals that NVIDIA just made with OpenAI or Open AI made with A and D

9:03 They're almost circular deals with money that's literally being made out of nothing. So if you think about how the AMD deal worked that was just announced Earlier this week. You had AMD selling chips to open AI. Open AI.

9:19 technically can't really afford to buy the chips. Okay, they don't have enough if if you actually just look, they don't have enough cash to buy the chips technically. They take a warrant. A stake in AMD they know that if they announce this deal. The stock of AMD is going to go up, so now the warrants are worth something, and now you could effectively sell those warrants or take a loan against those warrants, and now you have cash.

9:41 To buy the chips. Andrew, I want you to imagine that you're temporarily not a journalist, no ethical issues. Okay. And when the Treasury Secretary and Commerce Secretary and perhaps the President call you up and say, boy, you seem to know a lot about this. What should we do? Well I think that the answer is and this is you you want some semblance of specul in the market. So I just want to say straight up, here we are in one of the greatest cities in in the country, and it's the city that's about innovation. And no innovation has ever happened without some form of speculation.

10:14 Speculation is not the evil twin. of innovation. But they are connected. They're like Siamese twins. To some degree. Can't have one without the other. Elon Musk would not exist. Uh SpaceX would not exist, Test would not exist without somebody deciding to speculate on something that seemed completely and utterly

10:30 Crazy. So you want that. However You don't want it to go too far. So

10:36 My anxiety today is about A lot of the things that we're doing To take the guardrails off. So There's a move afoot you've probably read about.

10:47 President's announced plans doesn't believe that public corporations, for example. should have to have quarterly earnings declared. Wants to do it twice a year.

10:56 More transparency to me is Better, typically. That's probably not the best idea. I'd say Mr President. This is not gonna help the situation. I mean we could argue we we do need companies think on longer horizons quarter to quarter, right? I mean, and I get the argument if you're a CEO, you don't want to waste the time, you don't want to waste the money, you don't want to waste the energy.

11:16 But One of the things that has kept us from going totally over the edge, and by the way, there was no SEC. in nineteen twenty nine. None of these rules existed in nineteen twenty nine. That's why one of the reasons I think we had the deepest recession, if you will, or depression we've ever had. And so The argument I would make is you have to keep some of those guardrails around.

11:34 One of the things we're doing right now is we're saying we want the public to have access. to private investments. Well Private investments are great, and it's true. If you had access to shares of Uber or shares of Facebook before they went public, you would have made a fortune.

11:50 The conundrum is that there's not the same kind of disclosures that are required with those private companies. And if you look at most Venture capital firms right now. I would argue do there's some like mark to bake believe situation that goes on every day when you get

12:06 The numbers'cause it's not a real market yet. And It's not that It's all gonna go wrong. It's that charlatans and frauds and others emerge. And the question is How much protection?

12:17 Do we want. It's interesting. Some people say to me, Andrew Don't protect me. And by the way, if you're trying to protect me, what you're really doing is you're protecting the man. I mean like that's the argument. You're protecting the man.

12:27 Каз I want a shot. For years we had something called an accredited investor rule. You had to have a million bucks to invest in some of these things because the argument was we didn't want people who couldn't afford to lose to lose. Is that the right argument? I don't know, but I think we have to start thinking about this and talking about it, because this is not the conversation that's happening in America right now.

12:49 More with Andrew Rossorkin. In just a minute. Humans will never be more intelligent than AI. There's gonna be two types of companies. Those were great at AI and those that went out of business because they weren't. How do we build a future? That is human centered.

13:16 I'm Rana El Chayubi. And on my podcast Pioneers of AI, we answer that question and so many more. As an AI scientist, entrepreneur, and investor, I know what it takes to build AI that works for everyone. Every week I sit down with the pioneers shaping our future. and we take you behind the scenes of the AI that's transforming our lives. Find pioneers of AI wherever you tune in.

13:46 Hey listeners, Bob here. If you listen to Rapid Response on Masters of Scale, you may be missing half the show. Because every Friday we release a second rapid response exclusively in the Rapid Response feed. The guests and topics are just as compelling and timely from Ford CEO to NAS administrator to the lessons from The Devil Wears Prada. It takes about 10 seconds to find, just search rapid response wherever you listen to podcasts and hit follow to make sure you never miss an episode. I hope to see you there. Welcome back to Masters of Scale.

14:26 You can find this conversation and more. On our YouTube channel. One of the other things that's happening in our economy is, I think, unprecedented in American history. We are seeing companies Kicking a share of profits.

14:41 To the federal government outside of the normal tax code, we are seeing the federal government take stakes. In companies. You did a recent long piece on this and an episode of the Daily talking about this. How do you think about what you want to call it state capitalism or or some other phrase? How do you think about what's happening on that front, particularly as we look at the broader economy? I want to come to specific companies in a minute. So I don't think it's unprecedented because it happens Russia and China every day. It's unprecedented here.

15:08 And I'm surprised that more people are not raising their hand and saying Hello. What's happening here, this is a little crazy. I think that

15:17 In the short term, maybe it's not a problem. In the long term, the idea of a Free market. And the capitalism I think we've all enjoyed. having the government, I think pick pick winners and losers, this idea of industrial policy, nobody's doing these deals.

15:32 Genuinely because they want to. The doing these deals because they're being coerced. into doing them. Let's just call a spade a spade. That is what is happening. And I don't know what that portends

15:45 longer term in this country. Now by the way, the flip side is China's been doing this for a very long time, and by the way, it's been working for them. Most of the time in our country, when we've tried things like this. It hasn't worked. Is there an example of where we've tried it? Well, you could argue I mean.

16:02 Look. The Obama administration used to get uh a lot of criticism for giving money To Solindra, for example, or there have been these instances where we have subsidized E V plug in stations across the country. That was a terrible waste of money. So there's been lots of things where and where we've had a a piece of it.

16:20 We historically haven't taken pieces of companies unless it was after a financial crisis. So we did this with the banks, and by the way, that did work. We did this with General Motors. And that did work to some degree. So but we haven't done it just because We want some. There's a bit of a mafioso kind of thing like hey, give me some, otherwise if you don't give me some, we're not gonna let you do XYZ. So we just played devil's advocate for a moment, because certainly

16:46 Undeniable, the president himself would say some of this has been coercive and proudly say so. But one could argue that Jensen is like, I want to access the Chinese market. Yep. There are legitimate reasons for us not to have it. There are legitimate reasons for us to have it. Boy, if I just sweeten the pot a little bit. I can get access to the market. So Mr President, what if we kick fifteen percent of our profits to the federal government, everyone wins, and we'll only sell a lower quality of chip to China. Like is that coercive or is that a CEO simply playing the system?

17:17 Oh no, he's playing a system But I'm arguing that the system is not right. What I'm suggesting is If we have a national security concern, We should

17:26 Make the decision based on that, not because we're getting paid off. As the taxpayer. to do something that we would otherwise not do. That to me is the fundamental question here about all of these transactions. Are these deals that we would otherwise do or not do? And here's where it gets complicated.

17:42 Over time So now we, all of us in this room. We own a stake in Intel. We should be rooting for Intel. In truth, we should be rooting hopefully for all American companies, I would like to think, but we now actually need to all root a little bit more for Intel.

17:57 Okay. So in the past If Intel wanted to do a merger, let's say with another company that historically The Department of Justice and um

18:09 regulators would look at a scance and say We don't want that much concentration. That's not good for consumers. Well, how does that decision now change? It may be bad for consumers, but maybe good for us. These are the kinds of things that I don't think unfortunately we're talking about in terms of what the true implication of these things could be.

18:30 The flip side. It was Difficult. for me to watch Tim Cook go into the White House and hand a gift to the president, or to see Mark Zuckerberg at a dinner with tech leaders whispering to the President, I didn't know what number you wanted me to say. You say diff it was difficult. Difficult, I'm not sure. Yeah.

18:51 Um thank you. Um being very careful here. See, by the way, we're all being very careful now. That's the other thing. We're all being a little too careful, probably. But maybe not. I'm curious about your perspective on two things, and I want to go micro then macro. Micro, you're the CEO of a company that has the opportunity

19:08 to play to these tendencies of this administration, but you know that like long term it's probably bad for the overall economy and for capitalism. It feels like a collective action problem almost. Like if you're the one who doesn't do it, your competition may do it and they win. What's a CEO to do right now, particularly when they're in a regulated industry? Okay, so this is where I will probably break with the other comments that I made. I don't actually begrudge Tim Cook.

19:38 or Jensen or any of the other leaders of these companies that are making deals with the government, even though I think these deals are not in the necessary long term interest of the country because the truth is if you were running a business today and you're trying to play a long term game.

19:55 There's very little advantage in raising your hand right this moment politically and saying I don't like what's happening here. Because What exactly Can you change in this moment міні

20:08 The politics of this country are clearly Almost lopsided in one one way in in Washington. Nothing is gonna be adjusted as a result of you raising your hand on your own. Maybe the politics of the country change after the midterms, I don't know. But I think that raising your hand now

20:25 Only mys you're likely to get slaughtered. Tomorrow. And so if you're trying to play for later This doesn't help. The question is when do you raise your hand?

20:34 If you don't like what's happening. And I think that is a very big question. I think there's a lot of people who say, Well, you need to raise your hand now because if you don't raise your hand now, by the time you want to raise your hand you won't be able to. I don't know if that's true, but I I'm very cognizant of Look, we're living in a world of trade offs. Everything is a trade off, and I try in my own way as a journalist. to meet people where they are, to put myself in their shoes, and I I hope that we're all cognizant of what those tradeoffs

21:02 Look like. You referenced Russia and China. I want to reference Hungary, because it is a softer form of autocracy, effectively. But Victor Orban has picked his winners. And the winners do very well and their competition gets eliminated or swallowed up by the winners. And so in my my mind, democracy and capitalism are inextricably intertwined. Like you cannot have A free market without democracy. Small d democrat.

21:25 Am I right? Am I wrong about that? I think generally you're right about it, but then I look again, it's a very strange thing to say. I look at China And China's been One heck of a success story.

21:38 And they've done it a completely different way. And so You tell me. Where things really are, I don't know long term. And by the way. You know, Reed was talking about AI.

21:48 AI could change all of this. That's the other piece of this that I just don't know. Are we on the cusp of something that's so revolutionary that it upends even the way we think about capitalism and free market? I want to go back. To the crash and the depression, because coming out of the Great Depression. We saw unprecedented social change in America. When you look at the history. And you look at today, what gives you optimism about the next phase of this future that that we're gonna be building? Well

22:16 Look, I do think and this is so maybe it's Pollyanna. To say. But I think that For the most part. When we do have these sort of inflections.

22:25 Amazing things come out of it. By the way, look at the end of ninety nine. You could say there was a crash. Terrible thing happened. And then An explosion. So it's not to say that

22:34 You know, we're gonna go off the cliff and then we end up At the bottom of the some ravine somewhere. I do think we do learn our lessons. It's just a little bit more painful than we'd like. The lessons to be. That's really where I land, and I'm optimistic

22:48 That We as a collective Have found ways almost invariably, you know, there is a mother of invention that happens in these moments. And I think we will find our way. To the other side of the

23:03 The other side, if you will. I want to close on this. One of the things that I was struck by in the book was the relationship between journalists and the barons of the era. And so putting your journalist hat back on How's journalism doing covering what's happening? That's my slice backhand. Yeah, yeah, yeah, yeah, yeah.

23:25 Look, I actually think right now That Journalism is doing a pretty good job. I do. And I would

23:34 Say I would say journalism capital J, but Big tent. I think we now know more than we've ever known before. I really do believe that. I know that everybody thinks that journalism and legacy journalism is dying. And maybe it is. I don't think that's true. But I think we now have more inputs than we've ever had before in real time.

23:57 I think it's more complicated. I think the other component thing that's a component part of Journalism in our society that shifted. Із да ебій іннесро has become their own journalist. This is actually to me the biggest shift that's taking place.

24:12 over the last decade or two. Which is to say Twenty years ago, we all went to one or two or three different media sources, and that was our diet of how we learned about what was going on. And I think we believed what we were what we were reading. Today

24:27 It's very different. We might go to five or six or seven or ten different sources. And knowingly go to places And to writers and to speakers and to other sources that we know may not be accurate. Or at least completely accurate.

24:43 But we think there's a a grain of truth in it, and we're all searching for our own truth. Now that's a complicated situation. And so I think that there's Journalism, which is trying to get at truth. But then there's a public that's has almost shifted. The way it thinks about that truth.

25:00 And I think that ultimately, right now, is the greatest challenge. that at least what I've done historically f professionally faces. Mm. Mm

25:09 The book is nineteen twenty nine. Thanks everybody. Thanks again to Andrew Ross Sorkin for joining us. Again, the book is 1929, and it's available everywhere you find books. Make sure you check out Masters of Scale on YouTube to watch more videos from our fantastic speakers and Really riveting conversations at our summit. Masters of Scales await what original.

25:49 Our executive producer is Eve Tro. Our senior producer is Trisha Bobida. The production team includes Masha Makutunina, our senior talent executive is Stephanie Stern. Mixing and Mastering by Aaron Bastanelli and Brian Pugh. Original music by Ryan Holiday. Our head of podcasts is the tall Molad.

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