The REAL Reason The Next Recession Has Started

0:00 On this point of stocks,

0:01 the average person and tying it back into what we were saying about AI,

0:04 because there's been this over investment

0:06 in artificial intelligence tech technology companies.

0:09 You said earlier, a kid in Stanford right now or anybody could raise 10,

0:12 20 million dollars for some AI idea they have and I'm seeing it everywhere.

0:17 The companies are over investing in infrastructure.

0:19 I mean it was crazy.

0:20 I think OpenAI did the biggest ever fund raise.

0:22 Was it almost 200 billion dollars to build data centers on revenues

0:26 of I don't know if is it 30 billion dollars or something?

0:28 Craziness is going on in the markets.

0:30 Yes.

0:30 At some point things correct.

0:32 Oh, 100%.

0:33 If you look at the greatest spends on infrastructure,

0:35 when they get above 2 or 3% of GDP, there's almost always a crash afterwards.

0:39 It happened in the railroads.

0:40 It happened in electrification.

0:42 It happened in the internet.

0:43 It happened in the huge telco build out of global crossing.

0:47 Now, having said that, that doesn't mean

0:49 those companies don't come back at some point,

0:51 but there's almost always a dip or a correction afterwards.

0:54 I incurred or I I absolutely was on the wrong

0:57 end of that dip in 2000, again in 2008.

1:01 But, if you look at the most valuable companies in the world,

1:04 they have in a single year all of them have had a 40 to 97% correction.

1:10 Amazon went down 94 to 97% from '99 to 2001.

1:14 Facebook was off 72% in 2022.

1:18 The difference now is if those companies go down,

1:20 they're such a big part of the market,

1:21 if they sneeze, the global economy could catch a cold.

1:25 So, I I think the technology will absolutely survive.

1:30 I do think it's seminal, it's breakthrough,

1:32 but that doesn't mean that we're not going to incur

1:34 a pretty massive correction from a stock market perspective.

1:37 Also, let me catastrophize for a moment.

1:42 Your generation and the majority of investors right

1:45 now are under the impression that any breakthrough

1:47 in technology results in a small number of companies

1:49 over time that are able to use IP,

1:52 distribution, ability to raise capital to sequester

1:57 and capture trillions of dollars in market cap.

2:00 E-commerce, that's Amazon, eBay, Shopify, social media,

2:05 you know, whether it's you know, obviously meta or or or snap or YouTube or AI.

2:13 The problem is is that what we forget

2:16 is there have been seminal technologies that have

2:19 not necessarily resulted in any small number

2:21 of companies been able to capture shareholder value.

2:23 Let me give you some examples.

2:25 If you someone said to you right now, for the next 36 months,

2:28 you either have to go without AI or jet transportation, what would you pick?

2:35 [laughter] Without jet transportation or without AI?

2:36 Crop plans for the next 3 years Oh, no.

2:39 Oh, AI.

2:40 I would I would keep the AI.

2:41 Okay.

2:42 Hands down, jet transportation.

2:45 I use AI every day.

2:46 I invest in AI companies.

2:47 Jet transportation is much more important to me.

2:50 I think that's skirting along the surface of the atmosphere at 8/10

2:52 the speed of sound has unlocked

2:54 emotional and financial well-being across the world.

2:57 It's an unbelievable innovation.

2:59 If you added up all the shareholder value,

3:01 the losses and the gains, the profits and the losses,

3:04 right now as we sit here now,

3:05 the entire airline and jet manufacturing industry is a break even.

3:08 It still hasn't made money.

3:10 If you look at all the airlines that have gone out of business,

3:12 if you look at it the government subsidies of all the jet plane manufacturers,

3:14 it has been a shitty business.

3:16 It's at zero.

3:17 PCs, I was on the board of Gateway computer.

3:20 I realized that's the weakest flex in the world.

3:23 [laughter] I've no idea what that is.

3:24 You don't know what Gateway is?

3:25 God, I feel so old.

3:27 It was this company Ted Waitt who was

3:28 sort of the Michael Dell of his generation figured

3:30 out a way to assemble computers in I think

3:32 South Dakota and it became this hugely valuable company.

3:34 It was the second when I was on the board it

3:35 was the second largest computer manufacturer by volume in the world.

3:38 We were ahead of Apple.

3:39 We got sold for 600 million dollars or maybe 760,

3:42 which is what Alphabet will lose in about three trading seconds or gain today.

3:47 No one's been able to capture a lot of money around PCs.

3:49 People say Apple.

3:50 No, it wasn't PCs, it was the iPhone.

3:52 Vaccines, I think vaccines are the second greatest innovation

3:56 in history only bested by the American middle class.

3:58 Millions of lives saved through vaccines.

4:01 Moderna's down 90%.

4:03 There's no one company that's been able to capture, sequester shareholder value.

4:07 So, my thesis is that there's a one

4:08 in three chance that AI becomes as important as vaccines,

4:13 as important as jet transportation, as important as PCs,

4:16 but there's no one or small group

4:18 of companies that are able to capture shareholder value.

4:21 Why is that?

4:22 AI puts AI out of business.

4:25 And that is if you look at the convergence of the technologies,

4:28 all the models are converging.

4:30 Yeah.

4:30 They're AI reverse engineers any feature and basically they're

4:34 all kind of they all started with this delta,

4:36 they're all converging towards the same thing.

4:38 So, I wonder if the big winner or the stakeholder that wins in AI is us.

4:43 Yeah.

4:44 And that is we have this we have amazing vaccines, PCs, transportation,

4:49 but a small number of companies haven't become worth trillions of dollars.

4:53 And I wonder if the same thing might not happen with AI,

4:55 with open weight models out of China,

4:58 with um basically great models that are for free.

5:02 My prediction would be to go short

5:04 the AI ecosystem from a shareholder standpoint,

5:07 but from a stakeholder standpoint, I think it's going to be great.

5:10 And let me back up.

5:13 I think a more important technology in terms of how

5:15 it's going to change the world is not AI.

5:18 You every year I say this is my technology of the year.

5:20 In '24 I said it was AI.

5:21 '25 and '26, I had the same technology and said this is more important than AI.

5:26 Any guesses?

5:27 Talk about this a lot.

5:28 You would not know this technology or use it.

5:31 That's a hint.

5:33 Okay.

5:35 Testosterone.

5:38 [laughter] Replacement therapy.

5:39 That hurts cuz you know I'm on it.

5:41 That hurts.

5:42 Okay, no, it doesn't.

5:42 Um okay, Ozempic.

5:44 Okay, GLP-1.

5:46 GLP-1s, yeah.

5:46 Talk to somebody who's on GLP-1 and uses AI every

5:49 day and ask them which one they would give up.

5:51 Yeah.

5:51 [laughter] I think GLP-1, if you look at what's really going to have an impact

5:55 on people's lives and what will create more shareholder value,

5:57 I think it's GLP-1 than AI.

5:59 And a lot of people much smarter than me say,

6:01 you foolish AI, AI is going to change everything.

6:04 I I don't.

6:05 I think GLP-1 is more important technology than than AI.

6:07 And my thesis is there's a one in three chance

6:10 that AI ends up being more like vaccines than e-commerce or social

6:15 and that is going to be impossible for a small number

6:17 of companies to capture all the shareholder value they're raising money at.

6:21 The other kind of what I'll put, you know, fun to speculate or catastrophize,

6:26 if someone were to say the US economy crashed

6:28 in the next 24 months or or valuations came down not 30%,

6:33 but the market dropped 40 or 50%, which has happened before,

6:36 I wouldn't think it's because of its misadventures in the Middle East.

6:40 I think there's a decent chance if I were advising Xi in China and I saw

6:44 America as a real adversary and said we are sick of these guys messing with us,

6:48 treating us so poorly, these ridiculous tariffs,

6:51 very difficult to understand what they're what

6:53 they're thinking or how we deal with them.

6:55 I would do what I think they're doing

6:57 and that is I would engage in modern day steel dumping.

7:00 So, back I think it was in the '80s or the '90s, China wanted to ramp up,

7:05 they wanted to consolidate the global steel market,

7:06 so they began dumping cheap steel into the US

7:09 and US steel manufacturers could not compete.

7:11 And the idea was price it below market,

7:13 consolidate the market and then you get margin power.

7:15 That's basically what Amazon and Netflix have done.

7:17 They've sold you a dollar worth of goods

7:19 for 80 cents until they wrapped up the market, then they started raising prices.

7:23 I think China is beginning to engage in what I'll call AI dumping.

7:27 And that is they're going to have a series of open weight models.

7:30 About a third of corporations now are supposedly

7:32 using Chinese lightweight open weight models that are cheaper.

7:35 If I were Xi, I would just dump cheap AI into the US market and the moment

7:39 large corporations start announcing they're not engaging

7:42 these multi-million dollar site licenses with Anthropic or OpenAI,

7:46 they're using these inexpensive Chinese models and the market realizes

7:49 that there's no way they can justify these incredible valuations,

7:53 I think the US market crashes cuz 40% of the S&P now is

7:58 directly or tangentially related to this giant bet America is making on AI.

8:02 The majority of GDP growth of the last 2 years has come from AI CAPEX.

8:07 If that slows down, we're immediately in recession.

8:10 That's such an interesting idea that if you're sat in China as a leader now,

8:13 you go, "You know what?

8:13 Give Americans cheap AI and you'll kneecap their economy." 100%.

8:18 That's what I would do.

8:20 It does make sense.

8:22 Right?

8:21 a lot of sense.

8:22 I I've heard a lot of founders um

8:24 get quite scared that there will be an economic

8:26 crash in the next 12 or 24 months because of the over investment in in AI

8:31 and investors are going to start to realize

8:32 that that the returns just aren't there for a lot of these companies that have

8:35 raised at 100 million valuation that on an idea.

8:38 And so the market will contract.

8:40 And if it if the market does contract,

8:41 what does history tell us that the individual should do?

8:44 The person listening, they're not the average person in such a market

8:47 cuz they're scared they're going to be laid off.

8:49 If all this investor money suddenly contracts,

8:50 investors go risk off, they might be laid off.

8:54 Well, again, so Jamie Dimon was asked, "What is the definition of a recession?"

8:58 And he said something that happens every 7 years.

9:01 Your generation isn't used to a recession.

9:03 No.

9:03 I was on the board of the New York Times and within like 60 days,

9:07 70% of our revenues went away.

9:09 2008, the credit crisis, advertisers, 70,

9:13 80% of the New York Times revenue was advertising.

9:16 You know, in May we're doing X million in revenue.

9:20 And then you join the board and then [laughter] No, I think I joined the board.

9:24 I joined the board at exactly the wrong time.

9:25 I raised Quickstar, I raised 600 million to become the largest shareholder

9:28 in the New York Times and overnight I turned it into 200 million.

9:32 [laughter] So, but yeah, that was a that was a learning experience for me.

9:36 Anyways, just about the time I started having kids.

9:38 God, that was stressful.

9:39 Anyway, they basically within 60 days lost 70% of their ad revenue and we had

9:45 to go and find a Mexican billionaire to basically call us in to bail us out.

9:50 Your generation really doesn't know what a recession looks like.

9:53 They everything stops.

9:55 Imagine 70% of your subscription and advertising

9:57 revenue from one month to one month declines.

10:00 What would that do to your business?

10:02 to consider letting people go and you'd have

10:04 to cut costs and But here's the thing, to a certain extent, it's healthy.

10:09 You start developing all these fatty deposits and the best time to start

10:14 a business is coming out of a recession because people are cheaper cheaper,

10:18 things are cheaper, people have a new way of looking at stuff

10:20 and also for your generation people don't realize I mean quite frankly,

10:25 if I'm a 28-year-old who's talented and doesn't have

10:27 kids and dogs yet I think a recession that takes

10:31 down the asset prices might not be the worst

10:32 thing in the world that happens to your generation.

10:35 Because when '08 crashed,

10:38 when there was the crash of '08 we let the banks fail we I'm sorry,

10:42 we bailed out the banks but we didn't bail out

10:44 the economy and I was coming into my prime income earning years,

10:47 I was in my early 40s and I was

10:49 still lucky enough and talented enough to make good money.

10:53 So what did I get in 2009?

10:55 Amazon, Apple and Netflix were eight, 10 and 12 bucks a share.

10:59 Those companies have 20x'd.

11:01 Mhm.

11:02 We [clears throat] don't let anything fail now.

11:03 We bail out the markets.

11:05 Where do you and your colleagues find value?

11:08 Like what's cheap right now?

11:10 Where do you find value?

11:11 And here's the thing when you there's two

11:13 parts of your life from a financial standpoint.

11:15 There's investing part of your life and there's harvesting.

11:18 You're in the investing part of your life.

11:20 There's a certain advantage to getting to invest when asset prices are low.

11:27 There's nowhere for you to find value.

11:29 Yeah.

11:29 I I I'm pretty comfortable saying Apple

11:31 and Nvidia aren't going to 20x from here.

11:33 Where do you find value?

11:35 Real estate?

11:36 What Brooklyn is $3,000 a square foot?

11:40 So while you're in the investing part of your life and you

11:43 can survive a bit of a shock I don't know if quite frankly

11:47 a good thing to happen for your generation wouldn't be a correction

11:51 in asset prices cuz the economy has

11:53 an unbelievable malleability and resilience to reform, reshape and come back.

11:58 Recessions usually don't last longer than 18, 24,

12:01 36 months and I think a correction in asset values would be good.

12:06 But what we decided,

12:07 the leadership of my generation has decided we'd rather pull out your credit

12:10 card and artificially prop up the markets through deficit spending or bailouts.

12:16 They're talking We mentioned Spirit Airlines.

12:18 They're talking about a $500 government loan

12:22 to Spirit Airlines to bail them out.

12:24 That's nothing but you transferring money to me.

12:27 Sure.

12:28 Because who owns shares in Spirit?

12:31 People my age.

12:32 Who's trying to buy for cheap?

12:34 People your age.

12:36 It should be allowed to go out of business.

12:38 It should decline in price.

12:40 Asset values should go down.

12:42 When we bailed out every baby boomer owner of a restaurant

12:45 or a small business in COVID that just robbed opportunity

12:49 from the new graduate of a culinary academy who wanted

12:51 her shot to go buy a restaurant for pennies on the dollar.

12:55 Everyone in my generation has had those asset dips where

12:58 if you're resilient and coming into your prime income earning years,

13:01 you could buy assets for a lower price.

13:03 We've decided that the the government is here

13:05 to bail my generation out and smooth out our assets,

13:09 make sure that our assets never go down by too much.

13:12 All that does is rob opportunity from your generation.

13:15 You wrote this book, The The Algebra of Wealth, a Simple Formula for Success.

13:18 A brilliant brilliant book.

13:20 And linking to what you were just saying there where are you investing now?

13:24 Like if you're a young person that's trying to defend your money or just really

13:27 anybody at any age that's trying to find a place to put your money where

13:29 you'll make a return I guess there's

13:31 actually two questions here which is the investing

13:33 part and then like how do I set myself up just to make more money?

13:37 Especially if there's going to be an economic collapse,

13:38 things might get a little bit uncertain.

13:40 I think you I think I heard you

13:41 say before that less people are leaving their jobs,

13:44 it's it's harder for entry level people to get

13:46 into to newer roles potentially at the moment.

13:49 So in such a world where there is uncertainty

13:51 and I want to make sure that I don't go broke I have $10,000 let's say and I

13:56 want to make sure I increase my earning potential.

13:58 What's one's advice for those dual strategies?

14:01 Well, I'll tell you what I'm doing.

14:02 So and it's different.

14:05 I'm at a point where I'm not looking to get rich, I'm looking to not get poor.

14:07 So I just diversify like crazy.

14:09 I don't put more than a I don't invest more

14:11 than 3% of my net worth in any one thing.

14:13 Yeah.

14:13 And I'm in diversifying out of the US

14:15 market into Latin America and European markets.

14:17 Because the reality is nobody knows.

14:20 The only Kevlar against the unknown which is everywhere is diversification.

14:24 Now a younger person can take more risks, right?

14:27 I mean what am I doing?

14:28 I'm diversifying and I'm investing in Pokémon cuz I do it with my son and he

14:32 loves it and I think collectibles are actually

14:34 the only place where there's value right now.

14:35 Everything to me just looks crazy overvalued.

14:38 I look at everything and I that's going to get

14:39 cut in half or that's going to get cut in half.

14:42 But you always want to be in the market.

14:43 It's very hard to be a stock picker.

14:45 So if you're your age you're a talented entrepreneur,

14:47 you're investing in yourself.

14:49 There's no ROI like finding a business you're good

14:52 at, trying to invest and working your ass off.

14:55 That's how you get wealthy in this for young people

14:57 in this generation or you find a company that's going fast,

15:00 you do well there, you get stock options.

15:02 But the key is to make sure that a certain

15:06 amount of your income never comes into your hands.

15:07 People your age can't save money.

15:09 If they get $100, they'll spend 105.

15:12 So the key is to find every matching program or every vehicle or hack to make

15:16 sure you never see the money and from an early

15:19 age it goes into low-cost index funds.

15:21 Take 30% of your capital and have fun with it.

15:24 Buy Nvidia, whatever you want.

15:26 You think you're smarter than everyone else and then you're going

15:29 to find out you're not and and the market outperforms you.

15:32 But how do you get rich?

15:33 The only answer I have is slowly.

15:36 And that is figure out a way to make sure

15:38 that money every month is invested in low-cost index funds.

15:43 In terms of trying to pick the next big thing oh Christ,

15:48 your guess is as good as mine.

15:49 I just don't and anyone who tells you they know doesn't know.

15:53 So I know how to get you rich, that's the good news.

15:56 The bad news is the answer slowly and it requires some discipline.

15:59 But people your age just find out a way to start saving when you're a teenager,

16:03 25 bucks a month and in your 20s 100 then 500 then 1,000 and regardless

16:08 of whether you have a platinum record

16:10 or a best-selling book or a podcast empire, you're going to be fine.

16:14 Uh but I don't I can't look at a sector and say, oh it's AI.

16:18 Well, AI is overvalued right now.

16:19 I don't know.

16:20 Your job is to find something you're good at, to focus so that you

16:23 can become great at something which

16:24 commands more income to show some discipline,

16:27 save some money, to diversify like crazy and then to let time take over.

16:32 Cuz I look at you and I think, oh I'm like Steven.

16:34 I'm a young entrepreneur.

16:35 And then I look at the mirror I'm like,

16:37 And I'm like, oh my god, I'm five years from death.

16:41 It goes but it happened in a blink.

16:44 So take advantage of that because if I gave you a magic box and said

16:47 if you put like you're making real money now if you put $100,000 in a box,

16:52 by the time you're my age it's going to be worth a million bucks.

16:55 And imagine that that that that box is like a second.

17:00 100,000 in, a second it's a million dollars.

17:03 This to this feels like a second.

17:05 So how much money would you put in that box?

17:07 Oh my god, yeah.

17:07 So the moment you have some capital just think

17:11 about trying to at a young age show some discipline

17:15 and put some money in that box because it just

17:18 compound interest is just it's staggering the power of it.

17:22 But trying to predict where you should invest rather than investing in yourself,

17:26 additional skills, certifications, investing in relationships,

17:29 trying to be as do as many nice kind things for other people.

17:32 I think that compounds especially when you're younger.

17:35 People remember people who helped them when

17:37 they were younger and maybe not that powerful.

17:39 Imagine you're very loyal.

17:41 The person who gave you 5,000 bucks, do you resent the money they make?

17:45 They made?

17:45 No.

17:46 I see you emailed him this weekend it's called Alister thanking him again

17:48 sent him a big letter That's because that person took a chance on you.

17:52 There was a certain amount of kindness there, right?

17:54 even the 5,000 it was that a smart person said I believe in you

17:57 and that meant that I could go over to my mother who was ignoring me and saying,

18:00 look this smart person believed in me

18:01 and therefore it made me believe in myself.

18:03 That's really the investment they made.

18:04 That's everything.

18:04 And they took a chance and that probably was they wanted a return

18:07 but what they wanted to do was help out a young man.

18:10 Yeah.

18:11 Your opportunity to make those investments as a young

18:13 person whether it's helping someone get a job,

18:15 being kind a kind a kind word, a kind text,

18:18 telling them how impressive they are,

18:19 whatever it might be that stuff it's like investing it compounds and you

18:24 wake up at 50 and you find those relationships are really powerful assets.

18:30 Mhm.

18:30 So look, I don't I don't have a silver bullet here.

18:33 Save money, diversify, compound interest, invest in relationships early.

18:38 Those compound, too.

18:39 What are the most important decisions you made that resulted

18:41 in the biggest sort of wealth upside for you?

18:44 And they could be any kind of decision.

18:46 It's not like I invested in this but just I don't know,

18:48 a philosophy, a mentality,

18:50 an approach that when you look back on your career you go,

18:52 it was that that that was the biggest step change in my money.

18:55 Well, my superpower is I've gotten shot in the face

19:00 a couple times personally and professionally and I

19:02 mourn and I get up and I go try and raise money again and start another company.

19:06 I had an e-commerce incubator.

19:08 It was basically out of business six months from starting it.

19:11 My e-commerce company that went public in 2002 went through

19:14 restructuring which is a fancy word for bankruptcy in 2008.

19:18 I started a video delivery company that went out of business.

19:20 I I mean you know, people talk about their successes.

19:24 I mean generously I'm sort of like three, four and two.

19:29 I've I've had more losses than wins.

19:31 Every time I've been rejected from a school I

19:34 had my affections weren't returned from a potential romantic partner,

19:38 I got fired, I had a company go out of business, I had investment.

19:42 I've always been able and I think this is the key skill.

19:44 I think you have to do whatever you need to do

19:46 whether it's be around people who care about you, exercise.

19:49 You have to be able to stand in front of metaphorical mirror

19:52 and go I can add a lot of value to a company.

19:56 I can raise money again and start a business if I need to.

19:59 I can make someone really happy.

20:01 That's [clears throat] been my superpower.

20:03 So, the the seminal moment in my professional success was a willingness to say,

20:09 okay, I just got shot in the face.

20:10 The whole world says I'm a failure because my business I raised a ton

20:13 of money and I had to call my investors and say we're shutting down.

20:15 It's humiliating.

20:16 It's public failure.

20:18 I mourn and then I go out and I raise more money and try another company.

20:21 Because only one in seven businesses succeed.

20:24 So, I started nine.

20:28 [laughter] And I knew at some point,

20:28 if you work hard enough, I mean you can't guarantee success,

20:31 but so much of it is out of your control,

20:33 you just want to step up to the plate as many times as possible.

20:36 You want to have a great swing, you want to be in shape,

20:38 you want to be a good person, but a lot of it is resilience.

20:41 I have a lot of really talented friends

20:44 who came up through the alternative investments community,

20:47 masters of the universe making one, two,

20:49 three million bucks a year working for hedge funds in the '90s and the '00s,

20:54 and then they went out on their own,

20:55 raised a bunch of money, hit some bumps, and then closed their funds.

21:00 Or they had a business I have friends who are entrepreneurs who

21:03 left a good job and started a business, and they get stuck.

21:08 These are people who've never known anything but success.

21:10 They got into an Ivy League school, they got a great job,

21:14 everything has been this, and then they hit a failure,

21:19 and they just get that they lose their mojo.

21:21 They just get stuck.

21:23 They can't get over it, they lose the confidence to go out and raise more money.

21:28 And that's the key.

21:29 The key to success is getting shot in the face and then just getting up again.

21:34 I'm 30 years old.

21:36 How old are you, Scott?

21:37 I'm 61.

21:38 You're actually 61?

21:39 No, I'm lying.

21:40 Yeah, I'm 61.

21:41 It's the testosterone therapy.

21:43 No, I thought I didn't think you were 61.

21:45 that.

21:45 Um I thought you were 62 or 61.

21:48 62 in November.

21:49 If you'd said to me anywhere between 49 and 61,

21:55 I think I would have believed you.

21:57 Um so I'm sorry, let me take that out.

21:59 I'm 49 today.

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