Is This The Next Big Crisis For Markets And Global Economy?

0:00What's going on, guys? Today, I've got a very special treat for you. I'm sitting down with the business and finance editor at Semaphore, Liz Hoffman. In this conversation, we talk about what's going on in private credit, prediction markets, how the Pentagon is trying to hire investment bankers, and what some of these things are going to mean for your portfolio. She also answers the question as to whether she's worried about artificial intelligence and it taking her job, which I thought was a very interesting answer. Liz recently launched a brand new show called Compound Interest, where she's having long-form conversations with great people, and I think that you all will be very impressed by her.

0:29Please remember to subscribe to our YouTube channel and here's my conversation with Liz Hoffman.

0:45Alright Liz, let's talk about private credit. It feels like everyone was all hot on private credit. All of a sudden now there's cracks in the wall. It seems like a tsunami of fears taken over and paralyzed Wall Street. What's going on here? Should people actually be scared about this? Or is this all just a bunch of headlines and fear mongering that's not going to show up actually in the market?

1:03Liz Hoffman:I think the problems are real. I mean, what you are seeing is a slightly slow moving run on the bank, right? You can think of retail investors who own private, you know, shares in private credit funds as depositors at a bank. And they have decided that they want their money out and they want it kind of indiscriminately, a couple of firms at the heart of it. But this is obviously going to spread. But the way these things are set up is basically you have to get in line and once a quarter, they'll give you 5 % of your money back. And so we are seeing a slow moving run on the bank. Think about what took down Silicon Valley Bank in like two days is playing out kind of at quarterly intervals until people calm down.

1:39Liz Hoffman:And I don't see a lot of evidence that they are calming down. I think some of the issues, like you can think of two issues here, right? Like, and same with the bank. You've got credit risk. Did the bank, or in this case, the private credit fund, make a bunch of stupid loans that are going to go bad? We don't know. Clearly, like, they got a little drunk for a while and we're lending to companies that are particularly now like these big leverage software companies that are having problems. And then you've got liquidity risk, which is do they have enough cash to give it back to people who want it?

2:07Liz Hoffman:And the answer there is clearly no. They're not designed to. But that is the situation that we are in. And I don't see it getting a ton better for these firms that are right at the eye of the storm. So on one hand, the structure is working in terms of that interval component is preventing the run on the bank, right? It may be a slow moving one, but at least it is somewhat working there. But I think the second order of fact here is like, well, if the loans are bad, does that mean that the companies are bad? And so it's not just private credit. it's actually private equity is like the big elephant that is going to get shot next.

2:41Liz Hoffman:Totally. I mean, I had a piece on this like two weeks ago. Like if you are if you think there are problems in private credit and clearly people do, then you should be really worried about private equity because like not to dumb it down, if you think there's a problem in the private capital stack at the top, the people that are getting run on right now have the senior mostly secured piece. So if they're going to lose money on those loans, the equity under them is worth zero dollars. And And I don't think we're talking enough about that. The problem a little bit is like you're talking about sort of product design is that there aren't as many places to express that fear.

3:14Liz Hoffman:Private credit has a lot more of these kind of slightly semi-liquid, publicly tradable sometimes vehicles than private equity does. That said, like Blackstone's got a retail semi-liquid private equity fund, and I don't see like a line out the door of redemptions there. So just as like a practical matter, if you're thinking about financial panics, it is weird for it to start at the top of the structure. And if you think, to your point, there's this big tsunami coming in, well, then you should panic at the ground floor first and not in the penthouse. And that's what's happening now. And so I'm a little confused by it.

3:52Liz Hoffman:But clearly, it is just an emotional phenomenon at this point. Well, I wonder how much of it is, are the companies actually good or not? Now, if the companies are good and they can pay back these loans and like private credit is fine, then naturally that would mean that the people panicking are just like they've lost their minds. They're being irrational. But then you hear like Apollo's John Zito and he's essentially like everything is fake. Everything is made up. There is no reality here. That I don't think strikes confidence in the mind of investors. No, not at all. And look, there are real problems at these companies.

4:27Liz Hoffman:Like, basically, software is like 40 % of private equity buyouts. So you can think of it as 40 % of the credit sitting on top of it. Those companies have real problems. And they had real problems, by the way, before AI, like software has been kind of uninvestable for a couple of years for different reasons. They are massively over leveraged. You know, one thing to look at, there were these loans, a lot of these loans were made on a revenue basis, right? Most lenders underwrite to profits and cash flow. They were made as these recurring revenue. And the idea was, all right, like, we'll give you some money.

5:01Liz Hoffman:We'll lend you money. Go grow. Go invest. Go hire. Go ship code. And then in, like, three years, we will flip it to a more traditional cash flow loan. And then you're going to have to start paying us back. And those loans were like 2021, 2022, a little bit into 2023. And they got to that three-year, like, oops, they did not have profits. And so that is a real sign that the underwriting was, in fact, if not terrible, like really misplaced on this stuff. I don't know. I think, you know, you look at the panic in SaaS, enterprise software in the public markets right now, like clearly very real, also kind of indiscriminate and probably oversold.

5:40Liz Hoffman:These are companies that were trading at 40 times earnings that are now trading at like, I don't know, three, four, five, six times earnings. It's probably somewhere in the middle. But like, that's another indicator. I think those 2021 to three private credit vintages are going to be very bad. The question is also, by the way, The interest they are charging was lower. So they kind of caught that yield on the way up. I think the question now, if you are Blue Owl, is, all right, can you manage the withdrawals? Can you keep your talent? That stock's going to be at$10 for a long time. And then is the 2024, 2025 vintage, where everyone was a little more sober and doing things that were slightly less goofy, is that going to kind of bail you out on the back end?

6:26Liz Hoffman:You know, these are these, you know, loans tend to kind of refinance or reprice every three, four years. So we'll know. The question is, like, are they going to be around to find out? Yeah, it's very fascinating. I talk about finance. The Pentagon wants to hire investment bankers. When I saw this at first, you know, immediately the Internet blows up with like Patagonia Vest or people walking into Venezuela or El Salvador. But it does seem like the government is becoming much more involved in investments in general. Obviously, the White House asset management has now become a thing. You've got this new, I think it's a DFC, which is basically trying to fund things around the world in terms of being strategic with capital and kind of where we look from a geopolitical perspective.

7:10What's your take on the investment bankers? Are they interested in going and doing this because it sounds cool? Or are they just like, hey, I'm not going to get paid nearly as much money as I can make in the private sector. You know, there's no chance I'm going to do that.

7:21Liz Hoffman:Yeah, I mean, it does sound cool. And you're right. There are all these jokes about like the, you know, Pentagon investment banker starter pack. Look, look, I got a lot of emails about that story when we broke it, you know, saying, who can I call on this? And, you know, so I sent him over to the recruiter. But I think, you know, you're right. The I mean, the administration in general, if you look at and it's not totally clear where the money for this is coming from. This may be from the military budget, but they've got like, you know, a couple hundred billion dollars coming in from these trade deals with Japan, Korea.

7:50Liz Hoffman:You know, they're they're probably going to take Fannie and Freddie public. So like that's going to be another chunk of change. It's a little unclear, like who's going to be directing this, but they have a lot of money. And the client here, Donald Trump, like loves doing deals. So we're going to see a lot of deals. The bottleneck for them is like they can't find them. Right. Think about the adverse selection of the kind of people who just call the Pentagon switchboard and say, hello, I have a company, I would love to sell it to you. So they need bankers. And so they are forming, as you said, this economic defense unit and hiring Wall Street investment bankers, particularly those who cover private equity firms, who kind of know what's inside these portfolios and what might be a good fit for, I think they're called the Office of Strategic Capital.

8:33Liz Hoffman:I mean, there's all these kind of slightly goofy acronyms floating around. as you mentioned the um the dfc which i think is the thing that um ben black runs is a little bit you can think of it like a slightly privatized or or financialized version of usa id right which they just gutted which is saying like let's stop giving money away let's think about it like what's the roi on it i don't know is it gonna work like in general the government is bad at picking winners and losers you can go back to the obama administration remember like what a mess that Solyndra deal that the Department of Energy did, they went bad.

9:06Liz Hoffman:It turned into both a financial mess and just a political nightmare. So I don't know. And I will say, I've covered Wall Street for 15 years. Don't discount the desire to serve in public service. It's kind of a strong pull. And then, by the way, the thing the Pentagon is dangling is, A, $200 billion to deploy over three years, which they correctly note is more than you will ever see in your job in the private sector. And like unparalleled access. And you could obviously that is a code word for like connections that you can then go monetize on the back end. Kind of look at what Jared Kushner is doing and his his fundraising right now.

9:45Liz Hoffman:Like having friends in high places is a very monetizable asset when you go back into the private sector. Yeah, you know, it's pretty interesting because, sure, you can go and deploy a lot of capital. You get to put it on your resume. Yes, it would be fun. But I do think that there is this element of like you kind of go to the belly of the beast. Like you get to see how everything works and therefore then when you go back out. But at the same time as they are looking at these opportunities, like the rise of the defense sector is very notable. You know, if you look at obviously the Anderils and the Saronics of the world that are in the private market, I'm a shareholder in Ondas, which is rolling up a bunch of these drone and autonomous type technologies.

10:24But it seems like this is becoming pervasive, where not only do you get the battlefield threat or, you know, kind of the weaponry, at the same time, you're getting the opposite, which is like, hey, we also have to mitigate these threats. And not only on the battlefield, but we need to mitigate them for critical infrastructure for, you know, stadiums or entertainment venues or, you know, public areas. And so you've written quite a bit about this like military industrial financial complex that is building that kind of just seems like the primes, you know, all over again just now with a tech forward focus to it.

10:56Liz Hoffman:Yeah, I mean, right. Go back to the military industrial complex, which, by the way, has become a thing that we know, but it was born out of a warning that Dwight Eisenhower gave on the way out of office to beware this because you end up in this kind of permanent war footing and you have these incredibly vested interests who are incentivized for us to be, you know, at a high level of readiness at all times and start throwing bombs when sometimes diplomacy would probably do the trick. And to that, we've added this financial leg. And, you know, to kind of steel man their argument, you know, the military industrial complex was born to fix problems in the way that we built weapons and procured weapons, that this new piece is fixing a problem in the way that we pay for them.

11:39Liz Hoffman:and you know i was talking to david yulevich who runs the uh kind of america first fund over at andreessen horowitz the other day and and he was like we'll take on that risk like having the government fund advanced r &d for which the roi is like very unclear like that's what we do for a living we underwrite risk i think where i'm skeptical of it is okay if you think we need this stuff and you think that there's a role for the private sector and private capital to play Why does it belong to venture capital? These are guys who have spent their careers building like really light stuff, code, things that scaled infinitely, that have a TAM of a billion, you know, infinite customers, doesn't weigh very much, doesn't touch hardware, doesn't touch people.

12:22Liz Hoffman:You know, studiously avoids Washington. And I think that it's because they like it, that they've had this ideological shift in Silicon Valley. They have been kind of to varied degrees red-pilled and they like it. And so they want to believe that they can be good at it. David actually kind of turned me around a little bit on that and said, well, there's changes in the way that like hardware, yes, used to be untouchable of IVC. But you're thinking of this like very factory assembly line, you know, the robotic factories of the future, like might be a better fit for what we do. But I just think if we're here in 10 years and like, you know, these big companies, these big defense tech companies have not cracked the prime and, you know, like that ecosystem, which there's some things that can be disrupted.

13:05But I think Doge taught us that the federal government is not one of them that we'll all be like, well, yeah, like they kind of had no right to play there.

13:12Liz Hoffman:That's what I'd be watching for. But it is all like interesting. And I think in large part being driven by this ideological shift to the right inside Silicon Valley. Yeah, there's a couple of different components to it, right? I think on the technology side, one, it is a very different way to build technology today and even the business model, right? It used to be kind of this like cost plus model that now all of a sudden the venture capitalists are willing to fund it, but they're willing to fund it because you've got founders who are open to doing this. Interestingly, if you go back in history for venture capital, like they were funding, you know, Apple was building computers in garages and all these things.

13:47So, like, I do think that there's this software to hardware, you know, kind of oscillation that occurs. Yeah. But maybe more interestingly, Anderil, Palantir, maybe you can come up with three or four others. They kind of have become like the new primes. They win these contracts and then they're subbing out different components of these contracts to all of these smaller companies. And so in a weird way, a startup would have a really hard time talking to or interacting or interfacing with, you know, one of the major traditional primes. They much easier can get connected to, interface with, et cetera, a Palantir or an Anduril.

14:22And I don't know if it's a tech thing. I don't know if it's just a network thing, whatever. But it does feel like that has led to an explosion where people are like, hey, I can start a company. I can get a contract, you know, as a sub to a Palantir contract. And that'll put me in business. It'll help me raise more capital. And I'm like, I'm off to the races, right?

14:38Liz Hoffman:Yeah, I think that is right. And, you know, Palantir kind of thinks of itself as a sixth prime. We'll see if, you know, Anderle gets there. I don't know. And then the other question is like, okay, well, if they figure that out and they do crack it and really get one of these, you know, big kind of signature, you know, programs, like life is pretty good on the inside. You wonder how much of that DNA will stick around and that kind of hunger to stick around. But also, like, the primes are in a lot of trouble right now with the president for slow rates of production, too. And, you know, if you're looking for people to move fast and break things, which it would seem that the Pentagon is at the moment, like, they've obviously knocked on the right door.

15:16Liz Hoffman:But again, like, you know, look at look at Doge. Right. There was the sense that like we can we can disrupt this. We can do this better. And like they couldn't. There are things that are just sort of structurally the way they are. And I think we're in like a live experiment to find out if if defense procurement is one of them. Do you think that Doge was successful in identifying things but prevented from fixing them and improving them? Or do you think that Doge was on a fact-finding mission that they just never found the issues that they thought were there? I think that wall of receipts was pretty underwhelming.

15:50Liz Hoffman:I mean part of it is just like the biggest expenses in the federal government you can't touch. They're entitlements. And by the way, they are defense. We spend a ton of money on defense. And so if you're looking for places to save, like, OK, you can gut USAID. You can lay off a lot of people in the department of whatever. OK, like, fine. But they did not touch the deficit, like literally did not make a dent in it. And the federal government is going to spend more money in 2026 than it did in 2025 because it's driven by things like defense, Social Security, Medicare and interest payments. That is where the money goes.

16:24Liz Hoffman:It doesn't generally go to social programs. And if you want to touch those, that's really unpopular because a lot of conservatives are on Medicaid. It's sort of structurally problematic. And I think, I don't know, just watching it captured the arrogance of Silicon Valley. Like, yeah, we have a deficit problem. Would love to fix that. But I think these guys, you know, they correctly have disrupted a lot of things and they have convinced themselves they have a right to do it everywhere. And some things just, you know, are immutable. it's interesting i'd argue that they did disrupt the government if you think about an outsider sitting in the white house the pentagon has been taken over by silicon valley essentially in terms of the people who are making decisions running the technology sectors etc they've diverted a lot of the budget from the traditional primes to the new folks um and so it's this weird dynamic of like maybe the disruption didn't happen via doge right but it happened in all these other ways of like the world has evolved.

17:29And I don't know, like almost on a daily basis, I see something happen that relates to the government. And I'm just like, I couldn't imagine that 20 years ago. Right. It does feel like things have like really changed. Right.

17:40Liz Hoffman:Yeah. Though, I think I would take the other side of that. You said that like the government's been taken over by Silicon Valley. I kind of think Silicon Valley has been taken over by the government. Right. Like, yeah, for sure. Like it's it's the support from that community is perhaps marginally a reason that Donald Trump won and is executing a lot of their agenda. But I think what's interesting to me is like, you know, when you talk about this stuff, AI, defense, energy, these are things that in a different era would not have felt coded politically. They're just important. It's important that we be energy independent.

18:14Liz Hoffman:This administration has taken a view that fossil fuels are the way to do it. I think most people would say we actually need everything, all of the above, and that, you know, gutting solar is like probably a self-inflicted wound on that front. But this is stuff that wouldn't have felt political in a different era. And like, I'm hopeful that one day we'll not. Like, yes, we do need to win on this stuff. We, you know, we're seeing the benefits right now of being energy independent. And I think the, it's become kind of a consensus sort of a bipartisan, the Overton window on China as a threat has massively moved or expanded.

18:47Liz Hoffman:And like, they're right when they say that if we don't build AI, like the world is going to be building on top of a Chinese AI stack. So that's stuff to me that shouldn't feel overly conservative. But when you have, you know, there's been this clip running around of Marc Andreessen, I think, in an interview with Barry Weiss saying that sort of some unnamed Biden administration had sort of told them they were going to nationalize AI and has become this giant boogeyman. I'd like to know who that person was. Like, we've not seen any follow up reporting on that conversation, but it is being sort of framed ideologically and in fact, like, shouldn't.

19:20Yeah, it's very interesting because, you know, one of the things whenever whenever I talk to people about like politics and stuff is most like Trump is basically like a 1990s Democrat, but it's under the Republican flag. Like, right. If you think about like a lot of the policies and stuff, and then obviously whenever the right now says something, they'll go back and they'll find some clip of whether it's Biden or Chuck Schumer or whoever saying the same thing, you know, 20 years ago, China with the deficit spending or the trade deficit type stuff, you know, illegal immigration, whatever. And so I do wonder how much of it is if you normalize over the last 50 years.

19:55Americans have generally felt the same way about a lot of things. It's just that the political parties keep kind of moving around. But most people, they want to live in a safe country. They want to have an opportunity for prosperity. They think that there's certain things that whether it's energy, et cetera, or national security, but also help drive costs down, make things more affordable. And it's almost the political parties are the ones playing hot potato, less about like the electorate. It's just like kind of quote unquote common sense type view on these things.

20:21Liz Hoffman:I think that's mostly true. I do think to kind of go back to the Silicon Valley ethos that, you know, Democrats are, I think, often fairly criticized as being kind of process fetishists. Right. But there's a there's a way that we do things and like less focused on the outcome. And obviously, like this is not like inherently certainly not small C conservative. Donald Trump doesn't care at all about process anywhere. And I think that is sort of what the tech community sees and likes. The problem is that you get a wide dispersion of outcomes, and that is fundamentally the venture capital model, right?

21:01Liz Hoffman:That a lot of things are going to be a zero and the winners make up for it. I don't quite know what the policy equivalent of that is, but it's unnerving, right? Like a federal government isn't supposed to like lose money and it isn't supposed to totally whiff on stuff. It's supposed to be sort of technocratic and just like do the job that people elected to do and provide a lot of services. So I don't know. There's always the tension is like can we make this a little better? And, you know, one thing that like has been kind of quietly going on that I've been interested in, it's totally superficial and aesthetic, but is the sort of user interface of the federal government is getting better?

21:37Liz Hoffman:You know, if you look at like the Trump accounts. Design studio. The design studio. I think this is Joe from Airbnb is like the chief design officer of the US. I've actually noticed a little bit of that. And we'll see, you know, like the Trump Rx stuff. Like, I don't know. Like, obviously, it's not important. But it is sort of notable that there is a user interface and a user experience component that's like getting a little bit of a glow up. Yeah, well, it is probably actually important for the cohort that is coming into this. Like I think a lot about we always want to evaluate the world in a static way.