CNBC Exclusive: CNBC’s Scott Wapner Interviews Chamath Palihapitiya From CNBC Institutional Investor Delivering Alpha Conference
Q2 2020 hedge fund letters, conferences and more
WHEN: Today, Wednesday, September 30th
Realtime Transcription by www.RealtimeTranscription.com
TYLER MATHISEN: Well, it was mentioned in the previous segment there, but you can't talk about investing in the year 2020 without mentioning the rise of the SPAC. And who better to discuss opportunities for alpha in that area and others than our next guest? Please welcome Chamath Palihapitiya, he is Social Capital founder and CEO. And my very good friend and colleague, Scott Wapner. Scott?
SCOTT WAPNER: I appreciate it very much. Chamath, welcome. It's nice to see you again.
CHAMATH PALIHAPITIYA: It's great to see you, Scott.
SCOTT WAPNER: We're going to get to the conversation about SPACs in just a moment. But I do want to pick up where we left off back in April, a conversation that really was summed up with the words "Let them fail." As we speak right now, the Treasury Secretary of the United States is meeting with House Speaker Nancy Pelosi. They're trying to iron out a new stimulus package. We just got layoff announcements. Disney laying off 28,000 people, other companies doing the same. Airlines are on the cusp of laying off tens of thousands of employees on top of that. Do you still want to let everybody fail?
CHAMATH PALIHAPITIYA: You know, this is what I was saying in April, which is that these companies were going to take the money, and the minute that they could let these folks go, they would have. Again, I think it's just a really ridiculous kind of shameful thing. What we should have figured out when we gave them this capital is what new rules we would create around their behavior. You know, these are companies, preceding this pandemic, had done the most absolutely horrid and idiotic forms of capital allocation you could imagine. None of these people were investing in R&D. None of these people were actually raising wages. None of these people were saving for a rainy day. What they were doing is they were entering the markets, they were buying back their stock, they were inflating earnings per share to drive their own personal compensation. And this isn't a one-year problem; this has been happening, frankly, for the last 15 or 20 years. So if you were going to give these folks money, you should have created some much tighter guardrails for what you should be doing in the future. That's number one. Number two, the thing that I said then and I still believe now is that the only way we are going to dig ourselves out is by focusing on the consumer. Ordinary Americans -- because the overwhelming majority of GDP in this country is generated by consumers and generated by consumption. So you need to put more money into their pockets, because for them it's a really simple equation where if they have more than they need, Americans are unbelievable at spending. And I think that spending right now is probably the best way for us to dig ourselves out. But giving more money to these class of CEOs and boards is idiotic and dumb.
SCOTT WAPNER: So I'm having a hard time hearing you as well, for the people in the control room, if they can help me out with that. So what do we do about the tens of thousands of people, though, that have either lost their jobs or are about to lose their jobs? I understand what you're saying about what the companies have done in the past that may have led to the precarious situation in part that they're in. But what do we do about those people? Shouldn't they be bailed out?
CHAMATH PALIHAPITIYA: Not a single extra dollar should go to these companies. All this money should be focused on those people. We should be improving unemployment benefits, we should make sure that they don't get forced out of their homes. If to the extent that they have loans that are coming due, we should figure out how to extend forgiveness programs. And then we need to compensate these folks. And that's what we need to focus on. You need to put the money into the hands of ordinary Americans. Stop putting it into these boards and these CEOs, they are not well run.
SCOTT WAPNER: It's a very big blanket statement, of course, but the United States cannot survive without an airline industry, for example. And again, this was a crisis not caused from anybody's fault. You can certainly take issue with the issues that put the airlines in the situation they are in now. You mentioned the buybacks, not planning for a rainy day. But in the situation we're currently in, we kind of -- we are where we are. Shouldn't we make sure that this economy can function going forward and then take the steps in the future, in the near future to deal with that?
CHAMATH PALIHAPITIYA: You know, if you really believe in trickle down economics, then let's actually see how trickle down economics would work. Give money into the hands of ordinary Americans. What I guarantee you they will do is they will spend. In fact, in the few months -- in the late spring and early summer when we actually were giving folks capital, what you saw were all kinds of capital consumption behaviors do incredibly well. They were buying cars, they were buying RVs, they were buying all kinds of things. The first few months of the summer when people could go and travel, they were traveling like crazy. That's the best way to implement trickle down economics in the next 10 or 20 years, focus on people, give capital to them, let them spend. The businesses that understand how to give a great customer experience will win, and then the money flows through the companies and then it will eventually flow into shareholder pockets. And that is a much better way to run the economy, knowing what we know. But giving boards and CEOs more capital when they have proven that they are fundamentally poor capital allocators is not a smart strategy. It's like giving a baby a gun. It doesn't work.
SCOTT WAPNER: What do we do, though, with small businesses that are hurting so much, as you well know? Restaurants, barber shops, all the small businesses that are hurting, should they be bailed out? Should they get more money from Congress today?
CHAMATH PALIHAPITIYA: Now, those guys are probably capable of running a good business. Again, what I am talking about are corporate boards. When you see the machinations inside these boards -- And, again, the SEC makes these folks disclose their decision-making. You see it in their quarterly reports or annual reports. Most of these folks are there to earn the paycheck of being a board director or are there to get their CEO compensation plan, which they've gotten one of their board directors to okay. Now, if you go to the other end of the spectrum and look at small businesses, they are forced to actually run a good business. They need to make good capital allocation decisions every day. They need to hire great people, train them, build a culture. Why? Because it is really difficult to make small businesses work. It's much harder for you to be running a small business than it is, frankly, to run a Fortune 500 company. A Fortune 500 business, you can get that job because you went to a fancy school, you knew the right people, you kind of failed all the way up. But if you're a restaurant owner or a small business owner, every single day is a fight. And if those folks are given capital, they will do so much better. And so my perspective is, give money to ordinary Americans, priority number one. Priority number two, give money to small businesses. But do not start ripping any more money into these big companies. They don't know what to do with it.
SCOTT WAPNER: A lot of it, obviously, comes down to pure politics, and that's kind of where we are. We'll see what comes out of the meeting that's happening, as I said, Chamath, as we speak. And speaking of politics, what did you make of the debate last night? Did you watch it?
CHAMATH PALIHAPITIYA: That was an utter shambolic dumpster fire. I mean, it was so sad. But in some ways, though, it was incredibly clarifying. I really learned a lot at the end of that debate. And I'll tell you what I learned, Scott. I woke up this morning, first I looked at S&P Futures, and they were up. Now, it was clear to most people that I think --You know, there were two goals. Donald Trump had one goal, which was don't look unhinged. He failed. Joe Biden had a different goal, which is don't look senile. He mostly did that. So, in many ways, I think Biden accomplished his goal. Trump did not. Yet the markets went up. So if you take a step back and really observe this in a dispassionate way, what did we learn? And I think there's something really important that's happened in the U.S. presidency that has been sealed in this election. It's the following: Which is that we are now optimizing and we, as voters, reward style versus substance. I know that's hard for some of us to hear because, you know, we think about people like George Washington, FDR, Abe Lincoln. But just to remind you, we also have to deal with Nixon, Harding, and Millard Fillmore. I mean, the reality is that the presidency has been somewhat scattershot. The reality is, today, people will vote for people, for individuals, for brands. They are not voting for platforms. And, in fact, the 8 seconds of that debate where they actually talk about substantive issues, it was hard to figure out how different they were. So, for example, you know, the few seconds they spent on foreign policy, it was clear that they both hate Russia, they both hate China, they both think the Middle East is not really worth investing in anymore, and they both need India. Okay. They both want to spend money, in the trillions of dollars. One calls it infrastructure; the other one calls it a Green New Deal. They both have monetary policy in the federal reserve that is basically kowtowing to treasury. Okay. So at the end of the day, what are we voting for? We're voting for the kind of person we want to see represent the morals and values of the country, and not necessarily a platform. So I think the stock market said, this is a "do no harm" election at this point and they voted with their dollars.
SCOTT WAPNER: So you think it doesn't matter who gets elected president, whether the President stays in office another four years? Who are you supporting and what happens to the market?
CHAMATH PALIHAPITIYA: No, I absolutely think it matters. Style absolutely matters. And there's certain issues at the fringes that I think are incredibly important to me. And so, you know, I will vote in a very specific way that reflects those values. And it's pretty clear. I mean, you can look at the SEC filings, I've given a million dollars to the Democrats, so you can kind of guess where I'm going. But I just want to make clear that 25 years from now, 40 years from now, don't be surprised if King Kardashian wins the presidency, and you'll look back to 2016 and 2020 and realize this was a watershed moment where media, the ability to channel the media, both good or bad, for paid views, clicks and click bait will be a driving force now in presidential politics. And I'm not sure that's a great thing, but I just think being an observer of the obvious, that's where we are.
SCOTT WAPNER: I mean, look, you could go back decades and say that the Kennedy-Nixon debate was decided by this -- well, who acted how on television. So it's not new. Now, it may be having a more profound impact because there are more screens and places to find out all this information and instant commentary that comes following an answer or a debate.
CHAMATH PALIHAPITIYA: That is exactly right. Scott, that is exactly right. Because, back then, the platforms were actually relatively close, and people then had to choose for small variations and you had to really understand it, and so the body politic was easier to comprehend. Now it's not clear what either of those folks stand for. It's a hot mess. So they're just going to vote for the person that they like.
SCOTT WAPNER: So in terms of how the market would react, Barry Sternlicht -- I'm sure you know who he is, he was part of Delivering Alpha 10 -- said the following earlier today that he's bracing for a, "pretty big correction and high-flying stocks if the Democrats win the White House," at least in the short term. What do you make of that?
CHAMATH PALIHAPITIYA: I think the markets are going higher, and the markets are going higher because I think the presidency and the impact of the presidency is being divorced from the economic future and prosperity of America. I think it is really important to understand that you have coupled together monetary and fiscal policy. You have a Treasury and the Federal Reserve that are acting in lockstep. And they are printing trillions of dollars, and they will have more of an impact on what the next four years looks like. And that's just the honest to God truth of what's happening. So you have rates at zero, you have absolutely no growth, and so you're going to fuel asset price inflation. And so I just think, irrespective of whether the Democrats or the Republicans are in office, if you're trying to generate returns, you need to be long --
SCOTT WAPNER: Okay.
CHAMATH PALIHAPITIYA: -- and you will probably get rewarded.
SCOTT WAPNER: And that's a great point you make and one that takes me very easily to the next part of the conversation I wanted to have. The Fed has forced you to go find growth wherever you can get it. And for a lot of people, that's been in either mega-cap tech, the FAANGs, Big Five, however you want to characterize them; for a lot of other stocks, Snowflake, for example, that goes public recently, 100 times sales, has everybody wondering whether we're doing 1999 in some sectors of tech all over again. When you see the kinds of things that I just mentioned, what do you think?
CHAMATH PALIHAPITIYA: I think there's an enormous difference between 1999 and today, and that is the risk-free interest rate. In 1999, you could generate 6, 6-and-a-half percent owning 10-year bonds. So these companies that were the alternative to owning something as risk-free as a U.S. bond, really had to do something incredible. Now what you've done is you've kicked the can so far down the road so that when you go and buy 10-year bonds at .6 percent, the bar is not very high, right, and so you're forced to own these assets. As a result, people go further and further out in time to build a model to justify owning them. I'm not saying that that's the right thing to do. You know, the ultimate reality is that until and unless inflation goes up, rates are not going up. And the Federal Reserve has explicitly told us that they're not going to touch these rates until 2023, at the earliest. And then even then, they would rather let inflation run a little bit before they raise rates. So what choice do we have except to find growth? For example, Scott, if you're just an ordinary American that has a 401(k) and you had a traditional 60-40 split between equity and bonds, 40 percent of your portfolio has been basically wiped out and taken to 0. What are you supposed to do to fund retirement? What are you supposed to do to generate savings? What are you supposed to do to pay for your kid's college? What are these people, good hardworking people supposed to do? We have to go and find a way of pulling forward some growth and giving ordinary people access to good companies that grow fast.
SCOTT WAPNER: Well, I mean, when you see a Snowflake, as I said, which has this unbelievably parabolic IPO or a Tesla, which I know you're a big backer of, up 400 percent in a year, Nikola is a story in and of itself, is it nuts? Does this make sense to you because the Fed has forced people to go so far out on the risk curve to find growth?
CHAMATH PALIHAPITIYA: There's an incredible thing that's happening, and I think it's important for your viewers to understand it. What I think has really happened is we have started to figure out that there's an incredibly long tail of people that do incredibly good fundamental research, and there's a community of people on the internet now that can help you make money. So I'm not sure snowflake is yet a good example. Snowflake I think is an incredible business, it's growing really fast, but it went public through a very traditional mechanism. Most of the money, the overwhelming majority of the money was made from the cloistered insiders and the infrastructure of Wall Street. But if you look at Tesla, the most incredible thing about Tesla that I love is all the money was made by retail, every single dollar. Because every single institutional investor had and found a way to throw pot shots, be sure, think they knew, and they turned out to be so completely utterly wrong, they completely bled out money. And the people that made the money, if you go into Twitter as an example, you find material scientists, you find people who understand batteries collaborating to generate research to explain this business to other people. And there are so many people in retail that made an enormous amount of money on Tesla. That, I think is the future. And I think that's a really important thing to underscore is that going forward, it is really up to individuals to work in communities, to understand companies and businesses together, and then to help each other underwrite the ability to own a stock. I think what will happen is, you'll find more Teslas.
SCOTT WAPNER: Our time is moving too fast. Before we go, and we do have a handful of minutes left, thankfully, I do want to get to SPACs. You have been called the king of SPACs. I don't know, what do you have, three? Still have three now? I mean, you've gone public with a couple. Do you have three now?
CHAMATH PALIHAPITIYA: I have -- we have three that have been filed and raised. One is completed, one has been announced and one is still available, and we are in registration with three more.
SCOTT WAPNER: Everybody's got one. Martha Stewart has one. Everybody has one. Why? Are there too many?
CHAMATH PALIHAPITIYA: No. In the year 2000 --Let me just speak generally. In the year 2000, there were about 8,000 public companies. In the year 2020, there are about 4,000. And it's unfortunately shrinking. And it shrank as private equity has exploded, as M&A has exploded, you know, unfortunately, as these poorly run companies have gone bankrupt as we talked about earlier. So we need more companies to be public. And, again, we need more, specifically, high-growth companies to be public, especially so that you can give ordinary folks the chance to own these things in their 401(k)s, in retirement accounts, generate returns for them to replace bonds that now do nothing for them. So the thing with SPACs, generally speaking, is they give you three very important things. Number one is they give you speed. Number two is they give you certainty of price. And number three is they give you sponsorship. That last thing is crucial, because it doesn't matter who has a SPAC. Ultimately, what matters is what is the judgment of the person that is helping bring these companies forward.
SCOTT WAPNER: Uh-huh.
CHAMATH PALIHAPITIYA: And how good are they at investing? What has their track record been in generating returns? And just like in any other industry, the folks that are good at putting points on the board will be the ones that you back, and the folks that aren't won't be.
SCOTT WAPNER: Well, the difference, obviously, is in a traditional IPO, if you will, you are betting on the future prospects of the company at hand. With this, as you just said, you're betting on the individual who is going out to find the company to buy and then take public. But --
CHAMATH PALIHAPITIYA: But --
SCOTT WAPNER: The knock on that is that it's one giant marketing game, that it's who can market things the best.
CHAMATH PALIHAPITIYA: I don't think so at all. I think you're completely wrong. What this is, is you're first betting on somebody to go and find a great business. In my case, what I am doing is trying to find a great company where I can invest my own capital. Now let me just talk about the first two deals that I've done.
SCOTT WAPNER: And you do. And you do. You have skin in the game. You put skin in the game.
CHAMATH PALIHAPITIYA: It's important to understand, IPOA which merged with Virgin Galactic, and IPOB which I announced is merging with Opendoor. Just in those two deals, I and my partners invested $280 million of our own money. It represented 16 percent of all the money that those two companies raised. 1.8 billion in total. So if somebody finds a great business, like me, and then I can invest my own money and then, you know, I don't want to work for other people but I really love partnering with other people, and if other folks want to then make the same decision that I do, that they can participate with me upside -- along with me. I think that's a really great dynamic.
SCOTT WAPNER: What about, though, the non-Chamaths, the non-Bill Ackmans, the non-Gary Cohens, the non of ten people that I could go down the list and name, who now have SPACs? What about the risk, though? In the fact of what I said, it seems like everybody has one. Not everybody has the impeccable track record of doing this kind of thing as you do, and some of the other all-star names that I mentioned. And the other underlying risk in part of this, too, is you have to be betting on the sponsor to find a good deal and not garbage because the clock is running down in the 11thhour or 11thmonth, as it were.
CHAMATH PALIHAPITIYA: You are 100,000 percent right. This industry is the same as every other industry. There are great hedge funds, there are crappy hedge funds. There are great private equity firms, there are crappy private equity firms. It is crucial that people do due diligence. It is crucial that people read the disclosures, that people read the S-1s, that people read the S-4s, that people go into communities that are talking about these things. Understand the diligence that's been done. And you have to fundamentally then rank people. And at the end of the day, Scott, what I will tell you more than anything else that I've realized in 44 years, of which 20 I've been investing in some way, shape or form, is those people who put more of their own money on the line tend to make better decisions than those people that are riding other people's money. And at the end of the day, if you look back on the single greatest investor of our generation, the most important thing that you would have done by backing Warren Buffett, you know, the best thing you would have done by backing a John Malone, the best thing you would have done by backing Jim Simons, is allowing them to compound their own money and going along for the ride with them. I think that's a really important point. And so, at the most basic level, my advice to everybody is read the disclosures, read the diligence, and then ask one primary question: How much of your own money are you putting on the line. Yours. Not other people's, not your fund's, none of that garage. How much of your own?
SCOTT WAPNER: Okay.
CHAMATH PALIHAPITIYA: Because that dictates the outcome more than anything else, I suspect, when you look back on this.
SCOTT WAPNER: A couple of quick topics I want to get to before we go. Speaking of disclosures, Palantir, going public today, direct listing. Interesting disclosure about their governance. I'm wondering what you make of it. Having dealt with a lot of founders, and the fact that the founders of this company are going to maintain control of this company even if they sell down their shares, is that good governance or not?
CHAMATH PALIHAPITIYA: I think the -- look, I -- and I can't remember how, I think I made an investment in series B, and I ended up owning some shares in Palantir. I sold them in 2014 and kind of moved on. So, you know, I think that that's a good business. I think that they provide a really important service, but it's not a business that I've looked at since 2014.
SCOTT WAPNER: Come on, this does not sound like the Chamath that I know. The Chamath that I know would, even if you're invested in this or not, takes a look at the governance of this company and says, Absolutely not, this is not the way that it's supposed to work. You've railed against Big Tech having too much power, things like Facebook and the way that Mark Zuckerberg has owned that company. Is there governance --
CHAMATH PALIHAPITIYA: I don't own that company either.
SCOTT WAPNER: I know, not anymore. But is it a -- I mean, do you not own Palantir -- would you not own it now because of the governance?
CHAMATH PALIHAPITIYA: It's -- I vote with my dollars. That's how I act, I vote with my dollars. I have a moral and ethical perspective on how I want to live my life. I try to do good things in the world that create value. I try to work on projects that can be substantively important, climate change, space, etc. And I vote with my dollars.
SCOTT WAPNER: I'm not even suggesting there's anything necessarily wrong with it. It is what it is. The company can do whatever they want. It's up to the investor and their dollars to vote like you have to make the decision on whether they want to be in that situation or not. I fully get it. I'm not naive to that in any way, shape or form. The other thing I want to get your take on, ByteDance, TikTok. I'm wondering how you view that situation.
CHAMATH PALIHAPITIYA: I think that this is an incredible product. My little interactions with it -- I'm a little -- I'm sad to say I'm getting older and less cool. But my interactions with this product, Scott, it is something very special and very different. Now, that being said, you know, that is the users that are creating that value. Underneath it, unfortunately, you know, they are caught between a rock and a hard place. They are caught between two governments that are using it as a pawn, to basically act out this very complicated game. On the one hand, you know, you have economics. On the other hand you have politics. Donald Trump may still be upset around the coronavirus issue. Xi Jinping may be upset about other issues, and this company will get ripped apart at current course and speed, unfortunately. But the users and the content and what they're doing, I think it's a really big trend for the future. I don't exactly now what it is. I would love to study it more, and I hope that there's a home for that creativity, because it's incredible. But that company at current course and speed is going to get ripped apart.
SCOTT WAPNER: Yeah. The World According to Chamath. It is never boring. I always enjoy speaking with you. Thanks for being a part of Delivering Alpha 10.
CHAMATH PALIHAPITIYA: Thanks, man.
SCOTT WAPNER: All right. We'll talk to you soon. That's Chamath Palihapitiya, core of Social Capital, the so-called "King of SPACs."
