Transcription
Hey Andrew. Um, hey Ray. Man, I just read your book and I think it is fantastic.
Um, thank you. It is um, you know, a thoroughly entertaining story and, uh, you know, to me it's informative, right? Um, I I I think that the story is kind of what you're into, but uh at the same time, I think as uh you've written a book on 2008 and now 1929, uh I think that you must think that history rhymes. So I'm so interested in getting into the conversation of not only how it rhymes but what the cause-effect relationships are and what lessons we should earn uh learn uh. So but on the other hand, you want to tell the story. So uh what it was occurring to me is let's start with some of the characters. Uh, it it occurred to me that some of the characters are also analogous.
Uh, to a lot is analogous to now, don't you think?
Oh, for sure. I mean, I I didn't realize. I have to be honest with you, when I started the project, I didn't think it would necessarily be analogous. I thought I was just writing about a period in history. And as I was working on it and, you know, really trying to like mine the archives and get into the diaries and letters and uh transcripts of some of these individuals, you start to think to yourself, "Oh my goodness, this does feel like so-and-so from today or such-and-such." And so, but that was a surprise for me. I didn't expect that, and maybe I should have. And then of course, there were all of these other sort of policy choices and other things that, for better or worse, mirror lots of things that seem to be happening uh today.
Yeah. You you know, I read a a a great historian um uh describe that uh the circumstances of the time create the characters and so almost analogous periods of time are going to bring out certain characters. Um, like what strikes me is and and uh it seems like there's a crowd right now and there's um in people, you know, the the group when they uh get together uh at Lamont's house and there's a small group and they're um talking about um how they should handle things.
Um, a lot of that seems to be going on now and the other characters. So maybe just describe the characters uh and those that you think are uh pretty much analogous.
Well, so I would say the the big characters of this book that sort of um drive the narrative. The first is a guy named Charlie Mitchell. Charlie Mitchell ran a bank called National City, which becomes Citigroup. And Charlie, they used to call him Sunshine Charlie. Charlie was as famous probably as Jamie Dimon would be today. I mean, he was on the cover of magazines. It was really also the 1920s was the first time actually that business leaders, that the CEOs in finance were actually on the covers of the magazines in the same way that, you know, Babe Ruth or Charles Lindbergh would have been. [snorts] He might be akin maybe to uh maybe like a Michael Milken too, in that Michael Milken created, you know, junk bonds uh and really sort of revolutionized credit for certain kinds of industries. He revolutionized credit in the context of the individual being able to buy shares of stock on margin for the first time. I mean, he really was the sort of man that that changed the entire game. All of a sudden, brokerages are, you know, emerging [clears throat] inside cities on the corners of streets like Starbucks. And there that's happening because he and National City and some of the other banks start to lend out extraordinary amounts of money. You could go into a broker's brokerage, put down a dollar, and they would literally lend you $10.
So, ding. Just a second. Ding. Because what comes to my mind now is I'm I just can't help myself. Um, okay. What are the things that are the ingredients that create the bubbles? One of them is uh a lot of credit, easy credit, and also uh the public going um into all of this because they're super excited about it. Now, I'll shut up because but occasionally as we go through this, I'm going to go dig and then we'll pick we'll put the analogous ingredient.
Completely. No, no. Look, this is why I wanted to have this conversation with you because you are, you know, you've been studying history for so long and thinking about the sort of big sort of systems and cycles and how these things all come together. Um, so I would say the other main character uh was really on the other side of Charlie Mitchell was a guy named Carter Glass. Carter Glass, you may know, and that the audience may know because of Glass-Steagall, which is a bill that ultimately breaks up the banks in 1933. But Carter Glass was a senator in Virginia. He was probably like the Elizabeth Warren of his time. And for a good portion of the late '20s, he would rail publicly about this thing called Mitchellism, as in Charlie Mitchell, and how he believed that Charlie Mitchell was going to upend the entire economy because he was loaning out too much money and he was creating this speculation uh in the market, and he thought that was very dangerous. So he was sort of the Cassandra in the room.
Ding. And there are those who want to regulate and there are those who want to let it go.
Right? So we we have it's analogous to now. It's analogous through history. Keep going.
So there's another character that I think of maybe as the Elon Musk of his generation. Uh, a guy named John Rascco. John Rascco uh ran General Motors. He's responsible in large part for actually credit in America even more broadly because prior to 1919, most Americans thought it was a moral sin to take on debt, to to take a mortgage, to take credit. That was not something that people did uh willingly, and he was at General Motors. He needed to sell more cars. And so what does he do? He he creates a credit facility to sell more cars. So they're going to loan money to buy cars. And because of him uh General Motors does that, and then people like companies like Sears, Roebuck decides they can do it with appliances, and then Charlie Mitchell, by the way, of course, does it with stock. So John Rascob is this fascinating character who then uh leverages that role and all of his wealth into uh becoming uh basically a big-time investor, but then getting involved in politics. uh taking his money and using it both to uh support a guy named Al Smith who was um running against Hoover. He loses. He ends up using all of his money to try to then uh ruin the reputation of Hoover. Interestingly enough, uh he then builds the SpaceX of his time, uh the Empire State Building. He he's one of the sort of philosopher kings at the time. He he ends up uh pursu basically proposing that we have a five-day work week. Back then we had six days uh where everyone worked, including the stock exchange was open on a Saturday, interestingly enough, and he was sort of everywhere and everything. By the way, he had 13 children, and I think he's just sort of a a fascinating person uh in America uh that plays a sort of unique role because people were constantly coming to him, and he had a phrase, "Everyone ought to be rich." At one point, he almost tried to start the equivalent of the first sort of leveraged mutual fund, interestingly enough, but he he almost changed the American dream. I would say prior to the 1920s, the American dream was sort of the Horatio Alger story. And in the 1920s, the that dream sort of became a get-rich-quick fantasy, if you will, which is a bit of what the dream looks like maybe today.
So, I'm going to put I'm going to uh uh put in my part of it, but because you covered, I think, very well, but uh you haven't brought it up yet. Um, okay. There are is always the new technological miracles that will uh change everything, and and they really are amazing technological miracles. So, for example, you dealt with the combination of credit and automobiles. We didn't have automobile deals, but every man was going to have an automobile, and um uh Ford's Model T. And then as you mentioned it, General Motors and Ford uh okay, automobiles, electrification. This was a time people didn't have electricity, and then we're going to have electricity, and then oh, can you imagine? You didn't have cars, and people going to have cars, people going to have electricity, and there's General Electric, which then becomes a very, very hot stock. And we didn't have communications. So there was radio, and then the beginning of the idea of television. Can you imagine communication that way? Radio and television. And that's why we had RCA.
That was like the Nvidia of its time. It was like the meme stock of its time. Yep. Can you uh because it makes sense, like, wow, radio and TV um, you know, and RCA was exactly as you say, and planes, aviation, we didn't have aviation at the time. So now you're going to have that, and we had motion pictures. Okay, this is the first time we had motion pictures, and uh Warner Brothers were the hot stocks. So, it was a miracle that I I would say was more exciting, seemed more exciting at the time. If you imagine all of these miracles happening, that you're going to have uh all the things that electricity and radio and airplanes and cars, all of that happen, it would make sense that all of those miracles would be these miracle stocks, and then you can buy them all on credit. And so isn't that uh logical that there's all of those miracles?
Oh, and this became the American century as a result. No question. I think that what happened was it just got out of control. And and look, from 19, I was going to say from 1928, [clears throat]
Talk about miracles. From 1928 to September of 1929, the stock market was up 90% Ray. So if you and if you were buying any stocks on with some margin or 10-to-1 margin, I mean, it was like free money, okay? So now what we have is um credit, debt, okay, and a miracle. I think what a lot of people don't realize is that a lot depends on the on how expensive the stock. Almost all these stocks went up as you described. And then we had the next major um ingredient, like tight money starts to come in to okay, interest rates naturally go up because maybe there's too much credit, and then also maybe the desire to put a little bit of the brakes on.
Right. So here we have three important ingredients, okay, of that classic, right? We have the de the credit to finance the miracle and a little bit of top top money. As I go back and I look at this and I see the panic of 1907, and I see the Japan bubble, and I see all the other bubbles, they all have those ingredients. And so you must see, you know, when you did this 2008 comparison with that, right?
100%. Think about subprime. Subprime was the the equivalent of buying stock on margin at the time. I mean, that was the
And housing was was everywhere. So I every time there is, you're right. I I hadn't actually thought about it exactly like that. I always think debt is the sort of the match that lights the fire, but it also is, I think, the piece that you've just described, which is this idea that there's some kind of magic, something about to happen that gets everybody excited. And it's the combination of of those two with then somebody trying to uh break the magic. And maybe that's the Fed. But the Fed, by the way, in 1929 didn't fully try to break the magic. And maybe that was part of their problem. you know, they were trying to put the slam slam the uh brakes on, but they didn't really know how, and they were very worried about the politics of it.
Uh, interest rates went up and the bubble went.
Yep. That is true. That is true. Um
And that's the same as in Japan. If I've looked at Japan, it's the same as the South Sea bubble. It's the same as um um, you know, the railroad bubble in the uh the uh panic of 1873. Okay. It's interesting the comparison. So um, of course, I'm into the mechanics of what goes on, and you're into the story, but they're both fantastic. So, so when you draw your comparison between uh 2008 and 1929 and those two periods and now, what are your thoughts?
Well, so I think of 1929 as a series of dominoes. The the first domino being the crash itself, or maybe you could say a little bit of the tight money that might have led a little bit to the to the to the crash, but then there was a series of policy errors on the other end. um fiscal and, you know, fiscal, monetary, and otherwise. You know, Hoover was trying to raise taxes. He's implementing tariffs at the time because he's trying to make good on this pledge he made to farmers to get himself elected the first time around that he's got to do it. U you have the Fed uh not flooding the system with money. You have, you know, uh Andrew Mellon, who was the Treasury Secretary.
Until it did.
Until it did. Until it did. But I'm saying in terms of the, you know, how did we get how did we get from 1929 to 25% unemployment and 9,000 banks failing in 1932, 1933? That was a that was a series of dominoes of terrible, just errors of judgment.
No. Well, when we say that we when we say that it always happens the same way to me. Okay. What happens is you have what we talked about in the B bubble, the debt, the everything going on, and then um classically, most classically, you have a a tightness of money, and then um and then debt ceases to be a money. So what you have is from 1929, you have the bust, and then you come down into March of 1933 because then what happened is you have all this debt. Debt is a promise to deliver money. Money was gold.
And then you had the Federal Reserve. You had Roosevelt get on the radio.
Like just like Nixon got on the television. 1971, Roosevelt gets on the radio and he says, "We're we're not going to give you."
And then and then you have the easing, the big easing. And in all of those cycles, you have the gold market then go through the roof because gold is an alternative market, alternative. Interestingly, then if you look at at 2008, and I think what's different about 2008 in a way is Ben Bernanke, who you know very well, and and wrote his thesis, his PhD thesis at Princeton on the on 1929 and the Great Depression.
I think he compresses that timeline effectively by by flooding the system with money. uh in 2008, it was the first time that interest rates hit zero since 1933. Okay. And what did they do when they hit zero? The Fed came in and bought a lot of uh debt, started to monetize debt. Same in 1933, same in 2008. So it was the same action. It was quicker. Each time has been quicker, but the at but the sequence is the same. In other words, Bernanke came in, right? We had monetization, debt monetization, central bank buying bonds and.
Okay, so if the Fed had done that in 1930, would have we gotten to 9,000 banks going under in unemployment in 1932?
We wouldn't have. If you look at the the patterns, the patterns are the same, and the gaps between them are that gap. In other words, okay, how long does it take for that for them to come in and uh make money uh available so it's easier to pay off the debt. And then the gold market all rallies all through that because now you have cheaper money.
And.
Yeah. Um, and but what now you have but you have the gold market rally.
So here's the thing that I think about, and I'm curious where you land. I think we've become better at handling the crisis on the back end. Meaning, once the crisis happens, we are faster and maybe more efficient in rescuing the system while creating all sorts of other problems along the way, which we can discuss. But we haven't figured out how to deal with the front end of a crisis.
Well, I would put it the following way. Um, what we do is we we all know and we know now, um, easy money uh is the cure-all. Okay. So, okay, you want to make things go up, um, make easy money. So, now we have a that kind of element of problem. All right. Right now, what we're doing was talking about um easing significantly easing monetary policy while we have um the stock market at the peak, the uh gold market's going through the roof, and we have that. Okay, what's the cure-all? Easy money. Okay, until until it's not. Then you have to put on the brakes, and then you have the pop. It's not easy.
So where are we now? Because I look at what's happening today with what seems like an AI bubble of some sort. I mean, we're spending extraordinary amounts of money somewhat indiscriminately without sort of an ROI plan necessarily. Does that mean that we end up in the same soup or not?
The dynamic, if you follow the, you know, the the follow the pattern, is um there's a debt-money dynamic, and then there's um the uh the stimulus dynamic. I mean, it would look to me like you're going to you're not going to have tight money soup. You're going to have more easy money soup, right? And you're going to have less regulation. So um, you know, the Elizabeth Warren is losing. All right. Yes. And then also you have very big wealth gaps, right? Because the unicorn makers are making a lot of money, and then you have the big wealth gaps, and so you have the people who are making money also in the stock market and so on, where the others are not participating. They're they're okay. So you have the big wealth gaps and and that dynamic. So I what I would think is I think it's going to be e uh easy money.
Well, but but here's one other things that's different about 1929 and now, and even 2008 and now, which is the deficit. The deficit is enormous. I mean, we had a budget surplus in 1929. Budget surplus.
You know, the whole dynamic was completely different back then. So, we could handle, you would think that we could handle some of these shocks. Today, you would think it would be so much more dangerous. Well, maybe it's not. I don't know. What what what we have here uh now is the private sector had a lot of the debt, and now the government sector has a lot of the debt. Still, we got a lot of the debt, and so now it's the government sector that's the one in the debt, but we got a lot of the debt. The debt moves around and and so on, but we got it in the government sector, and so that's a difference, but we still have the debt, and it still means one man's debts are another man's assets. And when the assets are not as appealing as the alternative assets, but you have to pay the debt, then you have to have some sort of monetization. I didn't mean to get us, but these patterns just happen in all of those bubbles. So, I just can't help myself. So, t on the stories, though. Um, so let's get back to some of those those stories. There's always a crowd that's an in-crowd, right? In other words, that that uh are the the rich capitalist financier guys and so on, and they're sort of the ones who are trying to control it all from the perspective of uh their perspective. And as you point out, then there are the regulators. It's that's pretty analogous. Why don't you describe?
So one of the one of the most fascinating characters is a guy named Thomas Lamont. Thomas Lamont ran JP Morgan. He technically was not the CEO. The CEO is Jack Morgan, uh, son of JP Morgan. Jack Morgan had died. I'm sorry. JP Morgan had died. Jack Morgan was his son, but he effectively puts Thomas Lamont in charge. And Thomas Lamont was the ultimate client guy. Um, he had relationships with everybody, with Hoover, ultimately with Roosevelt, with Mussolini, with Hitler, uh, with every bank, with every CEO in America. I mean, that's who Thomas Lamont was. And he was somebody who I think like JP Morgan believed if you could just put enough people in the room together, the right people in the room together, you could solve anything. And.
But they were the similar type of people, right?
Similar type of people that if you could just get the the heads of all the banks, the heads of the the different companies, couple of the political leaders, you could come to a a bailout, a rescue, a solution to these issues. That's who he was.
Doesn't that look a lot like the AI guys now?
Yeah. I mean, I think right now you're seeing a lot of these kind of meetings, right? You get a couple of these guys in a room with the president of the United States, and they think that they're going to uh, you know, solve or or create the future. I mean, that's a lot of what's going on. There's no question there's sort of a a shocking similarity uh to all of that. The thing that's interesting about Lamont to me, though, is that it ultimately gets away from him, right? He thinks that he he thinks that he can solve it and he thinks he can fix it, and uh the powers and uh of of control sort of are elusive, ultimately, because the market really just runs away with itself, and they make all of these efforts to try to stem the tide by frankly buying up stocks themselves when the market's tanking, and they they can't do it anymore. It doesn't even work.
It worked in the panic of 1907. Same dynamic, panic of 1907, except JP Morgan brought them in and then he paid, he pulled it off, right?
He pulled it off, but the market back then, I think, was smaller, and I think that's right.
The broadening of the market and sort of the the conundrum of of when things sort of go to these new places.
But the same dynamic, the group gets dynamic. Too much credit, too much debt.
I will say there's one other feature that was interesting that a lot of these guys were involved in that hopefully they're not involved in today, but maybe some people would argue they are um, which is there were people who were manipulating the market back then. I mean, there were no rules. The SEC didn't exist. There was no insider trading laws. Uh, there was no bank capital rules, bank act, nothing had happened. And you had groups of investors, oftentimes people like John Rasob and some of these others who had put these what they call investment pools together, which were almost like pump-and-dump schemes, uh, where they could, you know, they'd run up the price of a stock. It was almost like having actors on a on the floor of the exchange going, you know, "I'll bid 120," "You bid 150," "I'll bid 180," and we'll keep going up and up and up, and then we'll we'll pull the rug when we know we got the stock high enough. And people, I think, thought back then that that was okay. Uh, that that was, you know, in in a business of if you believe trading to some degree is about a battle of wits. You know, it's someone's trying to outwit the other. Whoever is a buyer thinks that they're smarter than the seller. Whoever is the seller thinks they're they're smarter than the buyer. Always. And I think people thought that these pools in a way were just another version of that. Today, obviously, that hopefully doesn't happen. Though I do think there's probably elements of that in the the crypto and sort of meme stock uh arena that are taking place.
Um, Andrew, the story is fascinating, but isn't it more important than the story? In other words, isn't it that what's most important is the mechanics and what to do and how to handle it? Now, in other words.
Oh, 100%. I think that the the reason that I'm always fascinated by the characters, though, is to understand the sort of motivations and incentives of these individuals who are in uh decision-making roles, and why they either don't make the right decisions or why they do make the right decisions, and who they're trying to either placate or who they're trying to prove something to, or what is driving uh people who hopefully are of goodwill, and I'm sure there are people who question some of the goodwill of some of these people. But, you know, why do we get ourselves in these positions, and then what happens on the other end once we do?
But but but Andrew, I'm a guy who's got to make bets in the markets.
Yes. Okay. You're a guy who is looking at this. Um, so we're looking at this one from a story lens, one from, okay, what is the mechanics and what do I do now? In other words, what do I hold? What do I do now? Um, I uh uh what I'd like to do with you is I'd like to do an examination of all of the bubbles. I've done an examination of all the bubbles.
Yes, you have. Okay. So what I you know, we we can go back to all of those, and I think we should be able to say, "Here are the bubbles, here are the mechanics," and we can agree perhaps that those are the mechanics, or at least have a conversation that way, because a real service that you could provide is to uh help to convey what those mechanics are so that we don't have this thing happen over and over. Yeah. Right.
Absolutely. The thing that I would love to know when we think about these systems is is it just is it a pre-ordained? Meaning, once you get into these systems where there's too much debt in the system and there's sort of this miracle uh that seems to be ahead of people in the future, does everybody just behave in a particular way always, and that maybe it's not about the individual?
It's not about the individual. There's a mechanics. Like I owe a lot of money, so I have a cash flow issue. That means I have to come up with cash. Okay, therefore, what is it, what amount of cash am I getting to pay off my ca my debt? Okay, those are numbers. That's that's mechanics. Those are numbers you can see. What is the amount of debt service that I have to make, or I'm going to default? And then where do I get that? And if it doesn't u produce that cash, okay, if there's an unsustainable way, where do I get my cash? Only two ways to get the cash. Either it produces the cash and gives me a yield, and I can take that yield to do it, or I've got to sell the thing. I've got to sell the asset. Okay, that's mechanics, right? That is mechanics. What I'm curious though about, I understand the mechanics of what happens when you get into trouble. I'm curious if you think that there are mechanics that that put you into trouble.
That force that force the creation of the.
Through all of these, through all of these times, it is that there is a growth in debt relative to money. So if you look at the breakdown of the monetary system in '71, '33, um, panic of 1907, there are too many claims. There I got to come up with money, and there are too many claims. So that a debt is a short money position. I have to come up with money, okay, and there's not enough money. And so what you have is the creation of debt, not the creation of money. You have the creation of debt, which is a promise to deliver money in order to buy this stuff. So where did all that buying power come from? It came from credit, not from money. Okay? And now when you have all that credit, which is debt, credit turns into debt. So I have all these IOU's, and then there's not enough money. And so you can go go through those calculations, and you could see that over and over again.
But is that just about the human now to store that? Is that just about the human condition that we just always want more, that we that we can't control ourselves, that with that?
Well, you believe we know the mechanics. We experience it today, and it's and it's such a good example. It's because you believe that that's going to be a better deal, and you don't pay attention to the price and the cash flow, right? In other words, everybody believes it's going to go up. So in 2008, housing, and and and and then we create the structure with tier, you know, the uh various tiers in in that, and we uh tranches, and so on. Europe, same thing in two in 2010, '11, and same thing in Japan. Okay. So it it's the it's that you believe that that thing is better than credit. So you're going to be able to pay it off, and you build the credit, and it doesn't have enough cash flow. Always there's that mechanics. I don't know of any time that that hasn't happened.
Of all of the financial crises that you've studied, which one's the most interesting to you?
I think they're all interesting. I think the I think the ones that I found maybe the most interesting are the inflationary depressions, okay? Like the Weimar Republic, Germany's Weimar Republic. Because we think of inflation as being um something because there's, you know, too much demand pressing up against another. And I asked myself, why is that um why do you have a deflation, an inflationary depression? Wow. Okay. Why don't they just stop printing the money to fight the inflation? Why? Because there's too much debt, and then you have you produce a dynamic where they have to produce the money. The central bank starts to produce losses. Very interesting. The government produces losses. Central bank then prints money and buys that. Okay. Then you get the dynamic that the central bank starts to produce losses. Like right now, central banks have losses. Okay, on their balance sheets because they bought the debt, and the debt is uh gone down in value, and they have a negative cash flow. Okay, so you better lower the interest rates. So they have an interest rate, they have a problem. So I find the the ones where uh when the central bank can't do that, and then you produce an inflationary depression, probably the most interesting ones.
Okay. How much, and this is something that I've been writing a lot about and concerned about, but maybe you'll tell me this is not the thing to worry about. How much should we focus on the guardrails being on or off? Meaning, I look at what the guardrails that came on post-1929, the SEC, uh, uh, the Bank Act, capital requirements, all sorts of things that we we put in place. And I think of those relatively as good things. I'm sure people would say some of them went overboard, maybe some didn't. Uh, but I always get a little nervous when we have new products in the market. So, you know, we had SPACs, uh, we have NFTs, crypto, now we're going to be putting venture capital and private equity and uh private credit in these sort of semi-liquid instruments into the public markets, and we're effectively allowing private companies into the public markets without the same kind of disclosures through tokenization, all sorts of things. Is that something that that should that we should be concerned about or not really?
It's classic. I mean, what's classic is uh the putting aside the regulations and the SEC, um, and it happens in, you know, less bank bank capital requirements. Um, but but a very good example of that, of course, is private markets. Like, so what's the difference between private markets and public markets, and will they have the same regulations? In other words, in in a in a in a private market, um, you can do insider trading, essentially. Really? Yeah. You um, you can do a you can do a lot of stuff. You don't have to make.
You can make all sorts of deals and so on. So, if you're going to have the public go into a private market, um, shouldn't the same protections exist as existed in a public market, or what constitutes the difference of those things? Well, that's where I am, but it doesn't seem to be where the rest of the world is right now.
Make the a the easy access to the public. Okay. And are same things are regulations put aside? Like you could see, we're changing capital requirements. So, restraints are are put aside. Look, restraints are only things that people want after the fact.
Always want them after. They never want them before. They're all perceived as um problems. They're all perceived as you're standing in the way of um wonderful things happening. Yeah, that's part of the cycle.
So, you're touching on a very interesting thing because it did happen in the 1920s, this idea of everything was sort of pitched in the context of democratizing finance. Um, and and that's a phrase you hear a lot now. We're all trying to democratize finance. We want everybody to have access to the lottery ticket. uh the way the way, you know, people think that the elite have had access to the lottery ticket, but somehow the public hasn't. That was always done to protect the public, but are we but then people say to me, they say, "Andrew, you're not protecting the public, you're protecting the man by by by keeping us from having access to these opportunities. We, you know, you you're exacerbating the inequality."
Another another good example is mark-to-market accounting.
Get rid of mark-to-market accounting. That's that's part of the pendulum they um swinging. It used to be um there was no mark-to-market accounting, and you can hide hide things more. And then and then the problem happened. So then they say there should be mark-to-market accounting.
And then and then what you have is um, okay, the mark-to-market accounting, we should get rid of mark-to-market accounting because it's not okay. So private markets help to get rid of mark-to-market accounting, or less, you know, and think about even the wealth creation, the right now, wealth, you you can have, um, let's say you create a unicorn, and the way you create a unicorn is you issue uh, let's say $100 million of stock, um, that's so you sell that, you sell that amount, and um, you you sell 10% of it, and that represents a billion dollars, and now somebody's worth a billion dollars. Okay? Because [clears throat] they have it only took that $100 million and but all of a sudden they say, "I've got the stock." So they value the whole stock at the billion dollars. And now you've you say, "I've got a billion dollars." Now I can go take that stock and I can go buy things with stock. I'm no longer using money, and I'm and and I have I can go to the bank. I've got collateral because I've got a billion billion dollars, but there's no billion dollars.
Right? So different things like this come about. uh private credit, there's no one of uh the beauties of private credit is it's really not very much mark to market.
And it's um uh, you know, we won't call the default.
Right. We'll roll it forward.
So I so one of the things I think about is actually, are we safer today because of private credit? Sort of post-2008, a lot of the credit in the system moved off-balance sheet to these private credit funds, and some people would argue that's a better because they aren't sitting on the bank balance sheets and they don't have the the maturity um, you know, time horizon issue, which is, you know, the bank effectively is loaning out money for long-term but can get called on it by the depositor at any moment, and these funds don't have that problem. However, some of these funds are relatively highly leveraged, and some of them have um, you know, liquidity lines and other things to the banks, and we don't know about the marks. So I can't figure out if we're in better shape or not.
Well, it's sort of like I if you if you don't account for it and do the mark-to-market, um, okay, you're going to have less sort of uh defaults. U but okay, the the reality is you can't get your money, and it can't get the cash flow. What's the value of investment? There's only one value of investment. I can take my investment, I can sell it, I can get cash, and I can buy stuff. The only value of money, the only value is to buy stuff. Right. And so if you have liquid illiquid investments that are not marked to market, you can play all these accounting games, but it's not going to get you money to buy stuff.
Well, but then that argues, by the way, the private equity folks who tell you that this is a bug and not a feature, that they're able to make long-term decisions and do all sorts of things that people in a public market, in a liquid market, uh, can't do.
I don't know. I.
But but but but okay. But then think about it. Okay, there are there are those arguments that that what what what what would be the problem with the mark-to-market accounting? In other words, there's a market. Would you like liquidity or would you not like liquidity? Would I I would like liquidity. I mean, the option. Okay. But if you don't, then you can hide it like mark-to-market accounting. Okay. And anyway, how are these things going to work? So now the public's going to go into these private markets. Are they going to have the same regulation? Because aren't isn't the purpose of the regulation to protect the people?
That's what you would think. But I think for the most part, they're not going to have the same regulations because the assets inside of these things are still going to be considered private. And by the way,
Who cares? The the issue of private or public? It's a.
No, but without the same disclosures, you're not going to have the disclosures. You're not going to have the.
I got it. And why not? In other words, you're still.
I look, I think we should I think we should I think you and I agree. We should we should have these. If these assets are in the public markets, they should be treated like public market assets, and they should have the same kind of disclosures and rules.
Right? So, what does it look like to you now?
It looks like we're not going to get that. And that seems like trouble.
We're having a very interesting conversation. I hope that what we can do is um almost uh take the take the time, say what are the patterns, what are the red flags, maybe we can do that together, and then take a look at those things because they matter.
They do. They really, really do. And I don't know if we're looking at them hard enough. I mean, I think you and I are, but I don't know if the rest of the system is looking at it hard enough.
Well, we can only. Maybe. And maybe and maybe in this environment, I mean, this is what I'm so curious about, just giving you've studied all these things in these kind of environments, people seem to either wear blinders or they look away from these issues almost invariably. That maybe it isn't maybe it's a human condition. Um, I I think it is because the mechanics are not well enough understood. I think if you were if you looked at it as though a doctor looked at the physiology of the patient, and you look at the cause-effect relationship, and you really c calculate the cash flows. How am I going to come up with money?
Right. Okay. Like, can I come up with money to buy things? Okay. Am I going to have enough money? It comes down to that kind of thing. And you could do the calculations. I hope we can maybe do that together. But I I could. Are they going to make a movie out of this? I hope they make a movie out of this.
I hope so. There's a couple of people who've uh who've reached out in the past couple weeks uh from Hollywood. So, we'll uh hopefully stand by for more news there.
Well, I I would endorse that. It is a riveting, riveting book, an important book, and I hope that it's um it's at the brink of us then taking a look and saying, "What are the lessons?" Because if you did 2008 and you did 1929, with you could also do um Japan up in 1990, you could do uh the panic of '07. You can do the panic of 1873. You can do uh almost line those all up and then look across them, and th that would be, you know, okay, the same story. Uh, to me, it's almost like um watching the movie happen over and over again. You just change the clothes they're wearing, the names of the people, and the technology they're using, but it's basically the same thing in slightly different flavors. History rhymes, right?
History rhymes. I I'm hoping they can only write the prequels so we can try to avoid the sequel.
Only if you write it, man.
Thank you, sir.
Thank you very much. It was a.
So much fun. Thank you, Ray. I really appreciate it.
I hope a lot of people uh read it, both because they'll be entertained and they'll uh learn some patterns that might get them thinking.