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Major Market Risk: Chamath Outlines Corporate Default Dangers in the Wake of Trump's Tariffs

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Major Market Risk: Chamath Outlines Corporate Default Dangers in the Wake of Trump's Tariffs

Transcript

110 segments

0:00

The thing that we haven't talked about

0:01

is with all of the

0:03

tariffs, with all of the

0:06

financing questions, with all of the

0:09

recession questions, short-term rates,

0:11

long-term rates, the one thing that we

0:13

haven't sufficiently talked about. It's

0:15

not really in the press, but it needs to

0:17

be talked about is there is a tremendous

0:19

amount of corporate debt that supports

0:21

these businesses today. And you would

0:24

say, well, if long-term rates go

0:28

down, there's no real risk. But the

0:31

tariff picture actually impacts

0:33

revenues, right? And the problem with

0:36

that is that there's a lot of companies

0:38

that have debt covenants tied to revenue

0:41

and ibida. And so this is what I spoke

0:44

about at the beginning of January, which

0:46

is the one risk that is

0:50

uncontrollable is what happens to

0:53

corporate debt and could we see a wave

0:56

of defaults and a wave of action. Nick,

0:59

you may want to just play the clip and

1:00

we can talk about what we can do about

1:02

this. This was my pick for the best

1:04

investment idea.

1:06

Go ahead. All right, here we go from

1:07

What do you got? So, let me preface this

1:09

by saying that this is a pick that 92

1:14

times out of 100 goes to absolute zero

1:17

and six out of the remaining eight times

1:21

you make 10x extra money and then the

1:23

final two times you make anywhere

1:25

between 100 to a,000 extra money. This

1:27

is a loser trade, but I would be long

1:32

CDS. So, what am I buying? I am buying

1:35

insurance. I'm buying insurance using

1:38

credit default swaps. I'm buying what's

1:40

called protection that there is no

1:42

default event in 2025. I would like a

1:47

little bit of an insurance policy in

1:49

2025 so that the men and the women that

1:52

we have voted in have the chance to do

1:54

their work in peace. I think that there

1:57

is a small chance of some volatility

2:00

next year. I hope it doesn't happen. I

2:02

hope that this trade loses money, but if

2:05

it hits, it will be the best performing

2:06

asset of 2025. And I just want to be

2:08

clear, this is not something I think

2:10

will happen. It's not something I want

2:11

to happen, but I do think that if you

2:13

look back in terms of just the tonnage

2:16

of dollars you can make and the massive

2:18

risk asymmetry that it presents to you.

2:20

When you look at the concentration of

2:21

the S&P, when you look at just the total

2:23

gross amount of debt that we have, when

2:25

you look at rate spiking, all of these

2:27

things say having a little insurance may

2:30

not be a bad thing. It has

2:32

hit. Nick, you can show the CDS

2:35

graph. So, this thing for every billion

2:38

dollars of risk you would have put on,

2:40

every billion dollars that you put on

2:42

would have cost you about a million

2:43

dollars. And that million dollars would

2:46

have made you about $7 million in about

2:48

3 months. Did you put it on? I'm not

2:50

going to comment on my my trades, Jason.

2:54

Oh, okay. But we tal we talked about it

2:56

off air already. But if you did put it

2:57

on, does that mean you're taking us all

2:59

to Italy this summer? No. What's

3:01

happening here? Are you getting a boat

3:02

for us to record from the all-in yacht?

3:04

No, but there may be some boats for sale

3:06

if this trade keeps going this way. Oh,

3:08

why is this important? The CDS actually

3:11

represents the structural risk in the

3:13

United States private economy, in the

3:15

corporate economy. And so, Nick, if you

3:17

just put it back on. So, when you see

3:18

these spreads blowing out, this is

3:20

actually a very important warning sign.

3:22

And this is actually a thing that I

3:24

think Scott understands well, Howard

3:26

understands well. I think they'll

3:28

translate this to the president. If I

3:32

have an opportunity to explain it, I

3:33

will. But this is a really important

3:35

market to pay attention to. This is what

3:37

was the canary in the coal mine for the

3:42

great financial crisis. This was the

3:44

stuff that showed us that there was a

3:46

big default event happening in the

3:48

mortgage side of the market. But then

3:50

that spilled over to the broader

3:52

economy. And so the tariff picture and

3:55

the recession picture will get played

3:57

out in this chart. And I think it's

3:59

something that folks can and should

4:01

probably pay tremendous attention to

4:03

because I think now that this trade is

4:05

in the money, the question is I don't

4:08

think we want this to happen. That one

4:10

sigma two sigma event where all of a

4:12

sudden this trade returns a,000x is

4:15

really

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