Transcript: Nick Nemeth: The Everything Bubble Is Ending

Nick Nemeth [0:08] Dude, the new update, I don't know where my do not disturb is. And maybe more you can Who's Bridget? that's you. is is is this stuff in the camera? Yeah, it's fine. It's fine. It's fine, okay. Okay. Is is this stuff in the camera? Yeah, it it's fine. It's fine. You need to know people how you're you need to let people know how you're hydrating. Coconut water monster. Yeah. Sponsored. Yeah. Yeah. Sponsored. Nick Namus. It's a pleasure to meet you in person, sir. Yeah, it's good to see you. It's been two months since our first conversation. And what has happened since I I was telling you, it seems

Nick Nemeth [0:45] And what has happened since that was telling you, I it seems like the whole systemic credit contagion headlines that were in the news when we first spoke have have left the headlines, but it seems like there's still progression on the back end in terms of redemptions, redemption gating, and actually saw we wrote about in the newsletter yesterday, private credit issuance and underwritings down like forty percent month on month. Yeah, she went. Yeah. It's like in March, if you were looking at the AI token numbers, they were just going up, but AI stocks were falling off the cliff. So there's a little bit of there's it it's it's not making sense, right?

Nick Nemeth ⋮ Because if you look at the r defaults, redemptions, everything's going up. But the narrative, you know, people get tired of hearing about it until the next shoe drops. And during something like this that's deteriorating, it's almost like a shark attack, maybe like the shark will nibble you and get your calf and then it'll go swim off and you think you're fine. And then it comes back and like takes your leg. Well what's what's new on the default front? Well w what's what's new on the default front? What what sectors are defaulting? So

Nick Nemeth [1:51] So it's actually really interesting. I I I've done a lot of work into this and I keep on expecting software to be up at the top and it's not. It's like healthcare and consumer. So software is basically at average levels and again a lot of it's pick payment in kind, which is these guys just instead of paying your credit card minimum every single month, they're just like, Okay, I keep on rolling it up. And These guys just If you don't have any cash commitment, you can't default. I mean, maybe they'll call it quits, but the medallia, you remember s he hearing the medallia story, your audience probably knows that. And I I'll get like really specific. So so medallia had half cash, half pick. Wait, what is the medallion store?

Nick Nemeth [2:36] So they had some cash component and they actually were Ebidah positive by two hundred million dollars, but they defaulted on their debt because one, Ebidah is not cash flow. But two, they wanted to ask Blackstone, like, Hey, can we switch this over to pick? And Blackstone was like, Nah, we're not we're not really gonna do that for a business that's not likely not growing. And for those who are unaware, these these payment and kind loans they come with egregiously higher carrying costs too. Yeah. Yeah, it's like fourteen percent. So if you look at US equities, the S P five hundred is much higher quality equities with moats, you know, there's some junk in there, there's some value traps in there.

Nick Nemeth ⋮ But generally speaking, these are some of the best companies in the world. What's in these private equity and private credit portfolios? If you look through Tama Bravo, I'm like, what are these companies? I'll see a couple of cyber companies that I'll know, like McAfee or whatever. And the rest are like the the narrative that they go out and say these are quality companies, these are great companies. And I'm looking through and it's like and plural site that's check for tech-ish employees to learn how to use a CRM. Like that check for tech ish employees to learn how to use a CRM. Like now they're just prompting Claude, like how do I use this?

Nick Nemeth ⋮ Exactly. They're just like

Nick Nemeth [3:55] Ex exactly. They're just like Claude, go do that. And there might be some value in infrastructure of software, but that value is likely in the public markets. Databricks is in the private markets might be a a a great one, but there's a a a definitely a lower quality in software and we haven't even seen that in defaults yet. So when that picks up and joins the consumer and the healthcare. software and we haven't even seen that defaults yet. So when that picks up and joins the consumer and the healthcare, we're already seeing two thousand eight level defaults. So I mean people don't seem to care until they do care but defaults from a rate of default perspective or magnitude of defaults? We're already seeing two thousand and eight level defaults. So I mean, people don't seem to care until they do care, but

Nick Nemeth [4:36] I w the rate of default. But I wonder on the magnitude. It's definitely more 'cause the asset class is bigger. but I wonder just a segmenting out are the is the lower lower middle market doing worse than the middle market doing worse than, you know, the big software companies. That's something I don't have off the top of my head. Good idea though. I think that's something we Yeah. No, and I I think that's something we not that, but another thing we touched on a couple of months ago that I'm still trying to wrap my head is like, is this systemic? Like how much contagion risk can can come from this this private credit market specifically.

Nick Nemeth ⋮ And that's what we focused on predominantly in the first conversation is the intermingling of private credit and the insurance goes and you're from what I recall your your basic thought process is that it's not necessarily private credit that could incite this contagion risk. It's the insurance that are insurance companies that are exposed to it. Incite this contagion risk is the insurance that are I think private credit would incite the insurance, which would infect the system. Wherever there's a massive wealth effect to the negative side, I also think it's systemic. So if you're thinking about private equity guys, and I I just wrote this up yesterday, two days ago, if they're s driving the economy because they're the highest income earners and they're relying on their carry and their carry doesn't come and they're also sometimes five times levered into the fund.

Nick Nemeth [6:03] you know, subsidized maybe the loan subsidized by their fund or this huge G P financing industry. Well on this note, I I watch your video described. Well on this note, I mean I I watched your video describing this. I don't think many people realize this, but when you run a fund you're expected to invest in the fund and it's not always coming out of pocket. No. No, they don't have the money for the numbers that they're contributing. I mean, if you the thing is with private credit and this idea as well, at first principle it kind of makes sense. You wanna have skin in the game and LPs wanna see that you have skin in the game.

Nick Nemeth ⋮ But the way that it's gone and I've been meeting in New York City and when I heard the extent of that, I mean, we're talking Greenwich homes being secured. For a margin loan into private equity that some of these funds you may not get back for fifteen years. that some of these funds you may not get for fifteen years.

Nick Nemeth [7:02] They have they have a technical mortgage. No, no, yeah. I I think that might be what it's called, but then there's on the underlying portfolios there's debt. So you have NAV loans. And this is all basing. So you have the private credit and you have the private equity. If you're just not marked to market consistently. No, well, I nobody trusts the marks. If you ask these guys in private credit, you know, hey, is this company actually worth three billion? And this is all basing, so you have the private credit and you have the private equity. And NAV is not marked to market consistently. The answer more likely than not is maybe like maybe when we extend it for four years and it recovers the multiple or something like that.

Nick Nemeth ⋮ It's always hope about the future. And it's very n untested. If you talk to private markets guys, they're not like public markets guys. You may like see a personality difference. Private market guys talk slower. Public market guys a little like cuckoo for Cocoa Puffs sometimes. They're constantly because they need to play speed chess. And people will tell you you're dumb. Private markets for 15 years has been told that they're the greatest gift to earth, and they believe it. And maybe they're the ones that started this story. So I think that a lot of the stories that are being told, and again, you can be f five times levered into the fund.

Nick Nemeth ⋮ By the way, the Saudis are happy to see that. They are going to Norges Bank, the Bank of Norway, and giving them a hundred million dollars of Maybe they're the ones that started this story. So I think that a lot of the stories that are being told, and again, you could be five times levered into the fund. By the way, the Saudis are happy to see that. They are going to Norges Bank, the Bank of Norway, and giving them $100. Treasuries and getting a billion dollars back minus a haircut. Then they'll put out of that $100 million that turned into a billion dollars, $250 million in this fund and $250 million into this fund and $250 million into this fund.

Nick Nemeth ⋮ So the LPs, the GPs are levered, pension funds are less levered, endowments are less levered, but the sovereign wealth funds and certain players on the LP side w are extremely levered. So inside the fund. You have leverage. Then on the portfolio level, you let's just say it's a billion dollar fund. They'll take out 200 200 million dollars of debt on the whole portfolio, which is the first lien to the portfolio. Then they'll invest do leverage buyouts of companies at an extremely high leverage rate. So it's leverage into leverage into leverage. So what you just described there.

Nick Nemeth [9:14] And they'll invest do leverage buyouts of companies at an extremely rate. So to leverage and do leverage. So what you just described there, I think, highlights to me where this could be come systemic, going back to the Saudi Norway bank. Yeah. Levering up levering up ten X and then spreading the two two hundred fifty million dollar chunks around different funds and Yeah, people don't think about that. the Norwegian banks looking to make a return on that billion dollars that or that nine hundred million dollars that they lent you, essentially. They are incredibly smart. So if they pull the plug in the Saudi and say, Hey, we need more money.

Nick Nemeth ⋮ We need more money. They are incredibly smart. So if they pull the plug on the Saudis and say, Hey, we need more money. We need more money. The Saudis are gonna go ask the US for US dollar swaps, as they have done, just to get more money and to stay levered into the system because their cash flows are good, but do not support their massive real estate build outs and the full not even remotely close to the full equity of their investments across the world. That's mainly in the US. A lot of that's illiquid. So there is a massive amount of globe sovereign wealth fund risk, I believe.

Nick Nemeth ⋮ The n Norwegians are better, you know, Swiss might be better. But I have a particular concern about the Arabs that everyone think that have infinite money. Their economies are collapsing right now. And, you know, if you make, I don't know, a trillion dollars per year, I forget their their GDP, but I guess maybe two hundred and fifty billion naturally could go into markets after they sp spend their real estate and and whatever investments they're doing at home. They're deploying a lot more than that. There's there's no they don't have the money printer. They have to get access to our money printer. So I I'm like slightly concerned about the Arabs in just the system.

Nick Nemeth [11:16] just the system. What's going on in their economies? Well tourism's falling off the cliff because I'm on war. Yeah. And a lot of pipelines have been Well, tourism's fallen off a cliff because the Iran war and a lot of pipelines have been slowed or stopped, the Qataris, UAE, Saudis, and they're just shoving. They're right now they're just shoving, right? During March they bought a lot of puts. They didn't sell. Like these guys don't sell. And a lot of people have this perspective that markets just go up, you just gotta buy yourself time. And I think that's creating a massive bubble everywhere. Yeah. No, and you think about it too, you look at Dixie Dixie strengthening and that would validate what you just said 'cause that that's what I've been talking about it on my Monday show with John Arnold.

Nick Nemeth ⋮ Hard. It's been strengthening hard. Well, because where else are you gonna Especially if you're blowing the Middle East and Well it's because th where else are you gonna go, right? Especially if you're blowing out the Middle East and you have this AI wave hitting here, who knows if that wave's gonna crash or not, but the like if you're looking for a return you gotta come to US capital markets. Yeah. I mean people ask me, what's the safe place? If if this plays out poorly, a perma bearer right.

Nick Nemeth [12:16] Yeah, I mean people ask me, what's the safe place if if this plays out poorly, I'm not a perma bear, right? I try to make money wherever I see the best place to make money. I had to force myself to buy on the gap up in April, right? And I was like, the market should not be going up right now. It just shouldn't, but it is. So I just gotta force myself to buy something. And then the week late a week later, you know, I'm like, okay, what's the most irrational thing to buy right now? Like, what should I not be buying? Okay, I'm gonna buy that.

Nick Nemeth ⋮ but yeah, ultimately people ask, like, hey, if this goes, you know, the way that you think will eventually go, what do I buy? And I'm like, cash? Like you buy cash. Because even treasuries will come down initially, even Bitcoin will come down initially, even gold will come down initially. All the assets are correlated, and there's no real place to hide, and that's kind of a scary thing. Well, maybe we're already that, right? And there's no real place to hide and that's kind of a scary thing. Well maybe we're already seeing that, right? A lot of people in Bitcoin describe Bitcoin as this liquidity alarm bell that that acts as a leading indicator and because you know, again you saw turk It does a leading indicator and precious metals do as well.

Nick Nemeth ⋮ Because you know, again, you saw Turkey sell a bunch of gold. These if if there's like what? Turkey. Yeah. Turkey. yeah. When you see big players really need liquidity, they sell gold. And that's scary, you know. If there's like Turkey, excuse you. What? Turkey. Yeah. Turkey. Yeah. When you see big players really need liquidity, they sell gold. And that's scary. You know? So people like will buy it when they're worried about something, but when they're panicking. And you gotta wait until like the dust settles in order to be like, okay, there's gonna be a bailout or whatever.

Nick Nemeth [13:45] So people people like will buy it when they're worried about something, but not when they're panicking. And you gotta wait until like the dust settles in order to be like, okay, there's gonna be a bailout or whatever. You know, that's how p people typically justify buying precious metals. There's gonna be a lot of money printing. But the best time to do it is not like it's not before the panic. You know, that's how p people typically justify buying precious metals. There's gonna be a lot of money printing. But the best time to do it is not like it's not before the panic. People will be hedging out over two, three years on gold and then when the panic actually comes, they'll sell it and it'll just be down so so massively in a couple of days.

Nick Nemeth ⋮ Might wipe out years of gains. Yeah. 'Cause we actually read about it in our newsletter this morning, forty five percent of s People will be hedging out over two, three years on gold and then when the panic actually comes, they'll sell it and I'll just be down so, so massively in a couple of days. Might wipe out years of gains. Yeah.

Nick Nemeth [14:27] central banks have signaled that they're gonna increase their gold holdings year on year from twenty six to twenty seven. The pace of buying over the last three years is surpassing, I believe, the the decade previous. so they have been stacking a lot of gold and I think the price isn't result showing that. No. I no, no, it's not. And that's maybe these are lagging indicators from last year when the price was ripping. But six to twenty seven. The pace of buying over the last three years. The price the price isn't result showing that. Mm. Again, g bring this back to like systemic risk contagion where it may break out. Like give us an update on the interplay between private credit insurance. Yeah, so I think that's the bot. Again, it brings back to like systemic risk contagion, where it may break out. Like give us an update on the interplay.

Nick Nemeth [15:04] Yeah, so I think that's the bomb. You know, I I talk about the big picture because it's it all happens at the same time. There's so much leverage built into the system. People want to talk about, the consumer's not as leveraged as it was in 08. And it's like their home val values are fake. Like, you know, those homes aren't worth that much, right? Especially if you look forward to, you know, the boomer retirement, you know, p next ten, fifteen years. They're all gonna be retired and a lot of them are gonna be selling their homes for one for one reason or another. So you know, the home mortgages that are at all time highs.

Nick Nemeth ⋮ People are like, but home equities are at all time highs. And I'm like, yeah, a little bit, you know, agr egregiously high on the total residential real estate market. Then you have credit cards at all time highs. You have asset back lending, which they're doing burritos and, you know, used car loans, Carvana. So, you know, everything. Mortgage backed secur securities, commercial mortgage backed securities, like the commercial real estate market is Something's gotta give. Yeah.

Nick Nemeth [16:15] God-awful right now, you know. So it's all these asset classes and they all move together. But the private credit is the worst, most untested part of credit. It's not all bad, but it's a lot of real bad junk. And people usually get off the stop in the exit where they go, Do the banks have a lot of this? And for you and me, they do, but for their balance sheets, no, they don't have a lot of it. You know? So it's all these asset classes and they all move together. But the private credit is the worst, most untested part of credit. It's not all that, but it's a lot of real bad junk.

Nick Nemeth ⋮ And people usually get off the stop in the exit where they go, do the banks fed a lot of this? And for you and me, they go, but for their balance sheets now. or they'll look at the fact sheets from Aries, Blackstone, BlackRock, all all of them. Everyone is in this. Like it was the it was the freest money on earth because you don't have to follow interest rates, you know, you just mark your little Excel spreadsheet every quarter or every month. So we all just started rushing to it. It's the greatest story on earth. And at a certain point, you gotta find new buyers, right?

Nick Nemeth ⋮ All of them. Everyone is in this. Like it was the it was the freest money on earth because you don't have to follow interest rates, you know, you just mark your little Excel spreadsheet every quarter or every month.

Nick Nemeth [17:11] It's you know, i it's not a Ponzi scheme, but it's Ponzi like. And you see like a desperation when all of a sudden the money's not coming in because, you know, Bernie made off Said he had 10-15% returns every single year, very smooth. All of a sudden, you know, it's all of a sudden assets are going down. People are like struggling for liquidity and wanting their money back. And he can't find and and typically, you know, just human psychology, then they start panicking and they go into the next one. And right now it's 401ks. But prior to that, all the wealthy people had made money from.

Nick Nemeth ⋮ twenty ten to twenty seventeen in private equity and they actually survived two thousand and eight because a lot of funds could just be extended through it and they mostly recovered. they started looking for insurance because they're looking back to Warren Buffett and we talked about this last time and they're like, Well, you can take a big balance sheet and just take risk with it, right? It makes sense. Take risks with it, right? Mm-hmm. It makes sense. And for those who didn't hear our first conversation where the risk is introduced there, where may differ from Buffett strategies that these private equity funds were getting large, I think, like majority ownership stakes in these insurers and then replacing the asset manager of the insurance program with themselves and then feeding that investment capital into other products that they control.

Nick Nemeth ⋮ Yeah, so the alternatives, the private placements, that's where they make the money, right? So they're they've been maxing out immediately, they get all the assets. Warren Buffett was buying value stocks, Coca-Cola. It's better than buying just bonds, right? Tippi you know, before the mutual insurance era

Nick Nemeth [19:08] It was a lot of bonds. At some point it got into high yields and then executive life blew up. So there has been like r historical blow ups. But there weren't a lot of equities, especially in the fifties. So so Warren Buffett was like, Hey, like, got a hundred million dollars here. Why don't we put f ten percent, fifteen percent in value stocks? And you buy the business for like five million, ten million bucks. some point it got into high yield and then executive life blew up. So there has been like historical blow ups. But there weren't a lot of equities, especially in the fifties. So so Warren Buffett was like, hey

Nick Nemeth [19:36] So then all of a sudden it's like you're levered, but it kind of spreads out and if you do really good underwriting, you can make a lot of money. Yeah, and his whole play was like Yeah, and his whole play is like we're buying value stocks that have a track record that are sustainable, that are sort of embedded. I mean I mean for Berkshire Hathaway, a lot of cultural brands, Coke, the insurance company, Geico, all that, established economies of scale, pretty predictable cash flows, but bringing this back to like private equity buying these insurers, like their private credit funds are more speculative in nature. Yeah, and also Right.

Nick Nemeth [20:03] Yes. Yeah. Yeah, and also yes. So Buffett was really good at just being completely ignorant of I mean, he would address it, but he somehow would just put the blinders on and he would be like, Can this business h handle everything? Inside of a portfolio where I may be wrong a few times, but is this just gonna stay intact through whatever cycle comes? And he would do it intelligently, but he would look for pristine balance sheets with motes. That are operating on a cash flow basis. And private equity was like, okay, like we can do that, but let's charge two percent fees, carry, lever up these businesses a lot.

Nick Nemeth ⋮ The businesses rarely have moats. You know, if you look through these portfolio companies, you wouldn't recognize the names. It's not like C's Candy or Coca-Cola. So they took it to the limit. And then the limit kept on moving almost every year, especially over the past five years. It's accelerated. This private equity push to insurance probably started with with Athene's founding. So Apollo co-founded Athene and they ended up buying it. And those are two points in this that marked the beginning and the acceleration, in my point of view. And the regulators are supposed to stop this, right? But the regulators have been allowing it. And they'll literally have rules that say you can't put this more than this much in, you know, affiliated paper, which is Apollo owns a theme, and these investments are underwritten by Apollo, and we are trying to see if Athene is safe.

Nick Nemeth ⋮ So you can relate party's like Exactly. So it's supposed to be half of the capital surplus. There's like r related parties clauses that should So it's supposed to be half of the capital.

Nick Nemeth [22:10] Or 10% of assets, but the lesser of the two. And we are talking about, I believe it's 26 times what the limit should be, Apollo and Athene. And this regulator in Iowa, he goes, sure, sign it. And then he has the audacity to go out there and say, Well, we really, you know, we really shouldn't allow it this shouldn't shouldn't be happening. And it's like, you're allowing it, buddy. And we are talking about I believe it's twenty six times what the limit should be. He's like, I wish we could see what's in Bermuda. And it's like, Athene's in Bermuda, like you're allowing that to happen.

Nick Nemeth ⋮ So, you know, there's a lot of perverse incentives. And I guess what I would say to like bring it to okay, this is systemic, is if this blows up, these balance sheets are levered 30. If you're a mutual fund, it might be 15, but mass mutual is horrendous. So, you know, there's a lot of perverse incentives. And I guess what I would say to like bring it to okay, this is systemic, is if this blows up, these balance sheets are levered thirty

Nick Nemeth [23:06] To sixty to ninety times. And when you look at a theme, and I've done a lot of work on this because I think that there's gonna be money made shorting it. If you look at Athene's capital surplus, they say twenty billion, Fortress balance sheet. It's like, okay, how about we take out the goodwill and the amortized sales credits? All of a sudden it drops down sixteen billion. So the twenty twenty billion go becomes four billion. And then you can take out made shorting it. If you look at a theme's capital surplus, they say twenty billion of for just balance sheet. It's like, okay, how about we take out the goodwill and we amortize sales credits.

Nick Nemeth ⋮ All of a sudden it drops down sixteen billion. So twenty twenty billion becomes four billion. And then you can take out other capital that's intangible. And in that four billion s supporting how much in liability is hundred and seventy billion Other capital that's intangible, not six hundred and seventy billion dollars. Like I guess it's it's insane. And people just think these Apollo guys are so smart that they can Yeah, it's it's insane. And people just

Nick Nemeth [23:55] They're smart in a sly way. They are so they're so evil. They are so they're so evil. They are smart. They're good with the narrative. I'll I'll give Mark Rowan that. But the hubris, the arrogance, and you can see it. They wa they do a couple things intelligently compared to peers. They pull away from certain industries that they just feel like the crowd's getting in and they'll go to the next one. But they run a risk level that is I think it's it's higher at a bigger scale than anything that's ever happened in financial history. May like I keep on going back to the South Sea bubble where there was a government a private private partnership with the government where for the time I feel like maybe that would rival this scale. And people were like, the government's behind it and the the the poems and the first person accounts that I see kind of feel similar. Yeah. And people were like, the government's behind it and

Nick Nemeth [24:55] I other than that, it's not two thousand and eight. Well Well there are many people who listen to our first episodes like is this guy does he know what he's talking about? But I I DM'd you. I had a a good friend at a big four bank working on basically their private credit desk who texted me yeah immediately after listening. To our episode, he's like, he's dead right. Like show me some presentations that they've been going around giving warning about this risk. And th there are people in the industry, particularly in banking, commercial banking, that understand this risk exists. They're trying to point it out.

Nick Nemeth ⋮ but from what I understand, a lot of people on the inside have been hitting you up independently as well. What are they saying? Side and you up as well. What are they saying? Well, it's 50-50. So when it comes to insurance, there is some the smartest people that I know. I try to I talk to like especially people that you've known for years, they will look at it and they'll look at the statutory equity and the gap equity and they'll read the sell side reports and they'll just be like There's you gotta reconcile that, you know. And then I spend four months going through ten thousand page filings over multiple years for six hundred and eighty insurers, and I'll come back to them and I'll be like, I reconciled.

Nick Nemeth [26:13] This ac this gap equity, what Fitch and Moody's are saying is the capital surplus in Bermuda. It's it's not real. And then they go, Okay, these things are gonna take longer than you think. Right. So there is that side that just, you know, it's been a bull market for 15 years, and even long short guys are mostly just trying to stay afloat on on their shorts. Then on the other side. I have to say that there is an extreme understanding that there's a massive problem that could infect absolutely everything. The question is the timing, but there is, and I don't want to lead myself too much, there there is a content there is a segment of the hedge fund community.

Nick Nemeth ⋮ It's not the tiger cubs, right? Tiger Cubs are, you know, beaten raise, beaten raise. no beaten rays. That's it. They're not looking to really make money on the short side, generally speaking. But there is a segment of the hedge fund community that's trying to do work and get their hands around this. And I think the banking guys, like more more 25% of them actually kind of understand. And it's just sort of a I because I've been s on this so long and doing so much work and talking to so many people and getting it inflows, I can tell that it's picking up intensity. What's the the spectrum of timelines that people on the inside that understand this give you?

Nick Nemeth ⋮ Yeah. Well what are what are their their inclinations in terms of people are scarred And it's just sort of I 'cause I've been s on this for so long and doing so much work and talking to so many people and getting it inflows, I can tell that it's picking up intensity. What's the the spectrum of timelines?

Nick Nemeth [27:43] That's the trillion dollar question. peop people are scarred and they look back to to 2007, 2006 and they don't want to be too early and blown out. I'm you know, w with a a few few partners, I'm like, you can make this carry neutral, right? You you can get paid to wait. And then when it blows up you'll lose on Something and you'll make a whole lot more in something else. but I think we're talking in quarters. I I don't think we're talking in years, and I get I understand the wisdom of like, hey, it's not gonna happen as soon as you you you think, but I also think at the same time it happens sooner than you think, and happens quicker than you think.

Nick Nemeth ⋮ So the work that I've done and continue to do, I mean, it was like two day when Mythos came out, just auditing my work in one night, I spent fifteen hundred bucks. I'm like yum. Yeah, and then they took it away from me. I felt like I'd been broken up with. It was the worst thing ever. I had all these ideas. I saw our future together. But it was worth that fifteen hundred dollars. It was worth that fifteen hundred dollars. Mythos is really good at You got it in before they pulled it out.

Nick Nemeth [28:48] Was the worst thing ever. But it was worth that fifteen hundred dollars. You know, whatever the next gen models, I'm sure they're all gonna do this. Really good at segmenting out and tackling large data sets, sort of almost agentically inside of a a prompt. So it would put out 120 sub-agents and just do one task and then 70 more and do another task. And I was kind of shocked because I'm used to Opus, like I gotta type this out, ask me questions, let's go through it, let's make a game plan. Which gave gave great output. But Matthews was just ripping it. I was like, yeah, you go get Go get Well I'm thinking of Go get it.

Nick Nemeth ⋮ Well thinking of again and it's probably annoying to hear this time and time again, particularly from me, but it's like what is what is the the match that lights the fuse and you thinking back to eight as an analog and the big short specifically. Yeah. Well Well yeah. Well, yeah, because w we remember the part of the Big Shore where things are defaulting but the rating agencies refuse to to downgrade a lot of those mortgage backed security investments and the CDOs. So like it's it's just purely defaults and

Nick Nemeth [30:17] think it could be I think it could be four th or so things. Well because also when that was going Well, because also when that was going on, like defaults were rising. Rating agencies weren't moving, but the banks were offloading their books at and I think that's starting to happen. Yeah. So that's that's the point I'm getting. Is that happening right now? So they'll do it a And I think that's starting to happen. And you know important. Is that happening right now? Yeah, so they'll do it uniquely, right? Maybe they'll s sell a swap against it, do a bonds. I'm not inside a investment bank, but I do kind of hear things and I have friends and I talk to them.

Nick Nemeth ⋮ They're definitely cutting back the risk. And when it comes to the funding mechanisms, like these guys got basically commercial paper sometimes for these BDCs and the funds. The Jamie Diamond is sitting there with his hands on the rug, right? And you know he's gonna rug pull and he's gonna be right because you're it's your financial best interest to not take the loss. And you may know that by pulling this rug, it's gonna blow up, but it's not your responsibility, right? It's not your responsibility to help Cliffwater have liquidity, right? So I I I do think that the institutions

Nick Nemeth [31:27] with water. Mm-hmm. Qualified institutional buyers, the f whatever funders, they're really starting to get their hands around this. And ultimately it's only a matter of time. You know, maybe it's not this quarter, maybe it's not next quarter, but it could be three or four quarters from now. And you know, as defaults continue to go up, again, software hasn't even defaulted yet. Right? You know, the idea, I see a lot of people that say, well. Right? You know, the idea I see a lot of people that say, well, AI's you know, AI's a bubble, so software has to be fine. Like there's a potential. And I think AI is more fine than probably the consensus.

Nick Nemeth ⋮ AI's you know, AI's a bubble, so software has to be fine. Like there's a potential and I think AI is more fine than probably the consensus these days. There's a potential that the there's no ROI on hyperscalers and software explodes and they've just rushed into hyperscalers in order to diversify away from software. And software explodes and they just hyperscalable in order to diversify software. Well that's what I was gonna bring up. Maybe that's the the match is right. You have all these hyperscalers that have funded their CapEx build out via cash flows for the last three years and you had Google come out what last month and do an equity raise that Berkshire participated in, but next they're gonna have to go to to debt markets to really and they're starting to.

Nick Nemeth ⋮ Matters.

Nick Nemeth [32:49] They've done so mu they've done more than people understand to debt markets. A lot. Well that's the big question. Like, do they go to really tap the debt markets and then all these private credit funds are like we don't have the cash or we need to get liquidity? or do the private credit funds view this as like a Hail Mary, like, yes, let's pile into this and hopefully the ROI makes our nut back on the back. They don't they don't know how to have reservation when allocating capital. Their business is to allocate capital. They get paid to allocate capital. There's no and maybe it's not the best time.

Nick Nemeth ⋮ They're just thinking kind of like a rat in a in a maze. You know, we're getting burned on software, like we gotta go here. And now they're going to energy. Like they just go. And that's a huge problem. If you think about what private markets are supposed to be, it's like stuff that's not gonna do well in public markets because it's not popular and it's quirky and you know, you can make a good return just by maybe prettying it up, but mostly just operating it well and you know, it's cheap. Now they're like Blackstone is like, Ooh, it years twenty twenty one, what's hot? Enterprise SaaS and infrastructure.

Nick Nemeth ⋮ Okay. Let's do a bunch of green and a bunch of, you know, wrapper like the ten times ARR software application that was built by 25 guys and you know, built upon since, but it you know, has some revenue and seems to be on a good trajectory. You know, every year since it's like

Nick Nemeth [34:29] They just go into the hot stuff. Okay. Now it's data centers. Now it's, you know, gonna be energy because they can see oil prices. Well, we think it's gonna stay above seventy dollars. So let's go into that. And also we are underexposed there. It's like, yeah, but you you guys are writing seven-year loans. Like, if you go into the hottest thing every single year and expect to exit in seven years, it's not like a public markets person where you know you can buy them a momentum. And if you know how to get out, you'll make money. These guys have no liquidity. So they're going in at not at already elevated multiples, in some cases, extremely elevated multiples.

Nick Nemeth ⋮ Expecting in seven to ten years that While clipping a management fee every single year, that there's going to be a multiple expansion and EBITDA is gonna grow. So well, I mean you know, I think to solve this Well, I mean, and I think to solve this problem within the last few years you've seen these secondary funds get raised where somebody will go raise a fund basically to buy secondaries from private equity V C funds that have that have underwritten and deployed capital and their fund life cycle's coming up and they need to to get liquidity back to their LPs and so they'll basically go to a secondary fund, sell their share, and the secondary fund will take on that risk.

Nick Nemeth ⋮ My favor one of my favorite shorts, I have a few favorite shorts, is Stepstone. Stepstone is a secondary platform, used to be institutional, went towards retail, pays a massive sales credit, three and a half percent for one share class to sucker people in. Day one markups does it, you know, on average, I think that's three percent of their returns throughout their portfolio. But then they'll mark up day two and day three. They will tout the SpaceX, made a bunch of money on SpaceX.

Nick Nemeth [36:29] The small lines and Andoral and Anthropic. The rest is hidden in these SPVs. Nobody has any idea what they are. And you know that it's enterprise SaaS and it's infrastructure and it's stuff that like one of them's called Peggy Aggregator LLC. Another one's I have a tweet where I just go through and I'm like reading through and I'm just highlighting. Like one of them's called Peggy Aggregator LLC. Another one's I have a tweet where I just go through and I'm like reading through and I'm just highlighting the craziest names for these SPDs that make absolutely sense. And then I actually like tried to try to figure out what they were, I like, no, okay.

Nick Nemeth ⋮ Or a couple of them I could figure it out and I excluded those. the craziest names for these SPVs that make absolutely no sense. And then I actually like tried to tried to figure out what they were. I was like, no, okay. Or a couple of them I did figure it out and I excluded those. So Stepstone. That's an example of what's happening in the private market. Hamilton Lane's another one. They're just trying to get liquidity. We're in the end of the cycle. Okay. I don't care what anyone says. It's been a long cycle. It's been a great cycle. Stepstone. That's an example of what's happening in the private market.

Nick Nemeth ⋮ Hamilton Lane's another one. They're just trying to.

Nick Nemeth [37:21] You you might not think it's gonna end as poorly as I do. Okay, that's fine. We are closer to the end than the beginning. And these guys are like, SpaceX this year, like this is gonna cagger at 10, 15%. Like their gains right now. They think next year they're gonna have 10% more. And the next year they're gonna have 10% more. And Stepstone particularly is paying mo b mostly for executives, basically 60% of their market cap. Stepstone particularly is paying f mo b mostly four executives, basically sixty percent of the market cap, because they built this retail business. What? Yes, on a multiple of twenty twenty six and twenty twenty seven, it's like fifty percent, twenty six, they're gonna exercise it.

Nick Nemeth ⋮ Because they built this retail business. What? Yes, on a multiple of 2026 and 2027. It's like 50%, 26%. They're gonna exercise the put. That's an assumption. 50% of 2026's unrealized gains, 40% of 2025's unrealized gains. And this is like the best, this is the best IPO market ever, especially for a secondary platform. Typically getting good shares in the secondary market's hard, but like SpaceX was a very unique situation that had a lot of liquidity because it was private for a long time. Mm. And now it's below where where it listed.

Nick Nemeth [38:28] And they're gonna dilute the crap out of common ac out of shareholders. And the stories that they tell them like, man, you guys are dumb. You guys sex with investors. Stepstone, the analysts. I came out with a short report and all of a sudden it was it was right before the earnings call and all a sudden all of the analysts were like Yes, are dumb. SpaceX or the investors? Stepstone, the analyst. Reading like a line to ask from from my short report. I swear to God, they had never asked any of those questions before. And all of a sudden they're all asking about the the the put and the space ex valuation and how much it was marked up.

Nick Nemeth ⋮ And the answers were horrendous. Besides the first call, typically they give a softball, like it's a fake hardball. Who was answering this question? The other writers or space edits? No, the stepstone executives that made this deal with their sub agents. They've never asked any of those questions before. And all of a sudden they're all asking about the the the put and the space exvaluation and how much it was marked up and the answers were horrendous. Besides the first call. Typically they give a softball, like it's a fake hard ball. Who was answering these questions? The underwriters or SpaceX? No, the Stepstone executive. Okay. That made this deal with their sub agents.

Nick Nemeth ⋮ so you're you were telling the LP analyst in Stepstone to ask these questions. No, it's it's the Stepzone the Southside analyst. so after the early Stepstone Public? Stepstones public. Okay, there we go. No, it's the it's it's the the sell side analyst. after the earnings public stepson's public, yeah. Pass son stepson's public. And all of a sudden it's like, all right guys, like thanks. You know, there's a lot a lot more to come in my view. Yeah.

Nick Nemeth [39:40] Well, another interesting twist here too is with Warsh coming in, I mean, last week's FOMC meeting, I think he made it pretty explicit that he doesn't really want to do bailouts this time around. Like he wants he he he articulated the definition of a recession is when you have over levered, over indebted companies that that got over their skis actually just dying off because that's that's what should happen. And so it'll be interesting to see if that does manifest and he does let go. I yeah. Manifest and he does let him go. Everything he says like ninety five percent I agree with. If you just look at the history of Warsh At Morgan Stanley, they were like, he doesn't do work.

Nick Nemeth ⋮ He just walks around and pats people on the back and says, like, what's up, bruh? What are you working on, bruh? And then he marries a billionaire RS and all of a sudden is in the Bush administration. If you look at reports of what he did in the Bush administration, he was just like setting up meetings and shaking hands and being the networker guy. Then he becomes Fed Governor, because apparently he did a good job at that. The worst track record on record of identifying crises and responding to them out of probably any of the Fed governors. And then he's like a Stanford professor after that.

Nick Nemeth ⋮ I don't know. Works for Druck and Miller, probably setting up meetings and giving him chit chats. And now he's controlling the economy. He has good ideas. Like I do think that he is intelligent on a intellectual theory basis. But when shit hits the fan, those types of people have no idea you know, I you see may see it for making money. The smartest people you know, the Isaac Newtons of the world, have no idea what to do when shit hits the fan. It's not the speed chess that Not the speed chest. Yeah, he he famously aped into the East India Company at the top, right?

Nick Nemeth ⋮ it was just yeah. Yeah.

Nick Nemeth [41:29] Y it was just i yeah. Yeah. Seventeen, twenty Yeah. yeah, so the it's like Rick Reader is actually a genius. I get that he works at BlackRock, but I've grown up listening to him. Every time Rick Reader is on CNBC, I'm like turning up the volume and I'm just listening, I'm like And he's like he uses his hands. I feel like intelligent people, when they're trying to explain something simply, they use their hands a lot. And I just feel like he's just conjuring a mental model that is sufficient to handle most scenarios. Versus when I look at Worsh, I'm like, I don't know if he really understands these things.

Nick Nemeth ⋮ Like it it's different to build a mental model versus to follow, you know, a like a wave of, you know, intelligent discussion. Well, that's another question too. Well that's another question too. It doesn't really matter because it seems pretty clear that the whole thrust of the Trump administration going back two years now in the lead up to the the twenty twenty four election was we're gonna basically go back to a Fed Treasury accord where they're gonna work in some patico. And since the administration has come into office the beginning of last year, they've really sort of leaned into

Nick Nemeth [42:37] since the administration has come into office beginning of last year. for lack of a better term, nationalization of core sectors of the economy. putting direct investments in companies like Intel and other infrastructure companies and it seems like we are sectors of the economy. as a country and as at at the Treasury and at the executive level, like on wartime footing in terms of the nationalization of parts of the economy. So like is there like a treasury bailout that manifests through all this? Maybe it's not maybe it it's not a bailout of private equity. It's just like a hey, private equity got over their skis, over indebted. Maybe that's why Warsh is out there saying we're not doing bailouts this time, but Maybe it it's not a bailout of private

Nick Nemeth [43:21] got over their skis, over indebted. Maybe that's why Warsh is there saying we're not doing bailouts this time, but AI being a systemic national security risk as identified by AI being a systemic national security risk as identified by the administration of like, hey, we're gonna let that fail, but we're gonna ensure that this infrastructure build out sustains itself and that we're there for that. Yeah, no, I I for that it doesn't help these portfolios because you're screwed at 90 90%. It doesn't matter if the government backstops ten percent, right? It just doesn't. I do think that if shit hits the fan, there's gonna be like a you know new deal that's gonna be UBI and pushing it AI. Like that's the fiscal response that I would imagine. You think so?

Nick Nemeth [44:03] It's just you can't print enough money for true systemic distrust to be jawboned. You can't. There's only $22 trillion of US dollars in circulation. We're talking about asset classes that are extreme multiples of that, right? So if you double the money supply, okay, but what if people still don't want to own that stuff? Right. You could double the money supply and you could buy private equity companies, right? Based on how much they're levered. Maybe you have a little bit to spare. But I don't want that to ha I'd like I mean it's gonna suck but gonna be worth nothing. Yeah. And and by the way Well like more importantly, like you should have a feedback loop of failures like just getting out of the market.

Nick Nemeth ⋮ And and by the way, the year fail, let it fail. There's so much moral hazard in all of this. You know, it would take three hours to explain the incentives at each level. And you have to follow one to a trail and you're like, but this is a different moral hazard. We have to come back to that. And they are like tied and it's this, you know, tree of how this incentive system has done exactly what it's done.

Nick Nemeth [45:15] We gotta let it fail. And like last time I'm talking, and I sound like a sourpost, like we need the market to crash. And I I'm like, would it be that bad? Right? I get that young people take more risk and w we're gonna get smoked and it's it is what it is. But imagine just clearing the decks and all of a sudden maybe you can buy a home in the Hamptons for two million bucks again. So you might s go back to, you know, not much, but you have skills Right. You have the opportunity, you have the youth, and you have the vigor. And by the way, those vacation those Florida homes might be a hundred and fifty grand, right?

Nick Nemeth ⋮ They're seven hundred and fifty grand now. Someone's gonna get liquidated. You can buy a foreclosed house and you can have a winter home as well. If we just let this stuff delaver, it would be so much healthier. And the only way I can describe it is like it's like Seven hundred fifty.

Nick Nemeth [46:12] somebody that has s like a real like cerebral palsy or something and you're just putting steroids into them and you're like, okay, are you like better? Like you're not, you're just juiced to the gills. Like real like cerebral palsy or something and you're just putting steroids into it. And you're like, Okay, are you like better? Like if you're not you're just juiced to the gills. Like and and eventually it's gonna be worse. And and eventually it's gonna be worse and it's gonna be worse the longer that it happens and the more cycles, because every time that the repo market blows up, a hedge fund is like, my god, we're gonna lose all money.

Nick Nemeth ⋮ And then, you know, everyone hears about it in like certain circles, and then the Fed comes in and just like completely seals it. That guy's fine. Three more hedge funds are gonna step up their risk, right? And it happens every single place, like every time we bail out people. The there's people with a thousand residential homes, you know, in the f Sunbelt state, because they heard that was a great idea, and they're all renting rent r rental properties. They think that housing price is never gonna go down again because last time it was too hard. So, you know, this time they're just it's just not gonna happen.

Nick Nemeth ⋮ So they can take a billion dollars of debt or 250 million dollars of debt to do that. Just c like can we just clean out a little bit of the greed in the system?

Nick Nemeth [47:32] Yeah, you would hope. That's the question. Again, going back to Warsh's comments last week. Like is he actually gonna stick by them? Yeah, I mean I I hope so. So that's a good comment. Good comment. Don't want to criticize the comment. I just don't trust it necessarily. I will s Yeah, 'cause you imagine the the thick of the madness or like, Fuck it, we gotta fill this hole. Like just print the money. Yeah. So when Yeah, so when people when people th I I do worry about Walsh not being independent, but do you really they've never really been independent. There's been there's been an illusion of independence. But I think that worst is I actually find I actually find the the the explicit cooperation a bit refreshing where it's like, all right, you're not pissing on my face and tell me it's raining.

Nick Nemeth [48:02] They've never been no they've never been in a p but I think that Walsh is per I yeah, I I I think that there's an opportunity to call, you know, a cat a cat. But I'm worried about his dependency on not Trump. Trump thinks he's his guy. Warsh is not Trump's guy. Warsh is the guys of the people that are currently backing Trump. Right. And if they switch sides, Warsh is immediately anti-Trump. Trump's saying Warsh is the worst pick ever. I can't believe I did this. Mm-hmm. And if they switch sides. Well that's I mean we've had shout out to Matt Dynes who was on the show a few weeks ago and he he said explicitly that same thing, where it's like you have this sort of American heritage rich that are backing Trump to preserve I mean, this gets into a whole meta layer negative one discussion of like what is America and like what are we trying to do here?

Nick Nemeth ⋮ And his argument was that like Warsh is old heritage Americans, Bessent old heritage Americans, Trump, backed by old heritage Americans to preserve American autonomy in this transition to the digital age where the Davos class would like us to sort of be subsumed by their view of the world and This gets into a whole mess.

Nick Nemeth [49:29] Yeah, I think it's a different group than Davos. it is. Yeah. Yeah. Yeah. But it but I but it is the same idea. It's a lead group that's like it is. Yeah. That's that's what yeah. But it but I but it is It is an elite group. But it's an elite group that's like Davos, that's not the direction we're going, like we're we're going in this direction. Yeah, so all of those guys operate in circles that have feedback loops that rarely tell them they're wrong. I'm gonna say that they don't get it. They don't get it. Like I don't think they're evil. You know, I d I it takes a lot for me to think people are evil.

Nick Nemeth ⋮ BB Netanyahu might be evil. But I the these, you know, rich East Hampton guys. They have nice wives and they have nice dinner parties. And they talk nice ideas and it's kinda like fencing and they're intellectualizing everything. They do not understand the way that this will be perceived if it doesn't go to plan. If Warsh ends up being a bad pick and he's tied to a billionaire heiress, and that billionaire heirs is a member of these four clubs, and Warsh is a member of these three clubs, and they're in such a bubble that they think, like, well, like, there's always people that are gonna hate us for being successful.

Nick Nemeth ⋮ Like, what if you actually drastically lose the country? And everyone knows exactly what

Nick Nemeth [50:53] You know, circles you're running in, who your friends are. Worship's like publicly friends with, you know, a lot of people that do not want to be public. And on photos and it's like, guys, the elitist domination of this country is only gonna hurt the elitists and it's only gonna lead us into fascism or communism. Like just put your guys are successful. Go enjoy the beach. Like stop trying to control everything. Well, I mean in this guy. Well, I mean th and this goes back to something we were discussing earlier, which is sort of the dynamics of the the guys running PE funds and how they can afford their lifestyle using portfolios to get loans out to do all that.

Nick Nemeth ⋮ But I was at a presentation by Brown brothers the other week. I got invited and it was a great presentation. Their lead economists basically pulled up the chart of the K-shaped economy and showed that There's I mean, you've seen the headlines like the American consumer is alive and well, spending's up, consumer spending's up, but he pulled up a chart that said like t the top ten percent is driving fifty percent of consumer spending within the last year, when historically that that sort of ratio of the top ten percent driving consumer spending should be somewhere near like thirty, maybe twenty to thirty percent. So you're you're wholly dependent on that top ten percent and then within that top ten percent, the top one to point one percent, which is Top ten percent and then that

Nick Nemeth [52:18] the individuals that are involved with private equity and other types of hedge funds. And I I think from a self preservation perspective, what you're getting at here too, it's like, hey, you need to realize like this is not gonna work unless more people are participating in the wealth effect and able to actually go and go about their lives and and put a roof over their heads, buy food and enjoy some some Yeah, no. And I I think from a self preservation perspective what you're getting at here too, it's like, hey, you need to realise like this is not gonna work unless more people are participating in the wealth effects and able to actually go and go about their lives and

Nick Nemeth [52:47] paltry luxuries, I guess I would say. Like just like the some Yeah, exactly. And that's like to you I think what you're getting at is like the social incohesion that can arise from mishandling this. And I think you just look at consumer spending and the the portion of it that's being driven by the top ten percent. And I think that's proof in the pudding. Like, hey, like if you guys fuck this up on the private equity side, like not only are you gonna mess up your own life you're gonna I guess I would say. Like just like a steak dinner on a Friday? Exactly. And that's

Nick Nemeth [52:57] Incohesion that can arise from mishandle ruin the economy and so we need to figure out a way to like land that plane and get everybody back on a level playing field. That was a little bit of a ramble but there's something I stoked in my mind while you're saying that. Get everybody back when I love No, yeah. Well th it exactly right. The problem is convincing those people that maybe they got a little bit lucky and they're not God's gift to Earth is hard. You know. I just want to delineate when I'm talking about the people in private equity that make a lot of money and are potentially gonna lose their homes and to take their kids out of private school, I'm not talking about the people that have the fifty million home dollar home in Southampton or Montauk or whatever or Nantucket.

Nick Nemeth ⋮ And are pulling political strings behind the scenes that do not benefit them and they're seeing one step ahead and not realizing maybe you should allow some competitive dynamic and, you know, a capitalist democracy, if you will, of ideas. Well I think that's another hard part. Well, I think that's another important part. Like I am involved with the private equity fund on the VC side. Like I I I am in this world as well. And I think the point that's important to make is that these things aren't inherently bad in and of themselves. It's just like the risk that's been allowed to take on in some pockets of the market is so extreme that's creating a systemic risk.

Nick Nemeth ⋮ And it it's not to say that we should never have private equity fund. You need sort of capital allocators out there to invest in people with moonshot ideas. I mean Valor Atomics I think is a great example of this in the last week, able to spin up a nuclear reactor in nine months wouldn't have happened without private equity venture capital dollars coming in the room. Like th these things are necessary functions for society and the economy to progress. But it's just like losses are allowed Exactly. Like

Nick Nemeth [55:06] As long as l losses are allowed. Exactly. Like, I love risk. I get it. Listen, I want to see somebody, you know, hit a hundred X, but there's gotta be at least 50 zeros. Right. You can't have this. And what's happened in Silicon Valley, like, yes, we've over the past 25 years had a lot of technological innovation and a lot of people have made a lot of money helping. businesses become world changing, right? But it's been too much of a game and a grift. And you know, it's kind of just leading it up and everyone knows it's gonna tank, but we IPO it, right? And it's too much of a club and the good stuff you keep private, that whole th like everything just needs to be stress tested.

Nick Nemeth ⋮ And I think 50% of venture capital, 50% of private equity, fi 50% of Potentially insurance. It's all got it's let's just focus on the private equity. I think fifty percent of private equity funds are gonna be gone in the next ten years, right? It's gotten too crowded. It's gotten too crowded. We need losses. We need to test this the assumptions. And honestly, everyone needs to go to those private equity networking events and just listen. Hey, we create value by having buying an accounting firm and a janitor service. And then the janitor service cleans the floor of the accounting firm, and the accounting firm does the taxes for the janitor firm.

Nick Nemeth ⋮ Value creation. You know, we synergies. Synergies, right? It's like it's insane if you listen to these guys. It's insane. Yeah. And

Nick Nemeth [56:43] You know, we synergies synergies, right? It's like it's insane if you listen to these guys. It's insane. And there are really smart people in every industry, but private equity particularly. on the top, you know, if you go to the top five percent of intelligence, and these are probably firms that nobody's heard of, right? Same thing with hedge funds, but I think the you know it's the top 15. there are obviously smart people in every industry. Mark Rowan, think he's evil, but he's a smart guy. John Gregg, not so smart. Mark Rowan, pretty smart. My Argetty, Arenati, Michael Arenati, who's the lawyer? Yeah, yeah. So Michael Arenati of Aries.

Nick Nemeth ⋮ he's smart. Arenati is yeah yeah so Michael Arenati Aries. he's smart, but those guys are just alligator. But those guys are just allocating way too much tech capital and they're so deep into it that they're just Texas hedging by going everywhere at this point in time. But there are plenty of $30 billion private equity funds. You know, I was talking to a private equity fund a week ago, and I was like, this good ideas, bouncing ideas back and forth. It l lays over to the public markets, which is where I play. but they're generally intelligent people in the industry, but there's Eighty percent nonsense.

Nick Nemeth [58:06] And the consensus on how to create value and what val value PE is or real estate private equity, lower middle markets is the best opportunity. Like the justifications if you really test them. And again, public market guys get tested all all the time, right? If you go out and say, I like service now, you know, someone's gonna say you're an idiot and you say, I'm not an idiot, here's why I'm not an idiot, and he says, You are an idiot, here's why you're i'm you're an idiot, right? It's a dialectic and a s And and it's quite frequently discussed on social media or otherwise. Well the information's free, right?

Nick Nemeth ⋮ It's open. It's open. So like you have like information, there's not perfect information, but there's more information available to make decisions. You can't short private equity. Right. Yes. No, no. The the the public filings do a lot because then you you really have evidence. The amount of work that I've had to do in these private credit portfolio port portcodes using alternative data sets, like just going crazy on web traffic and you know, sales surveys, everything.

Nick Nemeth [59:10] In order to try to figure out is this company doing well? All of that stuff. If you're in the public market, the way this is gonna end, I think, and the way that should end and everyone sh should say that it should end, you have to file at least a consolidated state statement of how that, you know, is audited that says how the business is doing. And we don't even know the covenants of of these loans, but just more transparency would do wonders. Because then it would be pretty hard to argue that Plural Site should be marked marked at 100 cents, right? Or 97 cents in some portfolios. That's the Chag company, right? Chug. Because we see in the public markets. Yeah. Companies go down 95% and then the same companies in private equity portfolio in a different flavor. And it's at par, right? Or, you know, what they bought it bought it for four years ago. Check? Cheg. see in the public. Cheg company. Yeah.

Nick Nemeth [1:00:06] Just it doesn't make any sense, but you also can't short it, right? You can't go into now there's some C D S on private credit BDCs, but you can't go into, you know, Tama Bravo's fund seven and be like, this, you guys are terrible. Like I'm just gonna short all of this. The public marks are here. These public software companies are way better. These businesses are not growing. They're not cash flow positive. You underwrote them like idiots. And now, sure, maybe three of them will survive, but the value is certainly gonna be lower. The fact that you cannot short this stuff. I think, you know, people talk about shorts and they say that they're an evil upon the face of the earth.

Nick Nemeth ⋮ And from short sellers in jail. Yeah. I th I think left was a little sketchy, but yeah. I mean the bears are dead. The bears are legitimately dead. And it's like, but like you need some bears, otherwise the d the deers are gonna They're throwing short sellers in jail. Did you see that a couple weeks ago? The bears are going to jail. The bears are dead. The bears are legitimately dead.

Nick Nemeth [1:01:10] run rampant and that's what the the if you tr press the typical private equity or private credit person on assumptions, they look like a doe. They look like a doe with an oncoming eighteen wheeler and they just like default to the same five things that they say justifies their existence. Well I mean this is Yeah. Well I mean this is why I do what I do when I've been doing this show for nine year nine years now, which is hard to believe. So I think a lot of the I you say the the bears are dying. They're their d extinction is almost predetermined by the monetary system.

Nick Nemeth ⋮ Like going back to that Saudi Norwegian bank, like the fact that you can lever up 10X on a hundred million dollars, get a billion dollars from money printed out of nothing is the whole problem. So it's floating all these values across the board where it's private equity portfolios, they're able to take loans out or raise a secondary fund to get cats, like keep it afloat. Real estate prices, same thing. It's cause there's no feedback mechanism. Not only will Feedback mechanism. the government and the central banks not allow these things to fail, they'll back it up with printed money that'll paper over it. And like that's why I'm so passionate about Bitcoin, because I think Bitcoin brings back a true opportunity cost to the market where you're forced away capital allocation decisions and there is a true cost to fucking up that allocation, which is we can't print more Bitcoin.

Nick Nemeth ⋮ So you gotta figure out what is actually providing value and cash flow. And I think that's a core part of the like again

Nick Nemeth [1:02:19] why I'm so passionate about Bitcoin because I think Bitcoin brings it back Going to layer negative one. It's like the the money, literally how the monetary system operates does not allow for this. I think the feedback mechanism is you identify a risk. The risk doesn't, you know, people cry wolf so many times, right? It doesn't materialize into a crisis and then you're back at the next risk that you identify. And that loop has happened so many times where it hasn't blown up recently and you know, the memory of people that are investing today that they think it's just always gonna happen. But the thing is, you look through financial history, things work for a long time before that you know, eventually they stopped working.

Nick Nemeth ⋮ Japan is a great example and it's recent. You know, they created a bubble and they did, you know, a lot of quantitative easing and then all of a sudden they didn't have an economy that grew for twenty years, right? But you can look back to the UK, you can look back to the Netherlands, you can back look back to the n Roman Empire, right? And, you know, Ray Dalio, I think he says some things that, you know Again, like these guys cry wolf too much. That's kind of the problem, right? And then all of a sudden people are like, Well, everything he said was wrong and it's like, No, some of that's actually true.

Nick Nemeth ⋮ You're just living on a time frame that is, well, when he first heard that I was in high school and now, you know, I've got a wife and my baby's crying and I don't even want to hear that shit anymore. I mean we get Got a wife and baby's crying even want shit. Yeah. I mean we get it a lot in the Bitcoin space. Yeah, we're crying wolf all the time to people. No, the the bit

Nick Nemeth [1:04:14] Yes. No, the the Bitcoin people I think are directionally correct, but they have been kind of scarred, kinda like the gold people, where, you know, they're like, it's all it's all bullshit. It's all bullshit. We're just gonna buy Bitcoin, you know, it's some maybe too much, some as a hedge. and you know, you can't pin more print more Bitcoin and we'll just leave it at that. It takes like takes like CTE a certain amount of brain damage. So it's like consistently be like, okay, well I see risk, okay, it's it's I really want to identify six concussions here, so CTE or a certain amount of brain damage to like consistently be like, okay, well, I see the risk.

Nick Nemeth ⋮ Okay, it's it's I really want to identify and I really want to do a tremendous amount of work for, you know, six months on end in order to encapsulate this risk and you know, maybe there's a new exit that's invented, but I don't think the old exit's gonna work. And you know, i y You can come off as schizophrenic. Like it's it's a it's a tough thing. And it's easier to just say, Yeah, it's bullshit, and I'll just buy a little bit of this and I'll be intelligent. But the vast majority of people are like, you know, you're a permabear if you like talk about anything bearish.

Nick Nemeth ⋮ The vast aren't even aware of it. They're not even yeah, you're right. Dichotomy. I live in circ I live in circles where we debate this. The average American has no freaking idea what's going on. And a vast majority of people aren't even aware of like the bull verse bear like dichotomy, let alone elevates are both same.

Nick Nemeth [1:05:42] Shit. I just see a turn where everyone realizes it's bullshit and it's gonna go completely different than what our leaders think. And you know, our leaders are so you like the you know, the East Hampton private equity, finance, crowd, they think that they're just gonna be able to say, like, socialism is dumb. Yeah. Mm-hmm. They think that they're just gonna be able to say like socialism is a Segway pipeline, dude. Yeah. I'm interjecting with some Instagram meme. If it's like become a meme now. It's like Segway pipeline, play lacrosse in an I have V, go to private equity, live in the Hamptons. Yes, definitely Yeah.

Nick Nemeth ⋮ So private equity. Yes. Definitely a super I think humor does an amazing job of like telling truth. Right. there's who do you know the guy on TikTok that is like do you know do you know what that guy's name is? Do you know what that guy's name is? The yeah, the private equity guy. Like he's private Mr. Private Equity. Yeah. It's it's it's so true.

Nick Nemeth [1:06:38] Yeah, it's private Mr. Private Equity, whatever. It's it's it's so true and I think it tells where this is gonna go because I think that the majority of financial elite think that they have to worry about socialism and socialism's all they have to worry about. But a populist that can intelligently talk about free markets and how the markets aren't free and it's been entitled to A certain segment and it's been sort of like a regulated monopolies times a hundred in every single industry. And you know, capital capture being political capital and isn't a socialist, like they're so unprepared to deal with that narrative. And I think it's gonna swing extremely hard.

Nick Nemeth ⋮ And sure there's gonna be socialists and there's gonna be some whack jobs, but I think that there's a very intelligent argument that these guys are not God's gift to earth. No, and one could argue, I think you make a strong argument. I have made it before, that we do live in a socialist society, it's just socialism for the rich via these bailouts, right? And it's like and that's what really that's where the the real dangerous trap is, is again going back to I mean, it's objectively true. The vast majority of Americans have no idea what's going on. They'll just know that something happens in the markets, it blows up and they'll blame capitalism for it.

Nick Nemeth ⋮ We don't have capitalism. Yes. Yeah. Yeah. And that's what

Nick Nemeth [1:08:07] Yeah. And the socialists use that as an inroad to see, say, capitalism got us into this situation, your home value went down, you lost your job because the capitalist system failed. But we do not live in a capitalist society. It is socialism for the the upper class. And again, I want to be very clear. I'm not trying to denigrate Yeah. Socialism. For the the upper class and again denigrate, excuse me, wealth creation or wealth inequality. Wealth inequality is just a foregone conclusion of human society. There are inequalities between each individual. I think Thomas Sowell said it perfectly, no one man is equal to himself on a day to day basis. Like inequality is gonna exist, but I think the inequality is exacerbated by socialism for the rich via these bailouts. excuse me, wealth creation or wealth inequality. Wealth inequality is just a foregone conclusion.

Nick Nemeth [1:08:38] inequalities between e each individual. I think Thomas Sowell said it perfectly, no one man is equal to himself on a day to day basis. Like inequality is gonna exist, but I think the inequality is exacerbated by socialism for We need class mobility and what that takes is the ability to go from the lower class to the upper class to the middle class to the upper middle class, whatever you want to say, but also from the upper class to the middle class. Also potentially from the upper class to the lower class. And I think that there's the people are kind of like, the company country could swing to like actual AOC socialism or memdani.

Nick Nemeth ⋮ And those I look where we are now. Yeah. Those are the identified opposition. But I think you could thread the needle intelligently and explain it to the average American that, hey, socialism doesn't really work. Like there's ample evidence of of that. But also what we have is not capitalism. And what we need is free markets, like legitimately free markets where there are losses. And if that happens, all of the moral hazard that we've been dancing around. What if there's not a bailout for those guys? And I think that could be a huge, huge recession. A huge recession. If all of a sudden the political power switches and a new crop gets elected, and the majority of our politicians are going.

Nick Nemeth ⋮ They're so old. So what if politics gets taken over by people that just don't service the same power, right?

Nick Nemeth [1:10:18] In that case, everyone's looking at you know, AOC and Mimdani. And it's actually that's not the opposition that you have to beat in order to get the bailout that you're counting on for whenever this cycle is gonna end. And listen, what what I would say is like, you know, maybe I'm an optimist. I think that route is gonna have a lot of acute pain, but is gonna lead to the you know, 30 years of a golden age, you know, with technology, with all of this stuff we talked about. But we kind of need a stuff we talked about, but we reset. Well there's historical precedent for it.

Nick Nemeth ⋮ Was it the mini depression of nineteen twenty or nineteen nineteen? there was, yeah. And with the the the acute pain that y you described it was it was big but we recovered very quickly within a couple of years. Yeah. There was yeah. Well, There's like under hardened or something like that. You know, economies typically have cycles that last six to eight years. Eight years is long, right? We have had one cycle since two thousand and eight. I don't care what anyone says. They wanna say, but COVID, but twenty twenty two, the the leveraging didn't happen.

Nick Nemeth [1:11:25] And that's gonna make it worse. But at the end of the day, we could have class mobility. And you know, you gotta take some of the leverage off. And some of these private equity guys that make a million dollars per year and have levered up in every aspect of their life and crap their lifestyle up to n ninety thousand dollars for each kid private school for K through twelve and then go to Duke and whatever. And college is extremely expensive and home prices are extremely expensive. The solution to all of this, I think, is just letting assets go down to reasonable and normal level levels and probably overshoot.

Nick Nemeth ⋮ And then at which point people that have income should be gracious. Sure, maybe your four one K went down fifty percent and it sucks. But Home prices are now down twenty five, thirty percent and you get to get into blue chip amazing companies for fourteen priced earnings. That is the reset that could get us there, but it has to be with deregulation and sort of a antibiotic for the moral hazard that's currently in the system. Cannot be unnatural. things crash, we print. Every everyone that knows better is gonna buy stocks when the Fed says we'll do anything it takes. So maybe maybe Worsh is that guy.

Nick Nemeth ⋮ What what I'm concerned with is that when things do inevitably crash,

Nick Nemeth [1:12:56] It's we're gonna try to V recovery it again with the Federal Reserve and it's not gonna go well and it's gonna lead to more wealth inequality. And all of a sudden, Warsh is gonna be the guy that it's like, Well, who why did you bail out your rich friends again? And then we could l then the v the political variants from there could be communism, could be fascism. Right. So I'm optimist that we can thread the needle. And I think that's the only way that we can lead a co to a cohesive society for the long term in the United States, Europe, and you know pretty much the entire Western world is dealing with this problem.

Nick Nemeth ⋮ Yeah. And I mean despite what Yeah. And I mean, despite what I think we have this this other backdrop right now, which is n the natural forcing function for all this to get set in motion, which is just you look at the treasury yield curve and the long end of the yield curve, it's elevated to levels that people Would have told you were impossible five years ago and so you have this natural increase in the cost of capital, via the bond market that's like forcing like the Fed doesn't have to to force it, but like the bond market's forcing financial discipline on the market and it will I mean, I think ultimately that w will be the catalyst for unearthing where where the bodies are.

Nick Nemeth ⋮ Liquidity is drying up. Liquidity is absolutely drying up. And you know, a six point five trillion dollar Fed balance sheet sounds huge. It was nine but pre global financial crisis might have been one or two.

Nick Nemeth [1:14:27] We're talking about hundreds of trillions of dollars in the debt markets, hundreds of trillions in just government debt, corporate debt, you know, any sort of real real estate related debt, whether residential or commercial, the asset stuff, the you know, leverage on the companies. When you put all of that together, if that is all coming down at the same time. The federal balance sheet may have to expand at such a level. It's this idea of a jaw bone. You know, people in financial markets understand the jaw bone. The average American doesn't understand the jaw bone, where the Fed will backstop and be like, you guys are good, like we got your back.

Nick Nemeth ⋮ It works while people think it it's gonna work, but if it doesn't work, we are completely unprepared for that. Because the true amount of dollars needed for the backstop. on the level of the everything bubble that I see, we would have to triple, quadruple the federal balance sheet. And then you have the dollar in struggle. But then if if if you have the dollar in struggle, remember this is a European issue too. This is an Arab issue. All fiat currency at the same time. It's kind of like COVID. COVID backstop worked, but you're gonna see massive you know government response. And then all of a sudden all that paper that has a number printed on it, that number's worth less, right?

Nick Nemeth ⋮ That would be a really painful thing because then you would have everyone trying to rush into real assets. Sure, Bitcoin would do amazing, gold would do amazing, but the economies would do horrendous on a real basis because you would just see the nominal GDPs go up and all of a sudden inflation would kick off globally and i i in a way that, you know

Nick Nemeth [1:16:22] it it would be hard to create true value, you know. If you just hoard commodities like gold and Bitcoin, you're not creating value. You might be hiding your wealth. But you know, and the volatility involved in that, you know, it would it would be gross. Yeah, because you just think might be hiding your wealth. But you know, and the volatility involved in that, you know, it would it would be gross. Yeah, because if you think of the return on capital necessary in the scenario you just laid out where you're debasing the currency potentially Approaching hyper deflation. I mean, we've seen this throughout history. I mean, I think the early episodes of the show had people from Venezuela, Argentina, Brazil that told the stories of hyperinflation, you literally can't allocate capital 'cause you don't have time to think about it.

Nick Nemeth ⋮ Your your time preference is such that you get your paycheck and you run to the grocery store to get as many goods as you can because they're gonna raise prices. I mean listen, if I were Approaching hyper deflation. I we've seen this throughout history. I mean I think the early episodes of the show had people

Nick Nemeth [1:17:04] You get your paycheck and you run to average person yeah I mean listen if I were to think about the best way that I can climb the the relative wealth channel it would be hyperinflation like I think I have the skills to navigate that environment very adeptly it's a zero sum game at that point in time right and I don't want to live in like I I'll do like I'll do well in a deflationary environment you know Just go and buy bonds. Go be able to read balance sheets and cash flow statements and be like, okay, well, I'll buy that debt. Right. The hyperinflation is where you really need skill, right?

Nick Nemeth ⋮ And the typical person doesn't have that skill. So the idea that, you know, two percent inflation, three percent inflation, inflation can always stay within, you know, a r relative band and it just takes some monetary finagling and it'll always stay there. I think Right now it's kinda like when the Bank of England broke and they were trying to keep a band of the the Deutsche Mark and you know currencies through throughout time I've tried to keep like a you know a a relative yeah, a peg or a window or something like that. I think that's kind of what we're doing with inflation. If there's massive deleveraging, you're gonna see pretty significant potentially great depression level deflation.

Nick Nemeth ⋮ If we respond to that and stop that, I think we're gonna go into probably the more painful category. And the idea that we can just stay here, it's it's togwash. And y if you look objectively true.

Nick Nemeth [1:18:17] Yeah, a peg or a window or something like that. I think that's kind of what we're doing with inflation. If there's massive deleveraging, you're gonna see pretty significant potential Stay here, it's it's tarwash. And well it's not even objectively true. I mean the like they say we're staying here, but if you look at real inflation, we're way out of it. Like we're way out of that band. say we're staying here if we look at real. The money supply, yeah. Yeah. I I I like when Bitcoin guys point to the money supply instead of the CPI because CPI is bullshit. Right. You can grow the money supply consistently ten percent every single year, but what you will see over the course of doing that Initially, CPI will be low because where that money supply grows goes into lending and goes into credit that potentially provides more supply.

Nick Nemeth ⋮ So it's not inflationary on a demand side, right? But over time, there's only so much, and you create massive bubbles, and there's only so much time that you can lever up before all of a sudden people start demanding that either equities go up. And equities can only go up with profits going up consistently. So profits can only go up really by raising prices. And you know, you can cut costs and AI may help do that. You know, that's kind of just it's not changing the scale of this in the long run. If that happens, then you're gonna get inflation. And these things happen. you know, they don't happen on a quarter to quarter basis.

Nick Nemeth ⋮ They don't happen on a year to year basis. And people think that modern monetary theory can just maintain, you know, this perfect level of, you know, Xanax and morphine and Adderall and like

Nick Nemeth [1:20:03] You know this. We got so many drugs in our financial system, it's insane. And then, you know, it's just fine. That's how you operate and nobody ever gets health effects. We're I think we're starting to experience that health effects. And I don't think that We got so many drugs in our financial system, it's insane. And then, you know, it's just fine. That's how you operate and nobody ever gets health effects. just because certain things have worked for 15 years that they will always work. And I would say the best scenario that I see is like a good healthy correction. And based on the levels where we are, that healthy correction might be forty percent, you know, across asset prices.

Nick Nemeth ⋮ That's what, back to where we were in twenty twenty, I think. If if that probably on home prices, yeah. Yeah. Well, and that's the other I mean, you mention Bitcoiners focusing on money supply versus CPI. And we actually do a monetary we do a quarterly global monetary base update. There's this guy out of Latvia. He's American, but he lives in Latvia. On home prices, yeah.

Nick Nemeth [1:21:09] Same to matter. Seems Matthew Mazanchius and he's he's one of my favorite monetary autists in the space. He's basically gone back and collected all the central bank data across the world, going back like fifty years now at this point, I think starting in nineteen seventy. And even before that, he's got some data too. But he's around the number. The global monetary supply over the last thirty years has a, I believe like a twelve point five percent kagger rate. so that's twelve point five percent new monetary Breath around the number, the global monetary supply over the last thirty years has a I believe like a point

Nick Nemeth [1:21:36] Twelve point five percent. Twelve. On a global basis. So add on a global basis, so adding all currencies together and sort of measuring the growth of the global monetary base over time as a twelve and a half percent kagger over thirty years. So maybe So maybe ten percent on ele eleven, twelve percent on equities isn't so good. Yeah, that's the argument. That's yeah. I like the idea of investing in businesses and you know, having smart people work for you. but when the money supply is growing so much it can completely corrupt any investment decision. Yeah. That's the argument you. Well it i i it inherently does because you're forced to think like you y pa patient capital completely leaves the market because it doesn't have the luxury of being patient, right?

Nick Nemeth ⋮ And you you you get this high velocity trash economy where you're getting money and pushing it into every piece of dog shit that exists because you need to get it in and get that return out as quickly as possible. the function and the viability of the actual actual business be damned. Like just get it and get it out. Yes.

Nick Nemeth [1:22:42] Buffet is patient capital, like epitome of patient capital. A lot of the people that think they're patient capital are now FOMOing into quantum computing or something. Like they're like, wait a minute, like we've l missed out on the past four years. And that's really where you get the pain because you did so good. You avoided it for so long. And now you're, you know, into, I don't know, maybe it's megacaps and hyperscalers or whatever. And Ha ha. Ultimately, it's unfortunate. It's unfortunate that so many people have gotten rich being, you know, not investors. Like we're we're not we're not compounding a basis on cash flows anymore, right?

Nick Nemeth ⋮ We're speculating. It's a massive speculation economy. And the number one way to see the effect of that is like look at Calchi. Look at the younger gener generations, right? They feel like they missed on Bitcoin. They feel like they missed on all this stuff. But there's one section where it's like every paper boy and milk girl was trading stocks. Like they were speculating. Yeah. Have you ever read a I haven't. I need to really study.

Nick Nemeth [1:23:55] Did you see this morning? So this is apparently Black Thursday. I haven't checked the market, so it was ugly in the morning. We did Warsh bring out the plunge protection team. Black Twos. Let's see where we're at now. We got Nasdaq down one point seven. Hmm. It's better. people think two and a half percent in one day is like the the worst it can get. It's like shh. Yeah. Yeah. Hank Paulson's on his knees right now. Print the money. Yeah. So I I mean I think your point earlier about getting threading the needle, again, bringing this back to the juxtaposition of socialism, fascism, and true capitalism in free markets. It's like that's the message that needs to get out there. We live in a quasi me at best. describe what we have quasi quasi capitalism. There are capitalistic sort of features of the economy, but at the end of the day That's the mess.

Nick Nemeth [1:24:46] at best. It's crone crony, quasi quasi capitalist there are capitalistic That money printing and that backstop is pure socialism for a particular subset of the population, which just so happens to be the rich. And it it makes sense. You're gonna backstop that because it's holding up everything else. But to your point, I think we have to eat the pain in the short term, clear the board and get back to wise capital allocation decisions, backing legitimate businesses, pr providing goods and services that people value at a profit to the economy. to the market. And I mean there are certainly companies that are doing that and people that are allocating those businesses, but the amount of businesses that are not doing any of that but are still able to susist and raise and sit in these portfolios is is way too much. Yeah. But businesses that are not doing any of that are still able to susist and raise and

Nick Nemeth [1:25:44] Yeah. I mean I I don't want to completely demonize the, you know, elitists. I just think that they're dumb sometimes. They're really dumb. And you wanna get back like elite they d they don't see it. They don't see it. What you want to get back like elite like social social hierarchy is like just natural and we just need to get it back to like a hierarchy that's actually based on based on meritocracy. Yeah, you guys can s you guys can still be rich. Like we're not we're not trying to take your money. We're just trying to take your, you know, profit centers. Your backdrop. Yeah, yeah, yeah.

Nick Nemeth ⋮ You can make money the real way. Like fine. You just you can't make money the way that you're making money because what that results in is shackless slavery for the middle class. And that is something that, you know, really is gonna lead to a worse outcome. Just let it go. You know, let go take t Your backdrop. No the moral hazard centers, I would say.

Nick Nemeth [1:26:31] You know, the boomer billionaires, you know, and the senti millionaires, right? Just like over the reins. Yeah. Well, and that's I didn't say there are there are boom boomer billionaires. Yeah. Well, and that's and say there are there are bo boomer billionaires and centimillionaires that I know that actually like have legitimate family businesses. Most of them are private, right? And like they're great businesses and it's like but they're operators. They're operating businesses in most cases. The financialization that's been sort of embedded on top of that where you have like somewhat parasitic class of financiers that are just trying to For sure. And like they're great businesses. If you guys are fine. It's like but they're operators. They're operating businesses. Yeah.

Nick Nemeth [1:27:03] Somewhat parasitic class of financiers that are they sort of squeeze everything that they can from that. That's where in the fact that they have a money printer sort of safety net, for them alone. Obviously maybe we get SNI checks, UBI, which would help or quote unquote help the common man, but like historically, at least in our lifetimes, it's been for that class. And Maybe we get snippy checks UBI, which would help. historically at least in our lifetime since we were that class. Yeah, I I mean I do think that we probably need UBI, but it should not be abandoned like it it cannot be the solution. Well shit, if we how do we No UBI.

Nick Nemeth [1:27:41] How do you have unemployment go to 14%? Like I think demand stimulation is better than supply stimulation. Like I think if you just evenly distribute 30 grand per person for maybe a two-year period through a recession and assets are getting crushed, maybe some of that money's going back into assets. I think that's pro like you the laissez faire side I just don't think is actually truly gonna work. I think there has to be something. I I if we wanna do an intelligent, you know, okay, we rebuild the infrastructure, you know, I I think a lot of the stuff in the New Deal is a kind of bad, really bad long lasting consequences.

Nick Nemeth ⋮ But I'm understanding of the Keynes I think Keynes is one of the most underrated economists of all time. What? I think Keynes is one of the most underrated economists of all time. What? Yeah, people don't understand what Keynes actually said. Keynes never said you could do this stuff indefinitely and that there aren't consequences. Yeah. Yeah, in the long run we're all dead. Yeah. stuff indefinitely there aren't consequences. Debt is only money we owe ourselves. You'll be dead by the time you have to pay it back. Yeah in the long run we're all dead. Yeah.

Nick Nemeth [1:28:43] but a slight, you know, i if if we have to do something, do it to the demand side, evenly distributed. But let's let's not use that to obscure what what has actually happened. And if people just tread water through bad times, sure, maybe you don't have as much disposable income to go to Florida or the Bermudas or whatever. You're not less wealthy. If everyone is wealth is down forty percent and your wealth is down forty percent, you're just as wealthy. It may not feel like it. On a comparative basis. On a comparative basis, right? Just try to take more intelligent risk and f find more security. And and save some money. Jesus. On a comparative basis.

Nick Nemeth [1:29:26] Well the the part of the equation that's really gonna fuck this up is the fiscal side. Like the government needs to cut their spending by arguably ninety percent and I mean yeah. Well On the on the boomers? Hey, boomers want to raise more taxes on the young people that are working. Pomp Pomp has some bangers sometimes. That was a banger. I'm like, God. They would literally vote to tax a child. They would be like, You are two years old. Now you need to start running on a treadmill to power a data center. You sent me a video today of Pomp talking about this. Yeah. Like

Nick Nemeth [1:30:02] Well Well the other way they're doing that is Trump accounts. It's like you are two years old, we're gonna print money and you're gonna throw it in equities markets. That's gonna increase our four one K's. That is true. Yeah, no, that's that it that is true. It's funny how that didn't happen in two thousand and eight and now when they need the liquidity and the permabid to all of their assets, they're like, Yeah, now we're gonna give we're gonna print money, give it to babies, they can't touch it, they can't sell it, they can't sell it until after we sell it. And after we sell it.

Nick Nemeth ⋮ To be to be technically it seems like there's like Michael Dell and others are contributing, so it's not direct money printing, but Listen to Sovereign Wealth Fun, all this stuff's great ideas, but it is very funny the timing of all of it, you know. Yeah. Yeah, we need to get back to it. This has been great. What what haven't we talked? I feel like we talked about everything. What haven't we talked about that we should wrap up with? The the Bitcoin.

Nick Nemeth [1:30:49] I the the Bitcoin, you know, I think we're clearly in a bear market. What do you think? Yeah. What what would make you think that? I it just feels bearish. I think that Bitcoiners, I would hope, would look a little bit internally at like the leadership. And I am of the opinion that you think? What what would make you think that? No. What are you talking about? Bitcoin will fail if Michael Sailor is the face of it. Because there's so much hogwash that guy says that an intelligent person in a corporate or sovereign wealth fund like, We're not pumping this guy's delusion. And if the consensus doesn't get adopted, we lose the beautiful picture of Bitcoin.

Nick Nemeth ⋮ Right? Yeah. You're you're parroting something Yeah, you're you're parroting something that's been said on this podcast quite a few times in the last couple of months. yeah. No there I mean, I'm not sure if you've observed it, but there is a a large narrative battle going on around this particular topic within Bitcoin. Really? Yeah.

Nick Nemeth [1:31:54] It's really divisive in the Bitcoin space. People think that anyone that buys Bitcoin and kind of like buys at all-time highs and is good and finds it's so one thing I would say is you know, really savvy people understand who is with them on the side of the trade that they're on, and that they're just because someone is buying a stock that you're in, they could be weak hands, they could be perverse, have perverse incentives, and it doesn't net just because they take a step. From 17 to 18 by buying it doesn't mean that it's good that they did that. Right. but also Bitcoin is inherently consensus based, right?

Nick Nemeth ⋮ And the it's it's a very, very strange. I've talked about this and it's resembles a currency in the way that the more that people buy it, the better the consensus is around it as a store of value. But Michael Saylor can be pouring in seventy billion dollars and stopping a hundred and fifty or a trillion dollars from going in just because he goes on C N B C and says things like, We're making more money than Microsoft and you need to apply a twenty X multiple on our Bitcoin gains and you know, by the way, this is a new invention. I I used AI and now we have pr preferred and structured credit and this is the best credit that's ever existed and gonna eat the entire like that's the Well that's that's the the semantics asshole in me is it looks 'cause it's not credit, it's preferred equity, right?

Nick Nemeth ⋮ Yes. With dividends. It's like this whole digital credit meme doesn't make any sense. Yes. With dividends. Yes. yeah, and and credit doesn't make any sense. And by the way, he doesn't have to pay you. He can just stop paying the preferred. But you know, if there's that constant overhang and Bitcoin's not cool, like I talk to Bitcoin people that think you don't need Gen Z to buy in.

Nick Nemeth [1:33:46] But it's like Yeah, no, literally. They're like, no, we just need the boomers to buy in. It's like, brother, if everyone if all if all boomers go into, you know, I'm going with Gen Z and I'm going tank that, right? Like that's that's what I'm talking about, like the crowd and looking behind and being like, okay, like, how do we have better ideas? Because Michael Saylor has raised all of this money on financial engineering that has nothing to do with the lightning network, has nothing to do with development, has nothing to do with crypto broadly blockchain improvements. Like What we've we we've lost the plot a little bit.

Nick Nemeth ⋮ And this is coming from a a Bitcoin bull, but that's a little bit critical because shit, what if we just break up MicroStrategy? We break it up into four, you know, don't you think that would be a little bit better than one guy that's delusional in many ways having five percent of supply more than Satoshi at some point in time? Like we can do a little bit better in the Bitcoin space. And I can play later. We can do a little bit better in the Bitcoin space. I completely agree. I mean you're and listen, I t I have a lot of respect for Michael Saylor in certain ways.

Nick Nemeth ⋮ He's on been on this podcast once and we fought the whole time. yeah. This was like five years ago.

Nick Nemeth [1:35:00] Really? Yeah. He he's he's really intelligent in some ways, but he's also says the dumbest shit I've ever heard. He tries to talk in analogies make sense. Yeah, he also lives in he he lives in a feedback loop that is very tight and a lot of yes maths. Yes. And He tries to talk in analogies that just don't make sense. It's a lot of sycophants, yes. And I completely agree with you. And that's actually been a point of focus on this show over the last six months is really getting back to basics. Like what are we here for? Peer-to peer digital cash with no trusted third parties.

Nick Nemeth ⋮ Like use it as money, saving it, spend it. I think the emergence and proliferation of the agentic economy f provides an incredible emergence and proliferation of the ejectic. opportunity to highlight highlight the unique value prop of Bitcoin and unique capabilities of Bitcoin for the agentic economy specifically. Like you have Stripe and all these stable coins building these products to to equip agents with wallets and and money that they can spend between each other and with other end with other companies. And Bitcoin I I'm wholly convinced is is way more Opportunity to highlight.

Nick Nemeth [1:35:50] building these products to to equip agents with wallets and and money that they can spend between each other and with other and form fit for that particular use case. And not only that, but it's like going back to what we were saying earlier about like the compound annual gross rate of the global monet monetary supply, your your comments on Turkey, and what they're doing, like that that is an economy that has experienced something close to hyperinflation recently. Like people need Bitcoin, monetary system and a monetary good outside of the purview of central banks and governments and Not only that, but it's like going back to what we were saying earlier about

Nick Nemeth [1:36:37] mm, arguably they've never needed it more than they do now. And so it's like instead of pushing people to buy preferred equity with a dividend or a common share. Well well that's the question. I don't think Sailor's gonna stop. And so and I think that's what a lot of people on I won't even say the the the opposite side of Sailor. I would say people who say, Hey Michael, like cool, you're doing your thing but we really need to get back to these base principles of of Bitcoin. Pushing people to buy it for Yeah, that only works if Bitcoin works and by the way we're gonna take the excess scans.

Nick Nemeth ⋮ Well that's the question. I don't think sailors can stop. And so People on I wouldn't even say the the the opposite side of Sailor, I would say people would say, Hey Michael, like cool, you're doing your thing, but we really need to go back to these base principles of of Bitcoin as money outside the system and work on improving the lightning network, other second layers and embedding native Bitcoin into everyday use cases that that people will as money outside the system and work on improving the lightning network, other second layers and embedding native Bitcoin into everyday use cases that that people will will interact with more.

Nick Nemeth ⋮ I think that's the question is how do you have that energy surpass Sailor's energy with the idea in mind that Sailor's not gonna stop? He's gonna try to get a million Bitcoin, probably try to get two million Bitcoin. It's like how do you you're you're not gonna stop him.

Nick Nemeth [1:37:26] energy surpass sailor's energy with the idea in mind that sailor's not gonna stop. He's gonna try to get a million better I he's sort of pot committed to this strategy. Yeah, but but but if we tell the story that that's bullshit and you're the sucker and by the way just buy Bitcoin, if MicroStrategy equity is permanently trading at a discount, if the SDRC never gets back to par and he can never issue at par again, he's probably gonna issue at 95 cents. People, you know, he said he wouldn't sell Bitcoin. He said he wo would only issue above par. Just watch. You know, that that guy is very, very greedy.

Nick Nemeth ⋮ on you know being the most powerful person in the future that he envisions for you know electrified currency right and just you know it's easy to point outside and say the financial system's fucked it's really hard to be like okay well you know I've been living in this community that I love and adore but like some of it's gone awry. It's like being in a fraternity and all of a sudden you have you know a few bad actors. Like it's hard to be like Shit, those guys are fucking up. I need to address it. But you know, if there is an attention to detail and also, by the way, it's not just Sailor.

Nick Nemeth ⋮ There's a lot of 50-year-old Bitcoin, 60-year-old Bitcoin guys that are super arrogant and pick up. Pick why didn't you just buy a thousand Bitcoin? When it was at a hundred bucks. you didn't have any money? well, you should work harder so that you can buy a thousand Bitcoin today. And it's like, it's a little bit of a different work hard than it was. And you guys just really got lucky, you know. you know, you saw the vision, you were correct. Great. Now

Nick Nemeth [1:39:05] Yeah. Do you understand that this has to be a collaborative ecosystem that actually grows or do you want to fuck off? Because, you know, if it is just dominated by those guys, Bitcoin I think will fail. And the reason why it will fail is because every four years, mining costs double, right? Functionally. Nah. Well well mining card. Yeah, supposedly. But but from four years ago the price hasn't gone up. And there is the death spiral potential. No, death spiral's complete bullshit. But what if the security drops down because the hash rate goes down? No. Well well if the price goes up. Yeah. There is the death spiral potential. No, the death spiral's complete bullshit.

Nick Nemeth [1:39:54] Then the difficulty adjusts lower, which makes it more profitable to mine. So people turn the hash rate on. Right, but then the system can be hacked easier. no. The death spiral. Don't Yeah. The death spiral. That that the hash rate is an important thing to maintain. Yeah, but like yes, I agree. So I've been Yeah, but like yes, I agree. So I've been in the mining industry for ten years. The the or nine years now. The that like that's the beautiful part of Bitcoin. Like right, is the difficulty adjustment is one of the secret sauces that like so like if hash rate falls off, prices down. It's happening now. Hash rate had its l we had the eleventh largest difficulty adjustment in Bitcoin's history two weeks ago on the thirteenth. And anybody who's plugged in there is more

Nick Nemeth [1:40:17] The It is. But it it's also less secure. So if if then you can hack blocks. Well, now we're getting into like the real game theory war gaming here. Yes, technically it is. maybe not even it's not technically less secure. It is because for it to be attacked, right? Like there's an amount of ASICs that exist in the world at any given point in time. The ones that are turning off because the price is going down, their electricity costs are too lot. too high and it's not profitable. Like they're going off the market for when that happens to attack the network. If so if a nefarious actor were to attack the network, they would have to go scoop up all those ASICs, scoop up a PPA, build infrastructure, plug those machines in and intentionally fifty one percent attack the network after that logistics problem solved, which takes time and a ton of capital.

Nick Nemeth ⋮ that happens to attack the network if so if a nefarious actor were to attack the network they would have to go scoop up all those ASICs scoop up a PPA build infrastructure plug those machines in and intentionally 51% attack

Nick Nemeth [1:41:36] After that. And that's not to say that there could be a nefarious actor who's been planning to fifty one percent the network over a long time horizon. They've been opportunistically acquiring ASICs waiting for hash rate. acquiring ASICs for it's China. Chi it's it's China. Ch China is theoretically the player that you would probably have to worry about on c the compute and power. And they already banned Bitcoin, you know, it didn't work. Yeah, I mean, listen, I think that's a really interesting conversation. Mm-hmm. Yeah. It's a n I'm not gonna say it's a not a risk, but I'm gonna say like the logistics of eff effectuating that attack or waging that attack are are har much harder than people make it out to be.

Nick Nemeth ⋮ It's hard hard much harder than people. It's hard, but as the total amount of compute goes down going towards the Bitcoin mining network, China is ramping up their compute, right? They could just switch it over from AI to Bitcoin. You could run GPUs. Well, they're running GPUs, right? have you couldn't run GPUs. You could, but you'd be like one GPU's equipped. This is a conversation an interesting working. Yeah. you're saying that the ASICs you know, yeah, and the the ASICs do one thing. Right, that's all ASICs you build them to do one thing and Bitcoin ASICs produce Shah hash cash SHA two fifty six hashes.

Nick Nemeth ⋮ That's all they do. The ASICs are w this is a conversation for another time. It's an interesting war game. but you're saying that the ASICs are much more efficient than, you know, Blackwell. The ASICs do one thing.

Nick Nemeth [1:43:01] Yeah. And so like they're hyper efficient at that. Like a G like we went from CPU to GPU to FPGA to ASICs. So like GPUs are two sort of compute levels back from where the cutting edge, not even the cutting edge, like there's ASICs that were produced in twenty sixteen that are still running today profitably if you have free energy. and then if you're China you have to weigh the opportunity cost of transitioning your GPU. in twenty sixteen. Interesting. and then if you're compute towards Bitcoin mining versus training large language models. Like do you believe you're in a systemic existential race to AGI versus the US?

Nick Nemeth ⋮ Like what is the cost of turning off some of your GPUs to train the models and to mine Bitcoin? So th yeah, this gets like deep like layers of of like game theory of how viable is a fifty one percent attack based off of a falling difficulty and hash rate actually and you get logistics and then you get AGI versus the US, like what is the cost of turning off some of your GPs to models and to mine Bitcoin? So yeah, they say it's like D.

Nick Nemeth [1:43:49] viable is a fifty one percent attack based off of a falling difficulty hash rate actually. opportunity cost equations that you have to run in your mind. And I think as it stands right now, transitioning GPUs to mine Bitcoin, it just doesn't make sense for China. If if they believe and I I do believe that they believe that they're in an e existential race for A GI against the US. opportunity cost equations you have to put on your mind. And I think as it stands right now, transitioning GP If they believe, right? That they're an existential race for AGI at the US. Yeah, yeah. I think I think it's not a concern now per se, you know, but it might be the next bear market.

Nick Nemeth ⋮ You know, imagine if the next bull market doesn't even get all time highs, right? That would be kind of gross, right? you know, I I think that the volatility of Bitcoin should smooth out a lot and Sailor has increased it a lot, but we should have had a higher high this cycle. Right. And I think that's, you know, there was a l it it just it was a bull market that had a lot of bullshit. You know, Trump coin, fucking, you know, it's like what what it was supposed to be the crypto presidency and it felt like it was the worst thing on earth, honestly.

Nick Nemeth ⋮ so I'm just, you know, throwing out the the bear case because maybe that incentivizes a little bit of self healing inside the space. And not that I'm rooting for it. I agree with that.

Nick Nemeth [1:44:50] Yeah. No, no, I think I I think it's necessary too. Like Trump the whole world liberty fi, the Trump coin, Milani coin, just complete so disappointing. That was brutal. And Solana's completely insider owned, you know. It a lot of the cryptos it just there's so much to like. And I think that a rational assessment of like what's going wrong can only make the space stronger. Yeah, I think we need to Yeah. Yeah, and I think we need to do a better job of holding up what's going right. Like I think Dorsey and what he's doing at Block, disclaimer, Block is a sponsor of the show, but I think what they're doing to actually make put a concerted effort forward to make Bitcoin everyday money and to make it more accessible to their millions of users is the type of building that we should be lauding in the space.

Nick Nemeth ⋮ More more so than like I'm not gonna say that any public company can't go out and tap capital markets to accumulate Bitcoin. If you want to do that strategy, go for it. But I think at the end of the day, Bitcoin peer to peer digital cash, who's building tools and applications and products that make it easier to operate your life using Bitcoin in that way. Like we need to focus more on that. That's why proud to have Block as a sponsor and really excited to see how aggressive the Block family of companies has been in implementing Bitcoin. tools and applications and products that make it easier to operate your life using Bitcoin in that way.

Nick Nemeth ⋮ We need to focus more on that. That's why Proud E Block is a sponsor and really excited to see how aggressive

Nick Nemeth [1:46:34] And what they're doing over the last year. Wa WAP is doing some interesting things with crypto and just fintech in general. You know, the PayPal Venmo, it's like, how are you guys fucking up so bad? Like I think that fin tech can get there. but you know, these are these are positives. It doesn't, you know, it would still address the negatives while you're pushing the positives, you know. Mm-hmm. Yeah. And going back to like the we're getting we're getting long now and it need give you back your time, but I wanna like the whole concept of digital credit, the way it's been explained, particularly if a strategy is bullshit.

Nick Nemeth ⋮ And I won't even t define this as digital credit, but I there is a place for Bitcoin in credit structures. It's just as collateral on long duration debt that like so th the like they're you look at commercial real estate, like Bullshit. It's complete bullshit. And I won't even define this as digital credit, but I there is a place for Bitcoin in credit structures. It's just as collateral.

Nick Nemeth [1:47:25] We backed a company called Battery Finance, traditional credit fund. They spun traditional credit credit fund, new market capital. He's a parent company, founder Andrew, really into Bitcoin, said, I think Bitcoin is a collateral asset and these credit structures actually solves one of our problems, which is like we need to get a return and we don't want to go further out in the risk curve. What we can do is go and refi high grade credit, commercial real estate, Yeah, in top tier cities. The first one they did was Philadelphia, but you imbue and you put Bitcoin in the collateral package and instead of sort of trying to demand a higher return on the cash flow of the commercial real estate property, you're willing to offer lower cost of capital because Bitcoin sits in the collateral stack and the credit fund appreci or participates in the appreciation of Bitcoin, appreciation of Bitcoin.

Nick Nemeth ⋮ in top tier cities, the first one they did was Philadelphia, but you you you put Bitcoin in the collateral package and instead of sort of trying to demand

Nick Nemeth [1:48:12] lower cost of capital because Bitcoin sits in the collateral stack and the credit fund. Participates in the appreciation of Bitcoin. Yeah, at the essence. Yeah, at the end. But like I think duration, like that's a ten year loan. And so like you need to be able to have Bitcoin sit there and do its thing for a longer period of time. And to your to our discussion earlier about like how do you delever and how do you like I I do think there is a place for Bitcoin as for lack of a better term, digital credit, but it's not in the way that sailors doing it. It's like, no, you make it part of collateral packages for long duration loans and then you start sort of de risking Yeah.

Nick Nemeth [1:48:46] Sailor's doing it, it's like, no, you make a part of collateral. the the capital that is focused on the underlying assets that have idiosyncratic risk and you sort of pair that with with Bitcoin, which if we get out of this bear market and people come to their senses and focus on what Bitcoin actually is, you you have Bitcoin which is sort of a risk profile that's completely separate from the individual assets that you're underwriting. I will say assets that you're right. I will say when ca capital stacks get more complex, there's a sucker at the table. You can have debt and you can have equity and both can win and both can be, you know, taking different risk profiles.

Nick Nemeth ⋮ As soon as preferred come into the equation, anytime I see it, either the preferred are the super sharp money and fucking the common equity. And you know, it's like God damn. But this is a public Like goddamn. But is this in public markets? Just anywhere I see it. Yeah. Yeah. Pri in in private equity and public markets and you know, digital equity credit like stuff. You're either the sucker for buying it or someone else is the sucker. As soon as preferred's come in. It's a d generalization, but I will say ninety percent of the time. So you don't like this thing? Mm-hmm.

Nick Nemeth [1:50:05] No. So you don't like this digital Bitcoin as collateral? I don't even like preferred. I think preferred is just get out of there. Do convertible debt, do senior debt. Don't tell me your senior debt is senior if there's something super senior or if it's the, you know, only the private credit loves to do this. They say s senior secured. It's like there's no subordinated debt. That's Unitronch. Okay. Like cut the shit, you know, or senior secured debt, but they have agreement among lenders and all of a sudden there's like senior first senior and second senior. You know, or a senior security And the first scene or or the subordinated debt actually owns the IP, which is the only liquidation value of the business.

Nick Nemeth ⋮ And you're sitting in senior, but the subordinated debt is below you, but has access to the valuable stuff. To the valuable stuff. It's the first lien on the valuable stuff. So let's clean up the cap tables. Is it possible? Yeah. And you're sitting in senior, but the subordinated debt is below you but has access to the valuable stuff. Yeah. So let's clean up the captains. Is it possible? we'll see. God damn it. There's too many. Fiat money inflation, diploma inflation, more lawyers, more laws, more regulations, more friction, more compliance. Problems we're not gonna solve, but Nick, this has been a pleasure. It's great meet you in person.

Nick Nemeth ⋮ Great to meet you. We'll we'll have to do it again. Yeah. Round three. At some point in the future. Peace and love, freaks. Tiki! We need to unemploy of them. That's that's the that's the next thing.

Nick Nemeth [1:51:23] Great to meet you in person. to do it again. Yeah. Round three. At some point in the future. Peace and love.