In today's uncertain economic landscape, understanding market dynamics is crucial for investors. Rising recession odds, tariff uncertainties, and changing consumer behaviors are reshaping the financial world. But within this volatility lies strategic opportunity for those who know where to look.
The economy is shifting fast. Are you keeping up?
Markets are moving by the tweet, consumer debt is spiking, and confidence is faltering. In this exclusive quarterly briefing, economic adviser Eric Rosen breaks down what’s really happening — from tariffs and treasury sell-offs to AI’s deflationary pressure on the workforce.
Whether you're investing, building, or planning for what's next, this update delivers the clarity you need.
“If we’re still talking tariffs in 60 days, we’re already in a recession.”
– Eric Rosen, Economic Adviser
Mike: Thank you for joining us for our first quarterly economic update. We'll be doing this about four times a year in partnership with our economic adviser Eric Rosen. Many of you should be familiar with him from the Rosen report, which is an incredible bi-weekly publication that we read. Eric's been a great friend for many years.
What we'd like to do today is just give an update on the economy. Obviously, a lot's changing. The market's changing by tweet. A lot's changed ever since we put together our deck last week. We'll go through our view of how we see the economy, especially through Eric's lens. Then we'll take a look at what that means in the venture space and how we see some challenges and opportunities.
The call is also being recorded. For those of you that may need to hop off, we will distribute the recording probably by the end of the week or first thing next week. If you do have questions, this is a live audience chat. Feel free to use the chat or you can actually chime in if you're on the computer. As we go through some of the slides, if there are specific questions, I think Eric prefers that you feel free to jump in right away. If the topic's relevant, you guys can ask questions, and then we'll have plenty of time for questions at the end as well. So without further ado, welcome Eric. Thank you so much for joining us.
Eric: Thanks Mike. Happy to be with you all and again, informal. Please if I say something that you don't follow or you want more clarification on, just ask the question.
What happened here is when Trump started, it looked like the economy was doing well when he came into office, and it was. I mean, behind the scenes it was slowing down a little bit, but the headline - low unemployment, strong earnings growth, confident consumers and confident CEOs - were definitely part of the picture. Then obviously that all changed in a hurry. As you could see, the recession odds went from let's call it 20% to up to almost 70%. It's back to low to mid-50s depending on the day. As Mike said, every time we do an update on these charts, four minutes later they become a little less relevant with all the moves that are happening.
The reciprocal tariffs, which we're going to go into in a little bit, created a lot of this pain. We're already starting to see some pretty big earnings revisions. Although the earnings tend to be okay, their forward guidance tends to be pretty bad.
It got very interesting. United Airlines said a couple of interesting things. One, they said they've seen a 50% reduction in federal airline bookings because of Doge cutting back spending. Two, they came out with two estimates for earnings - one if we go into a recession and one if we don't, and they were fairly different. The Doge coming into picture is also adding a new wrinkle because the federal government has been a net hirer over the last four or five years, and now they're laying people off. So that's a big delta.
So consumer economy - we've seen a huge fall-off in consumer confidence in the University of Michigan chart. And then CEO views - the same thing. The CEO confidence now - 60% of CEOs see a recession in 2025. That's up, that's more than triple where it was 3 months ago. So we're definitely seeing more concern from the consumer and the CEO alike.
This chart is a couple months dated, but I think it's still informative. Sadly these things come out every 3 months, and we're just going to miss it by a day or two. But subprime delinquencies for autos is really climbing. I mean, if you look back, you have to get back to the late '90s to get anywhere near this level. It's actually higher than it was in the global financial crisis, which surprised me.
A couple of data points out of the auto sector that jump out at me: Number one, almost 20% of auto loans are 84 months, which is a seven-year loan on a car. It's because they need to lower the monthly payments. Number two, almost 20% of loans are $1,000 a month. That's a pretty hefty payment when you look at how much people generally make. 0% deals are gone, and the average rate is 7% now, just over 7%. So I'm starting to see cracks. This was in January, just so you know that we're at 6.6%. So when I said behind the scenes, although things look pretty good, the consumer was starting to buckle a little bit.
Same is true with credit cards. We're seeing some increases in credit card past dues. Really since the free money of a few years ago with COVID, we've started to see those increase pretty dramatically since then. It's a consistent theme on past dues.
This one is student loans. For those who don't track this data really accurately, there was a pause on student loans under the Biden administration where he put a moratorium on student loan payments. Then they announced that in a year it would start again, and that was for October of 2024. Since October of 2024, when the mandatory payments began again, we've seen over 15% of borrowers fall behind. To me, that's pretty dramatic if in just a few short months over 15% of borrowers are falling behind, and we're now higher than pre-COVID levels. So another sign consumer is coming under pressure, and we really can't blame the tariffs on this one, and I think that only makes matters worse.
You know, I grew up with very limited means. My father passed away when I was five, and my mother never made more than $14,000 a year. I was always pushed by my mother to say, "if you can't afford it, don't buy it." The growth of buy now, pay later scares me quite frankly. It's a program where you go to a store, you can't afford something, and they give you a payment plan where a third party charges the retailer for it. 60% of general admission tickets to Coachella this year were bought with a payment plan of some form or another, which is concerning again, showing the consumer is really under pressure.
This chart shows the personal savings rate, and you can see the huge spike in 2020 - a lot of free money. Everybody's savings went up when they got a check in the mail. They spent it, then they got another check in the mail, and then they spent it. We are at levels below 2019. Personal savings has crashed. Interestingly, we see a little bit of a spike in the last couple months, and I think that's because of fears of a slowing economy. People are actually saving because they're worried about losing their job. They're worried about what's coming. So we're actually seeing a little bit of an uptick in savings, which is a good thing, but I think it's for nefarious reasons.
So this is what everybody wants to talk about. As I said, when Trump came to office, the markets were euphoric - going to ease regulatory burden, probably lower corporate taxes and income taxes, extend the tax cuts, open up the floodgates in M&A. Linda Khan was viewed at the FCC as being a killer of M&A, opening up the floodgates for IPOs. And that's the way it was actually.
CNBC came out with a study, a big survey actually this week, that showed in the 17-year history of the survey, there has never been a bigger move from optimistic to pessimistic on markets than there was between January and March of this year. So tariff policy uncertainty has clearly hurt GDP estimates as well as increased recession chances sharply.
But having said that, chaos creates opportunity. I was on Wall Street during 2008. It was actually record years for the business I ran in 2008 and 2009. I'm a big follower of Warren Buffett and his famous saying, "be greedy when people are fearful and be fearful when people are greedy." People are fearful right now, and there's opportunities to be made when people are fearful.
This is why I got concerned a couple of weeks ago. Historically, there's a relationship that when risky assets like equities or commodities or corporate bonds sell off sharply, treasury bonds rally and the yield goes down. Well, what we've seen two weeks ago - we saw markets selling off very, very sharply and equities down 4, 5, 6, 7% on the day. Yet Treasury bonds were selling off too, and pretty sharply. In just a few days time, the 10-year Treasury went from 3.88 to 4.60. You just don't see those kind of moves when the broader markets are weakening.
I believe this chart was the reason that Bessant pulled Trump aside two weeks ago and said, "Guys, you got to call off the dogs here." And he put a 90-day reprieve on some of the tariffs.
This next chart shows the dollar weakness. The DXY is a basket of currencies - the biggest one in there is the euro, the pound, the yen, the kroner, and a few others. You don't see moves like the dollar going from 110 - it actually hit 97.92 on Monday of this week. In a couple months time, you just don't see the dollar, which is the reserve currency for the world, fall by 11% in weeks time.
I think that chart coupled with the Treasury move is what really spooked Bessant to get Trump to call off the dogs. The chart on the left shows the foreign buyers, the foreign owners of US assets - about 18 trillion of stocks are owned by foreigners, about 7 trillion of treasuries, and about 5 trillion of corporate bonds. And make no mistake, they were selling. There's a big story that Japan actually sold a fair number of treasuries. That was one of the issues that led to that big selloff, and I wouldn't be surprised if China was in the mix too.
Inflation expectations - I'm 55 years old. For those of you old enough to remember 1981, when the six-month CD rate was 19%, mortgage rates were 16%, you had very, very high inflation. That's when Volcker had to raise rates to stave off inflation. The rate that people are anticipating inflation jumped to the highest rate since 1981 on tariff fears. It just shows the consumer and the CEO and those in the survey are very nervous about inflation, which is another factor that's weighing on markets.
I wanted to digress for a minute about something that I think is where the real savings are. A lot of people are talking about Doge saving a little bit of money, which is great, but to me, entitlement reform is really, really necessary. When Social Security started in 1935, the average lifespan was about 61 years old. Today we're 78. A Stanford study this last year showed that 50% of kindergarteners today will live to 90 years old. Well, I don't think Social Security, when it started in 1935 on the heels of the Great Depression, anticipated people living that long.
France last year raised the retirement age by two years. I think that's one of the three things we need to do to save off Social Security. The other interesting factor is we have gone from 16 workers per retiree to three workers per retiree in the last 50 years. Our fertility rates are crashing. In 1960, average fertility rate was 3.6. We are at all-time lows in the United States. It just came out - 1.66, down from 3.6 kids. And that is obviously contributing to the woes here.
This just outlines that entitlements are basically 80% of mandatory spending and crowding out everything else. That's why it's so imperative that we have to make some tough decisions, and sadly neither party's willing to do it.
This chart from a friend of mine named Mike Semlas at JP Morgan, who's the head of strategy for the private bank and asset management - a very bright guy who puts out some amazing charts. This chart just shows the growth of entitlement spending to 2035 and how much it's outpacing non-discretionary spending. It just makes my case in point - this is where the tackles have to be made in terms of cost savings. Again, it's raising retirement age, it's means testing, and it's also raising the cap on contributions. I think those are the three things that you have to do.
And this is the federal debt. It's at $37 trillion. We're growing at $2 trillion a year. We have been running deficits of about $2 trillion a year under the last four years. And then the CBO just came out and said over the next 10 years, we expect $22 trillion of deficits, which would be $2.2 trillion a year. And they always guess low. They're never right. They never guess high. So best case, we're going to be at $60 trillion of debt over the next 10 years. I just don't think that's sustainable.
We've been running deficits to GDP of about 7%. I'd feel a lot safer at 2 to 3%. Bessent came out today and said those words: "I'd like to be at 3% or lower." Warren Buffett has a great saying. He said, "If you want to end 7% deficits, it's very easy. Make Congress unelectable. They can't run for reelection if the budget deficit is more than 3% of GDP." It's brilliant. Sadly, it will never pass, but that's the way to go.
This chart shows the last time we had a balanced budget was under Clinton in 2001. Fiscal year ends in October, so that's why it's 2001. He left office in 2000. Bush ran deficits, albeit small - few hundred billion. Obama ran bigger deficits - global financial crisis. Trump ran a little bit smaller deficits until COVID happened, and then it was over three trillion. Then Biden ran pretty healthy deficits between COVID and a lot of the programs he had, finishing in 2024 at $1.83 trillion.
I just would like to see both parties show a little more fiscal restraint. I think Doge goes a little way towards that. The savings in Doge as of 10 minutes ago when I checked was $160 billion. Great. They were talking $2 trillion. If we get to $500 billion, I'm doing back flips. Also, Musk basically announced today, or last night, that he is going to be stepping aside from Doge in the next couple of weeks to focus on his day jobs of being CEO of multiple companies.
So how am I playing the volatility? I am buying on weakness. In my trust, I bought a lot of stocks when it was down big that day. I tend to play on big down days. And I'm also in my family office, I'm doing a lot in private deals with respect to private lending, hard money lending, and looking at people who are stuck and trying to find people who are in need of capital and willing to pay up for it.
I really like this slide from Mike Semlas again. It basically shows what happens after a big drawdown. When you look at a 15% drawdown in stocks, one year forward, 83% of the time you make money. If you look at a 20% drawdown in stocks, which is where we are about now, 87% of the time you make money after one year. And if you look at a 25% drawdown in stocks, you are looking at a 93% success rate, and that success rate is around 12%.
So it's basically saying when you have a big drawdown in stocks, chances are you're going to make money. Not necessarily over a day, a week, or a month or two, but over a year or more. And if you'll take some kind of a medium to long-term view, you're going to make money.
Q: What percent of national debt is new spending versus compounding interest?
Eric: The interest is going to run about $1.2 trillion this year. Our budget is $7.3 trillion for 2025. So we're going to do a little over a trillion dollars of interest. So we're running almost 20% of our budget on interest.
We had an amazing opportunity - I write this newsletter twice a week, it's a labor of love, read in 50 states and 105 countries - and I was very critical of the Treasury Department, Yellen, for not refinancing our debt in 2020-2021. Remember, the 10-year yield hit 33 basis points. The world was scared. When the world is scared, absent what's happened the last couple weeks, Treasuries rally. The 10-year got to 33 basis points. It's trading at 4.40 today.
We could have issued as many bonds as we wanted at 50 basis points, at 70 basis points, at 1%, and refinanced all the debt that we have coming due. But in her infinite wisdom, and Powell thought that this was transitory, we really didn't refinance any debt with long-term debt. We refinanced it with short-term debt. And now that short-term debt is coming due that was 50 basis point, 100 basis point debt, and is now being refinanced at 4 or 5%. And that's what's killing us.
So not only is the amount of debt that we have killing us, the interest rate that we're paying is killing us, and it's just going up over time. We're spending way too much money. If you look at a chart of history, we were spending almost nothing. We weren't running deficits until the '80s. The first 200 years of existence, we basically balanced the budget. It was only in the last 40-45 years that we started running deficits.
If you look at the chart I showed before on the amount of debt, we were at like $8 trillion in 2010. We're now at $37 trillion. Part of that was global financial crisis. Part of that was COVID, but part of that is just careless spending. I personally do not think we have a revenue problem. We have a spending problem.
Q: What are the risk factors to the bond market that is showing signs of weakness?
Eric: The risk factors are really that we are starting to see a breakdown of market relationships that generally hold true. I touched on that earlier.
I got to tell you, if I want to play hardball and I'm Xi Jinping, I'm selling US treasuries. I mean, there's a few things I'm doing, but he owns $1.4 trillion of US treasuries. Not only is he not buying, he starts selling and he pushes that yield up. That makes Trump blink. That's what I would be doing.
I would withhold antibiotics. Some of our antibiotics that we use - 90% of them are made in China. He's already withheld rare earths that are used in EVs and all the robotics. Musk came out in his call yesterday and said without China's rare earths, we can't build EV batteries and we can't build the Optimus Prime robot. So if he wants to play hardball, I think he could do that by selling treasuries.
I really watch the 10-year Treasury market. I also watch the rate between the 2-year and 10-year. I study the 2-year, 10-year relationship. Generally, when you think about it, if you wanted to borrow money for 5 years, you'd pay more than if you wanted to borrow money for 6 months. So there's an upward sloping curve for borrowing.
Before recessions, every time other than last year, since 1976, when the 2-year yield outpaced the 10-year yield, we've had a recession within months. Every time. Every recession since 1976, you've seen the 2-year yield outpace 10-year. It's a recession. The only time it didn't happen was just this last time. And it's because we're running massive deficits. It's the only reason we're not in a recession last year. You're running $2 trillion deficit, 7% of GDP. You're staving off that recession. But I look at that relationship.
Q: From a family office perspective, how has your appetite changed when it comes to backing VC funds/PE managers in this environment?
Eric: It's funny, I'm going to tell a story that's a little bit embarrassing, but I don't mind being self-deprecating. I made my first venture investment in 2007. I thought I wrote it off. I thought I got a zero. I got a check for 45 times what I put into the venture investment. So all of a sudden, now I think I'm Kleiner Perkins and Sequoia. I think I'm the best venture investor that has ever lived.
So then I went out and made a bunch of venture investments with that money. And I'll tell you, I have not done nearly as well on the subsequent venture investments as I did on my first one that I thought was a zero but was a 45-time home run.
I tend to have a barbell strategy. I have stocks, I have fixed income, and most of what I do is hard money lending. I get people who are in a pinch of capital, and I lend money against it. If I'm playing in PE today, I tend to go out and buy secondaries at discounts. A big school is selling a $6 billion portfolio of PE. I tend to play it that way, rather than VC, because I have made so many VC individual investments. I'm not as big of a VC investor today as I was, only because I was overexposed.
Q: The tariff pause is ending in 70 days supposedly to allow trade negotiations. What do you expect will be the outcome in about 2 months?
Eric: I will say this: if we are having a conversation in 60 days about tariffs, there is a 100% chance we're in a recession. There is no chance that we're not in recession if we're talking about tariffs in 60 days.
Torsten Slok, chief economist at Apollo, used to be chief economist at Deutsche Bank, was on CNBC yesterday and basically said if tariffs aren't over soon, we're going to be in a recession. He put out a chart this week on Monday in his Daily Spark (I would suggest everybody sign up if you're interested in economics. They put out a great little short chart and a paragraph on it. It'll take you two minutes to read, but it makes you smarter).
It showed that the average time of negotiation for a trade deal - and I had no idea before I read this, I'm stealing Torsten Slok's thunder - was 18 months to negotiate and 45 months to implement. I can tell you now, if it takes us 18 months to negotiate and 45 months to implement, and we are back talking about massive tariffs, this is not going to be your garden variety recession.
I don't think that's going to happen. But if that chart holds true for this case and he keeps backing off - Trump keeps backing off, and that's why the markets rallied today. They're off decently from their highs. S&P was up 182 at the peak this morning, and it closed up 88. People just don't trust it. He's on again, off again, and it makes it confusing.
I definitely feel that this tariff information and this tariff craziness has to be solved very near-term. And I think if I'm being intellectually honest, Bessant is the adult in the room in this administration. He is the smartest person in the administration, and I don't see a number two. This guy is very, very savvy, worked for Soros, ran a successful hedge fund. And I think he's the one who keeps pulling Trump aside and saying, "No más." I think that was what happened two weeks ago when rates backed up and the currency got killed. And I think it happened again this weekend.
Q: Are there many specific characters or strategies you're prioritizing on more of value managers?
Eric: When I ran a hedge fund - I had a billion and a half dollar hedge fund that I ran for a number of years - I like to say, "Well, how did I raise money?" I tried to be differentiated. What's my story?
First of all, I'm investing in people. I'm investing in the talent. Do I believe that the talent is good? Do they come from the right pedigree? Are they differentiated? What are they bringing me that somebody else doesn't bring me? And do I like them as people? Do I trust them? Because I'm giving them my money, and I worked hard for my money. So those are the things that I look at.
And on a macro level, do I want to be allocated to the space? I'll be honest, I launched a hedge fund, and I'm friendly with a guy named Dan Loeb, who's a very successful hedge fund manager. When I announced that I was launching a hedge fund, it was a story on Bloomberg. He called me and said, "I'll come over tonight for dinner. I want to celebrate with you."
So we went over to dinner. And Dan, who is clearly a little bit smarter than I am and a lot more successful, said, "Eric, I don't think now is the right time to launch a credit hedge fund. You know, it's time to be in equities, not credit."
Well, my timing wasn't great because I launched a fund with $500 million. I put a very meaningful portion of my liquid net worth in the fund, and returns just weren't there to be had. I was making 5, 6, 7% a year because the high yield market was yielding 5%. So it was really hard to make money.
Every fund that launched the year I launched closed within three years. I lasted eight or nine years, and I was like a hero for lasting that long. Timing is a big portion of it. So you have to look at the macro aspect. Is now the time?
If you invested a bunch in venture in 2021, chances are you didn't do as well as if you invested in 2016 or '17. So I think vintage plays a huge portion in your allocation.
Q: Assuming we do enter recession, do you think private market valuations have fully adjusted to the new macro regime?
Eric: I love this question. I've written multiple newsletters on this. I traffic in illiquid assets. I ran credit trading at JP Morgan, the distress business, a $7 billion global distress book where we traffic in illiquid securities and non-securities.
There is no fund on the planet that marks private credit perfectly because it's an art, not a science. It's very hard to do it. Actually, there was a big fund - you can check Wall Street Journal, I won't say the name, but it's a fund that everybody on this call knows - that came out during the carnage of COVID. They had built a hedge fund that was supposed to be liquid, and they put 50% of their assets in private equity and venture. They said, amazingly, our public market portfolio is down 44% on the quarter, but our private market portfolio is only down 5%.
I just started laughing hysterically. Of course it's down 5% because you didn't mark it to market. But if you had marked it to market, it's probably down 70%.
You've got to take a long-term view because there's not a lot of liquidity in this stuff. I think most of the folks that are trafficking in these illiquid assets don't mark to market, and that's the brilliance of the private credit business. They don't have to mark to market.
If you are allocating to private credit, I would just ask that you follow managers and invest in managers that have been through cycles, that have restructuring expertise, because there's not a lot of liquidity in these assets, so they have to work them out. With a venture deal, if it goes bad, you write it down, you don't put in any new money. In a credit deal, you might have to put in more capital, you might have to restructure it and take equity. There's different things you have to do, and you just got to make sure that you are backing a manager that has that experience.
I thought this was an interesting chart. I did a piece on this a number of months ago. What this shows is the number of workers that the S&P 500 companies need to generate $1 million in revenue. In 1985, it was about 8-8.5 workers, and it got down to 2 workers in 2024.
What does this mean and what are the ramifications? One, it means we're far more efficient than we were - smartphones, automation, robots - all those things have played a role in making us more efficient, which means that companies' margins are better and they're more profitable because of this chart.
I'll ask you all to put your "Great Carnac" hat on (I'm dating myself, but that was my favorite - Johnny Carson's skit where he would predict the future). Think about what this chart looks like 10 years from now. If I'm putting my Great Carnac hat on, I'm telling you that this chart looks like 0.5. I think we'll be at half a person to generate a million dollars of revenue for the S&P 500 companies, down from eight.
When you look at the growth in AI - there's a school in London that's $35,000 a year that will teach classes with AI tools. No human teacher. In Houston, Texas, there is an AI program that started 2 months ago to tutor children. Children's test scores improved by 30% over two and a half months. These are statistically significant moves.
My favorite story - to the question about VC investments - I just missed a huge one. One year ago, one of my readers brought me Figure AI. For those who don't know, Figure AI and Optimus Prime at Tesla are the two duking it out for robotics dominance. I got shown the deal at a billion or billion and a half dollar valuation. I quite frankly didn't understand it. It was over my head. I didn't do it. It was literally last March. This March, they raised money at $30 billion - in one year.
What I like about them, and it ties in with this chart, is they have leased robots to Amazon. And Amazon, I believe Bezos or Amazon, invested in the last round of Figure AI. When you have a warehouse worker, that warehouse worker with salary, overtime, benefits, sick days, 401k matching, pension, etc. - it's like $130,000 a year. One robot replaces three and a half people and it's $50,000 a year. The robot works 23 hours a day, needs to be charged for an hour - no lunch, no sick time, no phone time, no 401k matching, no pension, and no overtime.
If you don't think that there is going to be a massive deflationary pressure in the world on an aging population coupled with fewer laborers - they can do teaching, they could do warehouse work, they're going to be driving. One of the biggest jobs in America and in the world is a driver - truck driver, car driver, UPS driver, FedEx driver, mail truck driver. As we progress with self-driving and it becomes better and better - what does it look like 10 years from now? There's millions of Uber drivers, Lyft drivers, taxi drivers.
So I just thought this was an interesting chart, and I wanted to give you something to think about and the impact and what things might look like 10 years forward.
So I talked about the private credit market booming. We had about $2 trillion in private credit. I started in the credit business in 1992. For those in Chicago, it was at a firm called Continental Bank. I'm dating myself. Private credit is booming. And the big benefit there is they don't have to mark to market. So their returns look a hell of a lot more steady than a fund that's buying bonds or loans that are marked to market on a daily basis on a broadly syndicated basis.
There was a 46% annual decline last year in the number of new venture funds raised from '21 to '24. We're seeing fewer new funds close. Mike came up with this statistic from Carta: Over the last 3 years, the annual count of investors who made at least one new investment in US-based startup declined by 26%. I think that's interesting.
Also, we're seeing less distributions. We're seeing 21% distributions from the 2020 vintage versus 37% from the 2017 vintage. So you're seeing M&A fall dramatically.
Look at the IPO market in 2021 versus 2022, '23, and '24. We're talking about fractional. We were starting to see a pickup in 2025, about $10 billion of IPOs. In the last few weeks, you had Coreweave and Newsmax that started off both pretty hot. Newsmax went from 10 to 300 or something in short order. It's back down dramatically, down 95% from its highs in a matter of weeks. And Coreweave suffered the same fate.
With all this tariff uneasiness, where the VIX is hovering - hit 51 two weeks ago and it's hovering in the 30 range - it's very hard to do IPOs. If you look at IPO performance relative to the S&P 500, IPOs are massively underperforming the S&P over the last four or five years.
If you look at M&A, it's not as pronounced as the IPO chart, but 2021 M&A looks like a big bar. And then '22, '23, '24 is down about 40% or so from the 2021 levels.
So why is all this capital trapped? Why are you not getting the distributions in some of these private equity and venture funds? It's no IPOs and a significant reduction in M&A activity, both deals and volumes.
I had thought when Trump was elected in November, and I think the market thought, that the euphoria from the November election to January was around lower regulation, around Linda Khan being out of the FCC to open up the floodgates for M&A, around IPOs, around lower taxes. None of that has materialized because the thing that's taken over more than anything else is tariffs.
This chart is a little bit more pictorial about the trapped capital. Firms are sitting on a record number of deals that they want to sell - the green bars. They're trying to sell almost 30,000 companies in private equity, which is a big number. And then when you look at the amount of cash ratio of unspent cash to value locked in unsold companies, it was at 90% in 2000, and it's at about 35% today.
Yale is actually in market trying to sell a $6 billion portfolio. I believe there's going to be a lot of opportunities in these secondary sales. When I lived in New York City on the Upper East Side, one of the people who lived in my building was a woman who ran, I think, the biggest secondary portfolio of buying private equity stakes. She made a ton in 2009 and 2010 post-global financial crisis when no one could fund them. She was buying these things at 10-20 cents on the dollar, and I don't know what her return of her fund was, but it was massive multiples. It was a massive home run.
I think you're going to see more and more Yales of the world. There's actually talk of Harvard's $53 billion endowment - you know, Trump is battling a lot of these Ivy League schools over their anti-semitic, how they've treated anti-semitism, and talking about cutting federal funding. I personally did not know that the government was giving billions and billions and billions of dollars a year to these huge schools, but they were. And he's paused that. And that is leading some of these schools to sell their portfolio. And I think you're going to see more of that over the next year if that funding does dry up.
Mike: I'll turn it over to you, Mike. And if there's more questions, just chime in and I'll answer them.
Mike: Hey, thanks Eric. Just to capitalize on some of the stuff you said, this slide's very interesting because it shows - and this is a subset of Carta, excuse me, but it's a representation of the market - but if you look at that time period in 2021, you'll see in a period of one year, almost 3 years of capital was raised in the private market. I mean, that's pretty substantial.
So when you look at the amount of trapped capital that's in the system, this really ties back to some of the statistics Eric was talking about in the M&A market. That was part of our motivation for where we saw opportunity to come in. A lot of these firms, PE firms and obviously VC firms - they're all intertwined - are having a hard time with some of their valuations. Some have chosen not to mark to market theirs from 2021, but you saw euphoria that came in the system and a lot of this capital chasing really sky-high valuations.
Part of our strategy is - look, there's a lot of opportunity. I think what Eric said is there's a lot of great years, vintages, for some reason, because you're coming in on the aftermath when pricing comes down dramatically, and that was a huge area of opportunity for us. I mean, we saw in late 2022, there were some strong signals on some of these early-stage companies that were being started, and our whole philosophy was: look, we don't want to catch falling knives. We want companies that are being started in this environment. Real entrepreneurs are going to step up and come to the table and build these businesses in difficult environments.
I think we're starting to see some results from that, although you still see capital's a little elevated in 2024 based on the historicals. A lot of that has to do with some of these really high valuations. When Eric was just talking about Figure AI, the one opportunity he missed - sorry, Eric - but some of these companies are raising at extremely high valuations. There are some elevated valuations, and I'll kind of explain our strategy in the next slide.
This just shows - this is a nice slide because it shows you what's the average AI seed valuation versus non-AI company. Obviously, seed stage is the area that we're focused on. We think it's a great opportunity for many reasons. You've seen a lot less flux in valuations at the seed stage, predominantly because these are where companies are starting. So you'll see a lot less fluctuations because they're raising - they have to raise on a certain multiple, but you're starting to see a lot less cash raised in the seed round. So some of these valuations are starting to come down a bit, but there is a flight to quality.
So it is becoming harder to get in the higher quality deals, and, you know, thankful to our network, we've always had access to these deals, and we continue to do so. But if you look at, on average, your average AI valuation at the seed stage is about 50% higher than your non-AI valuation. So that's significant.
So part of what we look at is, we want to make sure that, obviously, we're getting in attractive valuations with the right companies. But you'll see that that's a statistic that I think carries weight across the entire market on vertical AI. Many of you know that's one of the areas that we're really focused in on right now.
I think from a vertical AI's perspective, it's in my opinion - I think we're starting to see the industrialization of AI. And so there's a lot of AI - it's, you know, AI is a big word out there right now, and a lot of people don't necessarily understand it yet, and they get too caught up in the hype. They see the Figure AIs, they see the ChatGPTs raising at these monstrous valuations.
There's so much infrastructure that these AI companies need to build. I mean, they need to raise billions upon billions to build this infrastructure. But there's also risk at commoditization for a lot of these companies as well.
And so when we look ahead and we look at where AI is going, we really see the companies winning aren't going to be the ones building general tools. I think they're going to be solving for concrete problems in healthcare, finance, logistics, legal tech. And really, our focus is purpose-built AI that understands the nuance of these sectors.
So essentially, our whole strategy is obviously investing in real businesses embedding in AI, and it's defensible IP. There's a lot of these wrapper companies that are AI - great for the consumer and business. I mean, today it's unbelievable how many notetaker apps are out there. So as a consumer myself, when we conduct business, the speed at which we can do things and the efficiency is amazing, and literally in a month there's another tool that's coming out that's better than the other one, and there's just a ton of churn.
So a lot of these high valuations, especially in AI, coming from these companies that are coming on the scene and producing $30 million ARR in the first year - I mean, that's significant. But if you look at the longevity of where that ARR is going, it's at risk of going to the downside as fast as it came up because the development of AI is moving at such a speed where every application is just becoming better and better. So we just don't see how that's an attractive area to invest.
We continue to believe that focusing on the verticalness of this business is really what's going to produce returns in the long run. It's capital efficient as well. I mean, look, you see all this news about the tariffs - I don't think any sector is immune to tariffs, as Eric said, and obviously, pricing is going to be effective whether we enter a recession or not. No sector's immune to a recession, but obviously there's ones that are more immune than others.
But there's a ton of capital efficiency with AI. I mean, Eric saw that chart - that was amazing. I mean, you saw the number of humans needed to produce millions of dollars in revenue, and it's just continuing to go to the downside. And I think that's going to be more prevalent in some of the businesses that we look at.
And obviously, technology that's deeply embedded in the companies - I think that's really important because it's defensible IP. You see now one of the most, you know, one of the best areas of opportunities, at least for someone getting a job out of school, was to be a developer. Some of these developers were getting paid, you know, $150,000 to $200,000 out of college to go develop technology for a lot of these B2B SaaS companies.
Now that whole profession is at risk. I mean, you're looking at AI coming in and being able to develop some of these technologies at almost 90% of the cost that it used to be. And so, you know, one of the greatest quotes that I see, and we live by in terms of how we make our investments, is: "Don't be scared of AI taking your job. It's the person that knows how to use AI that's going to take your job." And I think that's important.
And then as we look at these businesses, they're high value, high margin, but it really becomes the defensibility of IP. A lot of these AI companies - you need real expertise on your team to really understand the technology, because if you don't peek under the hood and see what they got, that business can be displaced in a matter of months at the pace this is moving.
Just to wrap it up, sort of the challenges and opportunities - I know we gave a whole view of the macro. I think from our lens, it's very important as we focus on the VC space. Obviously, that's what we do. We run an early-stage VC fund.
What's great to have people like Eric on our team is we love to take a whole view of the macro. It's very important in terms of the investment decisions that we make, but also the sectors that we choose to focus on. If you look at some of these tariffs, the logistics space becomes an interesting area to focus on.
So as we look at being sector agnostic in terms of focusing on vertical AI, AI based on where the economy's going and what types of policies our friends in Washington DC want to put forth - that really helps us lean into certain sectors where we think there's going to be even greater opportunities.
But when you look at the challenges out there - obviously, fundraising, it's a very difficult environment to fundraise. We're very thankful we've had success in fundraising. I think based on our strong thesis and the companies that are performing in our portfolio.
But the one thing I'll say to that is that fundraising has become a new checkbox in terms of making investments, whereas when you made investments previously, it was automatically assumed that good companies could fundraise. And that's not necessarily the case. You have to look for founders and teams that either have a strong network, strong cap table, or they have the ability to fundraise themselves because if they don't have the ability to bring more oxygen into their tank, as good as their business could be, it could be at risk in this type of market.
Market volatility impacting IPOs and M&A - that's been a cornerstone of our thinking from day one. You know, we came in after that whole 2021 era, and IPOs were an afterthought for us. If one of our companies goes IPO, I think that's just icing on the cake. But our whole goal is to align ourselves with disruptive businesses, real businesses that are making a dent within their sector that'll be acquired. And that's really how we go about looking at it.
Anyone coming in right now that's making early-stage investments thinking that with the underwriting with the hope of going IPO - I think is going to be significantly challenged. Obviously, it's rapidly changing due to advances of AI. I think that we've beat that to death during this presentation.
And then the tariff uncertainty - I think we're asset light the way we invest. I think that's a strength. But I think the way we look at tariffs is: Okay, well, which sectors can we focus on where we might be able to see outsized returns?
Opportunity is early-stage focus. I think early-stage tends to be more resilient. I think our philosophy has been shown to be the right way. You see a lot of these larger VC funds have been focusing on the earlier stage. The problem though is a lot of these bellwether VC funds can't focus on the early stage anymore because they raised so much capital. I think it's like six VC funds took in almost like 50% of the capital raised in 2024. So their fund sizes have become so big, they're having a challenge allocating to the early-stage space. I think that's a huge opportunity for a fund like us.
Smaller checks and the biggest players won't focus - that's true. I mean, look, we, as I like to say, when we make investments, we might not be the largest check, but sometimes we're the largest mind. And I think that comes to a fact of the VC funds that are going to get access to deals and win in this type of market are going to be the ones that can provide true added value.
Also, better terms and valuations. I know you saw the AI slide - obviously those are higher, but for some of the companies right now, terms are on the sides of the VC. When you have the right VCs there, you can definitely attract better terms and also work in pro rata amounts and other things that can help keep your ownership size steady over time.
Being sector agnostic - I think part of our sector agnostic approach, you know, around two years ago was that we saw challenging economic times ahead. And I think being sector agnostic within the VC fund allows us - our whole portfolio doesn't necessarily become at risk if we're focused on a space that can be challenged based on whether it's tariffs or certain recessions or certain economic policies that are passed down. And obviously with AI, disruptive tech is going to lead to new opportunities.
Mike: With that said, I don't know if anybody has any additional questions, but I wanted to thank Eric for the great presentation.
Eric: I see another question here from Kasra again, asking going a little deeper: "Assuming we do enter recession, do you think private market valuations have fully adjusted to the new macro regime?"
I would just say, I touched on it, but I would be careful. Those are things you buy in the secondary. If you have a fund that has a public and private arm, and they're taking new capital, I would really ask to see the valuation and just randomly pick three and how do you justify that being marked at this price and see if you feel comfortable with it. And if you do, that's one thing, but I would be surprised if you do.
Q: You mentioned a number of industries already seeing traction with vertical AI. Curious if there are any specific use cases or sectors you believe are specifically are especially primed for breakout growth over the next 12 to 24 months?
Mike: Great question. I mean, look, you look at a couple of the sectors - logistics, that's a space that's right for disruption, as some of the slides you saw from Eric. Legal tech - that's another space that we think is right for disruption.
I think more is going to change as you see what types of policies are being handed down. But there's so much opportunity within the vertical AI space. I think it's really capturing your hands on who are the best entrepreneurs equipped to build these types of businesses and then owning in on the sectors. We usually take our cues from some of the economic data that Eric presents on where we want to go a little bit deeper in those spaces.
Q: Please address the perceived war that Trump is waging on Powell and the effect on markets. Also, do you feel that energy sector in regard to AI is being overlooked and undervalued?
Eric: The thing I just published recently, today and then the last piece - I am an equal opportunity hater. I'm very hard on Biden, I'm very hard on Trump, I'm hard on all politicians because I think they all are degrees of bad.
What Trump is doing to violate the independence of the Fed is the reason the markets got killed. Today is Wednesday, so it was Monday that they got killed - 100% was that. He called the Chairman of the Federal Reserve a "political hack." I don't think the president should call anybody that, let alone the Chairman of the Federal Reserve. Even though I don't believe Powell should be the Chairman of the Federal Reserve - I thought the mistake he made by calling inflation transitory during COVID would have made him - he wouldn't have been my choice for the Chairman of the Fed.
I find it troubling. Austin Goolsbee, the president of the Chicago Fed, was very, very critical of Trump, trying to violate the independence. I am not convinced that we should be lowering rates today. I believe we will be lowering rates in coming months, but the uncertainty of these tariffs, whether it's going to cause inflation, whether it's going to stick - I think Powell is very heavily weighing what happened in the '70s, when we had runaway inflation and Volcker had to raise rates so many times.
Yes, rates are going to come down this year, but remember rates are already down. They've already been lowering rates now for six months, and the 10-year is materially higher. So just because you're lowering rates, the bond market is telling you where the 10-year is trading, and it isn't. The Fed funds is down, I don't know, 75 or 100 basis points, and the 10-year Treasury is up over 100 basis points. So just because they're lowering rates does not mean that's going to work on the long end.
And then, "do you feel that the energy sector in regard to AI is being overlooked and undervalued?" I mean, I don't want to specifically - I don't have a strong view on the valuation of the sector. Parts of energy are getting eviscerated right now. Look at oil. I mean, oil traded at $57 a barrel in the last week or two over the fears of a global slowdown. Commodity prices like oil tend to get crushed in an economic slowdown.
I bought Chevron stock 10 days ago when the stock market was down 8 or 10% that day. I bought a commodity ETF. I'd tell you if I remembered which one I bought. But I do think that the demand for power is unreal.
So I made a loan to somebody who has a huge solar project underway, and it is a huge solar project in Texas. The amount of parties that are circling around to get access to this power is just mind-numbing. And it's because one, the ERCOT power grid sucks. Pardon my French. It goes down all the time. And with the need for all this AI - it's a huge consumer of power - you really need more.
And generally, things like wind don't - aren't consistent enough if the wind doesn't blow. You saw that in the North Sea. But Texas sun is pretty consistent. And so it needs to be more efficient because grid power is very, very expensive, and there's been a vilification of natural gas and coal. I think 61% of our power grid runs on coal or natural gas. So it's not - I mean, they're very, very heavily weighted towards that.
Nuclear power is the answer. If you're asking what the answer is, it's nuclear. Look at what happened in France. In France, they went nuclear. Germany didn't. And Germany buys power from France, and France is growing, and Germany is under siege. So I do think a combination of some alternatives, but nuclear is the way I would go.
Q: Eric, a follow-up on private markets. Are you seeing LPs or GPs take advantage of the perceived on-sale environment for US high-quality bonds, and how might that crowd out capital from private markets?
Eric: Listen, I think everybody has an allocation, you know, the standard 60/40 equities and bonds to somebody who's earning a living, and then as you get older, it moves to more of a fixed income.
I advise some different families on allocation, and there's a family with somebody in their 80s, and I just took them all out of equities and put it all into fixed income because I had material enough that they were getting so stressed by the volatility in the equity markets. I did that, and they're doing quite well.
I would say yes, there is [interest in bonds], but I don't think bonds are super cheap. The high yield market - I looked today - is yielding at about 8.12% for an unsecured bond. If you're going into recession, I think that goes lower. So I don't think the high yield market's incredibly cheap. I think some of the private credit markets are still cheap. You could get teens returns secured, and I like that a little better.
Q: Given the current macro environment and tightening liquidity, are you seeing a shift in how angel investors are thinking about capital efficiency and runway at the pre-seed level? Are there new signals or founder qualities that are standing out now more than previous cycles?
Mike: I think I alluded to this earlier - fundraising is a checkbox. So are these founders and co-founders able to fundraise? But yes, I mean, everyone in the past year at this stage has been capital efficient. If you're not capital efficient, you're really not fundable.
But fundraising is a new strategy, and it's not easy. So you have to get these founders to really think ahead. If you look back to 2021 and what was happening is that everybody was raising in a matter of three months. So they were just waiting to run out of money, and then they would go back and raise in a short period of time. That's not happening now.
So you have to have really strong founders that are planning years in advance. They have a plan to get to break even or cash flow positive. But the real shift is how these founders are able to fundraise. That's something that you have to factor in when making these investments at an early stage.
Eric: And I mean, I think it's always consistent. I've got to believe in the person. If I'm trusting you with my capital, I've got to believe in you. How are you differentiated? What do you bring to the table? What about your team? What are interesting deals?
I was always reading the room when I was raising money. I think raising money was one of my core competencies. I would read the room and the kind of questions people would ask me and what they were looking for.
I think I want people to be tight. When you ask a question - so an investor would come in and say, "Oh, can you show me the last investment you made? How you came to that conclusion?" I'd pull out a book. That book had all of our analysis in it with charts and graphs and why, and our investment memo and why we did it. Like, we were tight, and I feel like that breeds confidence. And if you make a mistake, you could fall back: "Okay, this is my thesis. This is what went wrong," and try not to make the same mistake again.
I also think, as when Dan Loeb said to me, "You probably shouldn't be starting a credit fund in 2013 with high yield at 5%," I think a lot of allocation is being in the right place at the right time. You could have been the worst hedge fund investor of all time. A friend of mine started a hedge fund in January of 2009. He launched with $500 million at the lows of the market. Is he a genius? No. His first year return was up like 75%. He looks like a genius because of his timing.
So I think part of it is being able to allocate to the right asset at the right time is very, very important to outperform the market. AI is hot right now, and there's going to be some big winners in that space over the next five years.
Q: You brought up the 60/40. With US markets under pressure, inflation lingering, and the classic portfolio mix under pressure, how are you thinking about positioning over the next year or two? Are you leaning more towards cash, real assets, or international?
Eric: Listen, I'll tell you where I was wrong. I did not see Trump blowing up the world on tariffs, and I did not see the dollar getting eviscerated. Quite frankly, I'm going to Europe this summer, and I was very excited about how strong the dollar was and how cheap everything was going to be. Well, that all changed in the last few weeks. So now it's going to be a lot more expensive vacation.
I believe that you need to have some international exposure in the 60/40 portfolio. I would say that personally, I am underweight internationally because I have such a big part of my net worth in these hard money loans. I do it myself. I don't have a team anymore. It's a family office of one. I don't do anybody - I do all the documentation. I have a lawyer that I've hired. Doesn't work for me directly, but I hire them by the hour to help me document these deals. And I'm getting, for me, mid-teens returns, which is all I care about. If I could get 13, 14, 15% and sleep at night, that's how I live. So I no longer go to work every day. That's one of the things I do. I make investments in real estate. I develop some stuff. And so I'm not as active in international markets as I used to be because you really have to follow them.
But, you know, we - that's a good segue to reserve currencies. I did a piece on this in my last piece actually, wrote about reserve currencies. So in 1900, 84% of reserve currencies or something, or maybe more, was in the British pound, and very little was in the dollar. By 1947, the dollar became about 50% of reserve currencies. By 1973, it was 84% of reserve currencies was the dollar. Remember, 73 years earlier, it was 84% was the pound. And today, you have about 59% of reserve currency in the US dollar, down from 84% in '73, and the pound is like 6%.
So things change. If you're asking me whether I think the reserve currency will continue to be the US dollar, the answer is I do. If you're asking me by 2040, 2050, do I think the US dollar as a reserve currency will be 59%? I don't. I could see it at 40%.
My issue is: what takes the place of the dollar? It sure ain't the pound. I don't believe it's the euro. You know, lately, it's been acting like gold is the reserve currency. Gold is up 23% this year. It was down today for the first time in I don't know how long - it was down three and a half percent.
But I don't see a viable alternative to the dollar. Remember the largest capital markets in the world - if you want to borrow money, if you need to borrow real money, you ain't going to Europe, and you're not going to Asia. You're going to United States. So, you know, until that changes, and I don't think it's going to change in my lifetime, yes, I see the dollar continuing to trend down.
If anybody's interested in this, my last note - you can find me on Substack, Rosen Report. It's free. My last note that I sent out Sunday - I have a beautiful video that outlines the changing reserve currencies over time, and I think it's fascinating, and I wrote about it quite a bit, so you might find that interesting.
I think that takes us to the end of questions. I don't know if there's anything else. We've been on for about an hour, so I don't know how long people want to hang out, but I'm happy to answer questions for as long as you want.
Mike: I think we covered everything, Eric. I just want to thank everyone for joining us. As a reminder, we'll be doing this once a quarter. We'll typically do this the middle of the month after quarter end. And obviously, a lot's going to change between now and the next quarter. Things have been changing weekly. But thank you, everyone, for attending. We hope you found some value in it. And we'll also be sending out the recording of this by the end of the week or first thing next week for those of you that want to revisit for some more insight.
Eric: Well, Mike, thanks for having me, and I really appreciate everybody listening and asking such good questions. Making having an engaged panel discussion makes a lot more fun for me. So thank you for asking great questions, and everybody have a good day.