#58 - How To Navigate The Upcoming Depression

Yeah, unfortunately this is one of those things where you need to take action before it becomes a big problem because once it's a big problem it's too hard to contain. And, um, you know, the tragedy of this is there's a certain type of problem. This is, this is like a problem, like in your company you'll have with security or fraud prevention where you do a whole bunch of work up front and you hope that like nothing happening is a good sign. Like I used to joke with my head of security, if, um, you know, if we're not talking, things are good, you're doing your job. When I come and we have to talk, that's because there's a problem, and by then it's usually too late, the damage is done. Yeah. And unfortunately, with something like this where you have believers and non-believers, the problem is you— it's a lose-lose. So let's say you don't take action, you don't take action, and now the problem strikes and a bunch of people get sick, a bunch of people die, and, you know, bad things happen. Let's say you— let's say everybody took precaution, we locked the whole country down, we, we stopped, you know, travel, business, all this stuff. And if you succeed in doing that, the virus won't really proliferate. It'll look harmless. And then what people would say is actually not, 'Good thing we did that.' They'll say it was an overreaction. And so it's like a lose-lose in terms of perception, because if you take massive precaution, the winning scenario makes it look like it wasn't going to be a big problem, right? And, um, it's a, it's a dangerous thing. There should be a word for these types of, uh situations where that's the case. You know, like they, they have that word antifragile. Antifragile describes when— if you haven't read Nassim Taleb's book— antifragile is when a system breaks and the break makes the system stronger for the next one. So it's like plane crashes. Yeah, every time a plane crash happens, planes get safer overall. The next crash is less likely. That's an antifragile system. And, uh, so there should be some word for this too, where it's like the when you, when you do that, when you take precaution and you reduce risk and then the thing doesn't happen, and yeah, that's, uh, you don't want people's reaction to it to be, oh, we all overreacted, it was no big deal, right? Because it would have been a big deal, you just can't see it, right?

It's Yeah, I've talked about it before, but it's not public. I send this to— I used to send it to a private group of my mentors, advisors, friends when we were doing our startup. And then once we got acquired, I decided, hey, this would be a good way to connect with the rest of the exec team at Twitch because everybody's so busy, we don't all get to spend much time together. So I said, maybe I'll use my 1-2-3 email, which is just me brain dumping a bunch of thoughts on Sunday night. I'll send it to the exec team here and It's sort of like a private newsletter, private blog. And, uh, you know, my thinking behind it was kind of a growth hack. I wanted to blog because I enjoy writing, I enjoy putting my thoughts out there, but I was like, man, it's so hard to break out. Everyone's got a blog nowadays. So this was many years ago, 5 years ago, when I was like, well, if I just had 100 people who I think are badass read this, that would be a win, right? I don't need a million unique visitors, I need 100 of the people I like and respect the most in Silicon Valley to read this, that would be a win. So how do I guarantee that they read this? Well, let me make it something exclusive. So you're handpicked to get on a list. You're only getting this, and it's private, which means I can share, you know, things that I wouldn't always put out in the public. And so that's how this all started. And normally it's private, but given coronavirus, uh, this week's was all about coronavirus, and I wanted to make it public. So I was like let's talk through what I put in that email and share it with more people. So hopefully this is interesting to people.

Yeah, so I should actually preface this. This is more of a doom and gloom podcast because that's kind of my outlook right now. So if you're looking for something super optimistic, this is probably not it. This is me being realistic from what I'm seeing, right? And I'm definitely no expert in infectious diseases. I am no expert in the economy. But I have a lot of smart friends. I ask a lot of really dumb questions to them so I can learn, and I read a lot. And so that's how I form, you know, my opinion on this. And my opinion is that this is really, really bad, and I'll tell you why. So what's happening right now is that we have a health crisis, you know, a pandemic, which there's not— that's not often. So we have a health crisis, and that triggered— it started in China, so it triggered a supply crisis because The supply chain broke down, the global supply chain, which depends on China, all broke down. And then, you know, as it's come to the US, it's created a labor crisis where all these businesses, like, you know, all of American sports are shut down, hotels, casinos, movie theaters, schools, all the gyms, all these businesses are shutting down and they're not going to be able to go with zero revenue for long. They're going to lay off employees. So now you're going to have a labor crisis. Where people are predicting 20-30% unemployment, which is insane, right? And then that creates a labor crisis, creates a demand crisis. So we have a huge supply shock and we have the demand crisis and we have the labor crisis and we have the health crisis. And so what I wrote in the email was that I stole this line from my friend Vishal. It feels like an alien kid, you know, got tired of playing the video game Earth and he was on level 2020 and he's like, ah, this is boring. He just started mashing buttons just to spice things up, and that's what 2020 has felt like for me so far.

Yeah, so I think the economy is going to crash badly, and not a recession but a depression. And I think that on top of that, people will blame the virus, but the virus is the trigger, it's not the cause. And, um, you know, I could be wrong about this for sure. Uh, this is not something that is easy to understand. Like, the economy is such an interconnected set of pieces, and people who are experts in one area might miss another, right? It took, um, a lot— no, very few people saw the 2008 crash happening. Beforehand. Even those who did were not taken seriously. And only sort of later, when we do a postmortem, we realize, okay, it was these subprime mortgages that were being securitized and packaged up and then rated improperly. And that's where, you know, the sort of vulnerability was building up. So in my view here, people are going to blame the virus and say the virus is what shut down the economy. The virus is why we have high unemployment. The virus is why the economy is going to take years to recover. And in my view, the virus is the needle that pops the debt bubble, right? And so in the same way that the coronavirus is fatal to people who have an underlying respiratory problem, I believe that the virus is fatal to the economy because we have an underlying debt problem. That is the underlying illness that the economy had that the virus is going to expose shortly.

Yeah, you know, my reaction initially when I had heard bailouts, because bailout sounds like— that word is just very loaded. Yeah, it sounds like, you know, somebody's getting a free get-out-of-jail-free card. And that's how I felt in 2008. And then as I started to understand more, and I think I've recommended this video before, but I literally rewatched it last night. And that's gonna sound silly because it's such a simple video, but the The reality is you really want to understand the fundamentals of anything. It's not like— usually the problem is in the fundamentals. It's not in, you know, sort of a PhD level of complexity around something. Yeah. And so there's this video by Ray Dalio and it's called How the Economic Machine Works. It's on YouTube. It's a 30-minute video. Most people are not going to watch it. This should be required watching for every politician in every CEO and every college graduate should, you know, before you get your diploma, go sit in this room and watch this video. Yeah. And, um, what he explains in it is why these cycles happen. So why do we even have cycles? Why do we have these ups and downs? And so he explains, you know, um, and I can't, you know, sort of do it justice and explain the whole thing, but what I would say is the key to the economy is, um, spending. And so one person's, um, you know, one person's spending is another person's income. And most spending actually is not through cash that you have, you know, sitting in your bank or under your mattress, but through credit. Businesses spend through credit, people spend through credit, governments spend through credit. And so a lot of what's spent is credit. That credit becomes income of the next person. When you get income, you become creditworthy, and people will give you more credit, and then you spend it somewhere else. And that's how the economy expands. And so we go through these expansionary periods where people take loans, they spend, they buy houses, they buy cars, they buy— they invest in businesses, they buy stocks, whatever they— whatever they buy. And, um, some of it's with cash and some of it's credit. And then as when they're spending, that's somebody else's income. That person who gets income becomes creditworthy, and so then they can take credit, you know, take loans, get credit, and do their own level of that. And that's the expansion cycle. And then that, that naturally overreaches So it seems like, you know, this party just don't stop. This is working, we're all getting rich together, we're all— this is all growing, the banks keep lending, blah blah blah. And so, um, but you don't want too much debt out there. And so, you know, the government uses interest rates to sort of regulate that. They'll raise interest rates, which will reduce borrowing for a given time and lower the amount of credit and debt that's in the system. And, um, and so they have this instrument that they use to do that. So the The video really explains how during expansion times we use credit to expand quickly, uh, in the same way that if your company needs to grow, you'll take a round of venture capital, or you'll take an investment round, or you'll take a loan, or you'll take venture debt. Um, you know, those are the ways that you fund expansion that's going to happen in the future. And when it all works, fantastic! You expand, you make revenue, and now you're more creditworthy. You can raise bigger money, you can take bigger loans, that sort of thing. And unfortunately, human nature is that we get ahead of our skis. And so what's ended up happening here is we have a 12-year bull run of the stock market, one of the longest bull runs ever. And, um, and so we had this huge amount of expansion, and it was stimulated after 2008. You know, interest rates dropped, this economic stimulus package happened, quantitative easing. So we injected, you know, performance-enhancing drugs into the economy., and it gave us a period of expansion that lasted from essentially 2000, you know, '09-'10 till, um, till 2020, right? So you get this like sort of decade-long expansionary period, and then you're going to have, uh, you know, the sort of deflationary period where that comes to, to root. And so that's like a normal recession. But what he said, what he shows in the video, is how these— that short-term debt cycle layers onto a long-term debt cycle, which is happening over a 75 to 100 year time span. And what it sure does seem like is that we're now facing not just a recession, we're facing a depression. A recession is what's happening when the short-term debt cycle is being reversed, and a depression is when the long-term debt cycle is, is on the sort of the downside. And, you know, watch the video, it paints a picture with animations. It's really great, just well made. General. But for, you know, when you watch that, it's hard to watch that and not walk away looking at the world a little bit differently. And so my view is that after, you know, these periods of expansions and contractions, we're now on the sort of wrong side of the long-term debt cycle, and we're going to go through a multi-year deleveraging or depression, for a better word. And I think that's what's going to happen to the economy. Literally, I sold all my stocks. I moved every position to cash, everything I could to cash, and with a little bit of a crypto hedge. And, you know, if I could sell my house, I would have sold my house. Unfortunately, you can't sell your house now. There's no liquidity. So I took as much as I could out. But the reality is that we're all going to be exposed and I think everybody's going to end up less wealthy over the next few years because of this. Right.

Yeah.

Yeah, it's tricky, right? I texted several friends. So, I advise a couple of startups.. And what I told the startups that I was advising, I said, you need to lower your burn rate immediately. And they had already started that. And I said, no, even lower. Um, so I was talking to, you know, one of the companies I invested in, they're burning $70K a month and they had 7 months of runway left. So they were planning, hey, you know, things are going well, we're making progress. In the next 2 to 3 months, we'll raise a round. They're in one of the like kind of accelerator programs. So they were like, hey, there's a demo day. At the demo day, we're going to raise money.. And, um, so that's, you know, $70K a month. And they were saying, you know, we're trying to get that down to like $45K, $40K. And, um, right. And I, you know, I was on board with that. And then the next morning I woke up and I just texted him and I said, find a way to get it under $25K, like get it to $20K. That'll get you 18 months of runway out of your same amount of cash, right? And, um, I think you're gonna need it. And you don't want to be in a position where this dies because you spent too early. I said it's not about growing aggressively right now, it's about survival. Yeah. And you got to know when to switch gears as a company. And so I think, you know, it's very sexy and fun to be in the growth mindset where everything is about grow, grow, grow, but, um, there are times when you need to play a different game and you need to, um, you need to bunker down, you need to survive, and you need to weather the storm. And I think that's what's— what— that's my advice to the companies that I'm investing in or advising I also have friends who are out there raising money. They were, you know, they had done their seed, their angel round, and they were out there fundraising. And I texted some of them, I said, how's it going? He goes, well, I've had 3 investors cancel on me this week, right? Like, don't even take the meeting. Uh, you know, but, you know, the good VCs won't do that. The good VCs will continue to operate. Um, they will naturally get more selective. The valuations will come down. So for example, I'm talking to a YC company, and, um, you know, they're raising their seed round and it's like, hey, we're raising $2 million on a $15 million valuation. And it's like, geez, $15 million. And that's the— and I said, I asked him, I said, how'd you get to— why $15 million? And because he's doing, you know, um, basically like a million dollars a year, uh, run rate, right? And so it's growing, it's growing fast. So you can see how that's going to grow. But currently, you know, um, a million dollar a year run rate. And he said, well, the way a YC valuation works is pretty much, um, if you've got nothing, you're a $10 million company. If you, um, if you have something, you're a $12 million valuation company. And if you're profitable like I am, you're a $15 million company, right? And basically was like, you know, just sort of, he was joking, but he was, he was basically saying, well, it's YC, we get this premium, blah, blah, blah. I'm very curious to see if the YC premium holds up., given what's going on, because I think there's going to be a tightening everywhere, right? And, um, if you haven't listened to it, um, there's a podcast, a new podcast I really, really love. Um, so Jason Calacanis has been doing podcasting for ages, right? You listen to it, I listen to it. He's done thousands of episodes, and that's his podcast called This Week in Startups. But, um, he has a new podcast with Chamath called the All In Podcast. And I think it's still under his channel, but they're just doing the All In episodes like as separate, like episodes. And it's, uh, they've done one episode so far, but it was incredible. It's like, you know, if you can get Chamath, who's a super smart guy, um, don't agree with everything he does or anything, but you know, he's smarter than your average bear and definitely smarter than your average podcaster. Um, so if you get his thoughts for free, that's like, that's a, that's a conversation you want to be a fly on the wall for. And Jason's a very good sort of interviewer, podster, conversationalist, and that's great. And so they did one about coronavirus already. Definitely recommend you go listen to that and tweet @Jason and tell him I sent you. It's a great podcast, so I definitely recommend listening. In addition to that, one of the things they mentioned on there is, well, how does this affect a startup? Their recommendations were businesses should have 3 years of runway in the bank. Which I think is hard, very, very hard to have. But let's say more— what that really signals is you need more than you think. Not— not— don't think a year is good enough. Don't think 18 months is good enough. Yeah, try to get more. If you have any option right now to take money, either a loan you haven't really fully drawn down or investment, even if it's not the best terms or not the best investor, take it. Take the money. And, um, so that was the recommendation there. The second recommendation they had was, or the second story they told was sort of, how does this work? And so the way it works, you have to understand how a venture capital firm is structured. So you have the VCs and they'll, they'll say they raised $1 billion, but what's actually happening? You don't get $1 billion in your bank account and start writing checks to startups. You have commitments of $1 billion, let's say, or commitments of $100 million from your LPs, your limited partners. And your limited partners are pension funds, you know, family offices, you know, institutional capital pretty much, not individuals. And those institutions, they're basically going to allocate, you know, some small percentage of their equities, right? They're going to hold bonds, they're going to hold, you know, stocks, the public stocks, they're going to hold private late-stage stuff, and then they're going to hold some of this sort of technology or venture, venture bets. And they'll maybe allocate 5% of their portfolio to that. And what's happened— what's going to happen is as the stock market crashes and the bond yields go down, now that amount of money they committed, $50 million, $20 million, $5 million to a venture capitalist, now makes up not 5% of their portfolio but like 15%, 20%, whatever it is. They can't have that happen. That's too much. That's the wrong asset allocation. So what ends up happening, what happened in 2008 according to Chamath and Jason, it was very interesting. What they said was the VCs didn't stop investing, but they definitely slowed down because what happens is when the VC commits to a startup, they do a capital call. They say, hey, LPs, we found a startup. We need, you know, that money you committed. We need $10 million of it in the bank right now. And so what happens when the stock market starts plunging and there's economic freeze is they sort of go to their LPs or the LPs come to them and say, hey, it'd be nice not to have a capital call for a little bit. It's like, you know, yeah, we're committed, we're with you, but like, let's not call in my capital for, for the next 12 months or whatever it is, right? And so the whole rate of investing slows down because the VCs don't want to piss off their LPs. Um, the VCs still make their, you know, their management fees, so they're fine. They're— they don't need to invest this money to eat. Yeah. And so, um, that's what ends up happening. That's what slows down all of the startup investing. So it's a long way of saying All the shit's interconnected. If you have options to take money, take it right now. And if you don't, it's going to be very tough sledding. So if you're going to start a business right now, and many great businesses have started during recessions, I would say starting it literally at this moment is going to be tough because there's a lot of uncertainty. Once the crash happens, it's going to wipe out a lot of companies. There's going to be a lot of talent that's available for cheaper than it was before. There's going to be fewer startups in general. So it, you know, there's gonna be less competition, prices are gonna go down across the board, um, and so you can start a company then, but you have to be prepared to be scrappy. The fat and happy period is over, and now it's back to scrappy, you know, cockroach mode, right?

Totally. Um, my friend Vishal, who I've stolen now two lines for, for this podcast, he has another great one, which is venture capital is one of the few asset classes where the investment manager picks the security, right? Investor picks which company to invest in, but the security also selects the investor, right? And what that creates is this really interesting dynamic where During times where, um, it's a bull market and there's company— the good companies will have so much leverage, right? Because they can pick, you know, money is a commodity. They can pick this investor or that investor or that investor. They're all the same. Or even if they're not all the same, there's several tier 1s or several tier 2s. And so you have lots of leverage. You can sort of get the price you want, the terms you want. And this is why you see funds that are like, you know, no board seats, no liquidation preferences, blah blah, right? You get all these different terms. Here's, you know, take a million bucks off the table, um, when you, when you take this round so you feel secure, whatever, right? You can get lots of terms that you want, and when the market turns, that, that changes. Your leverage goes down. And, um, so it's— I don't think investors are going to be in a great position either, but I do think that, um, the pendulum is swinging, and for founders, things are going to be less friendly all around. People are going to be less interested in investing in you. When they do, they're going to be on less good terms, and you should be prepared for that.

Good show. Um, so, so some people recreated the Love is Blind show just using a Google Doc. So they basically said, hey, we're going to do something called Love is Quarantine, right? And they opened up 40 slots and they said they started matching people into rooms and you have like a voice conversation. You can't see each other and, um, you're never going to meet or whatever. You haven't met. And if you, if you like them, you talk to them again the next day, or if you don't, you pass and you go talk to the next person. And they're like running this whole thing off a spreadsheet and Instagram, and that's kind of amazing. So You know, people are getting really, um, really crafty, uh, really creative. People are, you know, coming together in certain ways. People are really appreciating what they have because it's all taken away. Um, like appreciation for the, you know, the delivery people, the workers at the grocery store and at the hospitals. Um, I mean, you can't look at these people the same way again because they sort of, you know, they're saving your life. Yeah, they're providing for you when you, when you needed it the most. And so I think there's some really good things for myself. You know, I've been able to spend more time with my family. My daughter was born, you know, and when she was born, um, when she was born, I took off 2 weeks from work and then I kind of, you know, she's like just a baby that lays there and it was like as interactive as a stapler. And so I was like, okay, I'm gonna go back to work now. And I just busied myself with that. And now with the shutdown, I'm spending time with her for the first time. And like really quality time extended. And now she has much more of a personality 6 months later. And so, uh, you know, that's been great. So I think a lot of people are gonna reassess what's important to them. People are gonna, you know, take time to reflect because they're just stuck in isolation.

Yeah, so I'm sure a lot of you who are in quarantine or lockdown are, you know, trying to adjust to a new way of life in a way. And, you know, people are trying to figure out how to make this work for them, right? It's, you know, you can go crazy just sitting indoors. You can go crazy just reading the news and listening to what's going on and checking Twitter, and it just feels like the world is crashing. It's very stressful and unhealthy. And so one of the things that keeps me sane is my morning routine that I've had for quite a long time, and I'm not perfect with it at all. You know, there'll be sometimes months can go by and I forget it, and then I come back to it always. But when I'm good, I'm doing this every day, and You know, I always wanted a morning routine, but it's in the same way, like, yeah, I also want to wake— you know, I wanted to wake up at 5 AM and go to the gym every day, and I did it for like 3 days, but then, you know, I stopped going to the gym because it's like such a tall task, right? And so the one thing that worked for me was I was at a Tony Robbins event, and he advises this thing that he's been doing for a long time, and he says, you know, I do this hour of power in the morning. I take an hour for myself, and I really get myself prime for the day. And he makes it— makes it sound like a lot of sense, right? He's like, you know, if you were an athlete, before you go onto the court or onto the field, you really get yourself in the right mindset. You get your body ready, you get your, your mind ready, and you, you have a certain routine that you do that gets you ready to perform. And, uh, isn't it strange that we don't do that in the sport of life, right? Isn't it strange that we don't try to get our mind and body ready for the day? For our, for whatever our, you know, sport is. And, um, that resonated with me. I, as somebody who played sports, that was something I felt, yeah, that is weird that I— it would be unthinkable to just, you know, roll out of bed and go try to play in a game. I would never have done that. But I'll do that with my work, I'll do that with my family, I'll do that, you know, on a normal day I would wake up, I'd hit the snooze button, I'd wake up again, I'd be groggy, I'd be late, and then I'd hop in the shower and I'd get dressed and I'm half looking at my phone and I'm figuring out what I forgot at home, and I finally commute to work and I get there and I'm in a low energy state and I'm not really operating with any intention. I'm just on autopilot. And so I got sick of being on autopilot, so I adopted this routine because Tony had this one thing he said, you know, I do this for an hour, but if you can't do an hour, do 30 minutes. If you can't do 30 minutes, do 15. If you can't do 15, do 10. If you can't do 10, you don't have a life. Right. And he just let it sink in. He goes, if you don't have 10 minutes, you don't have a life. So there's this thing that I do that's called the 9 Minute Morning Routine. I've been doing it for several years now. And I think it can help a lot of people. And so we're going to— I'm thinking about this. I think I'm going to do this. I'm excited about it. So I'm going to make a podcast that's just the 9 Minute Morning Routine. And I'm going to record it. And if anybody out there wants to, you know, try this in the morning, and I think it'll help you. I think it'll help you have a clear mind as you approach your day. And I can explain kind of how it works, but that's the idea. I have this morning routine. It's worked for me. It's helped me a lot. I'm just going to record it, and then if it works, if it helps you, you can listen to it while you do it in the morning. It takes 9 minutes, and if you don't have 9 minutes, you don't have a life. And so if you want to, you want to use this in the mornings, great. If this helps more people like it helped me, fantastic.

My one line would be: be a realist about the problem and optimist about the solution.