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Podcast Host (Ad Segment)
Okay.
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Host (Interviewer)
Iman Virjee, thanks so much for coming on my show.
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Iman Virjee (Guest, Author and Finance Expert)
Thank you for inviting me. Happy to. Happy to be here.
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Host (Interviewer)
So we're here to talk about your new book on the history and as well as analysis of bubbles.
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Iman Virjee (Guest, Author and Finance Expert)
That's right, yeah.
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Host (Interviewer)
And it's a great time to be doing it because everyone is wondering whether AI is a bubble, of course, whether crypto is a bubble, and if so, you know, when these bubbles pop, what will the impact be on society? If and when. Right, so. So let's table that for now because I know you have a lot to say about those subjects and a lot of analysis to bring based on the history of bubbles and what patterns you've noticed in the historical data, which is a really useful perspective to bring on it, rather than just shooting from the hip, which I think is what a lot of people are doing. But before we get all to that, get to all that, just tell my listeners a bit about who you are, what your career trajectory has been, and how it's led you to this interest in financial bubbles.
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Iman Virjee (Guest, Author and Finance Expert)
Yeah, sure. Happy to do that. So let me start here. If you'd asked me when I was like 15, 16, what do you want to be when you grow up? I think I would have said I wanted to be an investment banker. I was growing up in Toronto. My family had moved from East Africa, from Kenya, where I was born. And I was living in Toronto at the time and just loved math and loved reading the Wall Street Journal, which was kind of hard to get in Toronto in the 1980s. I had to walk about a half hour to the Beckers, which is the, I guess the Canadian equivalent of a 7 11. Paid 25 to 50 cents of the journal. Brought it back. I'd read it page to page, front to back, every day. So I went to Stanford, studied economics, did get a job on Wall Street. It was at Lehman Brothers, where I was a financial, in the financial engineering department. Bond trader, derivatives trader, had a blast and then went to grad school at Harvard Law. Back in those days and maybe even today, I don't know, you had to get a grad degree. In order to get to the vice president or even the associate level at an I bank or vice president, you had to get an MBA or a grad degree. And then a gentleman named Peter Thiel talked me out of going back to Wall street. And he had just started a company called PayPal. This is back in 2001 now. And so I joined PayPal right out of Harvard Law. I'd met Peter when I was undergrad at Stanford. He was at the law school. My first job There was the junior guy in the IPO deal team working with Peter and Elon Musk. Ten years later, I was running finance for PayPal. I've taken a couple of companies public since and worked in technology as a CFO and operator for most of the past 20 years. But six years ago, my partner and I started a new venture capital firm in Silicon Valley. He's a two time member of the Forbes Midas list. He had worked for Peter Thiel at Founders Fund. I'd worked for Peter at PayPal. So we met through that network and you know, and then today we run the venture firm and, and that's going great. But I've always had an interest in finance and economics. I've had an interest in financial history. And a few years ago, as we were coming out of the 2021, 22 bubble, I began thinking about how long is it going to last? When do valuations rebound to where they were before? Will they rebound before? A lot of the companies seem to be interesting and new, but I don't think this is unprecedented. I've seen technology bubbles happen. I mean, I lived through one in 2002. I was a young man back then, but I was old enough to remember. I lived through 2008, but I found a lot of investors making a lot of mistakes with the new bubble, thinking that technology was unprecedented, thinking that valuations would reset faster than they did. So I began researching the last couple of bubbles to figure out duration, how big they would be, when they might. Correct. And I was interested in it. So I kept going back to Japan in 1984, to the stock market crash in 1929, the UK railway boom in 1845, all the way back to Amsterdam in 1636, 37. And a couple years later, I have the book coming out next month that just talks about the 10 biggest bubbles in history and causes, consequences, how to think about them and how they reshaped society.
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Host (Interviewer)
Yeah, okay, so from there let's just start at the definition of a bubble. And perhaps you can clarify whether bubbles are caused by irrational mania and whether that is intrinsic to the definition of a bubble or whether a bubble is simply the phenomenon of rising values and then falling values and why that's important.
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Iman Virjee (Guest, Author and Finance Expert)
Yeah, there's a couple of. There's a few definitions possible. Charles McKay, a Scottish economist, would define it more like the first thing you said, it's just an irrational mania and there's a lot of psychology and a lot of storytelling around it. And then Kendall Berger from MIT also brought some more analytics around it and would discuss it as a, as a element of psychology and crowd like behavior where people just behave in herds and, and it implies there's some irrationality to it. Although he would explain it through some behavioral phenomena. I think that's really hard. I didn't choose to define it that way. I looked at it more like if there's a big run up in prices and then a run down in prices and it's roughly symmetrical. So in a relatively time bound way. So prices go up by 5x or more in two years or less and then they give up all that value. That's a bubble. You can define it in other ways. Like it's just when prices get untethered from some kind of fundamental value. But then what's the fundamental valuation for gold? What's the fundamental valuation for crypto? Why is it that those assets can stay elevated for a long time in defiance of fundamentals? And who's to decide what is rational or irrational? Right. So I basically looked at it like it's a big run up in price, it's a big rundown of prices. That's good enough for me. Let's talk about what happened and why.
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Host (Interviewer)
Got it. So I think it's important to underline that point because we have examples like Gamestop where it's literally a meme stock and the reason people get it is precisely because everyone knows that the quote unquote fundamentals are unsound.
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Iman Virjee (Guest, Author and Finance Expert)
Right.
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Host (Interviewer)
But it does go up in value. People make tons of money, people lose tons of money. It's sort of like a self conscious bubble on purpose at some level and therefore maybe not a real bubble, but when you look at something like AI or crypto, when we are genuinely uncertain about what the long run value of these things are because there is inherent uncertainty about the future direction of the entire world. Effectively you'd have to know the future direction of the whole world in order to know AI's current objective value. Right?
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Iman Virjee (Guest, Author and Finance Expert)
Right.
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Host (Interviewer)
And if whole groups of people don't
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Podcast Host (Ad Segment)
know that, that doesn't make them irrational.
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Host (Interviewer)
If they have a guess about it today, that ends up being very wrong in 10 or 100 years. That doesn't necessarily mean they were being irrational today. It might mean that it's tough to know the future of the direction of the world. And whole groups of the smartest people can get it wrong for long periods of time.
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Iman Virjee (Guest, Author and Finance Expert)
That's right. And they can also disagree on whether it goes up or goes down. And some group is going to be right and some group would be wrong. You can look back on GameStop as a, as a bubble. It wasn't, it was. It also followed the run up and run down in prices. There's some irrationally to it, there's some herd behavior to it. It's mildly interesting, but it's just one example. And throughout history there are lots of one offs. And baseball cards in the 1980s or 1990s can follow the same dynamic.
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Host (Interviewer)
Yeah, I didn't know that. I learned that from your book, that there was a baseball card and comic book.
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Iman Virjee (Guest, Author and Finance Expert)
Beanie Babies. Right. Comic books, you know, just markets go up and go down and that's just, that's just, it's, it's temperamental within markets. But what I was more interested in is like big asset bubbles that are significant. So land bubbles that are, you know, that, that are, that are massive, that, that are, that create a lot of value on a relative basis, like a big part of the economy, lots of people. And, and what I really found was it wasn't so much irrationality or irrationality. You can set aside some of that judgmental stuff. There were a couple of factors I found were in common every time. One, the bubble happened in usually the richest country in the world and usually the most wealthy city in the world. So whether it was London in 1845, New York in 1929, Tokyo in 1984, AI is happening kind of in Silicon Valley, if you will, you know, now. And we can talk about whether I think that's a bubble or not or has some of the repeat patterns of prior bubbles. Usually there's a lot of economic prosperity and it's the richest country, the richest city. One, two, there's a lot of wealth flung into a large homogeneous segment of the population. And then the last one is usually some version of easy money, loose financial conditions. It could be low interest rates, it could be an increase in the money supply, it could just be, in the case of Japan, they manipulated their currency to loosen financial conditions. In Amsterdam there was none of that. But there was the invention of financial derivatives and Buying on spec margin loans, fund forward contracts, all that had been invented in the early 1600s in Amsterdam, which created those conditions. So when those things happened, those were the keys to when those bubbles happened and why they happened as big as they did.
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Host (Interviewer)
Okay, I want to underline this because you're arguing that you've looked at the data, first identified what are the clearest bubbles that have happened over, say, the past 500 years, and then found variables that are common to all of them. And this is a very interesting case you're making. So the first one is clear. It tends to happen in the richest city, in the richest country, or pretty much close to that. The second one is less clear to me. What do you mean when you say it usually involves a homogenous population?
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Iman Virjee (Guest, Author and Finance Expert)
So I'll give you an example of what that means. Let's take Japan in 1984. Why did the Japan bubble, which happened in land and real estate, get, you know, get so big? Well, one, they were very rapidly growing. The economy after World War II in Japan was growing at a rate that I don't know if the world's ever seen anything like it. If you'd been born in, like, 1945 on the. On the day that the bombs dropped in Hiroshima and Nagasaki, and you lived to 40 years old, so by 1985, you would have been six times or seven times richer than your parents were at the time of the bombs dropping. So in the course of one generation, to have a 6x increase in wealth has never happened before. And I wouldn't say never happened again, but it had never happened before. So massive increase in wealth. And then what happened? They industrialized and urbanized very, very quickly. It went from being a largely rural, agrarian population. All of a sudden you had swarms of people moving into cities, and they all had shared experiences. So this is a large group of workers who came into those cities, shared history, shared experiences, a lot of shared skill sets coming off of the farms. After the US Began running the economy of Japan and the economy liberalized, they broke a lot of restrictions on who has to stay on farms. Hereditary rules on how land passes from one generation to the next. And they had similar tastes and values, and that pushed up the price of land because one of the things they valued and coveted at the time was land. And land was very scarce in the big cities. If the wealth is created over a longer period of time and it's into diverse crowds, the different types of tastes and experiences, they don't tend to bid up the same asset. The wealth goes into different pockets, different assets get bid up. There's not the same concentration of wealth. So that diversity of wealth tends to mitigate the creation of some of these bubbles.
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Host (Interviewer)
Oh, that's interesting. Okay, that makes sense to me. So it's like homogeneous with respect to your subcultural experiences, worldview, kind of the sort of type of person you are in a particular cultural. Cultural context.
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Iman Virjee (Guest, Author and Finance Expert)
Yeah. Your values, tastes, values, what you might buy, what you know, how your social status gets signaled, stuff like that.
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Host (Interviewer)
Right. Because you've all got a think. Tulips are really awesome if you're. If you're talking about the Dutch tulip bubble, for instance. Yeah, that makes sense. And then the third variable is just easy money. Low interest rates effectively is what that means. Right?
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Iman Virjee (Guest, Author and Finance Expert)
Low interest rates, an expansion of the money supply, creation of financial derivatives, a loosening of financial conditions. Any in any or all of those ways. Exactly.
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Host (Interviewer)
Got it. Okay, so you, you also argue in the book that there are two types of bubbles, really, that you looked at, or all the bubbles you looked at fell into one category or the other. One is like relatively harmless except to the folks who. Few folks who lost money, and one is destructive to the whole economy. Why is that? And what determines what kind of bubble falls into one or the other?
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Iman Virjee (Guest, Author and Finance Expert)
Yeah, so actually there's just a couple that were. I would. I would argue are positive, actually. Positive. Net net. So the UK railway mania and the 99.com boom, I think were positive, meaning they created a lot more wealth than they destroyed in the long run. In those two cases, they created a new technology. The railways in 1845-1849 were built out. A lot of money went in. A lot of money was lost in 1849, 50, because they just built them faster than profits could materialize. But over the next 20 years, England changed. The transportation infrastructure that those railways built changed how the country ran. But in the 1840s, it was very difficult to get from like London to Liverpool. It could take six to nine days by carriage ride. They were not safe. There were bandits on the roads. And therefore commerce was heavily suppressed. In fact, it was easier to go from London to Paris than London to Liverpool. So the domestic economy of England suffered. But between 1850 and 1873, that transportation facilitated a rapid increase in English commerce and British commerce, and the economy boomed. It was called the great Victorian boom. It's like one of the longest runs of economic growth ever recorded on par with the Japanese after 1945, after the dot com boom, if you'd only invested into.com companies in 98, 99, 2000 and just invested across that set of public companies. You would have lost a lot of money in 2001, 2002, but you would have come away with your portfolio would have included companies founded during the boom. So Nvidia founded 93Amazon 95 eBay, 95 Yahoo 95 Google, 1998, PayPal, where I worked, 1998, Salesforce 1999, you know, I could go on and on Broadcom 1999 and, and even out of the dryness of that bubble. So my two first bosses were Peter Thiel and Elon Musk at PayPal. Out of the bubble, Peter took his profits, invested as the first institutional check in Facebook. Elon went on to found Tesla and SpaceX and the boring company and who knows what else. And so a lot of value gets created. Assets reprice, they change hands. But the net is a huge positive for society, for investors as a whole, for consumers as a whole. Land bubbles tend to be destructive. It's a scarce resource. No value gets created. No technology got created. Tulip bubbles is sort of the harmless. It kind of, it was, it was an interesting limited asset class. Again, no technology got created. It wasn't a permanent increase in gdp, but it kind of went, it kind of came and went and the harm was limited to a number of florists and connoisseurs and the overall economy did okay. It didn't, you know, it didn't suffer. But the positive bubbles leave a technology behind that people can use. The destructive ones usually are a rapid and violent destruction of value around some kind of limited, scarce resource. It doesn't really benefit anyone.
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Host (Interviewer)
So it seems like one way to read your book is as a defense of bubbles in the following two senses. One is bubbles. So your three prong argument, right, where bubbles only happen in places that are experiencing enormous and kind of like long run prosperity.
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Iman Virjee (Guest, Author and Finance Expert)
Right.
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Host (Interviewer)
So in that sense, a bubble is a signal of success. It's a symptom of success. Like if you're in a place where a bubble is happening, it's very likely a great place to be be. And the bubble in a way is proof of that.
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Iman Virjee (Guest, Author and Finance Expert)
Right.
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Host (Interviewer)
And then the second thing is that there are bubbles that end up being really positive. Like sometimes an asset class really is great and about to change the whole world, but people just overestimate it. Overestimate what is fundamentally a really like railroads were great. Yes, they just were. Maybe they were built a bit too fast, but they changed the world. Similar with the Internet. So in a way, bubbles, I've come away from your book with kind of a more positive or nuanced view of bubbles because bubble seems to be an inherently bad thing. No one ever talks about a bubble in like a happy way unless you get a bad name sold right at the right time, in which case everyone thinks you're a dick.
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Iman Virjee (Guest, Author and Finance Expert)
Right. So they get a bit of a bad name, don't they? Yeah, but, but it's at least an argument that it's possible that it comes out okay. It's a form of Schumpeter and creative destruction. Famous Austrian economist who basically talks about these new technologies and whether it's railroads, whether it's agricultural productivity, a lot of jobs will get destroyed, a lot of destruction will happen of existing infrastructure, but it's going to be offset with a lot of creation, which net net is positive. And it is also an argument, I think that if a bubble is happening. So let's take AI Even if it, let's, let's assume for a second it is. I don't think it is for reasons we can talk about, but it will leave behind a technology that is transformative and life changing. I saw this in the 1990s when I was at PayPal. There was, you know, there was a lot of banks that had an infrastructure that they wanted to protect and defend. And it was around credit card processing and they were making a lot of money on it. And there was no incentive for them to make the credit card rails work any faster or better. They, it was all, it was all dominated by MasterCard and Visa. They would charge small merchants, you know, 10%, 20% of their sales as processing fees and monthly statement fees. And any disruptor who would come in and try to cut that rate in half. Banks didn't want to deal with them because it threatened their, their monopolies. Right. They're at least their oligopolies. PayPal came in, we charged 2% to merchants. We destroyed and we destroyed a lot of value in banks, but ultimately we created a lot of value with small businesses. And the bubble let us do that. Like, but for the bubble, Elon Musk and Peter Thiel probably couldn't have raised the money that they did from Sequoia in order to build the company. So the bubble actually catalyzes a lot of new investment in a new area that's valuable. It actually forces disruptors to, you know, to gives disruptors the ability to go after new areas, forces incumbents to adjust who otherwise probably wouldn't adjust. And so it actually could be a net, a net positive so the argument is maybe the bubble is okay, maybe you should let it alone and let it, let it play out.
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Host (Interviewer)
Oh, so that's interesting. So the bubble is inherently good for competition is what you're arguing. Because also like, like say for AI right now you've got the big, the big two, Anthropic and OpenAI. But you've got like it's right now if you talk to VCs or founders, they will tell you. It's just, it's a point of annoyance in certain cases how quickly AI companies are raising money right now. Like if you've, if you're an MIT guy and you've been studying AI, you got a pd, whatever, you can just raise a ton of money and it's at a speed that is like unusual. But that also, that means that the big dogs right now have to watch their back and have to.
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Iman Virjee (Guest, Author and Finance Expert)
Yeah, let me ask a question. So you said there's the big two, so OpenAI and Anthropic. There is the third one in the mix which we should talk about, which is Google.
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Host (Interviewer)
Yeah.
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Iman Virjee (Guest, Author and Finance Expert)
Have you used Gemini and used.
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Host (Interviewer)
I don't use it often, but I have used it.
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Iman Virjee (Guest, Author and Finance Expert)
Yeah. So you should check Gemini, the first company, in fact, Dario Almode, who's the anthropic CEO, came from Google. And a lot of the DNA that is in AI right now comes from Google. They had this technology back in 2018, 19, 2020. By this technology, I mean LLMs. Yeah, I remember AI driven LLMs that they could have used to improve Google search and they decided not to. And maybe part of the reason was they just weren't sure of the social economic consequences. Maybe they were afraid of Prometheus unleashing some new technology into the world without full regard for consequences or just maybe a distrust of humankind. I don't know. But the point is they didn't launch it in 2019 or 2020 or 2021. OpenAI comes along in 202122 with ChatGPT. They'd been founded before, I think they were 2016 founded company, but as a not for profit. And they finally began moving towards a more of a business model with ChatGPT around 2022. And what does Google do now? They released Gemini and they've approved Gemini and it's available to everybody. And you have to ask yourself, why didn't they release it when they had it back in 2021 22? It might be they were afraid of, you know, what would happen to humankind. More likely they didn't want to cannibalize their own search business. It was OpenAI and then anthropic that forced them to say, oh Jesus, if we don't do it, if we don't go after this market now, we will lose our search business anyway. And we'll be, you know, we will, we'll be out of the race. And so now you've got three competitors, but it was the disruptor funded by the bubble, if you will call it that. That's actually what created and motivated them, the incumbent to build and launch their, you know, their search engine. And then Microsoft got in the game and so all the incumbents were catalyzed and pushed into action because of these disruptors.
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Host (Interviewer)
That's interesting. It also there is something ironic about the non for profit worried about AI safety, forcing effectively the big tech companies to accelerate, put their gas, put their foot on the gas for AI. Ultimately, I want to talk about the 2008 financial crisis. You know, one of the common talking points you'll find, and I was just telling you before we started, I rewatched the Big Short recently, which is one of my favorite movies. Yeah, one of the common talking points is that these, these banks ruined the country. They, you know, so many people lost their homes and nobody went to jail.
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Iman Virjee (Guest, Author and Finance Expert)
Right.
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Host (Interviewer)
What do you think of the nobody went to jail point? As someone who understands, probably understands what went wrong in the financial crisis, pretty, at a pretty high level?
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Iman Virjee (Guest, Author and Finance Expert)
Well, if you go to the Adam McKay movie, the Big Short, and then the book from Michael Lewis. Right. It's based on Michael Lewis's book and Lewis is a fantastic writer and McKay is a great director, so it's entertaining. But should someone go to jail, comes to culpability and who was really responsible for it? The argument from the book, if you just take the book literally and then if you also look at the Financial Crisis Inquiry Commission, which was convened after the crisis in 2010, the story was basically as you said, there was greedy investment bankers, there were really complicated financial derivatives, what Warren Buffett called weapons of financial, weapons of mass destruction. There was rating agencies that dropped the ball on governance and then there was something about deregulation or some lack of regulation. It's not, not really clear exactly from the movie or from the book frankly as to what all that means, but those were the four, those were the four areas. And ultimately it's predatory lending. And so, you know, banks behaving badly, endangering their own balance sheets and ultimately taxpayers and taking advantage of people. And so if that's what happened, then maybe Somebody should have gone to jail. But I point out in the book that those four things have been around for a long time. It wasn't like those fell out of the sky in 2007. Financial derivatives have been around for a long time. Like the slave trade in the United States was not primarily, but heavily financed by slave bonds, mortgage bonds, in the 1830s, 40s and 50s. Derivatives have been around for a long time. Ratings agencies. I mean, the first rating agency was John Moody after the pandemic in 1907. So 1909, we've had literally 100 years of credit ratings and derivatives. Greedy investment bankers like I worked on Wall street in the 90s. We've been greedy for a long time. Michael Lewis, who wrote the book, worked on at Salomon brothers in the 1980s. He wrote his first bestseller was Liars Poker. It's about greedy investment bankers. So Lewis knows better. He should know that there were greedy investment bankers long before 2007. Deregulation. I mean, you know, we've known about lack of regulation and regulatory capture for ever since, you know, George Stigler won the Nobel Prize for this in the 1990s, I think. So what happened in 2007 to make these four things go awry? And was it just greedy bankers that somehow, for the first time in, you know, in hundreds of years, even though they've been greedy for a long time and equipped with these weapons of mass destruction, finally they, you know, they put the country into recession in 2008. I think there's something very different that happened, and it really goes back to the role of government. So in the, in. In what. What happened, what did happen that was new in the 1990s. What I do in the book is I go through a more comprehensive global view of. Let's pick the countries that had the bubble and. And where did it happen? Where did. Why did it happen in the US in 2008? Why not in a different country in a different time? Like, why not to 1988? Why not 1968? Well, it turns out the bubble really happened in four countries. It was the U.S. the U.K. mostly, Northern Ireland, Spain and then Ireland. Didn't happen in Canada, didn't happen in Germany, didn't happen in France, didn't happen in Japan. So what do those four countries have in common? They had a housing policy that encouraged affordable housing through incentives to lend. In the United States, this began in 1992. There's a bipartisan bill. Think it's called the Federal Enterprise Safety and Soundness Act. Some ridiculous name like that anyway, 1992, it's signed by, by George Bush, but passed by a Democratic Congress. And it for the first time told Fannie Mae and Freddie Mac, you have to put a certain amount of your money into low income neighborhoods, into families or households that are, that are at or below the median income in their community. Largely a lot of the communities that have been redlined during the 1930s also by government policy, when the FHA, FHA began to do this. So what if Fannie and Freddie Mac do. These are huge government agencies. They are buying up a lot of
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Host (Interviewer)
remind people what those agencies are and why they're special.
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Iman Virjee (Guest, Author and Finance Expert)
Yeah, they are government sponsored enterprises. So they are quasi government agencies. They actually ran as independent companies and were essentially backed by the government. Their job is to go and to create liquidity in the mortgage market. So the way the mortgage market developed in the US Was first banks gave loans to individuals. So I give a loan to Coleman. What I'm taking on is as the banker, I'm taking on a lot of idiosyncratic risk. Right. Coleman can lose his job. You can be in a great neighborhood, in a great house, but he could lose your job or just default. So I've got a lot of idiosyncratic risk as a bank. Well, what if I decided, hey, I'm going to give money to Coleman, but I'm going to spread my risk to 10 other people in your neighborhood and then 10 other bankers come and give money to people in your neighborhood as well. Now I've diversified my risk and I've reduced the idiosyncratic risk of one mortgage going bad. So now I'm more willing to lend and play in the market then the secondary market develops. Like I've got these mortgages to Coleman and his friends. If I need money as a bank or I want to raise money as a bank, or I want to diversify my risk even further. Can I just sell them on a national market to other banks? They can come in, they can buy up some of that risk and they're also diversifying their risk so the market runs better. Government says so 1938 they create Fannie Mae. In 1970 they create Freddie Mac. Those are big government sponsored enterprises that are buying mortgages to create liquidity for banks who can then lend it on to other people. But both of those agencies, as big as they are, and they were deploying hundreds of billions of dollars at the top of the market, 6 to $700 billion in 2007, 2008, they're buyers, but they're not making. They're not in the business of buying bad loans or making bad loans. They're looking for high quality loans. Like did the bank do their underwriting? Have they really diversified their risk? Is Coleman a good credit risk? Okay, if so, I will take that risk off of the bank's balance sheet. Let the bank spend more money on it, on the market. Beginning in 1992, these government sponsored agencies got a directive from this congressional law, the 1992 law. And the law was you have to spend 30% of your Fannie Mae and Freddie Mac. Buying has got to go into these middle and low income neighborhoods. So they put a quota on the housing market. So imagine if, you know, let's take the NBA as an example. What if, what if you said to NBA teams you have to start one of your five players who is 5 foot 8 or below. I'm picking for me.
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Host (Interviewer)
I could finally live out my dream of being on the Brooklyn Nets.
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Iman Virjee (Guest, Author and Finance Expert)
Well, that's, that's one way to. That's. They will definitely be.
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Host (Interviewer)
I support that law of mine. I don't know, you seem like you're about to criticize this law. I'm, I totally love it.
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Iman Virjee (Guest, Author and Finance Expert)
There's a good reason for the law. If you say 5, 8 is the average height of an American man and so let's get at least one starter, you will probably create opportunities for. You'll find a spud Web or Nate Robinson or Nate Robertson who's maybe. Is he 5, 8 or is he about, about. There will be players like that that can start and maybe didn't get a chance to start before. And that's all good. And you also ensure that, hey, we don't want discrimination against short people. We want to at least give them an opportunity. So. Okay. But then what happened was in the mid-90s, they soon ran out of these highly qualified loans going to people who were below or average income. So there are only so many Nate Robertsons that you can pull into the game. Right, right. So then they had to begin to stretch. Then the quotas went up. By 1996, they said 40% of Fannie and Freddie purchase loans have to go into these low and middle income neighborhoods or houses.
- [29:53]
Host (Interviewer)
And these, these policies are justified in the name of helping the poor, right? Yeah, Helping the poor, helping minorities, etc.
- [30:01]
Iman Virjee (Guest, Author and Finance Expert)
Yes, I think yes to both. So Barney Frank would have said poor people, people with below average incomes should be able to, you know, live in
- [30:10]
Host (Interviewer)
home and live the American dream and so forth.
- [30:13]
Iman Virjee (Guest, Author and Finance Expert)
Yeah, that's right. And, and banks shouldn't be discriminating against those people. So, you know, we should, we should ensure that everyone's got a chance to, to have a loan and we shouldn't sacrifice underwriting quality. Uh, I don't think that was the intention of the law. But, but you can imagine, like just if the NBA said you got to start somebody at 5, 8 or below, but make sure they're really, really good because you still got to play to win. Coleman, at a certain point, the team's going to be like, okay, I could probably find one of those people. I'm not sure I can. You know, I'm not sure I can find two, and I'm not sure they can start every game.
- [30:44]
Host (Interviewer)
Like, the assumption there also is that they're the, the, the, the teams aren't already looking. That's for the occasional gem there. Like, that's right. The Knicks did find Nick Nate Robinson and they did all by themselves and Spud Web and so forth.
- [30:58]
Iman Virjee (Guest, Author and Finance Expert)
But there is some assumption that maybe the markets don't work effectively and that banks, left to their own devices will, you know, will only get.
- [31:05]
Host (Interviewer)
Do you think that was true to any extent?
- [31:07]
Iman Virjee (Guest, Author and Finance Expert)
I don't know that there's a lot of evidence of that. If you look at the 1960s and 70s, I think you can probably justify that argument that banks would. Banks were very selective in terms of who they lent to. It was very, it was exceedingly difficult to get a loan unless it came from. Unless you, unless they could check the box on certain very easy to understand metrics.
- [31:28]
Host (Interviewer)
It was probably a lot of racial discrimination as well.
- [31:30]
Iman Virjee (Guest, Author and Finance Expert)
There, there almost certainly was.
- [31:32]
Host (Interviewer)
60s.
- [31:32]
Iman Virjee (Guest, Author and Finance Expert)
Yeah, yeah, I'm sure there was. I'm not, I wouldn't say I'm an expert on that, but I could imagine certainly coming out of the 50s and 60s, there would have been racial discrimination. Just even based on what neighborhood you were, you know, you were in, is the collateral high quality? But they would look at loan to value ratio, they would look at your employment history, they would look at your credit rating, and then they would look at things like what's your income? Like what is your income to, you know, what is the ratio of the income you're bringing, you're bringing in to the debt payments that you're making, essentially your income to debt ratio. And so, you know, all those would be factors that would go into the analysis. In the 1980s, when banks were slow to lend, we had a lot of innovation in high yield securities and a lot of that was in the mortgage market. And so there were innovators and bankers who would come in and would lend to people at higher interest rates given the higher risk. But they would. It became a much more inclusive market in the 1980s. And if you read Liars Poker, you know that that's where all the fun happens at, at Stalin Brothers. It's the mortgage backed securities market. So a lot of those inefficiencies were going away because of the market. Well, the bank puts quotas to go even further with Fannie and Freddie. And the quotas begin at 30%, they go to 40%. They were 50% by 1999. They were 56% by 2007 under George Bush. So it's a bipartisan problem with, with two presidents, Clinton and Bush and their respective Congresses pushing the quotas higher and higher and higher because, you know, they're getting more affordable housing. I guess that's politically popular. At the time, interest rates were super low. So people were making their payments, housing prices were going up. So everyone was happy. But by 2007, housing prices have now escalated to their, you know, to a bubble proportion, especially in certain neighborhoods where the, where you have like, you know, tier, tier three housing that's much, much more expensive than it should be. There's a building boom happening. Then people got into subprime loans. So what happens when you run out of high quality people that you can, you can lend to? The, the, the Spud Web Nate Robertson example. Well, now you got to stretch, you got to find someone that is, you know, five, eight or below who's like a low lmi, a low or middle income family or household. And what if they, what if based on these other metrics, you know, you can't, they don't, they don't want to take your money or you can't get them to qualify? Well, you begin to reach. So what do they begin to do now? Now the bankers began doing things like, well, let's cut your interest rate from 6% to 1.9% now for two years and then it'll kick up to 10% later. Teaser rates. If normally I'd want 10% down, can you give me 5% down? Can you give me 2% down? How about you give me 0% down? How about we do a negative amortizing loan? What's a negative amortizing loan? You say, oh, well, you need $100,000 for a house. Let me lend you $102,000. So I'm actually negative, I'm going to negatively amortize the loan and then you're just going to owe me Interest for a bit and then we'll get to the principal payments later. And Fannie and Freddie Mae were buying these loans in 2004 or 5. Not only were they buying them, they were telling people, I want more loans like this. So Fannie and Freddie May.
- [34:26]
Host (Interviewer)
Was there an incentive, was there incentive simply to comply with the law or did it go beyond that? The actual decision makers there at Fannie
- [34:33]
Iman Virjee (Guest, Author and Finance Expert)
and Freddie, I think they're, well, their incentive, they were, they were pushed by this congressional mandate. So they, they had to put 56% of their money into these LMIs. And so the government quota, the government mandate was, I think their, that was their main incentive. They did tell the government on more than one occasion we're not compromising underwriting standards. So yes, we've relaxed, you know, the, the loan to value ratio. Less. Yes, we've, we've relaxed standards on things like, you know, your debt to income ratio. Yes, we've relaxed some of the other unusual payments like negative amortization and you know, teaser rates. We would not have done that in the 1980s. We're doing it now. Up until 2007 they were representing that they were not sacrificing loan quality and, and they were kind of right. But what was happening was in two, that from 2003 to 2007 you also had a period of strong economic growth and super low interest rates. The rates had fallen to all time lows by 2003. In the 1980s and 90s you might, in the 80s, you might remember, mortgage rates were 8, 9, 10%. The economy was growing and people would pay 10% for a housing loan. In the early to mid 90s, rates came down to 6%, 5%, 6%. Pretty, you know, pretty, pretty affordable, but still relatively high relative to, you know, what happened after 2001. 9, 11 happens. Rates come way down. 2003, 2004, rates stay way down. You get 1 in 2% interest interest rate mortgages. So in that environment, people were making their payments and you didn't have a problem. And Fannie and Freddie I think were feeling like, okay, we've relaxed our standard, we've changed some of our rules, but we haven't relaxed our standards and no one's defaulting, so it's got to be good, right? Well, 2007 it begins to go wrong. The economy begins to slow down. All of a sudden the, the default rates begin to pick up and pick up and pick up. Historically, the subprime bonds were just kind of a new asset class. Had only seen default rates of 2 3, 4% they got a size 40% in 2008. And that I would argue that some of that is bankers dropping the ball and and making bad loans and bad decisions. Some of that may be malevolent, some of that may be, you know, deliberately predatory or or obviously obfuscating loan doc requirements. But I think the reality was the the market disciplines people who do that. You don't have to send them to jail, they will lose money all by themselves. They don't have to go to jail to to learn the consequences. But when you have the government buying up a big chunk of those ill performing loans and you've also got super low interest rates that are disguising a lot of bad behavior, those are also, I'd call it contributory negligence, to use a legal term.
- [37:06]
Podcast Host (Ad Segment)
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- [37:45]
Host (Interviewer)
and want to get past all of
- [37:46]
Podcast Host (Ad Segment)
the noise, this show is for you. Search Wandering Jews with Mijjal and Noam on Spotify, Apple Podcasts or YouTube and Subscribe. Or find the link in the show. Notes if you're like me, you've probably seen a recent headline and wondered, can the President really do that? That's why I recommend checking out the chart topping podcast, you Might Be Right. Hosted by former Tennessee governors from the left and right, Phil Bredesen and Bill Haslam. It's produced by the Baker School of Public Policy and Public affairs at the University of Tennessee. And fun fact, the show's named after Howard Baker's principal. Always remember, the other fellow might be Right. Now that's a quote that conversations with Coleman can get behind on youn Might Be Right. The governors tackle timely policy conversations with political luminaries like Al Gore and Judy Woodruff. If you need a place to start, check out their recent episode on Whether There's Too Much Money in Politics. Political spending enables expression and participation, but at what cost? As we approach the midterms this is a timely and thoughtful discussion featuring Harvard Law School professor Larry Lessig and former Chair of the Federal Election Commission, Brad Smith. Here balance perspectives without the shouting matches found on mainstream news. Follow youw Might be right on Apple Podcasts, Spotify or wherever you get your podcasts and tell them I sent you.
- [39:12]
Host (Interviewer)
So is is one of the causes of of you mentioned that subprime loans were a new asset class and that strikes me as potentially important to understanding bubbles in general. Maybe not everyone, but don't they often involve new asset classes that are poorly understood as a result? Like we don't totally understand crypto's value in the long run because it's new. We don't totally understand subprime mortgages. Or at least we didn't at the time. Tulips were new even in the Dutch case, right? Like there's something that happens when something new is introduced where it's inherently its value is inherently more uncertain. Is that an important component of the story with bubbles or is that just a few cases? I'm cherry picking.
- [39:58]
Iman Virjee (Guest, Author and Finance Expert)
I think it can be not always. I think subprime. It was something that was small and niche and was kind of around in the 80s and 90s, but it was like 10 to 50 billion a year and it was all like you couldn't securitize that stuff. It was a bank makes a risky loan, 99% loan to value ratio or hey, we'll do a teaser rate. That would not have qualified for most securities pools. It wouldn't have qualified for Fannie and Freddie. So they're taking the risk on their own. And maybe Coleman's a good guy and I'm going to make him a one off loan. But it went from being a little niche industry to $600 billion a year in the, in the 2000s because of the it became a really big asset class because the government policy was what I argue tulips was definitely new. But you know, flowers had been around for a long time. Maybe tulips were there was a special scarcity to them and they became a very coveted flower in the 1620s and 1630s in Europe came from Turkey. A lot of the bubbles though are just like around land. The Australian land boom is a perfect example. Like there's nothing new about land, it just became really scarce. Japan was also about land in some cases. It's just, you know, some of these other factors play into a very well known asset.
- [41:03]
Host (Interviewer)
Right. So if it's true that the 2008 financial crash was like the key variable that made it all possible. Was government policy intended charitably to expand housing to the. To the poor?
- [41:19]
Iman Virjee (Guest, Author and Finance Expert)
Yeah.
- [41:21]
Host (Interviewer)
Why is that not the lesson that most Americans are walking around with in their heads from the 2008 financial crash? Is it just that the story has been told through a left wing media bias that doesn't want to come to that conclusion? Is more comfortable sort of blaming greedy Wall street or is there more to the story?
- [41:42]
Iman Virjee (Guest, Author and Finance Expert)
That's a great question. So the question, I guess you would have to. It's entertainingly told. But Michael Lewis and Adam McKay, it's an easy narrative like, oh, the bankers were badly behaving. Whether that's left wing or just entertaining, I don't know. Obama definitely campaigned that in 2008, 2009, and the financial Crisis Inquiry Commission drew that conclusion with the majority of Democrats writing that conclusion. So that became. There was some political hay to be made. If you ask the question why this happened in the US and not in Canada? So Canada also, or Germany, the Netherlands, all these countries want to do affordable housing too. What do they do In Germany, they didn't encourage lending to people who couldn't afford the loans to buy low income housing. What did Germany do? They built housing. The Netherlands, Belgium, they built housing. Canada built housing and then they subsidized people. So, Coleman, you qualify for a housing subsidy, a voucher, I'll give you the money directly, you do what you want. I'm not going to go subsidize JP Morgan to give you a loan or force them through a quota. So this kind of level of understanding of comparative economics, I think looking at the US asking yourself why did it happen in the US and the UK and Ireland and Spain, all of which had similar housing policies, by the way, how come it didn't happen in Germany, China, Japan? I think that's just hard thinking. People really have to work to think about it and have to understand economics a little bit. It's easier, I guess, to tell a story about greedy bankers. It sells more. It's easier to campaign against it. A lot of economists who have looked at it since I think have come to that other conclusion, which is there's more to it than that. But I think a lot of this is just economic literacy among the broader population. And would you take the right lesson away from history, which is what I hope to resolve with my book. I hope everyone reads the book and asks those questions.
- [43:28]
Host (Interviewer)
Yeah, what's the status quo now with respect to quotas on Are there still any quotas on mortgages of that Kind or was that lesson properly learned?
- [43:40]
Iman Virjee (Guest, Author and Finance Expert)
That's a great question. Fannie and Freddie went bankrupt in 2008. In fact, a little known trivia point. What was. Who were the first major institutions to go bankrupt when 2008 happened? Lehman Brothers, Bear Stearns, AIG. Very famous victims, Fannie, Freddie Mac of that group. Who was the first one to declare bankruptcy? Do you know?
- [44:02]
Host (Interviewer)
Bear Stearns or Lehman? I don't know.
- [44:04]
Iman Virjee (Guest, Author and Finance Expert)
Good.
- [44:05]
Host (Interviewer)
My memory.
- [44:05]
Iman Virjee (Guest, Author and Finance Expert)
That's what it is because you've read the big short, that's probably where your head goes. That's what a lot of Americans think. Actually it was Fannie and Freddie. Bear Stearns had a couple of high flying hedge funds that were in March of 2008 that were restructured, didn't go bankrupt. Fannie and Freddie went bankrupt first in September and then Lehman followed about a week later. And then the shit really hit the fan and then the government had to step in to take out to prevent the other catastrophes from happening. But Fannie and Freddie were essentially taken off the market. They went bankrupt, they were privatized. They're still running under government restructuring plans. Now there's discussion now to take them public again. But they're far smaller than they were back then. Today they're between 500 billion and a trillion dollars in purchases, I want to say against. What's the US GDP? 35 trillion. Back then US was 10 trillion in GDP and these guys were spending over a trillion dollars at the top of the market. So they were far bigger relative to the economy at the time. They've relaxed their quotas and they've completely changed how they go about evaluating loans and are I think much stricter in terms of what they scrutinize. But you can imagine, which is a
- [45:08]
Host (Interviewer)
tacit admission that those laws were part of the story.
- [45:13]
Iman Virjee (Guest, Author and Finance Expert)
I think when they declared bankruptcy that was an admission that they weren't quite playing the way they didn't quite have it right at the time. There was congressional testimony where if you asked senators, hey, what percent of all the bad loans in America are being held by Fannie and Freddie? There was congressional testimony in middle of 2008 that was like, oh, none of it. It's all the private sector, isn't it? And it only came out later that when Fannie and Freddie were properly audited, like, oh, they're holding like half. Two thirds of all the bad loans in America in 2009 were on Fannie and Freddie and other agency books, the veterans agency, they were all subsidizing their lending and no One knew in Congress that it was the VA and Fannie and Freddie. This all came out in subsequent testimony. In fact, this came out in 2011 and 12 after the FCIC Commission issued their report, which is a point now that gets made by economists who are thinking about this a bit more clearly. So I think Fannie and Freddie have substantially changed how they operate. Doesn't mean that they're immune from political pressure. I could easily imagine this happening again because people don't always take the correct lesson away.
- [46:17]
Host (Interviewer)
What lesson should we draw from the Great Depression and how it was ended? A what actually ended the Great Depression? I know that's a source of, of controversy among economic historians. And so in your opinion, what ended it? What lessons should we draw?
- [46:34]
Iman Virjee (Guest, Author and Finance Expert)
I don't, I think the mainstream view, I don't know there's much disagreement anymore. In 1929, just to refresh everyone's memory, the economy is coming off of a 9 or 10 year run of like 4% real per capita GDP growth. That is the best decade on record. Like after the 1880s, it's probably the best decade that the US has had on record. A lot of technological change, whether it's the automobile, the assembly line, chemical factory processes. The movies began to talk in talkies, began in 1927, 1928. And a lot of this economic growth happens during the roaring twenties. In 1929 the stock market crashes and we'd had crashes before, stock markets had gone down 10, 20% multiple times. Never created this kind of a massive contraction in economic activity. But between 1929 and 1933, the economy contracts by one third. Unemployment rate peaks at 24, 25% about 1932, 1933 and even 25 years later, a lot of economists didn't really understand, could not have told you there was no consensus as to what was the cause of the Great Depression. Why did this stock market crash cause everything to collapse? And we had this big prolonged decade of economic despair. One of the bestsellers was written by John Kenneth Galbraith called the Great Crash. He wrote in the mid-1950s and he opens it by saying to this day we don't really know what caused the Great Depression. So up until 1950s and Kenneth and Galbraith is like a best selling author, Harvard professor. If anyone knows the answer, it's going to be him. He's like, I don't know. Not only do I not know, nobody knows. In the 1960s there's groundbreaking work from Milton Friedman and his wife Anna. And they eventually won the. No, he eventually wins The Nobel Prize primarily for this research. He writes a book called the Monetary History of the United States. And he points to the money supply. And he goes back and says, here's what happened. Beginning in 1929, the Federal Reserve was kind of new at the time, only about a decade and a half old at the time. They let the money supply contract by about a third. And as they did, it basically took all the economic activity down. Money really matters. Managing the money supply really, really matters. And economists ever since then, I think, have generally said, yeah, he's, he's probably right. How do I know that? Well, one, he won the Nobel Prize doesn't necessarily mean that he's right, but it means that they were coming around to that point of view. Ben Bernanke, who won his own Nobel Prize in 2019 for writing about the Depression and the money supply, was Federal Reserve chairman at Milton Friedman's birthday a few years ago, he said, you know what, Milt? You got it right. I agree. We were the problem. We, the Federal Reserve, are the problem. We'll never do it again, thanks to you. So by then, I think he had a consensus view that the shrinking of the money supply was a, a huge factor.
- [49:11]
Host (Interviewer)
Can you explain why that was a factor?
- [49:14]
Iman Virjee (Guest, Author and Finance Expert)
What's the model? Yeah, it's, it's, it's kind of complicated, but I'll, I'll try to keep it simple. The way that money supply gets created in a banking system is a bank gives you a loan. You, Coleman, a loan. You, you know, you go out and spend that money in the economy, and then you're spending that money on, you know, on items and goods and services. And that money gets circulated in the economy over and over and over again. And so that creates money and liquidity in the economy. Well, let's say the bank stops lending and calls back the loan. So you, Coleman, have to give the money back to the bank. You can no longer spend it on goods and services or your kids or your car or whatever else. And so there's a contraction in the amount of money circulating in the economy. During the Great Depression. What, what had happened was once that, once the, once the economy contracted, banks began pulling in their, their loans. The Federal Reserve actually encouraged them to. They were like, hey, don't have any bad money going out into the economy because, you know, that's, that's not good for the banking system. So banks began to pull their loans back, and that caused people to stop spending and the economy dropped. Then asset prices fell. Stock market, but also the housing market. Banks Are like, oh my God, our collateral homes, you know, real estate, the value of stocks, collateral value is going down. We got to pull back our loans even more. And this creates a cycle of shrinking money supply. And then there was a huge bank run and there were a couple of them in the 1930s. And now all of a sudden people want their money back from banks, so banks have to pull their loans in even more. So the loan portfolio shrank by a dramatic amount. And that just pulls money out of the economy. So Friedman would have said, well, the Federal Reserve should have stepped in at that point and ensured that banks were liquid. That means that they don't pull their loans back. They could have cut interest rates, didn't do that. And they just created this deflationary spiral by allowing collateral values to drop and banks to pull in money. And that's just a cycle. It's very, very hard to get out of. I think most people would now agree. John Maynard Keynes recommended. I think people would agree. What broke the cycle in 1936 was there was a reflation of the money supply. The US Comes off the gold standard, which forces you to keep your money very, very tight. Again, technical reasons, we don't have to go into. But when you're on a gold standard, you can't just print money willy nilly. You have to keep, you have to, you have to. You know, if Coleman comes in my bank and says, I want, Hey, I want a, I want, I want, I've got a, here's a bunch of cash. I want gold, or I want gold and I want a bunch of cash, I have to be able to honor that commitment. So if I print a bunch of money and all of a sudden Coleman comes at me with all that money and says, I want gold. Well, I better have gold enough to back my currency. So the US comes off the gold standard, 1932, 1933, and at that point they can print more money and they can lower interest rates and they reflate the currency. And then John Maynard Keynes says, you should spend a lot of money on the deficit in order to push the economy forward. Kind of countercyclical. When the economy is shrinking, government should step in and spend. They do that around World War II. They resisted initially in 1836, 37, but 39, the war comes along and it's all bets are off. And then it starts spending money, reflating the currency. And the combination of those two things gets the economy moving again. So I think that's sort of what caused it, and that's what got us out one last point, which I think is kind of my predisposition, although I think Friedman is largely right. There was a big tax increase in 1932. Calvin Coolidge had cut taxes from the end of World War I from up to 60% at one point down to 25%. Those tax cuts really helped to stimulate the economy and move it forward. Kind of a supply side argument before supply side economics was a thing. Under Hoover. Tax rates went back up from 25 to 63% in 1932. And then by 1933 they were at 79%. And when you increase taxes, I think anyone today would say if you increase taxes from 25 to 79% in a recession, well, you're bound to have a, that's bound to be bad for the economy. I think all economists, left wing, right wing and centrist would now agree that was, that had to be a contributing factor as well.
- [53:02]
Host (Interviewer)
So they just didn't understand that in a massive tax increase at a time of decreased economic activity, which seemed, which is kind of obvious today.
- [53:09]
Iman Virjee (Guest, Author and Finance Expert)
You say that now because it's obvious you got the benefit 100 years.
- [53:13]
Host (Interviewer)
That's how it became obvious.
- [53:14]
Iman Virjee (Guest, Author and Finance Expert)
That's how it became obvious. And the money supply thing would ultimately be obvious until at that time though it was not obvious to people at the time.
- [53:21]
Host (Interviewer)
Right. Okay, so is AI a bubble?
- [53:27]
Iman Virjee (Guest, Author and Finance Expert)
I would say no. Let's go back and remind ourselves what it's the definition of a bubble. It's a big run up in asset values that then all goes away. So what you're asking is all that value created in OpenAI anthropic Google, is that all going to go to, you know, is that all going to go away in the next year or two years? So a couple of facts. Most of the AI spend right now is coming from four really big hyperscalers. Okay, It's Meta, it's Microsoft, it's, it's Alphabet, it's Amazon. These are very profitable companies. They're all kicking off cash flow. At the end of last year, these Companies collectively had 260 billion in cash and cash reserves on their balance sheets. A lot of this is financed with equity. The stock market today as we sit here is trading at about 20 or 21 times next year's earnings EPS. This is the S&P 500. The hyperscalers are low 20s. Google's at 15. Nvidia's like 15, 16 times price earnings ratio. Okay, let's compare this to 1999. The price earnings ratio of the NASDAQ 100 peaked at 73. The company in the middle of everything then was Cisco. It's Nvidia now. Nvidia is a profitable cash flow positive company. They're going to buy back probably $100 billion of stock in the next couple of years. They just authorized an $80 billion buyback I think a week ago. The company middle of everything then was Cisco. Cisco, they were building the routers for the Internet and The network switches. 200 times price earnings ratio in, in 99 and 2000 they lost money. In 2001 they were not selling to well capitalized hyperscalers. They were selling to mostly telecoms. Global Crossing, Quest Communications, WorldCom, Enron. We thought the telecoms were profitable at the time. It turns out they weren't. And they ended up going through accounting frauds and scandals and restated earnings. And when all the dust cleared, they were also money losing. So you had this massively valued company, Cisco, selling to primarily money losing companies. And that was the Telecom bubble of 2000, 2001. Very, very different from where we are today. Just the valuation environment's different. And so that would suggest to me this is not the thing that bubbles are made of. One other really important point, and this is distinct, I think from the 99 bubble and also the 1845 railway boom. In 1845 we had a railway bubble because people thought railways would change the world. They did.
- [55:55]
Podcast Host (Ad Segment)
Correct.
- [55:56]
Iman Virjee (Guest, Author and Finance Expert)
They thought the profits would come in the next three to seven years. They didn't. But they built a lot of railway in advance of demand. So it was a build out of a new technology in advance of the demand really materializing. They thought people would take the railways that would go from transporting cargo to passengers and the railway revenues will increase dramatically in the next three to seven years. Well, it turned out between 1845 and 1850, railway revenue doubled and it doubled again from 1850 to 1859. So you're like, how can that be a bubble? Well, they spent so much money that even that doubling and doubling of revenue didn't justify the investment. And that caused a market crash. In 99 they were laying so much dark fiber, basically fiber optic network cable that connected people through broadband. But it wasn't lit up by demand. Internet demand was rapidly increasing, but they built so far ahead of it that 99% of all the fiber laid by like 99, 2000 was dark, hadn't been lit up.
- [56:50]
Host (Interviewer)
What's the probability that data centers are like the railways of today? Like it's a good investment, but they're doing, they're going too Fast.
- [56:59]
Iman Virjee (Guest, Author and Finance Expert)
I think every single. So this feels more like it's demand driven and the constraint is supply. Now, meaning if every single GPU that Nvidia rolls off the assembly line metaphorically lights up the next day, it's not like they're laying dark fiber or building railways that, you know, no one is using and then thinking, if we build it, they will come. They're already here. They're building what people want. So this feels like there's real demand. And the demand is coming from OpenAI and anthropic, as you said, but also from Google and from Facebook and from lots of other folks who are just now figuring out the use cases for it. So I think those are three reasons why it doesn't feel like a bubble. The valuations are different. I think it's. It's demand driven, not supply driven. And then, you know, then I think just a. Just the overall business, the technology, the value of it is incredible. There are a lot of things that AI is going to enable us to do that we haven't yet figured out, but that will leave a lasting and generally positive impact in what we do. So it doesn't feel like we're in a bubble at that level, I will say there's a very good possibility the market will go down by 20% next year, and OpenAI or Anthropic or one or the other or both may not be worth a trillion dollars. So there'll be lots of companies that don't make it and lots of, you know, individual idiosyncratic losers, but that's not quite the same thing as being in a, you know, in a systematic bubble.
- [58:17]
Host (Interviewer)
All right, Aman Virgie, thank you so much for coming on my show.
- [58:20]
Iman Virjee (Guest, Author and Finance Expert)
Okay. Thank you for having me. Had a, had a good time.