Understanding Financial Bubbles: Lessons from History with Venture Capitalist Aman Verjee

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1:05 Take what the wise I've got to. In part. These are the principles of the game. The principles of the game. Oh, these are the principles of the game. OK, welcome back to the Compassionate Capitalist Show, where we showcase keen insights of industry leaders that help to guide your journey to wealth as an entrepreneur or an investor in entrepreneurs and entrepreneur companies. Today's conversation is especially timely if you've ever wondered why markets seem to swing from euphoria to panic, why fortunes are made and lost in waves, and whether you're living through yet another bubble. You're going to love this episode. My guest today, Aman Virgie, is a Silicon Valley venture capitalist with an extraordinary career. A Manhatt was an early PayPal employee, served as a CFO at Sonos and eBay in North America, worked at Lehman Brothers, and today he's a general partner at Practical Venture capital. He's also the author of the upcoming book A Brief History of Financial Bubbles, where he breaks down the centuries of speculation from Tulip mania to tech and AI. So we can understand not just what happened, but why it keeps happening.

2:24 And then when you know why it keeps happening, knowledge is power. You have the ability and hopefully through the course of this conversation, I'm going to have with Aman how to potentially avoid a bubble or at least go slow, Ted lightly as you start to enter into a bubble so that you can anticipate and make good financial decisions. Not only as the founder of a company or an executive in a company that might be in the space or being impacted, but also as investors investing across the board from private to public in the things that might ultimately become part of a bubble. So, so it's Aman. Welcome to the show. Thank you, Karen. Great to great to see you. Great to be on the show.

3:04 OK, so before we dive into specific examples, the start of the big picture, what originally motivated you to write the Brief History of Financial bubbles? Why do you think understanding bubbles is so important right now? Well, I have been in markets for a long time now, I said. I started my career as a bond trader at Lehman Brothers. So I've been in and around financial markets probably for about 25 years now. And in the, in the last couple of years as I've been running my venture capital fund, we had a lot of investment opportunities in 2000, 2020. One just as we were getting started where we had a whole avalanche of companies that were pitching a certain type of business that was really predicated on remote work and the, the post COVID downturn. And there was a lot of excitement and a lot of a lot of energy around crypto and decentralized web and finance. And my partner and I took a very slow approach. We had been around, I guess luckily for us, we'd been around in 2008 and 9 and saw one epic run up in the market and then a crash.

4:03 And then we were kind of young entrepreneurs at PayPal, as you said, in 2001. So I kind of had some recollection to have that all played out. And just that pattern recognition made me think we should be really slow and, and thoughtful in how we deploy capital because this feels like the third bubble of my lifetime. And my partner was like, well, we're not supposed to hold capital, man. We just raised a fund. We're calling capital. We get paid management fees. Surely we're supposed to put that money to work. What are we going to tell our our investors? I just told them, look, I think we have to hold, hold our money until we think the asset prices have normalized. How long will that be? He asked. I mean, are we going to go on the beach for 18 months, a year or two years? So I began researching bubbles just out of curiosity, thinking like, how long do these typical cycles last? Why do they happen?

4:44 Why do they recur? And the more I learned about it, I got kind of a, a template in mind for how these things typically play out and why and how long it takes. So a lot of it was just figuring out how to be a successful investor in what I thought was a market where I'd seen some stuff before. A lot of the funds in the space were jumping in because they hadn't seen, you know, these are 2530 year old fund managers. So they hadn't been through the last bubble and didn't really know quite what to do. But in addition to that education, I just found it interesting. I thought the research was fascinating. They kept looking back in history to find some of these recurring themes. And, and I hope it's a it's a entertaining and fun as well as educational book for for a lot of folks. Well, you know, I'm sort of like an economics junkie, you know, in a way that was my training, my educational, my first educational background from college.

5:29 And I, and it's, I think it's really always interesting to sort of anticipate or try to like analyze what the bubbles are. So when you, you know, approach me about being a guest on the show, I thought, oh, this is going to be fun because it is. You know, oftentimes there's indicators that we're leading into it. You know, we talked previously and we'll get into it about the cheap money as part of that. But is it fair to say that bubbles aren't just financial events, but also social and psychological ones as well? I certainly think so. You know, I'm also an economics junkie. It's been, it's been my passion all my life. It was my favorite subject in high school and that's what I studied at at Stanford undergrad and I now teach that at at Harvard Business School. So I'm, I'm biased to say that it's the economics around it is sort of where I, where my head goes. But you'll see in the book that I go through the political context, the social context.

6:22 Why did, why do bubbles happen, for instance, in Amsterdam, 1636 around tulips? What did happen around, you know, or tobacco or why didn't happen in London? It could happen in Paris, it could happen in 1626, not 1636. That has nothing to do with economics. All those factors are politics, religion, the role of the church and society at the time. And so I incorporate all that stuff into the, the narratives. I think there's a lot to be said about these, these qualitative or societal factors and political factors, and they keep recurring over and over again, which is also one of the one of the telltale signs. Yeah, well, let's talk about the Tulip mania of Amsterdam, because you know that even though it was so long ago, it still pops up as a relevant example.

7:04 And obviously you covered it in your book. So what does that story teach us today? Well, I'll give you just a quick encapsulation of what what happened. So the Dutch at the time were the wealthiest country in the world. And one thing I've I've recognized in this bubble is that they typically happen in the country that is the wealthiest 1 and maybe in the most financially successful city in the richest country in the world. So that was true of the Netherlands and in particular Amsterdam in 1636. They had just become the global reserve currency. The guilder was the currency in which everyone transacted. They were a seafaring nation. They became, as a result, they opened up trade to the West Indies and became the wealthiest country in Europe. So there's a lot of money floating around.

7:45 Also true of Paris. Also true of London, but not quite to the same degree in Paris at the time. This is one of the social factors. Now in Paris at the time, there's a lot of places where you can spend money. If you're in the wealthy aristocracy, you can buy land, you can buy clothes, there's fine silts, they're very fashion forward. There's furniture for the houses. There's a lot of places where you could spend your money as a wealthy Parisian in the 1630s. Not so much in Amsterdam. It's a puritan country. The society looks down upon the ostentatious displays of wealth. Lots of stories about travelers who come to the Netherlands from London in the 16th and they cannot tell the richest merchant from the poorest member of the working class because the clothes all look the same.

8:27 There's no distinction in terms of their, their upward presentment. And they're not, you know, spending the money on lavish stuff, unlike Paris or the summits of London. So where does all the money go? Well, it goes into houses, country houses, country houses have gardens, gardens have flowers. The Tulip is a very beautiful flower. And all of a sudden there becomes a huge bid around the, the florists. And so that industry expands in the 1620s and 30s. It's, it becomes socially acceptable. There's some horticulture and science behind it. People begin to take that as like a, as a real serious endeavor and then the prices begin to increase and the limited supply of tulips and just the, the form, the variety of the varietals become very coveted. In some cases, the top of the bubble in 16361637, you can buy a house on the river, the Amstel River in Amsterdam for a, a couple of tulips.

9:16 That's how, that's how valuable these things got really six times the average salary of a of a merchant. And then very quickly in February of 1637, the bust happens. And it's not entirely clear, you know, why the bust happens when it did. There was a market swarm that just drove up the price. A lot of psychology. And then the, the, the frenzy just rolls away in early 1637 and the market goes dead and prices of tulips are down by 90%. And, and that whole episode is just what what you learned about it is, you know, it's one, one bit, one bit economy, a lot of psychology, people just rush to a new commodity and new products and they bid up the price. If something is in limited supply, it becomes coveted. And also you can't produce it.

10:02 But in the case of tulips, there was a whole flurry of new varieties and new tulips in the 16361637 and they flooded the markets. You know, you'll learn about the scarcity of a commodity and just the the whim of a people. Yeah, OK, So it was there. So this kind of creates a sort of interesting, you know, there's speculation where people are playing options or futures and thinking. But then there's sometimes a social signaling. You know, people might say, oh, it's like almost like a lemming, you know, we're like everybody else is doing it, so I need to do it too, without really understanding what it is they're doing. Or just, you know, in this case, it was a product. So even though they weren't trying to show off their wealth, did tulips become the signal of wealth or had it spread wide enough around because it got started there and then? People like you, used in Paris for as an example, wanted to have tulips too.

11:01 Yeah, it became a acceptable social signal. There are always ways that you can signal your status, your knowledge, your sophistication. In Paris, it was really done in a more ostentatious way. It was you have to be part of the, if you're part of the aristocracy and you have land and you have a house and you then you have the right furniture. They were, they were the inventors of fashion in the 1600s. So they're they're dresses and their gowns and their silks and the latest fashion that these are all the ways that you signal being part of that elite group. I guess like AI don't know a Hollywood star today. You know, they're always dressing in the latest fashion suit. The question you get on the on the red carpet at the Academy Awards is it's very rarely tell me about the artistic influences of your movie. It's like, Hey, who are you wearing? And if you can bring your fashion designer with you, then, you know, that becomes a signal.

11:44 Interestingly, the Puritans in in the Netherlands, as a distinct from the Catholics in France, they didn't they didn't they were very austere and what in terms of clothes, in terms of that ostentatious presentment, but houses and gardens and you know, flowers in the garden and the beauty that that has was socially acceptable. It became the envy. It became the object of envious desire. We see it here in the Bay Area at least we see crypto and Bitcoin and you know, four or five years ago, everybody was trying to get into Bitcoin. Nobody was thinking about buying gold for sure. And a lot of my colleagues here in the Bay Area weren't even thinking about buying stocks that paid dividends and generated returns. They were thinking about what is the latest altcoin, you know, how do I signal that I'm with it?

12:27 Because I know and I'm have information about and now I'm buying some of these new meme coins, which, you know, that strikes me as an unhealthy destructive bubble, but that that has certainly happens. Yeah, OK. So you also talk about the railroad boom of the 1800s. What similarities do you see between that era and the more modern bubbles in particular that you outline reoccurring patterns? So is that do they show up again and again? And do we learn from that in the past, like the railroad bubble? Yeah, that one, that one is an interesting one because it did, they did fall into some some bad habits in the 1840s that. So we'll learn from some of it, but I don't think we've perfected that lesson yet.

13:10 That was the technology that was developed in the 1830s and 40s primarily in England as a result of the Industrial Revolution. And there was an understanding that it was going to change the world, that it was going to connect England in a way that had never happened before. It was going to make transportation a lot easier. As an example, back in the 1820s and 30s, London, the difference between like London and Norwich, which is a city a couple 100 miles away was like a six day, seven day ride on a horse and a buggy. It was very inconvenient and you could be from London to Paris in maybe a couple of days with this a channel process. So London as a result is a lot more connected in its economy to Paris than to parts of the the north of London.

13:51 But railroads changed all that because they were going to connect the country and make commerce work a lot better and that would connect the national market and just make everyone, everyone richer. So there's a flood of investment and interest in this brand new technology, this transformational technology. But by 18441845, at that point when the when the investment boom starts, the business plans began mounting up and everyone's doing it thinking if I just build the track, the demand will come Between 1845 and 1849, which is the period that I cover, something like 3500 miles of track gets authorized by the English government, which is 15 times what had been built in England's history.

14:31 So a lot of track in a very short amount of time. And if I add up all the assumptions in the business cases, in those in that boom, they were planning on building 24,000 miles of track. So 10 times what actually got greenlit by the government. So the revenue from railroads was real. The revenue from railroads doubled between 1845 and 1849. It doubled again in the late 1850s. But they invested so much and built so much supply that demand never caught up. And the exact same thing happened in the 1990s when the Internet came, changed everything. Everyone knew it was going to be transformational technology, but all the Internet traffic, even though it was doubling and doubling and doubling every year for a period, it got outstripped by the telecom, the dark fiber that was being laid by the telecom companies in the late 1990s.

15:14 And so they, they just thought the demand would explode. And somehow all that if you build it, it will come. And what you see in those two cases that a number of others that I cover is just a technology, a new technology that gets a a rapid build out and gets overbuilt and then the market has to has to catch up. Sothe.com bubble was partially triggered by the overbuilding of Internet access. Yeah, in 1995, it really gets. It starts off with Netscape, which is the first browser that like you or I could use. Before that, the Internet wasn't wasn't really a thing. It was the thing, but it was a bunch of college professors and government officials who had built stuff that, frankly, nobody could use unless you had an advanced degree in programming. And then Marc Andreessen at 95 comes up with a browser that you or I or, you know, my daughter could use. And now everyone is on the Internet. And so there's a huge demand for Internet companies, the telecom companies.

16:09 The telecom industry gets deregulated in 1996. And now the telecom companies are like, well, if we can provide broadband to our Internet customers who can then use it to, you know, do everything from shopping to collaborating online and all the other use cases of the Internet, we can make a lot of money. But you have to build fiber optic cable to provide that broadband to all those households. And the expectation was that the Internet usage would be so much that the demand for all that fiber optic, fiber optic cable between 96 and 99 would require hundreds of billions of dollars of investment. And then the telecom companies start jumping in to build that. They would do that a lot with debt. They didn't do it with equity. They took debt. These companies weren't very profitable. They they had free cash flow negative margins during that period that they were able to borrow on the promise of the Internet. And so they built out that that fiber optic cable network, well at the peak of the bubble in 99 two, 1097% of the fiber they laid was dark, meaning it wasn't wasn't being used. And even a decade later, only about 2/3, about 1/3 of it was used and 2/3 of it was still dark. So they built basically in anticipation of demand happening, but they built so fast and so much that for the next 10-15 years, most of what they built didn't even didn't even get used.

17:21 And so a lot of money got wasted on that build out. OK, so I have, you know, like this might bring us into the conversation of cheap money. I had been, you know, we previously talked about the skyscraper, you know, theory, whatever about real over building real estate when there's cheap money, which was, you know, I, I guess with our real estate bubble that we had in the Great Recession, butduringthe.com, what I saw sort of happening was cheap money in venture capital, money competing for deals because they've sort of keeping up with the Joneses sort of a thing. So you ended up having because I guess what you're talking about, the promise of all this Internet usage, all these new business models, you know, e-commerce, But I like the example of online pet stores, you know, and you know, pet, you know, and, and not all of them could survive, But there was so much money being thrown in because when you create a market for an exit, right? And you and you, you manufacture the exit because there's a buzz of people, public stockholders want to buy this new hot and there's so many of them happening, but they can't sustain that.

18:32 It just it starts to implode on, on itself, hence the bubble. And I always interpreted the.com bubble as the fact that these IPOs couldn't sustain because they had been throwing to sort of kind of like what we're experiencing and we see sort of manifesting itself now with unicorns, right? A lot of money going in to create these, but their business model doesn't support it. So they either delay, you know, precariously to go public because they can't support. They've learned their lesson in a way of not putting a public company out there. They can't sustain the value proposition or the valuation, the market cap and then, you know, having and then, you know, market corrections on those.

19:14 But then you, you risk missing the mark because other technology might leap you or other value propositions of another company might leap in that process because they're the new thing that's getting capitals. Talk a little bit about your experience because out of Silicon Valley, you're right. And some of the companies that you were part of, you were living and breathing that at the time. So was there as any kind of perception that, I mean, I, I look back to Guy Kawasaki talking about at garage.com at the time where they were not really doing due diligence on someofthese.com companies. They were just trying to find another one to invest in because one of their peer VC companies had invested in ABC.

19:54 So they needed to find, you know, DEF company and see which one could, could win in the public marketplace. Was was is that just outside looking in or was that really happening? Yeah, I think the the lesson of the late 1990s for sure where it's a tail end. I think you've described accurately that market psychology what what tends to happen and there's just a just a recap some of the major events. So in 9596, the market after Netscape goes public, which is a unprofitable money losing company, but it seems to have the promise of great fortune. Then you get a whole bunch of competition of a bunch of mostly consumer Internet companies. The example of the you know pets, PetSmart and pets.com and Amazon is also selling or signaling wants to go into pets and say you get 3456 companies doing the same thing. None of them are profitable.

20:44 None of them are even prospectively profitable, but all of them are able to raise a venture, a bunch of venture money. That was definitely happening in 959697. Up until that point, though, it seemed like the balance unbalanced. Most of those business models were good. There were companies like Amazon or Yahoo that were able to go public. eBay, where where I worked was another public company at the time. You also had real technology happening, TDMA adoption, like real people using the Internet and using it for business cases. And then in 19, at the end of 1996, Ellen Greenspan is the chairman of the Fed at the time, gives a big speech in Washington, DC. And he basically says, hey, look, it's a rational exuberance speech where he basically says, look, we should be thoughtful about where valuations are right now.

21:31 Are they? He didn't say that they are irrational, but he basically asked it like a question. I am observing that there is this big run up in valuations in a short amount of time, a lot of money being spent. I am prone to wonder whether it's rational or not. And when the central banker says that, he's sort of signaling, hey, maybe we got to take some of the air out of the balloon because this is getting potentially unhealthy. And he references Japan in his speech, which was another example of a bubble that went bust with really negative consequences. Well, Greenspan was a very free market guy. I don't think he had any intention of telling the market how it should be pricing things. But the tone of the speech, and I've read it, it reminds me of me telling my older daughter maybe, hey look, I'm thinking about separating you and your sister because you 2 are fighting a lot and I don't want to tell you what to do and you have to work it out. But you're, it seems like you're about to set your sister's hair on fire.

22:16 Like at what point do I father intervene and now begin to separate you 2 idiots? But he doesn't actually do it. And so the market takes a little bit of a pause in 9097. There's a draw down and then Amazon goes public and all of a sudden it's game on and the market is another big year. And then in in 97 and through 1998, there's a Asian financial crisis rolls through the global markets. But you might remember, but very few people remember now in the context of the the.com boom. But it's important because in the middle of 98, just as the, as the financial crisis is rolling through, there's a 20% drawdown in the market. So the kind of a mini bear market in the middle of 1998. And all of a sudden investors have got to be thinking at that point. Like to me, that's just a healthy correction because now investors who were wanting to invest in the 3rd, 4th of the 6th unprofitable pets company, Ron noticed that, hey, this, maybe this is, this is too good to be true. Maybe we should be wary.

23:04 Maybe we should be doing diligence on our tech companies and the pressure is going to be on for returns and real cash flows as opposed to just getting in on the next deal, which I think is a healthy correction. Unfortunately, right in the middle of that 1998 drawdown or correction, the the long term hedge fund called Long Term Capital Management gets caught offside by the Asian financial crisis. It's not a big hedge fund. It's 5 billion in equity, 125 billion in debt, not big by today's standards, but over a trillion dollars in notional swaps and derivatives. So they are a counterparty for all kinds of banks in Wall Street. And as the as the market begins to trade off and the risk spreads begin to increase, they're basically going to go insolvent. And a lot of the banks are now concerned that, hey, one of our big counterparties might be insolvent.

23:48 That's going to create ripples in the banking system. Fed steps in and they make sure long term Capital Management gets bought out by a consortium of banks. And then they cut interest rates to make sure that those assets retain their value while they get worked out or increase their value. And so the Fed in the middle of this booming economy with the market at very high valuations, they cut rates not once, not twice, but three times in the fall of 1998. And when you make money cheap like that, that's back to the cheap money point. This seems to happen in a lot of bubbles when you then make risk free rates go down and you increase liquidity in the system. You give investors like the guy Kawasaki example, now they have they're you're re arming them with more bullets to go out and find more companies and you're fueling that unhealthy dynamic. And stocks basically doubled from the from late 1998 to March of 2000.

24:34 They doubled and then and then the bubble pops and then they give back all those gains and then some. And it's a difficult work out, but all the bubbles that I looked at had some event like this where either the Fed cut rates, there was a central bank that was involved in lowering interest rates in the 1845 bubble, the UK bubble. It followed the 1844 rate cut by the Bank of England, which at the time brought rates down to the lowest point in 150 years. So on and on again. But it definitely, it definitely fuels that cycle of unhealthy valuations when there's too easy money at play. Yeah. OK. So you now part of your bank, I mean part of your book. Oh, wait. Let me just say this for folks that are listening at this point, you want to go no more get on. By the time this comes out, it may or may not.

25:16 The book may or may not be out, but where you can get either. If it's not out yet, you can go get on the list to know what it is. And that's at www.bigbubbletrouble.com. And make sure you put your WS in there and go get on the list or go get the book because I'm I'm certain it's going to be a fascinating read. And you talk about the idea of productive and destructive bubbles. 1 distinction is the the well, let me the idea of productive and bubbles and destructive bubbles. butthe.com bubble that we just were talking about was a productive bubble, I guess, right, largely. So can you explain the difference? Yeah, I think so.

25:57 Yes, I can. So when most people think about bubble, there's just a negative connotation around that, right? Like there's a big run up in valuations, it's unsustainable, it's irrational, it blows up, people lose money and then, you know, it's just it's bad. All hell breaks loose. But the one thing I'd point out in and look, think of the economic consequences for the different bubbles. So what happened duringthe.com bubble? A lot of investment came into a new technology. The technology was real. It was life changing for a lot of us. A lot of companies that created in that, in that bubble, like NVIDIA is founded in 93, PayPal where I work was 98. You had Amazon founded in 94, Yahoo in 95, Salesforce in 1999, what else? But Google kind of is founded in 98, Broadcom, which is spins out of a an HP affiliate IN992000, so on and on and on.

26:45 And so there's a lot of value created in all those companies. And even after the bubble pops, out of the detritus of the bubble, you have like Peter Thiel and Elon Musk were the founders of PayPal where I worked for 10 years. Peter takes his profits and goes and funds Facebook and Elon goes on to start, you know, Tesla and SpaceX and he buys x.com. So there's a lot of value created out of that out of that whole experience. In fact, if you'd bought the basket of Internet stocks in 1999, you probably would have made money today. You would have had a lot of good years and then some really bad years. But if you'd held through that whole period, you would have made money. And what happens to the US economy? We have a mini recession in in 2 thousand 2001, but it's not a it's not a bad one.

27:26 And then now over the last 20 years, the US has continued to grow and has now become the the global leader in terms of GDP per capita and the economic superpower. And all that is based on the technology that was built in large part because of that that bubble similar in the 1840s in the UK, the the railway boom, although it created a lot of investors who had a very, very poor run in 18495051. The economy has a mini recession in 184950 and then the next 20 years is what they call the long Victorian boom, which is a period of rapidly expanding incomes. It's broadly felt in the country. It's driven by the tail end of the industrial revolution and the locomotive and steam engines are a big part of that. So those are very, those are very positive bubbles, although there are creative destruction, winners and losers and the negative ones. You've already talked about the 2008 Nine that was a -1 big, a big recession, a lot of workout and the economy goes through a A2 year recession, a big spike in unemployment, Australia in the 1880's, the Great Depression came after the 1929 bubble, Japan in the 1980s.

28:24 So I draw the distinction between ones that create economic value and long term growth even though there's short term pain and then bubbles where that's negative are. There any purely speculative bubbles? Yeah, I think, I think the Tulip bubble counts as just a lot of speculation of the sense of people buying just for the sake of reselling at a higher price. That probably happens across across the board, but that's an example where you you it went from florists and people who really appreciated tulips to all of a sudden people who wanted to trade for a profit. A lot of the land bubbles I think fit that pattern as well. People buying and flipping properties and then waiting for the the higher price. So that definitely is a recurring theme as well. So when you mentioned the role of long term Capital Management and monetary policy is there, I mean, I would think that there are lessons learned, but there's still so many variables, right? Even when you went through that history, there's a variable of things that are happening.

29:23 You know, the world is is flat, right? I mean, things that happened in other countries impact us here. Things that happen here impact other countries. We see that all the times, you know, we're how, what, how do people are these monetary policy set, you know, people that said it, do they forget or do they not anticipate? Or is the predictive analysis that we do because we have better tools, AI tools perhaps that might predict some behavior? Do they, do they react to that without really thinking about the ripple effect of, of how it might might be back in, you know, whatever economic policy is set and the impact it has on, you know, we're living through some of this stuff right now here with our job situation and our lack of skills for the jobs that are that are available and we're and the companies that want to hire people.

30:19 So talk a little bit about the lessons learned, learning from lessons, forgetting lessons, and how that fits into fiscal policy. Yes, that's a great question. It is amazing to me that we are still having this debate on monetary policy. So think about how monetary policy gets set in the US right now. You talked about the value of lessons and history and AI, but none of that, none of that is a factor in how we currently set interest rates. We don't have AAI generating the machine that sets rates, you know, day-to-day based on market conditions and supply demand dynamics. the Fed meets once every month, sometimes once every two months. These are 12 people who then take a vote and they move interest rates up or down. So that is how we set policy in the US today. It seems kind of insane that we're not, we're not using it. We're not setting rate policy based on, you know, I mean, there are hedge funds that are out that are reallocating the resources every day, every minute based on trading algorithms and based on all the stuff you're talking about. That's not how we set rate policy today. So one, that's one observation.

31:23 But think about today. We've got a an example where we've got a economy growing at 3 to 4% year over year GDP growth. We have valuations that are at historically high levels and there's still political pressure because of jobs, because of whatever to cut interest rates. And the rates right now are in the mid threes for the Fed funds rate. The inflation rate's 3%, right. So it's a half a percent real inflation adjusted interest rate on the Fed funds rate right now. How what kind of sense does it make to continue to push rates lower than half a percent in terms of real rates when the economy is expanding? I know, I know there's a job situation, but we have a full, we have a 4.6% unemployment rate. That's historically very low. So, but why, why? So why is there still a push to cut rates? Well, you know, there's political pressure to do it that that comes up over and over again. Politicians are pushing the Fed to lower interest rates when they when they shouldn't.

32:15 And maybe that's a short term political gain, but the long term issue with that is then you fuel valuations and you fuel the easy money, then fuels destructive behavior. You know, that's that seems to be, unfortunately a lesson we haven't been able to shake yet. Yeah, money. Might be, I'm sorry, might need to reform the Fed to do that. Yeah, Yeah. Well, I don't know if adjusting interest rates are daily or dynamically there would be, I think it would, might, might create more chaos. There is a certain amount of stability for predictability on cost of money and planning for businesses to plan and and know what they can invest in, particularly for infrastructure, but definitely not just 12 people in a room making a decision. Right, you know the prime investment the rates for two years get set by the market every day, right? Like your your your your mortgage rate is cooked on the 10 year bond.

33:02 The 10 year doesn't have a 12 men in a room or women in a room setting. The price, the 10 year trades every day, rates go up, rates go down and and people base mortgages and credit card debt off of that. So there are market, there are areas where the markets work and Mark, you know, work pretty fluidly. And then the Fed, rather than being the one that sets the price, just kind of comes in to control things like, hey, there's a liquidity crisis here or there's a there's a shock here. We can, you know, we can counteract some of those big moves. The monetary stabilizer is the, is the term in economics, but we don't seem to, we have not embraced that kind of a philosophy yet. Sure. So let's jump jump in on the AI bubble that it seems to be all in the news and in this stuff like, so is there any historical bubble that what we're experiencing with AI might resemble? I would assume that it's productive because we are solving a lot of problems, but there's also a lot of fluff out there.

33:53 I think there's a lot of froth and excitement. Yeah. I think on a high level, I'm not as concerned about the valuations of AII. See we see in the private markets a lot of companies that are getting AI type valuations that are concerning like in the public markets. If I just compare this to 1999 for instance and the tech, the last tech bubble which was the maybe the most recent example, the company in the middle of everything right now is NVIDIA. They are building most of their AI infrastructure with GPU's, unlike the telecom boom. Every time they build AGPU and roll it off their assembly line, so to speak, it lights up because there's demand for it. And the demand is coming from hyper scalers like Amazon and Apple and Meta and Microsoft. Those are the four big customers and they need or they need that technology today.

34:35 So they're not. They're not. We're not laying dark fiber like we were in 1999 or building railways that don't get used for 50 years like the British did in the 1840s. I guess that's one bit of good news. And then NVIDIA is trading at 23 to 25 times fully taxed earnings next year. At the height of the.com boom, the company in the middle of it all was Cisco. They were the ones building the Internet and selling the routers and switches to companies that would then the telecoms and Cisco's at 200 times earnings. Cisco, IT was not a tremendously profitable company. They did fine. But in their in their biggest year, they made $3 billion in profit in 2000. NVIDIA spent $112 billion buying back stock over the past five years. So they're profitable, free cash flow positive. Their valuation is nowhere near where what we saw in 1999. And their customers are the hyperscalers like those big Internet companies, which are also profitable, free cash flow positive, buying back stock or paying dividends. That wasn't true.

35:29 The telecoms back in the 90s, they were, they were indebted and were not, you know, paying back, buying back stock or paying dividends. So I think this is a much more real technology revolution. I'm sure there's going to be ups and downs. I'm sure a lot of us will lose money on AI. There might be another 20% drawdown in the market next year because growth never happens in straight lines. But I feel much better about where we're at, where we're at now than, say, 99. Okay, good, good, good. That's why I was going to, you know, follow up with that because and the reason why you feel so have people learned a lesson? Have the venture capitalist, the money people learn the lessons and they're being more discretionary to look to not buy it and and looking for real business models, real problems being solved kind of a thing or you know, is it how is this different than not? Even I think I think so.

36:18 So I would say 959697 felt to me like some of this is my own memory of it and I was very young back then. And so it'll be, it'll be a imperfect recollection, but I've done research and followed valuations as well. It seems like before the Amazon IPO, there was a fair amount of discipline on the money being invested in that. In that bubble, people were looking at profits and cash flows and returns and reasonable returns and how big can this market be and what are your sales going to be in the next three to five years? After Amazon went public, it did sort of change the tone and made it a lot more optimistic. And what I see now looks feels a lot more like 97 time that pre Amazon exuberance where there's a lot of optimism, but there's a lot of there's a lot of questions about what will this do to your business? What is the return on AI spend?

37:06 A lot of the money is coming from these BIG4 hyper scalers. So it's profitable companies which care with cash on their balance sheet, putting money into it with equity. You get into 9899, you get like smaller companies start-ups building a lot of the technology that were then raising money. There were there telecoms were doing it with debt, not equity. Those are all red flags, dangerous signals that I don't see it yet. Now some of the data centers that are being built now are being debt financed, not equity financed. So that's beginning to now we're beginning to verge into, OK, that's a that's a yellow flag. Maybe there's the circularity is now the big talk in the valley. It's good. It's actually great that we're talking about it because it shows that people are scrutinizing this stuff. But there's a discussion about circularity like, hey, I'm going to invest in you and you're going to invest in that company, but they're your customers.

37:48 It's a form of vendor financing. If you didn't invest in them, could they really afford the the bills they're going to pay? Like all the right questions being asked. So I feel like the level of scrutiny even now in the venture community with my, you know, my colleagues, myself is still reasonably high despite, you know, obviously a lot of optimism and a lot of excitement, but I think still fairly disciplined right now. OK, good. So discipline is one of those fat, you know, a key element, right? In some cases it's watching, some cases it's putting a little, putting your toe in the water, seeing what happens and then follow up with your full foot, so to speak, right. So is there anything else as far as risk or timing that goes along with that that investors should be and thinking about when they're looking at a breakthrough new technology? I mean, and as you know, because you've been around this a long time and right in the mix, you know any technology that we think is breakthrough now or the public thinks it's breakthrough has been worked on and invested in for 20 plus years prior to it, it becoming something that you know the everyday person becomes aware of and uses, right. So is there is there anything as far as that goes on, on those factors risk, timing, discipline that investors should that you would recommend investors consider? Yes.

38:59 Well, as a venture capitalist, my partner especially is very good at this. He's made over 2000 investments in seed and Series A stage companies between he and I. We have a lot of experience, a lot of, you know, a lot of training. Now in terms of just doing the diligence, I think the biggest thing that I've been that I push with our investments and our founders is the technology that you're building. As great as it is, what problem is it solving? And when that when that problem gets solved, how do you how do you make money doing that? And if and if and surprisingly 4 to 5 founders really struggle with that answer, which is that hey, what problem are you solving answer. I think we did have a recent experience in Twitter in 21/20/2021 and I never got a straight answer to that question for one of the big asset classes that that got created and then dissipated but still around crypto. A lot of people were pitching web 3 dot O decentralized finance, crypto, altcoin wallets, Bitcoin. And I kept asking, what problem?

39:58 Why do we need? Why do we need Bitcoin? What problem are you solving? If the technology didn't exist tomorrow, what you know, what would be different? And I never got a good answer from a founder about why the world needs crypto. And so we never, we never really invested in it. And some people did great in that space. But that is a very speculative technology that I think is going to be much more challenged. AI is the and the answers are a lot more clear now about AI than they were, you know, a few years ago. And I think they're very generally very good about what problem they're solving. Well, OK, to on the to me, and this is AI guess AI don't know. I don't think I'm trying to look for the right word, but one of the things that I have tried to steer people in their conversation is to separate blockchain from crypto and crypto being an app on blockchain, A solute, you know, one solution.

40:45 But when you get to, I really would like to see a lot more done on blockchain in the supply chain, right? Or even when you get into the validation of assets using, you know, NFT type of concept on the blockchain. There's, you know, goofy stuff that people like verifying, you know, bourbon or something like that. But there's real, there's real need for it when it comes to, you know, what is being brought into the country. Is it really what it says it is, right? Things like that, some of our supply chain, human trafficking solving. So a lot of that stuff of what's on the manifest and is it really what's in the container that blockchain can solve that. I don't real, I don't see people moving towards that. And even smart contracts or, or like we have natural, natural disasters.

41:33 We've gotten better since Katrina, but it's like, you know, entire entire history of, of who owned what or anything can be wiped out in a natural disaster. If we had it on the blockchain, it would be protected. Yes, I think in Weller circulated like what can blockchain be used for? So if you were building a blockchain startup and he said, look, I'm going to record land that's been owned in California on a decentralized Ledger that cannot be wiped out or destroyed in a fire. And if I want to look it up because I'm trying to sell you a piece of land and you want to know that I own it, we can look it up right now on a on a blockchain. You don't have to go to the registrar, the county records in Sacramento and look up the thing. And then, you know, God forbid it's a Sunday and it's closed.

42:14 You can't get in until the Monday morning and it's a holiday. Like you can look the stuff up in real time and validate ownership, validate assets, validate things like identity. Who knows, maybe even voting one day that that kind of scares me. But. That would be. Nice, but those are all good ideas. The hard part is, you know, if my mom asks me why do I why do you own Bitcoin or why do you know why do you own the Dogecoin? Like what good is it? You can't spend it. It's not a medium of change. I can't use it to buy Starbucks. Why do I need this thing again? Like if I struggled with that answer, I think that's a real problem for any for any entrepreneur. So my lesson to entrepreneurs, discovered the problem and the solution and then tell me about the technology and how cool it is. But always go back to your customer, your problem or solution. Yeah, absolutely.

42:55 And at the end, the buying and selling of it, everything about it is created an industry that just there's a lot of issues it comes to crypto and all of the things that how it's how the impact it has, the environmental impact, just all kinds of stuff on on that. So anyway, let's get back into. So you know, I I want to tell folks too, because, you know, it's fascinating. You can learn more about you also at your website, which is Aman Virgie that's spelled AM ANVERJ EE, and we've covered a lot of ground on your book on all and the different you know, what factors are that are that you that we're, you know, different factors that lead into a bubble. And I think you pretty much establish that you don't really see us in an AI bubble, even though the press keeps keeps talking about that.

43:47 Is there Is there anything else that you want to share that we may not have covered at this point in time? That's anticipating from entrepreneurs and investors? You know, we have this phrase that in the eco entrepreneurs is like skate to the puck. So is there a puck that you could see people to skate to that would get them to the other side or get them into something before a bubble happens or speculate that way? Yeah, I think if you're that's a Wayne Gretzky quote, the the puck, which I, I'm a big sports fan and a hockey player and, and love that. I think it's very easy to see that AI is it's here to stay. It's going to transform virtually every industry. There are great businesses that will be built and destroyed as a result of it. With the thing that does happen when you get these investment cycles and the hype cycles, I wouldn't quite call this a bubble for the reasons I said.

44:37 But let's let's concede there's a lot of money going in and a lot of excitement. And what tends to happen is you get easy money. It's not necessarily true. the Fed doesn't have to cut rates to 0%. We don't have to, we don't have to go back, you know, to another infusion of capital for just money to to be ready and available to entrepreneurs who want to fix the technology. The question then is what happens when that money rolls back out and if the business you're looking at or investing in needs to continue to raise money to higher and higher valuations in order to feed a product or business cycle for more than like a year. To me, that's like a big red flag. That's just generally, if we saw this in 20/20/21, a lot of companies raised money and had enough runway to kind of get to the next financing, but couldn't quite turn the corner and become profitable.

45:18 And then when the money dried up, they all kind of went by the wayside and some of them went out. Some of them are just illiquid now and are are don't really have a clear exit plan. So the thing that I just would always remind investors is just pretend the money went away. Do you have a path to profitability or at least self-sustaining a self-sustaining cycle? And if you're, if you're, if you have a real problem, you're solving with the real technology and can get to a point where you're not sucking in money as a result of the beneficiency of investors, which comes and goes, right? Investors get very excited and the kind of moves are heard. My industry does that and then they get very unexcited and they move out as a herd. And we've seen great technologies, whether it's fintech, whether it's SAS, even crypto for a while. The money comes, the money goes and then then we know what do you do as an entrepreneur?

46:04 So that's the thing we always going to work on in the business plans. It's how do you get this thing to, to break even? How do you get it to that when the money goes away, which it will during the next five years, whether it's next year or 2029, I don't know. I don't predict. My crystal ball doesn't doesn't have that precision filter on it, but it happens. What are you going to do then? And that's the only thing I'll leave you with. Yeah, absolutely. And it's, I think it's really healthy for the money investors out there, wherever they are in the capital stack to ask that question as part of their own filter system when they're looking at investment. You know, one of the biggest, you know, I talk about it in my 2 books, you know, and on the podcast with other people and on the other content I created is that, you know, investing on emotion is one of the kiss deaths of, you know, making a private and particularly a private investment. It always has to be what is the problem that a company is solving and do they know how they're going to make money? And even if it slows down, they're making money because they don't have X outside capital to accelerate the process of getting, you know, getting customers or things like that, they still know how to make money on it, right? That is to me fundamentally core. And for the mistakes get made when we let a a motion, the subjective criteria or the charisma of a of a founder outweigh the objective.

47:24 You know sensible things of you know, what is the value proposition and how do they put money in the bank? That's very well said, yeah. So all right, thank you everybody for tuning in to listen to the Compassionate Capitalist show again. Go get the book Big bubble. Trouble is the the website and the book is why don't you say? Because I'm scrolling to get all the words right. Yes, it's called A Brief History of Financial Bubbles. You can get that at bigbubbletrouble.com. Get your pre-orders now. It should come out in late January, maybe early February. I'm coming back and forth with the editors now and getting all getting it all done and unlike you haven't, like haven't written books and print them out. So I'm now appreciating how long it takes to get from the 98 yard line into the end zone.

48:08 But we're I feel like we're on the 98 yard line somehow. This is going to take a few. It might. It might be February before the book hits the shelves. And then then when it's out, they'll be able to get it on all the places that you normally get books, all your different book. It'll be, you know, bookstores as well as, you know, Amazon and all that stuff, right? That's right. That's correct. Okay, great and if you've enjoyed this show, listeners, please, please go and you know, give us a ring, give them a 5 give us a five star throw a comment. The simplest thing is just a thumbs up or whatever is on your particular platform that you're listening to because you cannot imagine how important that is for other people to find This show is that the the platforms recognize that somebody else listened to it and liked it.

48:52 So it's really is really important to do that. So thank you very much in advance for doing that. Onwards and upwards and and have a great day. Thank you. Thank you for listening to this podcast, The Compassionate Capitalist Show, brought to you by Cougar and Capital Holdings with Karen Brands as host. You are encouraged to visit the website kugarand.com to learn more about how Karen and her team help investors and Angel groups make money by avoiding investing in deals that suck. And how the Kugarand Capital companies and partners help entrepreneurs breakthrough their barriers to capital and live their dream by building companies that can scale and create generational wealth for their founders and investors.

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