#102 - Alex Shahidi: Top 10 Insights of 2025 (Part 1)

26:46This is one of those questions that really keeps parents up at night. And it's an important one because when families and parents and entrepreneurs have significant wealth, they can take care of a lot of things in their kids' lives. And so how do you keep them motivated when you could have the resources to take care of something? So a few things, and it's also related to some of what we've talked about regarding the attributes of a happy and meaningful life. But to keep motivated is things like help them, give them opportunities to be challenged and to overcome and to achieve. The achievement piece keeps the motivation.

27:27Another guiding principle as a parent is that just because we can take care of things, it doesn't mean we should. Or I have this expression, do we love our children enough not to give them everything we can? And so the idea there is, imagine in some ways that your parenting is you don't have access to the resources you do. How would you then guide your kid? What would you expect from them? What would be your counsel to them when they're in a tough situation and they want to back out? Part of that practically is having them work and earn. A lot of parents may not do that, for example, if their children are at the age of university or college, but sometimes they will.

28:09Or I've even worked with one or two families where they said to their children, even though they could have paid for everything, they said, we're going to pay for 90 % of school. You're going to pay for 10%. And as long as you maintain a B or higher, we'll pay for the 90%. But if it's anything lower than the B, it goes into your 10%. Most parents don't do that. But I would say that motivation piece is to help them identify their passions, their strengths, their goals, encourage, challenge, support, but help them achieve it as best they can within their own efforts. And I think that helps a lot.

28:46What we find over time, because what you do for a seven-year-old is not what you might do for a 17-year-old or a 37-year-old, but the general principle, and it's related to some of our conversation already, is this idea of if there are significant family resources, and that is the concern that how do we make sure these are used to serve our kids and help them flourish, not make them entitled or lose their work ethic, as some parents might say, is that you almost move towards transparency and even terms of access. So maybe there's a payment for school that's fully covered. But now after that, maybe there's a co-down payment on a house, not a buying of the house.

29:30Or some of our clients will help make sure that there's enough of a down payment on the house so that their children live in a community that's safe and maybe even near them. But then the children have to be able to have enough income to maintain the lifestyle and expenses to carry the home. So you just keep moving towards that progression over time. Paul Pagnato is a former scientist and longtime financial advisor, turned longevity expert and founder of Human Not Health and Transparency Global. In his episode, he reminded us that true wealth goes beyond money. He explains why longevity is often misunderstood and shares practical steps anyone can take to live a longer, healthier life.

30:11So many of us have different life experiences and we process what longevity means. Some of us may think that's, you know, living in a nursing home and not being able to walk around and being in pain. And others process it's something very, very different. So for me, I view true longevity more of a health span and a lifespan, living a long quality life. Today, there is over 900 ,000 people over the age of 100. And these individuals, I've met them from all over the world. These individuals are playing cards. They're going on walks. They're playing not just with their children and grandchildren, but great-grandchildren.

30:58and they're active, they're spry, they're laughing. So to me, that's true longevity, enjoying life in your 80s, 90s, 100s. And what do you think are the biggest misperceptions that people have about when you talk about healthspan versus lifespan? Our ability to get there, our ability, one's ability and mindset to actually accomplish that. In 1880, the average life expectancy was only 38. So most people think of maybe their grandparents that didn't live so long and just don't have that mindset that we can. Again, over 900 ,000 people can do it, can make it. And that number is exponentially increasing every single year.

31:46So the perception that we can't or the perception that it's going to fall off is just not the case with Stanford. The last three years, I'm fortunate to know Dr. Laura Cardison there. She founded the Center on Longevity and have done some profound work. and the biggest project has been the new map of life. And the new map of life is individuals living to 100 plus and being able to constantly reinvent ourself, being able to go back to school, learn a new career path, a profession, and do that and then go do it again and again and again. So there's this new map of life that we're all needing to live and it's a change of a mindset.

32:30I asked Paul what practical steps individuals can take to improve their healthspan. Here's what he shared. I think that's one of the biggest misconceptions. You know, we hear about these very wealthy billionaires that are spending an absorbent amount of money to biohack, to live longer, to hit escape velocity and live forever. The reality is 90 % of it are things that are free and that everyone can do in the world. You know, there are some foundational pillars to living a long quality life. And whether it's Stanford University Center on Longevity, whether it's the work by Dan Buettner in the Blue Zones to other major universities like Harvard, there's a consensus theme that a cognitive, our ability not to stress is like one of the most important pillars.

33:26and that doesn't cost money not to stress. In fact, just the opposite tends to happen when you have a lot of money, you stress out over a lot of things. Secondly is sleep. It doesn't cost anything to go to bed, to get a good night's rest. Third is movement, to go for a walk outside and whether it's 5 ,000 steps or 8 ,000 steps or 10 ,000 steps, no one's going to charge you to go for a walk. Some of the most important pillars that the centenarians have lived and live their life by are free. They don't cost any money and all of us can do that. You talked about the blue zones earlier and you gave us a little snippet about what they reveal about longevity.

34:11Is there any more that you can share? So there are some common denominators, some common traits. One of them is they tend to be slightly elevated. They tend to be five to 800 feet up. And when you go there, you see the results of that is they're very mountainous, hilly, and people are climbing. I have literally seen, I don't know how old they were, but they looked older with a walker, like climbing up the hill. This is what they've done their whole life, and they're going to continue to do it. Being able to have some elevation, and if you live on the water, that's okay. There's a stair stepper, right?

34:53There's things you can do to have that. So that's one common denominator amongst all of them. The second is they tend to follow the normal circadian rhythm, the cycle of the sun rising and the sun setting. That's how our bodies have been programmed for thousands of years. We are used to going to bed when the sun goes down and getting up when the sun comes up. But Thomas Edison and others introduced these blue lights, these light bulbs that we have, which is artificial. And our body to this day has not synced up with that. Our circadian rhythm is such that when our eyes see the sunlight, that's when our circadian rhythm turns on.

35:36You'll find in these blue zones, they tend to follow the natural process. Next is the natural eats. They're just not consuming processed goods. They're living off of the land. They're living off of natural goods. They don't need bottled water there. In Arles, France, the water right from the Rhone River there is super, super clean. And that's just table water. It's like mineral water. So they tend to be really eating unprocessed foods. And that means minimal amount of sugar. So there's a few examples of themes amongst all the blue zones that I've traveled to. Number eight, the math and the mind, a practical investment framework.

36:18Managing a portfolio is both science and art. The math is about sound principles and rational frameworks. The mind is about overcoming behavioral pitfalls. In my experience, the best investors balance both, creating strategies that work in practice in the real world. Bob Prince, co-CIO of Bridgewater Associates, one of the largest hedge funds in the world, explains that managing risk isn't just about returns. It's about avoiding outcomes that fall outside what you consider acceptable. He emphasizes the importance of defining those boundaries and holding firm to your strategy, even when external pressures may tempt you to stray.

36:56I think the answer is different. If you're a professional investment manager managing somebody else's money versus and you're being held to that as a benchmark versus if you're managing your own money and you're if you have some other purpose for your savings but i think if you're actually held to a benchmark you're like your professional manager you're held to a benchmark you need to explicitly know how much tracking area you're going to have relative to that benchmark and you might actually even if it makes for a less efficient portfolio you might actually have to hold some of that asset in order to measure the proper amount of tracking error, right?

37:32And so that's, you know, we have to do that when that's what it's called for. It's nice to have the freedom to not do that, right? It's much better to have the freedom to just say, I'm going to build the most efficient portfolio, the highest return per unit of risk, the lowest probability of hitting the adverse outcome that I referred to earlier. And we do these things we call a cone chart, right? Which is like, what is my range of outcomes over time? And as long as I'm inside that range, I'm achieving my own goals. And I have to be making my decisions based on my goals, what I need the money for, how much risk I can take and build this strategy for that.

38:17Not what somebody else might've done or what I could have done or something like that, because that will draw you into the mistakes that everybody else is making. And like I said today, what everybody is doing effectively, what the average person is doing is holding a highly concentrated portfolio in a limited number of stocks in the United States and taking a lot of risk in doing that. And the problem with risk, you only feel it after the fact. And after the fact, you can't do anything about it. The time to manage your risk is before things happen that are unacceptable. So you have to know your unacceptable outcome.

39:04And you have to know whether your portfolio or your investment strategy is going to be inside that cone of what's acceptable. Liz Ann Saunders, the longtime chief investment strategist at Charles Schwab, reminds us that the hardest part of investing isn't knowing what to do. It's having the discipline to do it. I asked her why the core principles of investing, maintaining a long-term perspective, staying diversified and rebalancing, can be so difficult to follow in practice. Listen to Liz Ann. Because it's our money and we have emotional attachment to our money. And it tends to, I think, exacerbate those natural emotions of fear and greed, which tend to infiltrate investment decision making.

39:47And, you know, ideally what investors can do is not figure out the hard way, whether there is a wide or narrow gap between what we could think of as financial risk tolerance. What's on paper? We sit down with an advisor. We map out a long-term strategy. It involves your financial risk tolerance. But then there's the emotional risk tolerance. And unfortunately, a lot of investors learn the hard way that there's a pretty yawning gap between those two. And it is those classic emotions of fear and greed. And it's why those tried and true disciplines, you mentioned diversification, such a key one. And then periodic rebalancing, which forces us to go against those emotions.

40:31It forces us to essentially do a version of buy low, sell high. It's add low, trim high. Of course, often when left to our own devices, we do the opposite. And that's where those emotions of fear and greed tend to come in. I phrase it in terms of one of the mistakes that investors make, and it has to do with the connectivity between time horizon and risk tolerance. And I think too often investors think that there's a direct link between your time horizon and your risk tolerance, meaning if you're young, you're automatically a risk tolerant investor and you should take a more aggressive stance, vice versa, if you're on the older end of the spectrum.

41:09But actual tolerance for risk is more than just about time horizon. You can be a 30-year-old investor and still have a long time horizon before, say, retirement. But if at the first 10 % or 15 % drop in your portfolio, that fear factor is going to kick in and you panic and sell, I don't care how long your time horizon is, you are not a risk-tolerant investor. Jeff Gardner, former partner at Bridgewater, highlights the behavioral side, why even the best math can be derailed by human emotion and psychological traps. Here's Jeff. I would think about the idea of your risk tolerance. So you mentioned this already, Alex, but I have seen so many times when people invest in something and say, well, you know, I'm holding this for diversification purposes, but then they really can't tolerate losing money in that, or it goes on for too long.

42:02And they get rid of it oftentimes right before it actually would have really benefited them to hold on to it. And so you have to really deeply understand what do I expect from these things? And what does a bad period look like? And then try to step away from that. And as you said, try not to be too emotional about the actual results you experienced versus having confidence in that longer term plan that you've built. On the other side, Paul Podolsky, founder of Kate Capital and former Bridgewater strategist, shared why, at times, trusting your instincts could be valuable. It's true that most people say, again, to the way investing, we have a disciplined approach, we have a long-term blah, blah, blah, we're not.

42:42And the whole idea is that emotion is really disastrous for investing. And certainly, emotion can be disastrous for investing. That's true. But I think about it a little bit differently, which is that we've been given this unbelievably powerful mind, and it has a very Darwinian survival instinct to it. And if you listen to it, it can have really relevant information. People say sometimes, this happened to my wife once, people have a sense, I've heard this particularly from women, that I was in a spot and something didn't feel right. and I just decided to take a cab or, you know, I got out of that situation fast.

43:23And one, this actually came up in that when I was writing one of the books is a fiction, it's a spy book that I wrote, Master Minion. And I talked to an actual CIA officer about this when I was doing it. And I had vented these techniques for the main character to be aware when he was being followed. He was in Russia where I spent a lot of time. And the agent said to me, he said, if you're any good as an agent, if you're being followed, you know it. He said, you just know it. And that really struck me that on some intuitive level, you know if somebody's after you. And I think that the same thing could happen in markets too, that if you're operating out of fear and reactive, that's not good.

44:08But if you really listen to, wow, I think that something, it could be extraordinarily good. Like this whole AI thing, people have obviously made a ton of money when they were like, wow, this is gonna be transformational until recently when they were on the long side. Or it could be something bad that bonds are gonna go down a lot or stocks are gonna go down a lot or whatever it is. And so I believe listening to those things is important. Number seven, are markets becoming less efficient? Conventional wisdom suggests markets become more efficient over time. Yet this year, two guests offer compelling insights on why the opposite may be true.

44:44Cliff Asnes, founder and CIO of AQR Capital Management, argues that while technology has made markets faster, it may have also made them more prone to bubbles and behavioral excess. And the market may be less efficient today than in the past. Listen to his rationale here. My belief is over my career. And again, I'm using my own career, but what else are you gonna use? That's my life experience, which is now 34 years of live results since my dissertation. I think the market has gotten less, not more efficient. And I love the way you asked the question about technological change, because I start out the whole piece saying, like many of my readers, I probably started thinking markets should get more efficient over time, because technology leads to more efficiency in so many things.

45:35Information is in all of our hand, close to instantly, close to ubiquitously. So it had to have gotten more efficient. But then two things. I've observed that over my career, these two periods I keep whining about, 99, 2000, and then 19 and 20, were respectively in highly measurable ways, the most extreme mispricings, in our opinions, we've ever seen going back in the near 100 years. So that's not too consistent with a market that's gotten more, not less efficient. Those are just two data points. But as we say in the formal statistical world, they're two freaking big data points. Influential data points is the more technical term for that.

46:22So, A, I thought markets have gone crazy twice in my career. I would not have guessed they'd go that crazy. I would not have said no chance. Hopefully, I'd be smart enough to go never say no chance in this business. I found 99-2000 a surprise. And I found 2019-20 a bigger surprise. Of course, we had seen the same thing a mere 20 years ago. That's not 100 years. 20 years later, people like me and people like me will still be around. So to see something as extreme happen again made me think something has made the markets a little odder. The next thing about technology is when I thought about it more, at least I came to the conclusion that technological advances are mostly about speed.

47:04Do I believe information gets into prices faster than 34 years ago? Yeah. We're probably talking milli, if not nanoseconds, when we used to talk minutes, when an earnings announcement would come out. But when I started my career, I'm old, but it wasn't the Stone Age. We had telephones and faxes. We had Bloomberg's. Information got in pretty darn quickly. So the difference between 10 minutes and 10 milliseconds matters a lot if you're a so-called high-frequency trader because your world has gotten faster and faster. But if you're talking about medium to long-term mispricings, it doesn't matter for a hill of beans.

47:48It's not about that. You can make or lose a lot of money on mispricings while waiting a week to do every trade from when you decide to because it's a slow-moving world. So immediately it was like technology is not really relevant to this general level of mispricing question. And I ended up deciding even more counterintuitively that some forms of technology have contributed to this increase in what I think is market inefficiency. And here I particularly mean social media, instantaneous 24-hour trading on your phone in a gamified fashion. I'm fond of saying if you're up at 4 a.m. on a Saturday night and you just need three more shares of NVIDIA, I'm not sure your financial planning is on firm ground.

48:39Social media, though, in particular, I pick on that a lot. I know I sound like an old man harumphing about social media, but market efficiency, while never, you should never assume perfect market efficiency, But a fairly efficient market has always depended on some idea of the famous wisdom of crowds, that individuals may make mistakes. And I could point to people doing crazy things, but the crowd itself is wise and will take the other side on net of mistakes and arbitrage them down, if not fully away. A wise crowd has a crucial assumption behind it that is usually stated, but sometimes left out, that the crowd is relatively independent of each other.

49:29That's why you get a good decision. If the crowd all gets to talk to each other, maybe you still get a good decision. Maybe the people who know the answer convince the people who are wrong. But maybe you get an angry, crazy mob, too. And again, these are taglines. But I like to say, has there ever been anything in history better than modern social media for turning a potentially wise crowd into a potentially dangerous mob? So I think market efficiency in general, and particularly some of these extremes, which is even more relevant for, of what I think are bubble-like behavior, have been exacerbated by a fair amount of our technological environment.

50:11I'm not a pessimist long-term. I think with a lot of big technological change, the world tends to adapt over time. We may be stupid about it for a while, but eventually we figure out that it's leading us astray. So I'm not a total nihilist. But I do think in the immediate term and for the last 20 to 35 years, particularly the last 20, I do think the technological environment has contributed to less, not more market efficiency. And I suppose the meme stock example is a pretty extreme case that highlights what you just said. You're exactly right. I just call the apotheosis of my thesis. I don't like pointing to the most extreme.

50:56That's why I didn't lead with it. You know, it's not fair arguing pointing to the single craziest thing and saying, see, I'm right. So I don't take this as proof positive. You know, the spreads between cheap and expensive adjusted for maybe quality and growth differences that got so extreme that we look at are across thousands of stocks around the world, diversified by industry. It is not about the meme stocks. But the meme stocks are probably a poster child for your social media driven. Extreme irrationalities. So, yeah, I fully agree with that, but I don't want to oversell the case. They're the poster child.

51:34They're not the driving force. He also shared what a less efficient market could mean for investors. What does it mean? It means the mispricings will be bigger on occasion. 99, 2000 saw spreads as we measure them. And this was very robust. Other people came up with their own ways to measure them after us. Between cheap and expensive, getting to record levels, and then in many scales surpassing those records in 2020 and early 2021. that means to an investor who can stick with what they do, who's rational, who's taking the other side of these emotions, they should make more money long term. Think of it this way.

52:11If the markets were perfectly efficient, there's no such thing as alpha. That's one way to think of perfect efficiency. So if markets are wildly inefficient, someone who can stick with betting against them should eventually be rewarded more than if they're mildly inefficient. But you've probably already guessed the second part. If they can get to more extremes, and like we talked about in the very beginning, if those extremes can last longer, it's going to be harder to stick with these strategies. Not that the world cares what I find fair or not, but in a weird way, I find this a remarkably fair trade-off.

52:48Harder to survive and do and stick with, but more lucrative for those who can? That's the way markets work, baby. You can't get away from that trade-off. It often works that way. Su Xuantan, founder of Disserene Group, explains why today's markets may be showing greater signs of inefficiency, particularly through what he calls the time horizon arbitrage. His firm focuses on companies with a truly long-term outlook, aiming to capitalize on general investor impatience. Here, we focus on what the companies do, not on what they say. We look for companies with thick rather than thin cultures. And I use air quotes here because it's a term of art.

53:31At companies with thick cultures, the corporate mission and value statements are lived out and experienced by their stakeholders. When you talk to your employees, they can recount how the company's commitment to these statements drove important decisions. At companies with thin cultures, employees are hard-pressed to even recall what the mission and the values are. We also admire companies that have this continuous improvement jeep, that they're willing to try to tinker with new things. They're willing to fail, but they feel smart and they feel quickly. They seldom bet all on red in the hope that red turns out, even though companies who make these big bets sometimes get the front page of Wall Street Journal, most followers on X, etc.

54:13So they get all the glory. But the people who try to work on continuous improvement, they're often quieter. We seek out companies who willingly and consistently trade short-term gains for long-term ones. There's a delayed gratification gene. They reinvest in customer price rebates and improved offerings. They reinvest in their employees via training and retention tools. They reinvest in the future via R &D and capital expenditure, even though shareholders often don't like that. So in many ways, they behave in the exact opposite way that most private equity roll-ups do, We joke about this. Why is it arbitrage at all?

54:50It's just common sense. And yet, here we are. Number six, lessons for market history for today's investor. Most investors don't know the history of markets, but those who do may gain a powerful perspective. What can we learn from past crises, bubbles, and recoveries? And how can those lessons help us navigate today's uncertainty? Jonathan Ruffer, co-founder and chairman of Ruffer, reflects on his 50 years of investing and deep study of history. He begins by discussing historical analogs to today's environment. When I said, you know, what's happening in the markets now feels like a combination of two things, the dot-com boom at the turn of the century and the nifty-fifty boom of a generation before that.

55:39And the thing that caught the dot-com boom out was that people bought the wrong companies. They bought young companies, which, however cleverly placed they are, are always vulnerable because new businesses, particularly in frontier industries, need a lot of cash, and the cash isn't always available. Whereas in FD50, they absolutely got the idea that online was going to replace retail. So they got the phenomenon right, but they played the wrong stocks. And in the nifty 50, they absolutely got the right stocks. You know, 48 out of those 50 really were a generation later, the great stocks of America.

56:26So they picked the right stocks, but by paying the wrong price, they were absolutely done for. So if you turn that on its head, I think that probably explains why I didn't spend enough time trying to find the next NVIDIA or the next Walmart or the next this or that, because I can have more success or lack of success by playing valuations. I then asked Jonathan whether long periods of prosperity create conditions for future instability. when risk-taking and short-term thinking rise at the expense of long-term resilience. I do think prosperity is a more dangerous phenomenon for all of us. It isn't just investment accounts, the adversity.

57:17Because adversity is something that the human spirit rails against and wants to see corrected. whereas prosperity invites you to be a laser-seater. And if it ain't broke, why mend it? Well, by the time you've driven your car without having it serviced for eight years, don't be surprised that when it breaks down, the guy at the garage says, buy another one. Jonathan also shared fascinating insights on the historical shifts in power between capital and labor and how that pendulum has swung over time and the key turning points behind those reversals. It's a sync of an entity that creates value as having two possible owners.

58:05Either it's the guy who puts the factory up or it's the guys who work in the factory. One or other both have, in the theory of things, a claim to ownership. and the communists say they all ought to belong to the workforce. And the capitalism says, no, they have to seem right, but actually the business belongs to the person who put the capital into the business. Now, I park that, but I note that. And if you go back through back to the Black Death, it's usually the place that people start. There's a very, very good book written by somebody called Hackett Fisher in the 1990s, which whenever I'm feeling rather pleased with myself, I go and have a read of.

58:56So I read it again and again. But what's very striking about that is that the interplay between capital and labor seems to operate on about a 50-year cycle. And sometimes capital absolutely has the stranglehold. And then, you know, 50 years later, it's labor that has the stranglehold. And because once the pendulum swung, it goes on swinging absolutely everywhere geographically until the thing has become so extreme that pendulum is almost forced to swing back. If you look at it through an English prism, the mid-1970s was the absolute high watermark of the unions. We used to go and have beer and sandwiches with the prime minister.

59:50And if you and I were setting up a business and we discovered the source of life and we thought, well, should we invest in that? We think, well, why bother? Because all that will happen is if it fails, we'll do badly. And if it succeeds, our workforce will capture all the benefits of it. And November 2021 seemed to me to be the high watermark of capitalism in the sense that winner takes all, that the amount of wealth that was owned by incredibly few people absolutely matched America in the early 1890s before the trusts were busted. That was a point when the extraordinarily rich were as rich as they were ever going to get.

1:00:43So the reason I'm interested in this is because I'm an inflationist. I think inflation is coming back. And inflation is always quiescent when the commercial world is in charge and is always dominant when the workforce is in charge. Andrew Metrick. He's a professor at Yale and director of the Yale Program on Financial Stability. And he delivered a master class on financial crisis in his episode, a conversation I highly recommend. He begins by explaining recurring patterns behind banking crises. History of banking crises is often something like a history of new types of money, new types of getting into this business gone bad.

1:01:28What will typically happen is what we call shadow banks, which are institutions that are engaged in the banking activity of borrowing short and lending long, but not formally banks. The shadow banks will come in because it's so lucrative to be in there. And then when they collapse, we'll say, well, we don't have to worry about it. They're outside the banking system. They're shadow banks, only to find out that they touched the banking system. Next, Andrew describes how after long periods of calm, people tend to start to believe they can operate at higher and higher levels of risk. To the extent that your system goes decades without anything happening like that, people start to believe more and more that they can operate at a higher and higher level of risk in this system with a smaller amount of equity capital protecting the depositors because these things just don't happen anymore.

1:02:22So it's the famous way to say this, not of my invention, but often attributed to Minsky, is that stability creates its own instability, like forests that don't have a fire and the trees grow drier and drier and dryer. And so even the smallest spark can set off a big fire. Andrew then shared his perspective on the major forces behind the global financial crisis, insights that could potentially help us identify factors worth monitoring today. But ultimately, it's the very unsatisfying macro forces that were the biggest drivers. The macro forces that were extant at the time really track back to the 1990s.

1:03:03If you remember, you seem younger than me, Alex, so maybe you don't. But in the 1990s, we had the peace dividend and we were actually running. It's hard to believe when you tell it to young people, budget surpluses in the United States. And we were having conversations, believe it or not. What will we do to anchor interest rates when the United States government has retired its debt? What are we going to do? We were actually in a world where the amount of government debt outstanding, which we talked about earlier as maybe being the base for the whole banking system in some cases, banks could just invest in that, that it's a very, very safe way to underlie the collateral system.

1:03:48There was much less of it relative to the demand. And at the same time that was happening, there was a global demand for that stuff that was getting very large from countries like China and the oil producing countries. What Ben Bernanke called in his pre-Fed share days the global savings glut. The global savings glut collided with there not being as much supply, natural supply of U.S. government securities and gave an enormous incentive to the private sector to manufacture substitutes for government securities. to find a way to package and to repackage different forms of collateral to give people things that could be used as a substitute for government funds.

1:04:34And that's what they did. There's no better business in the world than you give me money and I give you virtually nothing in return. If what I'm giving you is the ability to transact and the convenience of something that looks like money, then I can give it to you and pay a very low interest rate. And a lot of the things that were manufactured through the system They weren't manufactured because bankers suddenly got greedy. We're all greedy all the time. But the opportunity to put that greed to work was because of these enormous macro forces that aren't usually there. You can throw some people in jail.

1:05:09You can make certain things against the law. When somebody can make that many basis points on that many trillions of dollars, it's going to happen somewhere in the financial system. So we ended up with a banking system that wasn't inside the regulated banks. Effectively, we disintermediated a lot of what banks had previously done into a whole chain of acronyms and interventions that at one end was taking savings and at the other end was throwing out investment. but nowhere along the chain was anything that looked exactly like a traditional bank. But like traditional banks, they're subject to runs and they're subject to solvency, viability concerns.

1:05:53And when those popped, the panic was a very inefficient way to discipline that system. I have a whole course where I teach this. And when the course is over, to demonstrate how effectively I teach it a lot of my students say can you sum this up really in a couple paragraphs and unfortunately it's hard because it's not nearly as satisfying or as theatrical as what you can do in the big short or inside job documentary and a lot I think of the hardest problems to solve in the world are complicated that way as humans we really prefer narratives where there's people to blame and not systems. I asked Andrew about the biggest risks he sees in today's environment.

1:06:40By far, the biggest risk that we have right now is to the sustainability of the fiscal path in the United States, and thus the role of treasury securities and the dollar at the core of the global financial system. That's a major, major first order concern that dwarfs anything else. And I want to say that this is something people should be concerned about no matter what their politics are, no matter who they voted for. Both political parties in the United States have plenty of blame for the situation that we are in now. There has not been a party of fiscal responsibility in the United States for a really long time.

1:07:21A party that said they were of fiscal responsibility wasn't. And a party that denied that fiscal responsibility was necessary has gotten even more aggressive at it. Neither the Democrats nor the Republicans have covered themselves in glory, and there is not one president or one administration that one can pin the blame on for this place that we're in now. But it does appear, since the United States became the global financial center, bond markets for the first time showed reticence to hold as much U.S. government debt under the fiscal path that we had set out. They showed their first time reticence for that.

1:07:58But that might have been the first time that conversation reached an investment committee, actual asset allocation level at a critical mass of places. And that's a meaningful step. And again, there were very specific things that happened in April, but there's a long history of this in the United States. It's not as though one president, one administration made a decision and caused all of this. We have been building this passive cards for a long time, wondering at what point there would be instability noticed by markets. And it appears to have happened. We've been given that warning. The UK received that warning when they had their mini budget and their guilt crisis.

1:08:42We received it in a less extreme form, but we're a bigger place in April. The largest risk to the system is that the connection between markets and fiscal decisions that we make will be sufficiently strained. I think that what we've done so far, there's a part of it that's irreversible. That decision to go from 20 % to 15 % or whatever is not something that people will immediately say, all right, the problem's done. And I think the U.S., no matter what we do in the next five years, I don't see people saying, I'm sure the U.S. will be fine for the next 50 years. There's nothing we can do to get back what maybe we had 30 years ago when people thought we might not have debt anymore, or I should say 25 years ago.

1:09:24I think that we've done some harm to that position of U.S. treasuries and the dollar, some harm that's not coming back. The biggest risk is, will we do more? The markets have certainly sent a warning flare to us that has not been sent before in our time of hegemony of the global financial system. And we would be wise to heed that and to proceed with some caution in terms of what we're telling the world about our fiscal path and our seriousness as economic stewards of this privilege that we have in this dollar system. And again, this is a bipartisan issue. It's happening now under one administration, but it's not a new process.

1:10:08It is inherited from the last administration, which inherited from the last, which inherited from the one before that. And to close the interview, I asked Andrew if a crisis worse than the global financial crisis could occur. Here's what he said. A crisis where at its core is a loss of confidence in U.S. government securities is a conflagration beyond anything that we have experienced in the modern capitalist economy. It's beyond the Great Depression. There is not a currently available substitute to base the global financial system off, which is why those investment committees couldn't go from 20 percent holdings down to zero.

1:10:48But if suddenly there's real lack of confidence, the bond markets add a risk premium onto U.S. government securities that is large and permanent, there's not really a reaction to that. Government's ability to intervene in financial crises is totally predicated on their ability to manufacture safe assets to replace the unsafe ones circulating out in the system. You can't do that if you're the source of that problem. And in the past, there were wealthy countries that could help the less wealthy countries when it happened to them. There's nobody with the capacity to help the United States if that happens.

1:11:28And there's nobody with the capacity to step up and fill whatever vacuum is left if we're not playing that role. So that is the largest concern. And as I said, it dwarfs all the other stuff. It dwarfs crypto and cyber risk and any of the other private credit, any of the other stuff that is changing and could be a problem. But those are normal types of problems and slow-growing sectors that aren't going to bring the whole global financial system down with them. But the base of that system is the dollar and U.S. treasuries. And it's reasonable for people to be worrying about that. Well, that wraps up the first part of our top 10 insights of 2025, where we counted down numbers 10 through 6.

1:12:16I hope you'll join me next week for our final episode of the year when we reveal the top five insights. Thank you.

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