E121: Macro update, Fed hike, CRE debt bubble, Balaji's Bitcoin bet, TikTok's endgame & more

Federal Reserve Policy & Macro Economics

• The Fed raised the federal funds rate by 25 basis points to a range of 4.75%–5.0%, marking the fastest hiking pace since the 1970s.
• Panelists criticized the "middle path" of a 25-basis point hike, arguing the Fed was too late to react to 2021 inflation and is now too slow to recognize economic distress.
• Jason Sacks argues the Fed should have either cut rates or held steady (stood pat) given recent banking failures, though he acknowledges inflation remains "sticky" requiring terminal rates above 5.5%.
• Chamath Palihapitiya contends the 25-basis point hike was the "worst option," suggesting a 50-basis point hike would have created necessary short-term chaos to signal the need for future liquidity tools.
• David Friedberg notes the 10-year Treasury yield dropped from 4.1% to ~3.4% in the last two weeks, which may temporarily reduce unrealized losses on bank bond portfolios.
• The market anticipates a potential Fed pivot to rate cuts later in the year due to severity of the banking and real estate crises outweighing inflation risks.
• Global debt-to-GDP stands at 360%, creating a system where debt forces growth; without it, the system faces severe stress.
• Palihapitiya predicts the US government will ultimately print roughly $2–3 trillion to backstop commercial real estate and banking assets to prevent a "crippling economic ripple effect."
• The US dollar's hegemony is reinforced during stress as central banks utilize Fed swap lines, making other nations more dependent on dollar liquidity rather than abandoning it.

Commercial Real Estate (CRE) Crisis

• An estimated $300 billion in CRE debt is due for refinancing in the next year, facing a severe credit crunch as small banks refuse to lend.
• Small banks hold approximately $2.3 trillion in CRE debt, with nearly 80% of commercial mortgages concentrated in these institutions.
• San Francisco office vacancy rates have surged to 30–40% (up from ~5% pre-pandemic), driving down asset values and breaching debt service covenants for building owners.
• Panelists project a "fire sale" scenario where banks, unwilling to hold real estate assets, will auction foreclosed properties at rock-bottom prices due to a lack of buyers.
• Unrealized losses in CRE loan portfolios are estimated at $2 trillion, a figure difficult to quantify immediately due to a lack of liquid secondary markets for these loans.
• Major tenants like Amazon, Pinterest, and Facebook are reducing space or exiting cities, signaling a structural shift in demand that will persist for years.
• Freeburg predicts the government will likely intervene with bailouts to prevent a collapse in local tax bases and city solvency, similar to past crises.

Banking System Stability & Moral Hazard

• Discount window borrowing by banks spiked to levels exceeding the 2008 financial crisis, indicating extreme liquidity concerns within regional banks.
• Deposits are fleeing smaller banks for the "top four" systemically important banks (SIBs), exacerbating liquidity risks for the rest of the system.
• Sacks argues for protecting depositors via full FDIC coverage (estimated cost: ~$8 trillion in uninsured deposits), noting that the risk premium for such insurance is low (approx. 1% of deposits) and would stabilize the system.
• The panel identified a fundamental market failure where depositors view accounts as "safe vaults" while banks treat deposits as "unsecured loans" for high-risk investments, creating a misalignment of incentives.
• Palihapitiya proposes separating banking into "protected deposit" units and "risk-taking" units that raise capital from investors via Limited Partnership Agreements (LPA) to ensure clear liability and risk sharing.
• Current strategies like splitting deposits across multiple banks to stay under FDIC limits are administratively burdensome and do not solve the underlying systemic fragility.

Crypto, Bitcoin, & Regulatory Crackdowns

• Balaji Srinivasan bet $2 million that Bitcoin will reach $1 million within 90 days, driven by a prediction of US hyperinflation and bank insolvency.
• Jason Sacks dismisses the $1M Bitcoin prediction as highly unlikely within 90 days, citing the deflationary nature of the coming CRE crisis and the lack of global liquidity adoption for crypto.
• Sacks points out that Bitcoin has not surged despite systemic crises (trading near $28k), suggesting it is currently used for retail speculation rather than as a legitimate fiat hedge.
• A coordinated regulatory crackdown on crypto is underway, including SEC lawsuits against Paxos, settlements with Kraken, and a Wells Notice sent to Coinbase regarding lending programs.
• Palihapitiya suggests the crackdown may be a coordinated effort to prevent crypto from serving as an "off-ramp" for the US dollar during a potential monetary devaluation, drawing parallels to FDR's Executive Order 6102 regarding gold confiscation.
• Nick Carter, a crypto advocate, argues the US government is attempting to ban crypto via "Operation Chokepoint" to maintain control during the financial crisis.
• Sacks notes that while he supports Bitcoin as a long-term asset, he believes current narratives connecting the financial crisis to Bitcoin are "crazy" and distract from systemic cleanup work.

TikTok & Geopolitics

• CEO Shou Zi Chu faced a bipartisan congressional hearing where his evasive answers regarding CCP data access and engineering access led panelists to predict TikTok's shutdown or forced divestiture.
• Sacks supports forced divestiture to an American entity as a viable solution to security concerns, though acknowledges the difficulty in auditing codebases for backdoors.
• Palihapitiya predicts TikTok will be shut down rather than divested, arguing that the Chinese government (which holds a "golden vote") would rather let the US asset burn than reveal code or lose control.
• The "golden vote" held by the Chinese government allows them to dictate the direction of ByteDance, making a true separation of interests difficult to verify.
• Secondary apps like CapCut are viewed as additional potential vectors for privacy violations or spying, complicating any potential US approval.
• The panel agreed that the CCP likely controls the final decision, and if they choose not to divest, the US will likely force a shutdown, ratcheting up US-China tensions.

Space Industry Developments

• Relativity Space successfully launched a 3D-printed rocket (Terran 1), achieving critical milestones including main engine cutoff and stage two separation.
• The successful launch proves structural integrity for 3D-printed rocket fuselages and engines, validating the technology's viability for future cost reduction.
• The next generation rocket, Terran R, aims to increase payload capacity from 1,500 kg to 20,000 kg, significantly lowering the cost of space access.
• David Friedberg emphasizes that the space industry's economic viability depends on finding business models beyond government contracts, such as space tourism or in-space manufacturing.
• Freeburg notes a strong correlation between the space industry's growth and the cost of energy, suggesting that low-cost energy (e.g., fusion or renewables) is essential for scaling fuel production like methane.
• Palihapitiya highlighted the engineering achievement of the Terran 1's methane/liquid oxygen engines, noting the complexity of using the same fuel type for both stages.

Miscellaneous Observations

• Jason Sacks joked about his "moderator grift," noting he optimizes travel costs by using corporate budgets for commercial flights and saving the difference.
• The panel discussed the upcoming debt ceiling vote in June, warning that a failure to raise it could trigger a US sovereign debt default, compounding the banking and real estate crises.
• Nick Carter is noted as a partner at Castle Island Ventures with significant financial stakes in Bitcoin, raising questions about the objectivity of his "crypto apocalypse" narratives.
• The episode concluded with lighthearted banter regarding the hosts' attire and a shoutout to the "All In" community and merchandise.