How to make sense of today’s market

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JEFF BERMAN: Hey, folks, Jeff Berman here. This week we are sharing a conversation I had recently with Andrew Ross Sorkin at our Masters of Scale Summit in San Francisco. Andrew is truly a brilliant journalist whose work appears in the New York Times and on CNBC. He’s the author of the bestselling book about the 2008 financial crisis, “Too Big to Fail.” His new book is called “1929,” and it is an incredibly well-researched history of that year’s stock market crash, chock-full of parallels and cautionary tales for today’s economy. I am so grateful he joined us on stage for this conversation.

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Andrew shared that he had an interview where the person you were sitting across from said, “Throw him as hard as you can.”

ANDREW ROSS SORKIN: I was standing in the back of the stage and a billionaire who you all know looked at me and said, “Throw it as hard as you can.” And I looked at him and thought, what is he doing? Is this some way to screw with me to get me off my game? I didn’t really know what was happening. We do the interview. I try to throw a couple balls as hard as I can. Though, I, by the way, prefer a tennis rally. I always think we all like to watch the ball go back and forth. You want to see whether they can run and get the ball and hit it back. But, anyway, we’re backstage afterwards, and I look at him and I go, “Why did you say that? Because most people say, take it easy on me. Don’t ask a hard question. And he looked at me and he said, “Because if you throw it underhand, both of us lose.” And I thought it was the smartest thing.

BERMAN: And everyone here loses.

SORKIN: Everybody here loses.

Copy LinkParallels between 1929 and today’s economic climate

BERMAN: So based on the research you’ve done about the 1920s, what led up to the crash, what created the crash, are we heading for a stock market crash and a second Great Depression? You asked. I mean, that’s my slice.

SORKIN: Okay. So the truth is we are right now, there is no question, and I will say when I started working on this, I did not intend to write a book that mirrored or paralleled today. There is no question to me now, and I hate to say this, that we are directionally in a bubble of some sort. When it’s going to pop, I mean, we just talked about AI. It’s a huge, amazing force in our economy. I’m excited about it, but along the way, something bad is going to happen. And I think that there’s a bunch of forces at play right now that will probably set us up for a massive hiccup. Now, will that hiccup look like 1929? Will it look like 1999? Will it look like 2008? I don’t know. But I do think that there are a number of parallels today which we can get into that suggest something is not right.

BERMAN: Okay. So let’s lay the foundation for it then. Let’s go. Take us back to the late 1920s. And by the way, the book is extraordinarily researched. It is, especially the second half, an absolute page turner.

SORKIN: Thank you.

BERMAN: You are going to love this book and get a ton out of it. But take us back to the 1920s. What is happening that mirrors today where history might not just be rhyming but repeating?

SORKIN: Okay. So here’s the thing, and I didn’t know any of this really before I began this book. I think I knew that something very bad happened in 1929, but I figured I needed to understand who the people were and what they were saying and what was really happening. So the first thing to know about the 1920s was this remarkable period of technological advancement, actually somewhat similar in a sort of AI-ish way to now, but in the context of radio, telecommunications (by the way, the hot stock back then was RCA, ticker symbol was radio. It was like the meme stock would’ve been like Nvidia basically.)

And it was also a period of time where people took on debt for the first time in America ever. So prior to 1919, taking on credit, I mean this idea of a credit card today, all of that was almost a moral sin. Nobody did that. And it wasn’t until General Motors came along and said, we got to sell more cars.  How are we going to do that? We’re going to start lending people money. And people started to do it. And then Sears Roebuck said, oh my goodness, they’re doing that. We can offer credit as well. 

And then a guy named Charlie Mitchell, Sunshine Charlie, ran a bank called National City, turned into Citigroup, came up with this idea we’re going to start lending people money so they can buy stocks, and brokerage houses — across the country they started to emerge on the corners of streets the way you see Starbucks today. And you could literally walk into one of these brokerages, put down a dollar, and they would lend you $10. And for a very nice stretch of time, it was like free money. In 1928, the stock market was up 48%. Between the beginning of 1928 and September of 1929, the stock market was up 90%. And so if you were completely and utterly leveraged, it was this unbelievable thing. And all of this was done under the umbrella, this idea that they were going to democratize finance.

BERMAN: We’re hearing that in other places.

SORKIN: We’re hearing that a lot.

BERMAN: Yeah.

SORKIN: And it was this idea that the elites had gotten their fair share, but now we got to give everybody else the opportunity at the lottery ticket. And I think you’re hearing that a lot today in the context of, look, we just had a bill just passed that’s going to allow private equity, venture capital, private credit to show up in our 401K plans. This is all happening. Crypto obviously, and so many other sort of component parts, I think, are very reflective of that moment.

Copy LinkThe connection between speculation and innovation

BERMAN: So you’re also the “Too Big to Fail” guy.

SORKIN: Yeah.

BERMAN: So do we not learn our lessons here? What is it about us that we’re not looking at history and going, gosh, this doesn’t end well given we know?

SORKIN: Look, the human condition is that we all want more. There’s a great line, “Wall Street,” two, the movie, which was not nearly as good as “Wall Street” one. There’s a great line where Douglas looks at – was it Shia LeBeouf – and says something like, “What’s your number?” And he looks at him and he says, “more.” And I think that that’s reflective of what we all want. We all want more. And the question is, what are the guardrails? How much speculation is good speculation? And when you layer on credit and debt, what happens? That, by the way, unfortunately, is the magic ingredient of both a fabulous sort of growth period, and what often times ends it badly. It’s the accelerant. It’s the match that lights the fire. You could have all the bad actors on stage doing all the bad things you could possibly imagine, but that is the thing that sets you back. In 1929, it was margin loans. People were buying stock and they just had way too much debt. In 2008, you’d argue it was subprime loans. The question now: is it the leverage in the system around the AI ecosystem?

And, yes, it looks like whether it’s Meta or Google, they’re using cash, meaning to buy the chips in the data system. But if you look at so many of these deals now to build these data centers, the energy companies, the construction companies, the real estate companies, that is a complete leveraged mess. And if you look even at some of the deals that Nvidia just made with OpenAI or OpenAI made with AMD, they’re almost circular deals with money that’s literally being made out of nothing. So if you think about how the AMD deal worked, that was just announced earlier this week, you had AMD selling chips to OpenAI. OpenAI technically can’t really afford to buy the chips. If you actually just look, they don’t have enough cash to buy the chips, technically. They take a warrant, a stake in AMD. They know that if they announce this deal, the stock of AMD is going to go up, so now the warrants are worth something, and now you can effectively sell those warrants or take a loan against those warrants, and now you have cash to buy the chips.

BERMAN: Andrew, I want you to imagine that you’re temporarily not a journalist. There’s no ethical issues.

SORKIN: Okay.

BERMAN: And…

SORKIN: Here we go.

BERMAN:  when the Treasury secretary and Commerce secretary and perhaps the president call you up and say, boy, you seem to know a lot about this, what should we do?

SORKIN: Well, I think that the answer is, and you want some semblance of speculation in the market. So I just want to say straight up, here we are in one of the greatest cities in the country, and it’s a city that’s about innovation. And no innovation has ever happened without some form of speculation. Speculation is not the evil twin of innovation, but they are connected. They’re like Siamese twins to some degree. You can’t have one without the other. Elon Musk would not exist. SpaceX would not exist. Tesla would not exist without somebody deciding to speculate on something that seemed completely and utterly crazy. So you want that. However, you don’t want it to go too far. So my anxiety today is about a lot of the things that we’re doing to take the guardrails off. So there’s a move afoot. You’ve probably read about the President’s announced plans, he doesn’t believe that public corporations, for example, should have to have quarterly earnings declared, he wants to do it twice a year. More transparency to me is better, typically. That’s probably not the best idea. I’d say “Mr. President, this is not going to help the situation.”

BERMAN: I mean, we could argue we do need companies to think on longer horizons than a quarter a quarter, right?

SORKIN: A hundred percent. And I get the argument. If you’re a CEO, you don’t want to waste the time. You don’t want to waste the money. You don’t want to waste the energy. But one of the things that has kept us from going totally over the edge, and by the way, there was no SEC in 1929. None of these rules existed in 1929. That’s one of the reasons I think we had the deepest recession, if you will, or depression we’ve ever had. And so the argument I would make is, you have to keep some of those guardrails around. One of the things we’re doing right now is we’re saying we want the public to have access to private investments. Well, private investments are great, and it’s true. If you had access to shares of Uber or shares of Facebook before they went public, you would’ve made a fortune. The conundrum is that there’s not the same kind of disclosures that are required with those private companies.

And if you look at most venture capital firms right now, I would argue there’s a bit of a mark debate believe situation that goes on every day when you get the numbers; it’s not a real market yet. And it’s not that it’s all going to go wrong, it’s that charlatans and frauds and others emerge. And the question is: how much protection do we want? Now it’s interesting, some people say to me, “Andrew, don’t protect me. And by the way, if you’re trying to protect me, what you’re really doing is you’re protecting the man.” I mean, that’s the argument. You’re protecting the man ’cause I want a shot. For years, we had something called an accredited investor rule. You had to have a million bucks to invest in some of these things because the argument was we didn’t want people who couldn’t afford to lose to lose. Is that the right argument? I don’t know. But I think we have to start thinking about this and talking about it because this is not the conversation that’s happening in America right now.

BERMAN: More with Andrew Ross Sorkin in just a minute. 

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Welcome back to Masters of Scale. You can find this conversation and more on our YouTube channel.

Copy LinkThe rise of state capitalism in the U.S. economy

One of the other things that’s happening in our economy is, I think, unprecedented in American history. We are seeing companies kicking a share of profits to the federal government outside of the normal tax code. We are seeing the federal government take stakes in companies. You did a recent long piece on this and then an episode of “The Daily” talking about this. 

How do you think about, what do you want to call it, state capitalism or some other phrase? How do you think about what’s happening on that front, particularly as we look at the broader economy? I want to come to specific companies in a minute.

SORKIN: So I don’t think it’s unprecedented because it happens in Russia and China every day. It’s unprecedented here. And I’m surprised that more people are not raising their hand and saying, hello, what’s happening here? This is a little crazy. I think that in the short term, maybe it’s not a problem. In the long term, the idea of a free market and the capitalism I think we’ve all enjoyed, having the government, I think pick winners and losers, this idea of industrial policy, nobody’s doing these deals genuinely because they want to. They’re doing these deals because they’re being coerced into doing them. Let’s just call a spade a spade. That is what is happening. And I don’t know what that portends longer term in this country. Now, by the way, the flip side is China’s been doing this for a very long time, and by the way, it’s been working for them. Most of the time in our country when we’ve tried things like this, it hasn’t worked.

BERMAN: Is there an example of where we’ve tried it?

SORKIN: Well, you could argue, I mean, look, the Obama administration used to get a lot of criticism for giving money to Solyndra, for example. Or there have been these instances where we have subsidized EV plug-in stations across the country. That was a terrible waste of money. So there’s been lots of things and where we’ve had a piece of it. We historically haven’t taken pieces of companies unless it was after a financial crisis. So we did this with the banks, and by the way, that did work. We did this with General Motors, and that did work to some degree, but we haven’t done it just because we want some. There’s a bit of a mafioso kind of thing like, hey, give me some, otherwise if you don’t give me some, we’re not going to let you do X, Y, Z.

BERMAN: So let me just play devil’s advocate for a moment because certainly I think it’s undeniable. The president himself would say, some of this has been coercive and proudly say so. But one could argue that Jensen is like, “I want access to the Chinese market. There are legitimate reasons for us not to have it. There are legitimate reasons for us to have it. Boy, if I just sweeten the pot a little bit, I can get access to the market. So Mr. President, what if we kick 15% of our profits to the federal government? Everyone wins, and we’ll only sell a lower quality of chip to China.” Is that coercive or is that a CEO simply playing the system?

SORKIN: Oh no. He is playing a system, but I’m arguing that the system is not right. And what I’m suggesting is if we have a national security concern, we should make the decision based on that, not because we’re getting paid off as the taxpayer to do something that we would otherwise not do. That to me is the fundamental question here about all of these transactions. Are these deals that we would otherwise do or not do? And here’s where it gets complicated. Over time, so now we, all of us in this room, we own a stake in Intel. We should be rooting for Intel.

In truth, we should be rooting hopefully for all American companies, I would like to think, but we now actually need to all root a little bit more for Intel. Okay. So in the past, if Intel wanted to do a merger, let’s say, with another company that historically the Department of Justice and regulators would look at askance and say, “We don’t want that much concentration. That’s not good for consumers.” Well, how does that decision now change? It may be bad for consumers, but may be good for us. These are the kinds of things that I don’t think, unfortunately, we’re talking about in terms of what the true implication of these things could be.

BERMAN: The flip side, it was difficult for me to watch Tim Cook go into the White House and hand a gift to the president or to see Mark Zuckerberg at a dinner with tech leaders whispering to the president, I didn’t know what number you wanted me to say.

SORKIN: Right. You say it was difficult?

BERMAN: Difficult.

SORKIN: Yeah. That’s polite.

BERMAN: I’m choosing my words carefully.

SORKIN: Yes.

BERMAN: Yeah. Thank you. I’m being very careful here.

SORKIN: See, by the way, we’re all being very careful now. That’s the other thing. We’re all being a little too careful probably, but maybe not.

Copy LinkShould business leaders make deals with the government?

BERMAN: I’m curious about your perspective on two things, and I want to go micro then macro. Micro, you’re the CEO of a company that has the opportunity to play to these tendencies of this administration. But you know that long-term, probably bad for the overall economy and for capitalism. It feels like a collective action problem almost. If you’re the one who doesn’t do it, your competition may do it, and they win. What’s a CEO to do right now, particularly when they’re in a regulated industry?

SORKIN: Okay. So this is where I will probably break with the other comments that I made. I don’t actually begrudge Tim Cook or Jensen or any of the other leaders of these companies that are making deals with the government, even though I think these deals are not in the necessary long-term interest of the country. Because the truth is, if you were running a business today and you’re trying to play a long-term game, there’s very little advantage in raising your hand right this moment politically and saying, “I don’t like what’s happening here” because what exactly can you change in this moment? Meaning the politics of this country are clearly almost lopsided in one way in Washington. Nothing is going to be adjusted as a result of you raising your hand on your own. Maybe the politics of the country change after the midterms. I don’t know. But I think that raising your hand now only means you’re likely to get slaughtered tomorrow.

And so if you’re trying to play for later, this doesn’t help. The question is, when do you raise your hand, if you don’t like what’s happening? And I think that is a very big question. I think there’s a lot of people who say, “Well, you need to raise your hand now because if you don’t raise your hand now, by the time you want to raise your hand, you won’t be able to.” I don’t know if that’s true, but I am very cognizant of, look, we’re living in a world of trade-offs. Everything is a trade-off. And I try in my own way as a journalist to meet people where they are, to put myself in their shoes. And I hope that we’re all cognizant of what those trade-offs look like.

BERMAN: You referenced Russia and China. I want to reference Hungary because it is a softer form of autocracy effectively. But Viktor Orban has picked his winners, and the winners do very well, and their competition gets eliminated or swallowed up by the winners. And so in my mind, democracy and capitalism are inextricably intertwined. You cannot have a free market without democracy, small d, Democrat. Am I right or am I wrong about that?

SORKIN: I think generally you’re right about it, but then I, look, again, it’s a very strange thing to say. I look at China, and China’s been one heck of a success story, and they’ve done it a completely different way, and so you tell me where things really are. I don’t know long-term, and by the way, Reid was talking about AI. AI could change all of this. That’s the other piece of this that I just don’t know. Are we on the cusp of something that’s so revolutionary that it upends even the way we think about capitalism in a free market?

BERMAN: Yeah. I want to go back to the crash and the depression because coming out of the Great Depression, we saw unprecedented social change in America. When you look at the history and you look at today, what gives you optimism about the next phase of this future that we’re going to be building?

SORKIN: Well, look, I do think, and maybe it’s Pollyanna to say, but I think that, for the most part, when we do have these sort of inflections, amazing things come out of it. By the way, look, at the end of ’99. You could say there was a crash, a terrible thing happened, and then an explosion. So it’s not to say that we’re going to go off the cliff and then we end up at the bottom of some ravine somewhere. I do think we do learn our lessons. It’s just a little bit more painful than we’d like the lessons to be. That’s really where I land, and I’m optimistic that we, as a collective, have found ways, almost invariably. There is a mother of invention that happens in these moments, and I think we will find our way to the other side of the other side of the cliff, if you will.

Copy LinkThe evolving role of journalism in economic discourse

BERMAN: I want to close on this. One of the things that I was struck by in the book was the relationship between journalists and the barons of the era. And so putting your journalist hat back on, how’s journalism doing covering what’s happening? That’s my sliced backhand.

SORKIN: Yeah, yeah, yeah, yeah, yeah, yeah. Look, I actually think right now that journalism is doing a pretty good job. I do. And I would say journalism, capital J, but big tent, I think we now know more than we’ve ever known before. I really do believe that. I know that everybody thinks that journalism and legacy journalism is dying, and maybe it is. I don’t think that’s true, but I think we now have more inputs than we’ve ever had before in real time. I think it’s more complicated. I think the other thing that’s a component part of journalism and our society that’s shifted is that everybody in this room has become their own journalist. This is actually, to me, the biggest shift that’s taken place over the last decade or two, which is to say, 20 years ago, we all went to one or two or three different media sources, and that was our diet of how we learned about what was going on. And I think we believed what we were reading. Today, it’s very different.

We might go to five or six or seven or 10 different sources and knowingly go to places and to writers and to speakers and to other sources that we know may not be accurate or at least completely accurate, but we think that there’s a grain of truth in it, and we’re all searching for our own truth. Now, that’s a complicated situation, and so I think that there’s journalism which is trying to get at truth, but then there’s a public that has almost shifted the way it thinks about that truth. And I think that ultimately right now is the greatest challenge that at least what I’ve done historically, professionally faces.

BERMAN: The book is “1929.”

SORKIN: Thanks, everybody.

BERMAN:  Thanks again to Andrew Ross Sorkin for joining us. Again the book is “1929,” and it’s available everywhere you find books. Make sure you check out Masters of Scale on YouTube to watch more videos from our fantastic speakers and really riveting conversations at our summit.