The text below is a transcript of audio from Episode 20 of Onward, a Fundrise podcast, "The Cascade, the Great Deleveraging’s next chapter."
Disclaimer: This transcript has been automatically generated and may not be 100% accurate. While we have worked to ensure the accuracy of the transcript, it is possible that errors or omissions may occur. This transcript is provided for informational purposes only and should not be relied upon as a substitute for the original audio content. Any discrepancies or errors in the transcript should be brought to our attention so that we can make corrections as necessary.
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Cardiff Garcia:
Hello and welcome to Onward, the Fundrise podcast where you can find more about what's happening at Fundrise and where you'll hear some in-depth conversations about the big trends affecting the US and global economies. This is the Marking Views to Market episode and we are recording it on Thursday, March 30th, 2023. Thanks to all of you who've rated and reviewed the show in the podcast apps. We continue seeing really nice growth in the numbers and that is because of you, our listeners, so please keep those ratings and reviews coming our way. Also, evergreen reminder that this podcast is not investment advice. It is intended for informational and entertainment purposes only. And with that, let's get on with the show. I'm Cardiff Garcia of Bazaar Audio and I'm joined as always by co-host Ben Miller, CEO of Fundrise. Ben, this is going to be, I think as wild a ride, this podcast episode as the ride we've all been on in financial markets the last two or three weeks. How are you, man?
Ben Miller:
Good, good. I'm excited. I want to know, can we call it Cardiff?
Cardiff Garcia:
Can we call it-
Ben Miller:
Yes.
Cardiff Garcia:
Can we call it, can we call the Landing? Is that what we're finally going to do?
Ben Miller:
I mean, I feel like it's pretty clear at this point, but let's just see if we're on the same page.
Cardiff Garcia:
I figured we would start by just going back through everything that's happened in the last few weeks, the things that we think are relevant for our understanding of the economy, of what's happening in real estate, financial markets, and maybe even a little tech since of course Fundrise now has a tech fund. Where should we start? Should we start with that pivotal week when three banks started a collapse all at once and by Sunday night, Silicon Valley Bank, the bank for so much of the tech sector was in a free fall and everybody was wondering what was going to happen. Should we just go through that week one by one and kind of discuss what happened there?
Ben Miller:
Yeah, I think it's good to get synced on the facts.
Cardiff Garcia:
Sure, let's do that. Maybe we should start with the first two banks that really came under stress. These were Silvergate and of course Signature Bank. These two banks had a kind of a special situation, if you will. They were both massively exposed to crypto and in particular they had a lot of deposits from crypto exchanges and a lot of crypto players, and in the case of Silvergate, it also ran this exchange that allowed other cryptocurrencies to kind of buy and sell different fiat currencies and do other things. And so these two banks really quickly came under severe pressure heading into the weekend. What should we know about those two banks, do you think that's relevant?
Ben Miller:
Well, I like the way you described it, that there's lots of special circumstances. They were concentrated in real estate or in something unusual like crypto. Both had a lot of crypto exposure, both lost a lot of deposits quickly because of the crypto exposure. The crypto deposits turned out to be hot money.
Cardiff Garcia:
Regulators were watching, but so were other depositors?
Ben Miller:
Yeah, regulators, I think were not inclined to help them that much as a result of that crypto on-ramp into the financial system, and they were large. Signature Bank is a really large bank. Most people who are not in New York may not know them, but they're a powerhouse, so it was a significant bank failure.
Cardiff Garcia:
Yeah. And in the case of Silvergate, pretty quickly it saw that it would soon have to start liquidating. In the case of Signature, actually, the regulators took over and sold it for a song to New York Community Bank, which got a real steal on it and ended up having its share price go up like 30% the day after it bought Signature. And the regulators were like, "Hey, that's the way it goes. We were looking for stability and we needed to get rid of this problem because heading into that weekend, we also had the big problems in Silicon Valley Bank." And you could also say, by the way, this is going to be a theme in this chat that there was a special situation, special circumstances attached to Silicon Valley Bank. But of course if you say, well, all of these different things happening had special situations, it's like, well, maybe there's something connecting all of them. So Silicon Valley Bank, I know you were paying a lot of attention to it, so what should we know about its collapse?
Ben Miller:
Yeah, I mean on this one, I'm not sure I'm going to tell people things that they don't already know. Anybody who's listening to this podcast probably is following the 100 different analyses on Silicon Valley Bank, so more like I'll do the meta, which is the, everybody's talking about it being special, circumstantial specifics. It was concentrated in a single community, not New York real estate, but this time tech, that community, a lot of uninsured deposits, and there were a lot of things about it that were special. And as a result, it was arguably a singular failure even though it had been number three-
Cardiff Garcia:
Yeah, that week, just that week.
Ben Miller:
But it was special. There was no greater thematic driver happening.
Cardiff Garcia:
Yeah, it was interesting too because when you read a lot of the analyses of Silicon Valley Bank and what happened there, people talk about the fact that so many of the depositors, which were all these tech companies who used it as their bank to pay payroll and everything like that, they're all in touch with each other. It's a tech sector, they're all in the same slack threads, they're all in the same group, text chats and all these things. And so it was a real flight risk that once it started, it would really escalate. And a lot of people are also pointing to technology itself as something of an issue here that this is kind of new. It's not like in the past when people would line up at the bank and ask for what's going on or whatever, pull their money out that way. Now it's like you just go on your phone and click the button a little bit. Were you kind of tracking that as a potential problem as all this stuff was happening?
Ben Miller:
I mean, the larger phenomena, I think you and I have talked about that technology speeds up information flow, but I think the narrow consequences of that is just in this case, how it's sped up finance is, and the regulator really misunderstood that. And even Silicon Valley Bank might not have failed, like arguably there's a, I'm not banking expert on this one, but they couldn't get ahold of the money in time because it's just in a pure bureaucratic process. The old system didn't match the FinTech layer that now sits on top of the banking sector.
Cardiff Garcia:
Yeah. And also the regulators on that Sunday stepped in and said, we will guarantee all of the deposits, the uninsured deposits to effectively stop the bank run from continuing or starting and continuing whatever you want to call it on Monday. And so that's what happened in terms of Silicon Valley Bank. Then not too long after that, we ended up with Credit Suisse, another part of the world, and again, people were saying special circumstances, Credit Suisse has had kind of a scandal plagued decade and a half, really paid out a massive amount of money in fines. But the problem started at Credit Suisse and eventually it was forced into the arms of UBS and the Swiss regulators essentially said, we don't want to deal with it. What do you think were the kind of important circumstances to know about what happened with Credit Suisse and how it might redound back to the US or things that are happening in other parts of the financial sector?
Ben Miller:
Yeah, I mean, we're alluding to this, but most of what we think is most important, I think is most important is the broader phenomenon, the broader thesis that I have and how that's basically manifesting and a number of what generally is happening right now. The pundits and the press are calling these things sort of circumstantial or you said special circumstances, and that's just obviously not what I think is happening.
Cardiff Garcia:
Right. Yeah, we're definitely going to, we're get to a kind of restatement of the Ben Miller great deleveraging thesis in a second. I just want to point to one or two other things that were also happening at the same time, a number of other mid-size regional banks, their share prices have come under a lot of pressure. People worried that perhaps one of those banks is going to be next. First Republic Bank was backstop by a big group of other banks. It also is kind of unusual and it has an extremely high end rich clientele, and they're all wondering what to do right now, whether or not to pull their money or whether or not they're all going to be fine. And in particular, this was something that you tracked a little while ago as this was starting. You've mentioned it to me in private, the idea that a lot of deposits are starting to flee parts of the banking sector for the higher rates that are available in things like money market funds or just in treasuries themselves.
That has started to happen and the number's now in the hundreds of billions of dollars. So it is significant, and I personally have been surprised by the scale of it. So that's another part of what I think we're going to discuss in a second, which was the great deleveraging hypothesis from last November when you first stated the thesis and how all of this fits in is kind of what I think we should discuss next. But in terms of just getting our facts straight and what happened in the last few weeks, is there anything else that we should throw in there or did we cover it at least as comprehensively as we need to for now?
Ben Miller:
Some of the specifics that I want to get into are closer to the thesis, right? Because a lot of the critique of Silicon Valley Bank and Signature Bank, and now just go down the list, one that's really interesting because it's again special, but nothing like a bank, but it's Schwab. Schwab's under distress and it's for exactly the same reason. Silicon Valley Bank, basically what happened to Silicon Valley Bank, one narrow part of it was they had approximately a $100 billion of long-dated treasuries and agencies, which is basically Freddie and Fannie debt-
Cardiff Garcia:
They're mortgage-backed securities, yeah.
Ben Miller:
And that are guaranteed by the government.
Cardiff Garcia:
Uh-huh.
Ben Miller:
And they and a lot of participants in the market confused zero credit risk with zero risk. They misunderstood that treasuries and all debt has interest rate risk unless it floats. So you have to do floating treasuries to have basically zero risk, which are tips. So Schwab, who I think is well run, I think is going to be safe. I'm not trying to fearmonger it. They had almost $200 billion of different kinds of long-dated, what they thought was, quote, "safe assets." And that's basically, I mean in the case of Silvergate, and in the case of Schwab, the losses on paper are more than the equity in the bank.
Cardiff Garcia:
Yeah. This is a hugely important part of this story. A lot of these banks had on their books, these securities that were formally labeled, held to maturity. In other words, these are securities that really are safe in terms of credit risk. They are going to pay back. These are government issued or government backed securities. There's no credit risk, but in a time of rising rates and really steeply rising rates, the market value of those securities collapses. And when you take that into account, you could look at these banks and you could make the argument, at least from that perspective, that they're having some significant solvency issues. And the solvency issues eventually lead to liquidity issues in this case. And that is a huge, huge part of the story because we're talking about a rising rate environment, and that is a crucial part of the original great deleveraging hypothesis that we introduced in November. So yeah, I'm glad you pointed that out. That's super important. Ben, should we restate the original great deleveraging thesis for listeners who haven't heard that episode in a while?
Ben Miller:
Yeah. And a lot of people haven't even listened to it, and I think it was a little long. So maybe let's-
Cardiff Garcia:
Yeah, let's just [inaudible 00:11:47]. I like it.
Ben Miller:
I'll see if I can summarize. It's not my strength.
Cardiff Garcia:
That's right, man. That's what I'm here for.
Ben Miller:
Yeah, yeah, you're the expert, you're the professional. So, okay. So the great deleveraging thesis was this idea that there was a convergence of sort of two forces. One was that the US was transitioning from zero interest rate environment to a high interest rate environment. And as a result of that, borrowers would have to basically reduce the amount of debt they have because their interest rate is no longer covered. So they had to deleverage and it was actually either deleverage or default. We didn't talk about the default, but essentially if you don't do what you need to do, you're going to-
Cardiff Garcia:
Oh, we're going to talk about defaults. Don't worry. There is plenty of time left here. We're going to talk about defaults too. It's a big part of the thesis, so yeah.
Ben Miller:
Right. [inaudible 00:12:39] you saw that with Silicon Valley Bank because they then actually went out and, to raise more equity because we, part of the thesis was in order to delever, you have to go inject more equity and pay down the lenders. And Silicon Valley Bank had gone out with Goldman Sachs to raise more equity. In order to do that, they just basically ran out of time and there was some fear that caught into the market. So that's the first force. And the second force is that it's a systemic problem, that the system's more levered than it appears, and that all lenders are also borrowers and the lender is the biggest borrower in the market.
Cardiff Garcia:
That there's a lot of interconnectedness in the market, and especially when you start looking at the relationship between the banking sector, that's well known, and the shadow banking sector, which is less regulated, does a lot of borrowing, but they kind of borrow and lend to and from each other. And when you look at those connections, you can see that even a mid-size bank, it turns out, can pose a systemic threat. Right?
Ben Miller:
Well, that's what the regulator determined. That's why they decided to cover all deposits, even those that were uninsured. But yeah, so the way I had titled this idea of this systematic connectivity was that there was turtles all the way down. That there's, everybody is connected to everybody else, and as a result, there's sort of no bottom. There's just this system that's, a closed system that basically as a result of this sort of systemic connection, can have unexpected breakdown. And so deleverage as a result of forced pay downs or defaults because of high rates and great because it's systemic, the great deleveraging.
Cardiff Garcia:
Yeah. And also by the way, there's a connection to the real economy here, because if there's a lot of de-leveraging happening in the financial sector, it means there's less credit available and accessible to actual companies that build and make things that we all buy and sell and that employ an awful lot of people. And so if the system as a whole ends up coming under enough pressure, then eventually yes, you will see earnings decline, you will see layoffs in greater numbers, and you might see a recession or at least a growth slowdown or anything in between. That's fascinating. I also kind of think it's important to mention that a lot of these banks were criticized for not having hedged against rising rates. And a point that you made in the last episode, and that I think is really important to bring up again is that, okay, it makes sense to level that criticism from the standpoint of a single bank, but not everybody can be hedged against the same thing. There has to be somebody paying on that hedge. I don't think enough people quite understand this.
Ben Miller:
The way we talked about it last time is that you could buy an interest rate derivative that would cap your interest rate risk, and for whatever reason, these banks didn't do that. We did that. I'm not sure I understand why they didn't. But on a systems-wide analysis, it's almost like, I was at the great mystery, where are all these interest rate derivatives? Because the entire market, I've gone out and started adding it up. The entire banking industry is 30 trillion. The real estate industry is 10 trillion. There's nobody I know ever wants interest rate risk.
And so I'm going to go find it. I know how I'm going to find it, but I don't haven't had the time to find out who is the one holding this bag, this huge, huge multi-trillion dollar bag. But it's, at the moment, we're just at each turtle. So far we've seen Silicon Valley Bank turtle fail and then the Signature Bank fail and [inaudible 00:16:26] bank fail. And what happens next? The question happens next is basically what [inaudible 00:16:31] systemic, and so that's the next phase of the way the thesis plays out. And I've gotten some grief on Twitter that basically people think it's not systemic, but as we alluded to over the series of special circumstances, it feels general not specific. Right?
Cardiff Garcia:
Yeah. At some point, if you can identify a special situation that's different across a whole range of different kinds of institutions, you can at least start getting suspicious. My assumption, by the way, on who holds the bag on whatever interest rate hedges have been put on was that these are fairly opaque, very large institutional investors who maybe didn't think that interest rates would go up very much. And so they weren't as exposed as they thought, but I assumed it would be large hedge funds, maybe some other big institutional buyers, but where it's hard to actually find it and maybe that gets it, why it's been kind of a struggle to figure it out. But that has been kind of my assumption all along. But I don't know.
Ben Miller:
I'll hypothesize for one minute. This is speculation. Speculation is that it's off balance sheet at the banks.
Cardiff Garcia:
Oh, okay.
Ben Miller:
That's what I think that it basically held to maturity, if you will. So it's not marked in market and it's a drag on their earnings. I actually, when I prepared for this episode, I went and looked at a bunch of bank balance sheets because I wanted to understand essentially why they failed. And you could look at the banks that failed balance sheets like Signature Bank and Silicon Valley Bank. You can't look at their balance sheet in 2021 and be like, this bank's going to fail. It doesn't seem obvious, but while I was digging through, I was looking at Wells Fargos and they have this whole section about off balance sheet arrangements, and there's a big section on interest rate derivatives is off balance sheet.
Cardiff Garcia:
Really? Oh, that's interesting.
Ben Miller:
I'm going to find out-
Cardiff Garcia:
That's really interesting. You're going to get to the bottom of it.
Ben Miller:
I'm going to get to the bottom, but it's going to take me some time because they're, so far, when I go ask people in the market who are making this market, like I talked to this guy, the biggest real estate derivatives broker who does a trillion a year. I got to their lead on their desk and I said, "who's the buyer? Why do they buy this?" And he said, "I don't know." Basically took, he went and looked, came back and said, I don't know. And I'm like, Hmm, trillion dollars-
Cardiff Garcia:
The mystery remains.
Ben Miller:
The mystery continues. So I was actually thinking about calling this episode the great cascade.
Cardiff Garcia:
The great cascade. All right.
Ben Miller:
Yeah, the next chapter of the great deleveraging, yeah.
Cardiff Garcia:
Marking views to market the great cascade.
Ben Miller:
Uh-huh. I think it's going to cascade. That's how crises play out. They cascade like a nuclear reaction.
Cardiff Garcia:
Yeah, something that's been interesting about this crisis is that it started in these mid-size regionals. When we were first discussing the great deleveraging, we were trying to pinpoint which parts of the economy, which parts of the financial sector might kick things off or might to use your phrasing break first. And we had said, well, it might happen in commercial real estate where there's a lot of bridge loans and other short term loans that we're going to come do. And at higher rates, a lot of these projects were simply not going to be profitable anymore. And so there were going to be a lot of defaults there, and that might be one possible place where it would kick off. And by the way, that is still as I think we're going to get into in a second, a source of danger. But we had discussed that and we had said that maybe some of the real damage in the economy, if that's where it starts, was going to be in the office sector obviously, and in retail.
And again, those are still places that I think we're both paying a lot of attention to. But it started in a different unexpected place. And it wasn't just that we didn't expect it to start there, the Federal Reserve also didn't expect it to start there. And in its financial stability reports, it hadn't even bothered to possibly identify this. It hadn't even stress test against higher interest rate risk. It also, by the way, was looking more closely at the shadow banking sector than at the formal banking system. And so they were taken off guard. But it doesn't mean that those other things that we were discussing are in the clear, if anything, because it is originated, because a lot of this turbulence is originated somewhere else, the danger might actually be even more acute. So yeah, what do you think about the place where it originated and how that might end up spreading or not spreading if you've changed your views to the places that we had discussed before?
Ben Miller:
Yeah, I definitely think it's going to spread. That's why I want to call it the great cascade.
Cardiff Garcia:
The great cascade, yeah.
Ben Miller:
I guess I like the great, great things.
Cardiff Garcia:
Cascade sounds like a very cheerful spin on what is quite a doom heavy episode, I think.
Ben Miller:
Well, I want to end with a positive note because I think like where there are problems-
Cardiff Garcia:
Stay tuned everybody.
Ben Miller:
Yeah, where there are problems, there are opportunities.
Cardiff Garcia:
That's good podcasting to tease the positive ending right in the middle of the show. So hopefully everybody will stick around to hear what that positive note is. But yeah, so in terms of the locus of where it started and where it might spread to and everything, what have you updated in terms of your thesis?
Ben Miller:
Well, I thought it'd be useful to look at, I mean you brought this up, essentially what we got wrong and what I got wrong, and then we can talk about what we got right. And that does tee up, I think the thesis in general.
Cardiff Garcia:
Sure. I got lots of wrongs on my list, a couple of rights, but I got some wrongs. So you want to go first? You want to throw yours out there? You want me to-
Ben Miller:
Let me just do a couple wrongs.
Cardiff Garcia:
All right, let's do some wrongs. Go for it.
Ben Miller:
You just said one, which was that the crisis broke in regional banks. So the thing I didn't know, because I hadn't noticed when it happened is that the Trump administration rolled back Dodd-Frank on these banks, like I had-
Cardiff Garcia:
These smaller banks specifically.
Ben Miller:
Right. Specifically it used to be any bank with more than $50 billion of assets was regulated as systemically important. And I was telling people, look, Dodd-Frank's really protected the system not knowing that they had rolled Dodd-Frank back in 2018 from any bank bigger than $50 billion to any bank bigger than $250 billion. And lo and behold, the bank that blew up were between 50 and $250 billion. I mean, it's just uncanny [inaudible 00:22:36] how the politicians make the same mistake every time because the lobby pressures them to basically pull back regulations and just happens every decade. I mean you go back to savings and loan crisis. So that part was a missing piece of information I didn't have. And so I got that wrong. It was the banks again.
Cardiff Garcia:
It was the banks [inaudible 00:22:57] our old friends, the banks did it once again.
Ben Miller:
Once again it's the banks.
Cardiff Garcia:
It should be noted, it wasn't the systemically important banks, the ones that are above 250, it was those 50 to $250 billion banks. And where there was this fight a few years ago about whether they should be submitted to the same capital standards and crucially the same regulatory scrutiny as those other bigger banks, they weren't. And yeah, that could have been a big part of the problem, but that is where it started. Yeah, by the way, that's on my wrong list too. So join the party.
Ben Miller:
That's hard to avoid that one. I mean the biggest question to my thesis about it being systemic is that we're not seeing an above $250 billion asset banks. And Dodd-Frank is definitely dampening the spread of that risk because if not for it, then these big banks would also would've blown up because you see exactly where Dodd-Frank stops is where the crisis started.
Cardiff Garcia:
Yeah, absolutely. The fact also that it did start at these regional banks has in a sense made sure that everybody is paying attention to the big banks. Again, they are paying attention to other regional banks, the regulators in particular, if you look at the comments made by Powell and Janet Yellen are monitoring this very carefully and they have shown some willingness to move quickly, especially in the case of Silicon Valley Bank to say, "Hey, we're going to do our best to not necessarily overhaul the entire regulatory architecture, which takes Congress passing laws and things, but within our authorities to do things to make sure that at least this does not spread." That's been kind of a helpful signal. And I'm talking here specifically about the financial crisis risk, more runs. I'm not talking about the potential fallout for other parts of the financial system and for the economy broadly. Yeah.
Ben Miller:
What are the things you feel like you got wrong, Cardiff?
Cardiff Garcia:
I actually had held out some hope the last few times we spoke that higher rates might break something, but that it was going to be teetering on the edge, that actually maybe inflation would come down fast enough that the Fed would realize, okay, we can stop raising rates sooner than other people expected or maybe even at some point start lowering rates. And that might actually ward off something breaking. Well, I was wrong because something clearly did break, and this goes into my next thing that I got wrong, which is that I had anticipated that disinflation would continue a pace. In other words, that inflation which had started coming down meaningfully at the end of last year would continue, well actually in the last couple of months it seems to have flattened where it was. And so that means that the elevated risk of more things breaking has stayed in place.
So that was a big thing that I got wrong as well. And then finally, and I'll finish my list of wrongs here. I thought that because there's been a lot of hesitancy on the part of depositors in the past to leave their banks even for higher rates because there's a lot of friction in changing banks and things like that, that there wouldn't be such a stark outflow of deposits from some of these banks to money market funds or into the treasury market. But clearly we've seen that and it's not enough to say, well, that means there's going to be more huge bank failures and things of that nature, but there's been a lot more than I expected. And the flip side of that is you should put that one on your right list because you told me in private that you had expected this to happen a few weeks ago. So yeah, so that was a good call.
Ben Miller:
So what did you get right? And then I'll go.
Cardiff Garcia:
Okay. Interestingly, so far, and I want to be clear, this is a lagging observation, not a leading observation, but so far equities have basically moved sideways. Actually they're up about five plus percent for the year, the S&P 500 is, which is very strange. And I had said before that I thought that the equity market would be okay this year and that it would roughly move sideways. I didn't think it was going to crush it or anything. But basically equities, high yield bonds have been fine throughout all this. So I got that right. The problems that we've started to see in commercial real estate, the defaults, you and I were in agreement on that. The fact that remote work, hybrid work would be pretty sticky, that there would be more of that sticking around than people had anticipated. And finally, so far, and I don't think this is going to continue, but so far, if you look at realtime economic indicators, we haven't yet seen a big fallout for the economy.
And I just checked the Atlanta Fed's nowcast, and it's showing that there's going to be decent growth in the first quarter. That may or may not be right. I'm just saying that if you look right now at contemporaneous economic indicators, they're not showing a big collapse. And I think I had said that we would have a soft landing, which I had described as either a slowdown in growth, close to zero or possibly a very mild recession, but not a big recession where you'd see big layoffs, lot of unemployment, protraction in negative growth. But that's basically my list of got right things. What about you?
Ben Miller:
I think the thing I was saying to you over and over again is question was, is inflation harder to tame than the market is fragile to break?
Cardiff Garcia:
And I think you had said that the market was probably more fragile to break than inflation to tame.
Ben Miller:
Right. And I also, I think in our, this was only a few months ago our forecast for the year that I thought that inflation would get stuck. What's interesting is when it got stuck, because January was a very positive month in credit markets, later I have some examples comparing that to now. When it got stuck, I really think the market finally capitulated that inflation was going to be harder to tame. And that ended up being the catalyst to break the back of those holding long-dated assets, which not just treasuries by the way, everybody's talking about treasuries and there's a lot of long-dated assets out there that were done in the old low interest rate environment. So those two things basically came together to break through the financial markets. And I basically believe that they will continue to break. I think I called a liquidity crisis, which at the time people were like that. Liquidity crisis, that's ridiculous. I think that's a fact because you see the Fed pumping liquidity into the bank system right now.
Cardiff Garcia:
The discount window in particular has been a lot of borrowing from banks from the Fed's discount window.
Ben Miller:
The BTFP program, bank term funding program where they put out something like 5, 600 billion, half a trillion in two, three weeks. So that's like significant sign that there's liquidity needed in the market. We talked about derivatives and that derivatives were sort of like the tell and the system was more levered up than it appeared. I listened to our old podcast, which is painful but-
Cardiff Garcia:
[inaudible 00:29:41] podcasting, never listen to yourself-
Ben Miller:
I know.
Cardiff Garcia:
Unless frankly you want to learn. It's how we all get better. So good on you for confronting your earlier yourself. Yeah, what'd you learn?
Ben Miller:
I had something about that you would be willing to invest in safe assets like Triple As, agency debt, UK gilts. If you could basically lever it up and get a 10% return and that sort of levered safe asset was a source of basically risk because you had to delever that in high rate environment. So I just feel like in general, I think the mechanisms, a great deleveraging, which is basically levered interest rate risk is the mechanism that's crushing the financial economy. And then the financial economy is the channel by which the Fed sends messages to the real economy. And the problem is its messenger is not strong enough to carry the message. It's breaking under the load [inaudible 00:30:42] not happened and there's lacking data around it is. So the equities have continued to actually do decently well. They're up and last week when they should have been down, they actually weren't down.
And the flow of capital into equities have kept them stable. I still believe that the next shoe to drop is that the financial economy will go from bad to worse [inaudible 00:31:03] recession, stock market will follow both those legs down. And then the good news of all of that is that it ends inflation and that high inflation will be put down by these now unfortunate outcomes of the Fed's primary goal, which is to tame inflation. And they said they're willing to sacrifice or take some pain to do that. And now we're taking the pain. I mean it's in some ways they were clear about the trade-offs.
Cardiff Garcia:
Yeah, and it's hard because the Fed right now has a very difficult series of challenges. Essentially they have the challenges that Paul Volcker faced with high inflation but just not as bad. And they have the challenges that Ben Bernanke faced with potential systemic problems in the financial system, but again, not as bad. But they have both problems at the same time in a way that we haven't really expected or we haven't really seen in a while. And it's a little bit unfortunate because it means that there is the real possibility of a downturn in the months or quarters to come. How that's going to affect financial markets and so forth is sort of what we're trying to figure out right now. But it's not great. It's not like we have a great series of options in front of us at the moment. That's at least my read of things.
We can hope that there's like a surprise break in inflation, some disinflation that maybe we hadn't anticipated or that it continues at the pace that we had at the end of last year after this blip. And if it happens sooner than we think, then it might give the Fed a little bit more space to maneuver here. But so far unfortunately we haven't seen that. But yeah, that's a really good restatement of the thesis. It's a really good restatement of what you and I got right and wrong. I'm going to call it broadly right with some details that we may have missed as it usually goes. Maybe that's optimistic of me. But yeah, it's fascinating. And in terms of what happens next, I'm curious to know what it is that you're going to be watching in the markets both in the financial economy and also in the real economy.
Ben Miller:
Right. So the way I started the great deleveraging episode is I said, "Hey Cardiff, I've been out talking to banks again."
Cardiff Garcia:
Oh, no.
Ben Miller:
Yes, yes. So that's one of the things I can do that's helpful because there's a lot of analysis out there, but a lot of people are in the trenches. It's hard to get out there and tell people what you're seeing. So I'm talking to banks again and before they had been telling me that they were short on liquidity and that, what was causing them to be short on liquidity was that when interest rates went from low to high, every borrower did not want to refinance. They didn't want to sell their assets basically. And so when the banks don't have assets that are refinancing or selling and their assets are loans, then they don't have runoff. A lot of liquidity in the system comes from previous owners or borrowers paying off the loan. If nobody's paying off the loan, the banks start running out liquidity. So that was the previous shortage.
But now that's getting compounded by two extreme measures. I mean the banks are losing deposits except for the money setter banks and there's like a hoarding of liquidity happening in the market. There's actually, they went from being short on liquidity to actually going out into markets to get liquidity. The things you see, you see like banks issuing CDs in the market at 4.5, 5% and that's hot money, usually that's not something you want. So it's a sign that they're really trying to hoover up liquidity. You saw the half a trillion dollars of draw down from the Fed by the banks. And so when you go talk to the banks, but I know lots of bankers, they'll say basically they are virtually stopping lending. If you go to a regional or super-regional bank, it's not clear to me on the big banks.
Yeah, we can talk about that, the big four because it's a different analysis there. But the regional, super regional banks, they're saying publicly that they're going to do deals. But if you talk to them, the banker will say, "I see every deal that goes to credit committee, usually there's 20 deals to go to credit committee a week nationwide and zero are making it through, zero." So it went from being I'm defensive about liquidity to being offensive about liquidity. I need to get liquidity back into the bank and that's basically going to suck more liquidity out of the system-
Cardiff Garcia:
And shuts down their own credit extension. It shuts down their own lending.
Ben Miller:
So shuts down lending, which is bad for the real economy and bad for the financial economy too. And all those are signs of real fear and risk aversion and fear and risk aversion are really the key drivers of any real downturn. There wasn't fear in the market even last time we talked.
Cardiff Garcia:
Yeah. By the way, I also want to point out the importance of these banks that you're describing in terms of the lending they do and in particular to the segment of the market that obviously you specialize in. So let me just read you this quote real quick. This comes from the Financial Times, "banks with less than $250 billion in assets make about 80% of commercial real estate loans along with 60% of residential real estate loans and half of commercial and industrial loans," end quote. This is actually a bigger deal than people realize. I think that if in fact there's a big credit shutoff in that part of the economy that commercial real estate's going to come under a lot of pressure potentially. And this was obviously the sector of the economy that we had been tracking a few months ago when we first discussed the great deleveraging. But I think maybe it's something that people underestimate. What do you think?
Ben Miller:
No question. You said this at the beginning of the episode, you said insolvency and insolvency has couple definitions. One is basically means bankrupt. There's another definition because I happen to go look it up. So you and I [inaudible 00:37:09] Merriam-Webster defines insolvent as, quote, "having liabilities in excess of a reasonable market value of assets held." Whether you're saying you're going to hold the maturity, you're going to want to look at it as a mark to market. And fundamentally the banks, if you were to mark not just their securities in market but their entire balance sheet to market, they're a form of insolvency. It's not bankrupt, they're not going to go bankrupt. The Fed won't let that happen. But the consequence to that is that they don't have liquidity to lend systematically.
Cardiff Garcia:
I'm really glad you brought that up because for a lot of these securities that were labeled held to maturity and that suddenly people sort of realize, well, actually we better consider the market value of them because in a financial crisis or in a bank run or both, you have to be able to sell something in order to give money back to your depositors. Or if your own lenders of other types end up pulling their money, suddenly those held to maturity securities no longer can be held to maturity. What's fascinating about all this to me is that these banks were starting to have these troubles during a time in which the economy has not yet at least entered into any kind of recession. There's not a broader financial conflagration taking place. It really did start during a time when you wouldn't necessarily expect it or maybe they were just first.
That's the sort of thing that you have to sort of worry about. So I don't mean to be too [inaudible 00:38:42]. I don't myself think we're going to have that kind of massive conflagration. I don't at all think that we have the kind of dangers that we had in like 2007 or so. I don't think we're anywhere close to that. I'm not saying that. I'm just saying the circumstances arose. All this turbulence arose during a time when you wouldn't necessarily expect it or it might have just been a little bit early in response to something worse that might happen because interest rates climbed so much.
Ben Miller:
Right. That's why I'd almost taken optimistic approach, which is that the Fed could take two ways to eliminate inflation slowly or quickly. And there's parts of me that would prefer a faster resolution because even though it'll be more painful, it'll be shorter. And that's what I think we're going to see. And though that's why even though I'm expecting things to get worse and I want to walk through some of that, I think that it'll end inflation. And I think businesses that were not over levered and generally prudent will actually do better off putting this inflation and higher interest rates behind them soon, fast.
Cardiff Garcia:
Let's do that now. Why don't we walk through some of the reasons that you just mentioned for why things might get worse.
Ben Miller:
There's two ways that I like to think about things. I like to think about things generally and I like to think about things specifically or another way I like to think about things in the abstraction because a lot of times [inaudible 00:40:12] specifics can confuse what's happening. And so I think about the abstraction and I think about the specific cycle back and forth trying to refine the thinking. An abstraction, the basic nature of an economic cycle is there's virtuous forces and vicious cycles. And if you're in a virtuous cycle, the virtuous cycle is fundamentally about the patterns of credit and risk. And as there's upswing, people take on more credit and more risk. And that basically beneficial. And in a downswing credit and risk goes transitioned from being a gift to a curse. We started the vicious cycle. That's what the grade deleveraging basically was forecasting.
Because we were removing credit from the system and over levered borrowers then potentially blow up. The blow ups are the outer ring. So they are the first, no question, just like I think you said last time this is going to happen. I'm like, this is going to happen. There's no way this is over. Because the fundamental pressures on businesses in America and financial economy with high interest rates and quantity of tightening, which continues. And essentially if you're trying to invest into the market, you're waiting for those two things to discontinue, right to reverse. And that will be the sign of the new cycle. So that's basically that overarching abstraction. And then as you get down to how that impacts the real economy, when lenders retract, there's basically less money in the economy. And the retraction is, I've talked to some reporters and [inaudible 00:41:45] "what's the next shoe to drop?" [inaudible 00:41:47] "actually, you know what's the worst thing, is the uncertainty."
If we all knew it was going to be office buildings, actually it would be no big deal. But the fact that the uncertainty, so the fact is that we're uncertain about what's actually going to happen next. What's bad means that basically people are risk averse about everything, is like COVID in the beginning we didn't know and that was way worse for the economy than knowing these certain behaviors, these certain venues, those were more risky. And so we're in a period of uncertainty and that's causing broader base risk aversion, broader base fear. And that's why the credit committees are even more conservative. And so the point about the abstraction when I talk to the report is when they're asking for certainty [inaudible 00:42:33] you're missing the point. Once you get to certainty, we're actually pretty much through the worst of it.
Cardiff Garcia:
Uh-huh. And then what indicators then, given that it's hard to pinpoint the thing, given that there is this widespread possible contagion, widespread economic uncertainty, what indicators can we follow to sort of track whether or not this updated version of the great deleveraging which we're calling the great cascade, whether it continues or whether at some point there might be a turn and things start improving?
Ben Miller:
That's actually a really good way to frame it. So I mean things that I'm watching, and it probably everybody's seeing, right, is there's been a $100 billion of deposits flow out of Main Street banks into Wall Street banks. Like the unintended consequence of what happened with the sort of half measures on the bail-outs of Silicon Valley Bank and Signature was a flight to safety. And that's basically been to banks that are too big to fail and to money markets funds. So I think to me like 250 billion or a quarter trillion have gone to money market funds maybe more at this point. And also you saw basically all those dollars that moved to those places then ultimately ended up in treasuries because treasuries are where the safety is. And so treasuries moved a 100 bips in a single day, which is a historic move. I have a person I'm trying to get on the podcast and she ran the treasury desk at Goldman and she's like, "in my career, it moved a 100 bips, like once in 87, once in 94, once in 2008 and now." So it's a really big move.
Cardiff Garcia:
Yeah. I want to point out by the way that the yield curve has been inverted since I think either the end of last November or at some point in December. I just wanted to point out that like, we've talked about how equities have stayed strangely sanguine about what's happening. There is a big, big, big argument essentially happening between the equity market and the bond market. And it sums up the uncertainty that you're describing now I think.
Ben Miller:
Yeah, and almost always the credit market is right. On a more a specific thing I've seen we buy and invest in real estate and also tech and also across public and private markets. I think that breadth actually gives me a really good sense of what's happening in the world because it's all connected and if you see something early in one place, it makes its way to other places sooner or later. So we went into asset backed security markets about last summer and in February there was a new issuance that came out. There hadn't been a new issuance in a long time because basically no one wanted to come out the market when it was so cold.
And in January and February of this year, the markets got better. People thought inflation was going to be tamed and there was a lot of optimism. And this securitization came out of single-family rentals and we had been for the previous six months, the only buyer, nearly the only major buyer in the entire market of the Triple Bs of the sort of the class E and F [inaudible 00:45:44] that gives you a sense of what's happening in the market and what we're doing in the market. And it was nine times oversubscribed in February, just roaring back-
Cardiff Garcia:
Lot of interest-
Ben Miller:
Tons of interest, up and down, the capital stack, triple As, double As everything tightened up. When those things tightened up, it means credit will start to flow again because things will price well. And it was just like the market was open, it was less about high inflation, it was more about a lot of the movers in the market. The investment banks just basically they move, they're movers, is about certainty, clarity. So they thought they had clarity for a moment. Okay, so that was February. Today there is another single family rental securitization happening, came out to market at the end of last week. It's pricing today. We're going to try to buy one of the classes and crickets-
Cardiff Garcia:
Nobody wants it.
Ben Miller:
So like-
Cardiff Garcia:
You went from nine times oversubscribed to does anybody want to try this in one month?
Ben Miller:
It'll get done. But the class F, which is the triple B, the subordinate part of the stack, which was seven, eight times subscribed a month ago. I think there's like, either we'll take it or no one will take it and it's not going to get done and everything's widened out. So that's a sign that it's not shut down. Because there were no issuance late last year, but is much more chilled. And I think partly that's the case because there are some people who are a little, still optimistic, lagging indicators aren't so bad and the next shoe hasn't dropped, and I think the next shoe will drop and that will bring it to a screeching halt. But it's possible [inaudible 00:47:31] I don't even think it's possible, I mean.
Cardiff Garcia:
Well, let me float a couple of the indicators that I think are the things that are helping some people to kind of resist that doomier scenario that you just put forward. One is just that household balance sheets remain incredibly strong relative to where they have been for the last couple of decades. Households have already undergone their deleveraging. They did it a while ago and they haven't relevered. Another is just that at least to this point, consumer spending is still positive year over year. That might at some point be another shoe to drop. And by the way, I'm tracking credit card spending and that is starting to look quite bad. It's starting to look very risky. So I'm worried about that for sure. But the idea that the labor market is still quite strong, it's not showing that we're anywhere close to a recession, but again, that is a realtime indicator.
It's not supposed to be predictive. If you start thinking about what might happen with inflation this year, will inflation start to come down again? That is a possibility. It seems like that's more possible or more probable than that it spiked back up. And so far, at least some labor market indicators, not just unemployment are looking fine. They continue to outperform in ways that I think a lot of us didn't expect, especially in parts of the services sector, they remain quite strong. And so there are these kind of resisting trends, if you want to call it that. Right? Nobody uses that term. That's not an economic term. I just made it up. I'm saying these are trends that are contributing to I think a lot of resistance to people saying, yeah, this is all going to break. Or even if it does break, maybe the economy can still avoid that worse outcome that you kind of just described.
Ben Miller:
Yes, there's definitely countervailing forces and that's why we get paid the big bucks here.
Cardiff Garcia:
To take a, Hey, to take a stand. Try to cut through all the noise, yeah.
Ben Miller:
One of the things I saw happen in 2007, and I see it a lot, is that you see things in your day-to-day and then you don't realize there's signs of a broader phenomenon. And so for example, back in 2007, '06, I had friends who were all of a sudden were renovating five houses and owned five houses. And because subprime mortgage let them buy houses for $0 down. And I was just, "wow, this is incredible." I had no idea that time, because it was earlier in my career, that was a sign of problems, not a sign of health. So I feel like what happened with the Silicon Valley Bank failure was like a microcosm, and I was really close to the center of the storm and I felt like I, telling that story of how we were involved. I think that just what that means as a indicator or illustration of what is happening broadly.
Cardiff Garcia:
Oh yeah, we're not going to end this podcast without hearing about that incredible weekend, the weekend that Silicon Valley Bank was going down, the Oscars were on TV Sunday night and you and your team at Fundrise were hard at work trying to play a role, not in perpetuating the crisis of course, but trying to help out some of the companies that had deposits, that had accounts at Silicon Valley Bank. So that is a really important story and one that actually gives us some understanding of all these other things that are happening. So yeah, Ben, why don't we just rush to it. Let's tell that story.
Ben Miller:
Yeah. It was such an interesting experience and so I saw Silicon Valley Bank fail firsthand and at least I saw a piece of it. So we have a tech fund called the Innovation Fund, and we've been raising into it. I think we have 75, 100 million of capital we raised, and mostly we've been restrained in investing it because I felt like the market was unstable. So I do walk the talk a little bit on my views. And so we were in government money market funds. So on Friday, Silicon Valley Bank had failed and we were sitting in the office at 7:00 PM and I was talking to the team and we were like, "oh, wait a second. We might be able to lend our balance sheet out and bridge a lot of great companies."
And then so doing basically you become a powerful player in this ecosystem because so much of tech investing is about being important in the ecosystem. It's not like other markets. I mean the ecosystem or the community is a community. I mean, that's why Silicon Valley Bank worked. And so you really have to be in the community to be successful and the more important you are in that community [inaudible 00:51:46] the better off it is for the investors.
Cardiff Garcia:
Yeah, Ben, we should spell out precisely what you mean when you say you can bridge some of those companies. These are companies that had uninsured deposits at Silicon Valley Bank. They were worried about when they might be able to get their money out. It was likely that at some point they would be able to do it, but in the meantime, they had payroll that they had to make, they had to be able to pay their people. They might have had other debts that they had to pay, things like that. So what you were essentially saying was, "Hey, look, Fundrise has money, it has a balance sheet that it could possibly use to extend a short-term loan to some of these companies to help them make payroll, to help them pay their bills. And then when those companies got their deposits back, then they would pay off that short term loan to Fundrise." And of course one of the decisions you had to make was on what terms to extend that credit.
Ben Miller:
Right. And what the risk was. But first we had to basically put out the word that we were interested in doing this. So I sent out a bunch of emails to really our, the lawyers because it turns out the lawyers were the ones in the room. And by Friday night I had dozen companies just calling me and emailing me. And so then we had to start getting material from them. And we had the team woke up Saturday morning and started getting due diligence materials from companies and we started to create a loan doc. And basically my view was the interest rate doesn't matter because this is going to be outstanding for days. So I said, I think we need to end up at 10% interest rate because it needs to be higher than money markets because of the risk you're taking, but on a $100,000 loan, that's $27 a day.
So somebody paid $27 to make payroll, it's pretty good deal for them, especially considering that they would often tell me on a Saturday and ask to be funded Monday. So we got this deluge of companies, and so we had 50 companies that we were talking to. They were sending us drop boxes. I was seeing financial statements and I was seeing all their account statements and their previous fundraising books, and I was talking to venture funds. The venture funds were getting involved in sending me companies.
Cardiff Garcia:
And to lawyers, I'm sure. Right? You had to draw up contracts, assemble a team. This is a big logistical challenge.
Ben Miller:
Yeah, unless you've closed a deal and realize how much complexity in having 50 companies send us 50 marked up loan documents, they're like, no, no, no, no, we don't have time for that because you needed a fund by Monday. That is not normal. A normal bank will take two or three months to fund anything. But what I got was visibility into a big part of the tech market. Because I was seeing their businesses, their balance sheets, their statements, and that was the thing that was surprising. So we knew that companies and individual deposits were tied up at the banks, but when companies would come to us wanting to borrow a million dollars, make payroll, they had a $130 million deposits at the bank.
For most of the weekend, looked like they were going to lose half their deposits. It was going to get a 50% haircut. So these companies were going to be in deep water. But the part that I think people didn't see is the systemic consequences. And that was the part that was super interesting. So yes, okay, companies, their deposits were tied up. They couldn't pay their employees, but they couldn't pay their software providers. Their software providers-
Cardiff Garcia:
Have employees of their own.
Ben Miller:
Also had their own employees of their own [inaudible 00:55:17]. A lot of the payment processing of how all these companies are paid and stuff, couldn't run because they literally are on top of a bank, Silicon Valley Bank. So the payment processing systems didn't work, the customers couldn't pay them. And the customers' monies were also tied up. Employees personal accounts were tied up. The VC funds, some of the big VC funds had all their money, like billion dollars. I mean I know the numbers. Literally when the companies would come to us, what is happening is inside the boardroom there was a knife fight usually. So one venture fund saying I'll fund, the other venture fund saying I can't fund to help this company because all my money's also tied up there. And then what would happen is some of the venture funds who had the money would basically try to knife everybody.
Some of the things I talked about, a dirty term sheet, it's called pay to play, cram everybody down, you can't fund, I'll fund [inaudible 00:56:07] cram everybody down. And then I show up and say, I'll do it for $27. And they're like, "whoa, this is great." But the customers actually, also, this is something like a PayPal or all these places you put your money, there's a lot of sweeping, you might have Crewpon or all these places that have these sweeps where money just moves. A lot of that money that's moving, sitting on top of some of these banks. So a lot of them had hundreds of billions of dollars of customer funds at Silicon Valley Bank that was basically locked up or maybe gone. So they were having a heart attacks and then the internet portal, the online portal where Silicon Valley Bank's account statements and all that stuff was down, just shut down. So they couldn't even get their account statements. Watching this community just collapse because it was so interconnected and all the connections were broken, like the bank connections between Silicon Valley Bank and other banks had been severed-
Cardiff Garcia:
Yeah. And so tense. I mean just a weekend full of tension. If you're observing it from that standpoint in real time and you're actually in touch with the companies and what they're going through and having no idea what the outcome of all this would be because there's other variables too, which is what are the regulators going to do?
Ben Miller:
Right. I mean, everybody assumed that there would be some, two things that they thought were certain is it would take some time to get figured out and that there was probably going to be some pain. There were actually these emails going around that people were like, "I've talked to this regulator and they say it's going to be 50% and it'll become by Wednesday." There was all this rumor circulating and I was like, okay, Wednesday-
Cardiff Garcia:
I just want to point out that was not helpful. That was actually really bad. I think those people should be scrutinized right now for why they were putting out that kind of stuff. Because this was all over social media too man like-
Ben Miller:
I can send you the screenshots of all the things I was getting from so-called insiders.
Cardiff Garcia:
I mean, it was all crap and dangerous crap. They shouldn't have been doing that.
Ben Miller:
I don't know if it was real or not and people changed their mind. I have no idea. But what's so powerful about it, which I think is something that people who are not in the experience are missing was the psychological impact of that experience on the entire tech industry, the entire New York real estate industry. And it's not just San Francisco. I mean I'm either tech companies in Spain who were having these problems. It was tech companies globally and essentially, and the bank accounts where you thought you had money that was in a vault ended up being an illusion, just a complete fiction.
Cardiff Garcia:
Yeah. It's a fascinating story and I'm kind of curious about one thing, Ben, which is as you're making all these decisions, you're in touch with lawyers, you're drawing up contracts, you're trying to assess the health of all these different companies that are saying, yeah, we'd love to be eligible for one of these loans. You had investors in the fund. How do you communicate to investors that you're like, "Hey, this is a chance for us to do something different and here's how I assess the risk versus the reward profile of this idea."
Ben Miller:
Yeah. Well, the fund has a broad bandaid to invest in tech, so-
Cardiff Garcia:
So it fits.
Ben Miller:
Yeah. So we can and have been investing in credit of tech companies because I've been saying pretty consistently for the last few months, you want to be in credit, not in equities. And I still think that because I believe that we're towards the end of the hiking cycle and the interest rates are going to fall and then all of a sudden the credit's going to appreciate and then you're going to sell that and you're going to buy equities. So it did fit the broad prospectus. Yeah, I was hyper focused on the credit risk. But when you're talking about lending 1% of companies, 2% of companies deposits or treasuries, and the companies generally had 25, 50, a 100 million revenue and they were backed by the biggest names you could imagine. Actually one of the groups we were going to, we were going to lend to one of the most famous oldest venture funds in the world, we were going to lend $25 million to them. We had that ironed out because they basically said, "you fund us, we'll fund the companies." And I was like, "great. That's a lot easier for me."
Cardiff Garcia:
It's less credit exposure for you, yeah.
Ben Miller:
Yeah, less credit exposure. It's dozens of companies. Logistically you can manage that. But it was hard for them because a lot of them didn't have accounts. We actually had to fund directly to the payroll processors. We funded some of these loans, they're all paid back. But we actually did fund some loans because of the logistics of actually getting the accounts open for some of the people. And we had to fund their payroll providers and some of their payroll providers were on Silicon Valley Bank and those didn't work either [inaudible 01:00:48].
Cardiff Garcia:
We're chuckling because it was so crazy. But we should emphasize again, this was a tough moment for a lot of companies and for the banking system and everybody trying to figure out what was going on. Heading into Sunday as you've drafted all these possible loan agreements and you're getting ready to get this money out there before the start of business Monday, the regulators didn't kind of make their announcement that they would backstop deposits a 100%, I think until pretty late on Sunday. So how did all that play out?
Ben Miller:
6:42 PM.
Cardiff Garcia:
Oh, so you knew the exact time, right?
Ben Miller:
I subscribed to the Fed's releases. It's that kind of fun they've been putting out a lot recently.
Cardiff Garcia:
Uh-huh.
Ben Miller:
And so I got that and I was like, "whoa, oh, I'm so tired. I'm so glad. I didn't have to do, it was going to have to be an all-nighter." What was funny is that when everybody sort of, it percolated out to companies and then the bigger the company, the more likely they were to say to me, "we still want to close this loan." Like I don't believe-
Cardiff Garcia:
Just in case.
Ben Miller:
I don't believe them anymore. I'm just going to close this loan and then tomorrow will tell you if we want you to fund it. And then some of them actually we funded, we actually funded and actually two of the companies were public companies that you have heard of, like big companies that are like, if I told I don't want to just-
Cardiff Garcia:
No, of course I get it, I get it.
Ben Miller:
But like, yeah [inaudible 01:02:06] public company with $300 million of liquidity, like deposits, this is like a no-brainer. And we funded $5 million. So it was a relief, although we still ended up funding it, but that's why I'm saying it's a cascade because anybody who was anywhere near that has gone into contraction. They are risk averse. It was a near death experience. So the companies are really conservative. The venture funds are conservative. All the banks in the entire country have gotten conservative. And there's also this sort of like, their faith in the system was rocked. It's like going outside your house and all of a sudden all the roads are gone. The financial system just disappeared on them overnight. I saw this happen before in 2008. Like I was there in 2008, this is really what happened in 2008. And basically people's faith in the system got undermined and people were opening up dozens of accounts so they could get, back then I think FDIC insurance was lower and they had to open even more accounts and there were companies that would do that for you.
And oh, one thing I want to say, because we got a lot of investors asking this, Fundrise never banked to Silicon Valley Bank. We had no exposure. You could say it's lucky, but actually all of our money was in government money market funds because I moved them there six months ago as part of the great deleveraging. And also I'd done that in February 2020, and I've seen the system basically disappear and the only place you can be is in treasuries at that moment. And they actually usually [inaudible 01:03:34] make money when that happens. But the animal spirits, so the fear that's basically now rampant in the US economy is definitely setting off a cascade. There's no question that fear and risk aversion is the dominant concern of executives and bankers in America.
Cardiff Garcia:
Yeah. And you did promise a happy conclusion to this story, which is I think something you might have already mentioned, which is that if the cascade happens fast enough, at least we'll get to that point where we have some certainty about what's happening in the economy. And inflation will decline because the economy at that point will be struggling, which means that soon afterwards we can get back to a period of growth, financial system stability, healthy credit markets and so forth. That is part of the new great cascade thesis that this will happen relatively quickly. And so the pain might be acute, it might be deeply felt, it will be bad, but it won't last very long.
Ben Miller:
Right. So the cascade is the great deleveraging essentially continues and more companies blow up. You'll see more and more blow up. And that basically causes less and less lending. And in this instance, unfortunately it seems to be concentrated, the pain's going to be concentrated on a main street because that's where the lending is drying up fastest. And the part that I think is like, it's a little bit outside of my range here, but I really think that the markets are underestimating the risks of the debt-ceiling crisis that's coming. I think the debt-ceiling crisis is going to be the killing blow to this sort of like we'll have week after week of more problems and then the debt-ceiling crisis will end up dominating headlines. And you can see it. It's actually, even though it's not on headlines today, the credit default swaps, which are the insurance on US treasuries are higher. CDS rates are higher now than they were in 2008 or 2011 when the US was downgraded.
Cardiff Garcia:
That's fascinating. And a little bit, I got to say surprising given that even in the instance of a debt-ceiling crisis, which I agree would be terrible, a lot of people think that treasuries themselves would be safe, that essentially they would be prioritized and that there might be some spending cut to other parts of the economy. It would be economically catastrophic. It would bring on a big crisis of faith in how the government operates. But that treasuries themselves would be okay. And then in fact, what you might see instead is what you saw throughout some of those debt-ceiling crises of the 2010s, which is actually a flight to treasuries during a debt-ceiling crisis because they were considered to be the safest place even though they were themselves, the securities that everybody was worried about in terms of the debt-ceiling crisis. So anyways, I just wanted to point out that that's kind of a strange dynamic that exists there. So I'm surprised to hear that credit default swaps are doing that right now because of a possible debt-ceiling crisis. I hadn't seen that. That's really interesting.
Ben Miller:
Yeah, and I'm not forecasting exactly how to play out other than I think that if you look historically in 2011, 1996, that it causes a lot of more volatility, a lot more risk aversion, and it's already a fragile market. And by then a few more months of this sort of drain on liquidity, it's likely to be sort of the straw that breaks the turtle's back.
Cardiff Garcia:
Uh-huh. The straw that breaks all the turtles all the way down, all their backs break simultaneously-
Ben Miller:
For the final turtle.
Cardiff Garcia:
I think it doesn't-
Ben Miller:
Which is probably the, which the Fed, I think.
Cardiff Garcia:
Yeah.
Ben Miller:
And the tur, and that basically, that's the signal of the new credit cycle, that new upswing and all of this is like, this, I believe, will break the back of inflation too. I'm not a 100% on that because I think that inflation is supply side problem as well. I think the Fed just will not be able to resist the financial pressures that are likely to stem from the sort of cascade. And so then basically the positive side of it is you're at the bottom of the market and the bottom of the market's usually a good time to buy. Inflation is definitely going to be dampened a lot. That's good for assets. And the Fed's reaction, which is already the case, is they're going to balloon their balance sheet. The Fed's already added half a trillion to their balance sheet in the last few weeks.
If treasuries are at risk, they will step in to save treasuries and that will balloon their balance sheet more and all this ballooning balance sheet and falling interest rates, falling inflation, basically great for asset prices. And I think we sort of restart asset inflation and we restart an economic cycle. It's a crucible. We have to go through this sort of pain to get there, but it's talking about by the end of the summer, by the fall, having gotten through the worst of it and taken our knocks and now we can go back to rebuilding and our assets just for brief moment, the residential assets we have, they're likely to perform better in this environment because rental housing is countercyclical, interest rates falling are good for those assets, are good for those asset prices.
And so it's going to be painful and there's going to be, unfortunately, people who are over levered or people who basically are innocent to people who lose their jobs because their bank [inaudible 01:08:53] on a business, not lending to the company anymore. So from a policy point of view, you'd wish the government would be there to help the individuals who are impacted by essentially the Fed policy, but in general that the cascade is going to reach resolution I think by the end of the summer. And so that basically gives people like some clarity of how to act.
Cardiff Garcia:
All right. Well, I think that's a pretty good place to wrap things up. And all I can say is that at this point we've had the great deleveraging, the great cascade. I really hope that the next time we attach a great name to a big thesis that it's something closer to the great recovery or the great growth boom or something like that, something more positive. For all of our sakes, I think that'd be a wonderful thing. Ben, thanks so much, man. This was fun. See you in a month.
Ben Miller:
Yeah, Cardiff, you're the best.
Cardiff Garcia:
You have been listening to Onward, Fundrise podcast featuring Ben Miller, CEO of Fundrise. My name is Cardiff Garcia of Bazaar Audio. We invite you again to please send your comments and questions to onward@fundrise.com. And if you like what you heard, rate and review us on Apple Podcasts and be sure to follow us wherever you listen to podcasts. Finally, for more information on Fundrise sponsored investment products, including all the relevant legal disclaimers, please check out our show notes. This podcast was produced by the Podcast Consultant. Thanks so much once again for listening and we'll see you next episode.
