Ladies and gentlemen. Welcome to the business brew.
I am your host as always, this episode features Abdul al-Assad.
Abdul founded basic capital which launched in may.
There were many activities pre launch but official launch in
May and when the product was launched there were reactions
from people that were convinced that this was a bad idea that
was bound to blow people up. There were people that were
convinced that this is a great idea that everyone should have
access to. I said I don't know which is
true, so I reached out to Hunter Hopcraft.
Who? Is a friend of the show and he
made the intro to Abdul. My understanding of the.
Product is. It's basically.
Offering four to one. Leverage.
So you put a dollar? In you now have.
Access to $5.00 of funds. Four of those dollars at least
in some of the material that I saw are invested in mostly
double B credit. You're basically borrowing it so
for plus 4 1/2 and lending at so for plus 6 1/2.
So there's a 200 basis point spread.
I still don't fully understand why you're borrowing at a lower
rate than you're lending out, but that's something that you
get to work on for yourself should you find this episode
interesting. And I would just say that I one
of the things that I value about this show is the ability to have
these conversations with people. My initial inclination would
say, don't go anywhere near this product.
I think that that initial inclination has a reasonably
high probability of being the wrong thought.
So I hope that this episode expands, if nothing else, your
knowledge of what is available in the financial space.
So without further ado and after the sponsor reads, please enjoy
the show. Also, none of this investing
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People, people tend to like podcasts where I do think it's
like more of a discussion rather than just like, oh, hey, let's
talk about your corporate pitch, right?
Yeah, yeah, yeah. Nobody wants to listen to that.
It's lectures. Lectures are brutal for a
reason. And I'm a big podcast listener
and to me, I woke up on like a Saturday or Sunday or during the
week on my commute and I just put on, you know, Joe Rogan or
something and you know, I'm in for three hours.
It's like when Lex Friedman drops like a three hour episode.
I'm like, let's go like. Yeah, did he did one with it was
Dylan Patel and another guy on some AI thing.
It was like 5 1/2 hours. Yeah, yeah.
And I was. Singing, I was like, this is so
dense. I need to, like, sit there and
take notes. But if I do this, for this, I
almost have to dedicate half a week just to one podcast.
Yeah, yeah, yeah, yeah. Try to figure out what they're
actually talking about. Yeah, And I'm sure you're a
little bit like me word. Like if I hear something I like,
like if they reference an article or an author, I usually
like to go like be like, oh, let me go find out who that person
is. And there is something really
beautiful about that. There is something really nice
about like discovering like a sub stack or a Twitter account
or a podcast for the first time and you're like, Oh yeah, this
is going to be like good, like two or three weeks worth of like
content going back in the days reading their stuff.
Yeah, but a few. It's a few of five hour dense
podcast. Like, I'm not, I'm not doing
that. Yeah, well, I mean, it was, it
was OK, to be fair. But you know, it was a lot.
I, I was talking to this guy, Adam Robinson.
He's been on the pod and he was on Tim Ferriss's pod, which is
how I found out about him. But I was asking about the the
idea of, of reading 500 pages a week or whatever.
And his comment was, I think he said this on the pot.
He might have said it. We've chatted a couple times
offline, but he he was like, I like to just focus on 10 pages
in a in a day. Yeah.
And like really understand the thought.
Not every day, right. But like, there's certain days
where just thinking about one thought all day long can
actually get you much further than.
So sometimes you do run across podcasts that really causes you
to drive, you know, deep. Maybe this will be that podcast
for some people. I hope so.
I'm here for it. I'm here.
There you go. So I, I reached out to Hunter
after I saw a little bit of, I don't know, there were a lot of,
there were a lot of comments to, I guess you had a tweet that
went kind of viral. Yeah.
And there was some comments and I kind of couldn't figure out
from, from the comments or, or from, you know, the tweet
exactly what you guys did. So I reached out and here we
are. So that's kind of the back story
to that. Do you want to tell people sort
of your background and what you're building right now?
Yeah, of course. My name is Abdul al-Assad.
I'm Co founder and CEO of Basic Capital.
Basic Capital is the first company that gives you credit
non recourse financing. To.
Participate in financial markets to invest today.
In America, it's very easy to access consumer credit to
consume, can buy now, pay later anything. 95% of purchases on
Black Friday were done on buy now pay later people.
Send your credit card to your door to consume.
We're the first company that gives you long term duration
financing to invest. When we launched the business in
May, we've been building it for 2-3 years, but we've been
building it in stealth. Under the radar is the business.
In May, it became like a national sensation on Twitter.
People were like, losing it. Yeah.
The the the reactions that we got is either this is the best
test. This is the best thing the since
sliced bread. This is like really needed.
This is amazing. Like, people need to participate
in capitalism in a more meaningful way.
We give people credit for stupid reasons.
Why don't we give them credit for a good reason or they are
like, this is crazy. This is going to bring back the
Great Depression. This is 2008, all of Michael
Berry like memes, the hey, hey, there is a bubble.
There is no in between. It was it was very, very by
model. It was very, very, you know, and
to me I was like, I think that's good.
I think I think the most fascinating ideas are usually
trigger this type of reaction, this type of extreme reaction.
Yeah, well, not to continue to go back to Adam Robinson, but
one thing he likes to say is there's there's a decent amount
of money to be made and things that are are blatantly obvious
and things that make no sense. And I will tell you that my
general bias when I hear things like let's give people leverage
for their Iras is how is this guy going to fleece people?
And this is bound to end up wrong.
So, but I normally, I normally wouldn't, but then I saw like
Josh Wolf is with you and I saw Hunter and I know Hunter
reasonably well. I mean, I've read him for two
years and he's been on the pot And I was like, all right,
there's probably something I don't fully get here.
So thank you for agreeing to come on the program and, and
maybe explain a little bit about what you think the
misperceptions are or, you know, whatever.
One thing you said, which was hard for me to get my head
around is how do you offer leverage in a way that's non
recourse? How does how does that structure
actually work? Fanet Well, thank you so much
for having me, first of all, and we'll get into the structure in
just a second. But I'm going to take a step
back on a point that you you mentioned by passing and you
said something like, when I hear somebody saying, oh, I want to
give leverage to people's IRA, my first intuition is like, how
is this person going to fleece people?
Yes. And no, no offense taken, no
offense taken, just to be clear, OK.
And no, Mark Andreessen, A16Z Andreessen Howitz Opti of BC, he
has this this incredible thought, let's say, where he
says some of the most important industries in our society, think
healthcare, think financial services have a certain moral
statue to them. And because they have a certain
moral statue to them, innovation, the hurdle for
innovation becomes really, really high.
Nobody actually wants to go into innovating into healthcare
because you're dealing with people's health, right?
Like you do not want to make somebody sick.
You do not want to make somebody else you do not want.
Like there is very little room for experimentation there.
And the same thing with finance. You're dealing with people's
money, you're dealing with people's hard earned dollars.
So it has a sort of moral statue to it like banks a lot.
If you walk into a bank branch from the old days, not today,
they look a lot like churches. High ceilings beg you walk in,
they make you feel small. It's almost like you walk in
into into into a church. And I think this moral statue to
finance is is important because you are dealing with people's
hard earned wages and hard earned capital.
But at the same time, it deincentivized allow of
otherwise good winning people to enter the space and innovate.
So who and who actually ends up entering the space and
innovating in these financial services?
Either somebody who has complete like no moral compass at all,
like they have no moral consideration.
That's like this the classic scammer, right?
Or somebody who is like really like forward on the respective
spectrum, like me, who really believe in that idea that they
are like, OK, I'm willing to do it.
And there are example of that. You think of Jack Bogle 1980s,
he created the index fund and in in the 1980s and on before you
buy a stock, there is no index fund.
So you had to buy a single stock.
What you did is you called your broker, Wolf of Wall Street
style and you ask, or actually I think it back, your broker
called you, your broker called you and said, Hey, I have my
hand in this amazing stock. And you would go buy the stock
and and Jack Bogle showed up and he had this crazy idea which is
don't buy a stock, buy the entire market.
His idea was do zero due diligence.
In other word, his idea was literally do zero work, pay no
attention to equity research reports, buy all the companies,
the good ones and the bad ones. And people sued him for lack of
fiduciary duty because he was quite literally right, asking
you to buy all the companies, the good ones and the bad ones.
And some of them are very like evidently very obviously bad.
Some of them are not a going concern.
And he's like, no, no, just buy the whole thing.
You'll be better off in the long run.
And people, people sued him. People said me things about him.
I have a poster behind me. It says stamp stamp index funds
and American, which is a posters that they literally literally
put on Wall Street and and out New York and around Philadelphia
to discourage people from buying index fund because why, how, why
would you buy a stock with doing no diligence?
Every now and then you have somebody who comes out and they
do a big innovation and they're honest and they're trying to do
their best because they really believe in that idea and the
idea works. But because of this moral statue
to finance, unfortunately, it discourages a lot of otherwise
good actors to innovate and to create.
So I just I just wanted to touch to touch on that.
I mean. Now that we're having this
conversation because we can get back to the structure, I would,
I would just say that I think some of the skepticism comes
from it. It what I'm about to say is a
little ironic after what you just said.
But where I think some of the skepticism comes from is the
history of people successfully using leverage.
I I think is littered with far more blow UPS than things that
go right. Is that is that?
Don't, I don't, I don't know. I don't know.
I haven't seen all the data. So you, you may know that that
is not true. I think that's the skepticism,
especially when put into retail's hands and.
I don't know. I mean, let me, let me push you
back. And I and I think people that
are asking for for reasonably high fees, which you don't have
low fees, we can debate whether or not they're high fees.
That's also something that is against the grain at the moment.
So and then and then I think on the back of some very prominent
promoters of SPAC's that didn't go well.
You probably are suffering a little bit in people's minds
from the taints of 2020 and 2021 that you may you may not have
been a part of, but it's the old sort of.
No, this is my. This is my first.
It's not even the company you keep, but like you're associated
with it. Right.
Yeah, Yeah. You know, Full disclosure, I
never spacked anything. Yeah, Yeah.
No, I know. I've.
Never lost a meme coin. But but the SPAC guys are saying
the same thing, right? Like, oh, look at the innovation
that we're bringing to the market.
So I think that's part of what you're fighting against a
little. So, so let's go back.
Let's go back and test a couple of things.
You mentioned the history of leverage is full of examples of
where people blow up more often than they did well.
And you mentioned the fees as a concern, and then you mentioned
the SPAC's thing. And I want to address the three
aspects of these things, starting from the latter 1
Spacs. I don't believe in single name
investing. So I believe the best and the
third best invention of the 20th century.
And we're going to come back to the first two.
But the third best invention of the 20th century financial
market is Jack Bobo's invention of the index fund because it's
simplified investing and it said do no work, buy and hold long
term, you cannot beat the market.
So I don't believe in Spacs, I don't believe in buying single
name stocks. I don't believe in mid coins.
I, I, I'm, I'm a blockchain enthusiast.
I think there's so much money in financial markets are being made
by middleman, middle, middle men.
They just extract fees for no good reason.
And I think we should try to neutralize that.
And I think, you know, defy offers an exciting opportunity
there, but I'm not in favor of a certain coin or anything like
that. So to start with the last
aspect, I don't believe in single name stocks, I don't
believe in MIMA trading, I don't believe in Spacs.
The fees we're going to come back to the fees is like you get
what you pay for. And that became that is actually
the negative part of Jack Bogle's legacy, which is it
generated this thing where it became fees and, and themselves
became extremely negative. But the problem is that fees are
actually a scale game. And if you go back and you look
at the first index fund that Jack Bogle launched, it was a 2%
expense ratio. I think it was 1.150 beds or 180
beds, but it was close to 2% expense ratio.
And what happens with asset management to create passive
asset management is that it's a scale gain.
So it scales like software. So as you scale, you lower the
fees. But actually the first index
fund, we did not start out with five basis point.
Jack Boko could not have built Vanguard with five basis point
index fund. He started with 180, which for
the time was really cheap because the brokers on the bid
offer side, when they sold you single name stocks, particularly
pink sheet stocks, and particularly highly volatile
stocks, they made massive, massive money on the on the on
the crossing on the bid offer. So that's the point to the fees.
Eventually they will go down, but you can't start from day one
at 0 like that. No fee.
Eventually everything gets commoditized.
But in day one, the fees would have to be high to build a real
business. The first point you said
leverage has a history of more people blowing up then is that
really true or is that just the behavior of bias?
I think we in society and financial markets, we tend to
remember the bad days more than we actually remember the good
days all. Right, hang on, I gotta, I gotta
stop you because I like what you're saying, but all I hear is
background noise. Is it possible for you to get to
like a a quieter room? Hey, guys, You guys just give me
one second. Yeah.
Hey, guys. Is it, I'm sorry, I'm recording
from here. Is that good to keep, to keep
things just with that Logan, I'm really sorry, All right.
Thank you of. Course, Thank you so.
So we were talking about leverage and whether or not it's
really true. Yeah.
The the Third Point that you mentioned is leverage has a
history of more people blowing up them benefiting from it.
And here's what I want to like, challenge your thinking and
challenge the audience. So stay with me here, OK?
Just hear me out. I think at financial markets,
contrary to popular opinion, we remember the bad days more than
them. We remember the good ones.
I mean, if you go on Twitter today, everybody is talking
about crisis, Everybody is talking about a bubble.
Everybody is talking about, oh wait, everybody is talking about
1999. But when you look at the fact,
when you look at historical performance of the stock market,
sure, there has been 30% drawdown every 10 years or so,
but it's every 10 years or so. It's 10% of the time.
It's not 100% of the time. And I think here you get a lot
of the bias that is a lot similar to nuclear technology,
right, where nuclear technology has massive potential to give us
infinite abundance for our society.
But then, you know, you have one or two horrible examples and
that basically makes us move to fossil fuel and makes us move to
something that is much more expensive, much more
challenging, etcetera, etcetera. You look at airplanes, by the
way, you look at airplanes when they first started out, they
were not that safe. Safety is a function of reps.
It's a function of reps like if you look at this financial
markets and we'll talk eventually about about basic
capital, but I think this is fascinating for whole other
reasons. Safety is a function of reps.
When you look at the stock market when it first came out in
the 1800s in America, it used to be the volatility realized,
volatility was much higher. You look at 1929, you look at
the 1930s, you look at the 80s, you look at the 70s, 90s, early
2000s. And what happens though, with
every crisis, a new regulation comes out or with every crisis,
we learn something different about how credit works and we
learn something different about how financial markets work.
I mean, let's actually put numbers on it.
How long does it take for high yield spreads to normalize for
credit markets to basically go back to working functionally in
08? And no, I'll tell you in 08 in
O8 it it took actually a couple of years for a special.
Normal like 24 to 36 months would be my guess.
OK, well, let's look at COVID at COVID.
That was different because then you had the bazooka.
That was like in no time. But, but that's exactly the
point. The point is in O 8, we learned
that, hey, when credit when there is a credit crunch, you
launch a primary credit facility, you launch a credit
secondary credit facility, you lower interest rates and you go
out and you buy you stabilize the bond market and you buy
government bonds and you and you provide ample liquidity to the
banking sector. And when we did that in O8, it
took us a bit longer than we wanted to right, because it was
the first time we're getting grips at it.
But when O 8 hat when, when COVID happens within basically
like a couple of weeks, the market normalized.
Now we ended up doing too much fiscal stimulus.
We sent too much, too many checks to too many people and
they went out and they spent in a time with supply was
constrained and that created that could be inflation.
Yeah, right. But that was actually purely
fiscal stimulus. That was like sending checks to
people. I thought it was all the supply
chain. I didn't think it was the
checks, but I don't know, maybe. It is the combination.
I'm kidding. I'm kidding.
It's the combination of both, right?
I mean like a retrospect, it's the most obvious thing.
You have constrained supply and you're giving people more
ability to do more demand. I mean, what, what, what did you
think was going to happen? So I was on team transitory and
I was wrong so. But yeah, I.
But you look. The size of the checks and then
the continuation of them, that was a problem, but that's.
And then you look similarly by the way you look at the history
of leverage. Let's look at the mortgage.
The mortgage was invented in 1932.
FHA, the Federal Housing Administration, a New Deal, FDR
launched the mortgage 1930s from the 1930s until home ownership
rate in the 1930s was in the low 20s in 2008 or today home
ownership rate is 65%. So 65% of Americans own a home
massive by the way, one of the highest globally.
And basically we had 100 year run where we give everyday
people leverage by a highly concentrated asset and non cash
flowing asset and non diversified asset.
And what we created 80 years later is a nation of owners.
Now in the 80s Bill Clinton came and Bill Clinton created DEI
mortgages, I call them DEI mortgages where he was like, ah,
the banks are not lending enough to the under served communities.
So he passed a bunch of like housing affordability acts in
the in the 90s under Bill Clinton.
And these acts were meant to help people who are underserved
to access the mortgage market. It loosened lending standards
because it was believed that the banking sector is, is being too
stringent and too biased against certain borrowers, particularly
lower income borrowers. And we loosened the lending
standards and we went away from the standard 30 year mortgage
into all types of like, you know, crazy structures are.
Yeah, exactly. And then we blew up.
But let me ask you this question.
Let me, let me challenge you. I got my first house on one of
those one of those liar loans. So so I don't.
Think for the record, I didn't create.
It wasn't total fraud. It wasn't.
I don't, I don't think it was totally honest either, just
because, yeah, I remember somebody said to me they were
like, just fill in this section, I'll fill in the rest and then
you'll have the loan. Yeah.
And I'm almost like this doesn't feel right, but OK, yeah.
But let. Me.
You know what? I had roommates.
It actually worked out pretty well for me, but.
But let me ask you this question about O 8.
You know a bunch of people lost their homes in O 8.
I don't know when I under play O 8.
A lot of people lost their jobs in a way.
It was very problematic what happened where it's very sad,
very tragic, etcetera. But let me ask you this, if you
were a policy maker and you fully knew that at some point
the housing crisis would happen and a lot of people would lose
their home. Knowing what you know about the
mortgage market that we went from 20% home ownership to 65%
home ownership that now home equity or equity, your home
equity makes almost half of the average Americans net worth.
Most of people's wealth is tied up in their home because of the
mortgage because it enables them to present value their future
rent payments and buy an asset instead of giving to the
landlord to fully knowing what happened.
Would you or would you not have given people the 30 year
amortizing mortgage? Yeah, I would.
Credit markets initial fragility and financial instability is
inherent part to financial markets.
You cannot hide from it. You cannot hide from it.
I mean, I, when I was in college, I was really influenced
by this economist called him and Minsky.
And the whole point about him and Minsky is like financial
crisis will keep happening again and again and again.
And I really believe that the system overloads and at some
point it retracts. And the question that we should
ask ourselves today as Americans is would we rather keep 90% of
the country locked out of this system that sometimes go up,
sometimes goes down, or have them participate?
If they don't participate at all, they will for sure get left
behind. And that's what happened.
Percent of Americans own no stocks. 40% of Americans are
asset light. So 50% is asset lists and 40% is
asset light. The average investment balance
is $27,000 and the top 10% virtually owns all the wealth.
If you lock people out in the name of protectionism and in the
name of like this is risky, they will for sure not participate in
the OPS. Yeah, if you allow them in,
they'll participate in the ups and the downs.
And to me, I would rather have people participate in the system
and lose money every now and then than in a condescending
manner say, oh, this is too risky for you, that you know,
oh, this is not for you. Because it becomes a self
fulfilling prophecy and ends up creating the society we have
today massively in a in a group. Not to mention that we're
getting better and better at dealing with crisis.
So long started short, you know, just to kind of keep the the
listener anchored here. You said leverage, you said fees
and you said SPAC's. And I said, I don't believe in
single name stocks. Fees will eventually come down
because when they started, they started high for the index fund
and leverage. We tend to remember the loss
more than the win. That's like a heat classic
human. It's called prospect theory.
Losing money hurts more than winning money.
So we tend to be more traumatized by events like O 8
and 1929 than a lot of people think.
I think everybody thinks the opposite.
Everybody thinks like financial markets get exuberant and they
have short memory. I actually disagree.
O 8 was almost 20 years ago and we still talk about it and we
still put big short memes on Twitter every time we see
something. So I would argue like I don't
know if I would argue we have a short term memory.
I'm not entirely sure I agree with that.
I'll tell you two things. One with respect to to single
stock names, I, I, I do believe in it, but I, but I don't know
how many people are good at it. But if we ever go through
another O 8 and there is ever another consumer products
company like Apple that has lines out the door, despite
what's going on, buy the shit out of that stock that I know
that that one I do believe in. Did you buy it?
And, and look, I, you're, you're obviously correct that everyone
should incentivize participation in the system.
I think that what you as a company are fighting against
from a narrative perspective is why, why should it be in a
levered product and not just the S&P, right?
Like we should give people, we should just drive people to
indexing. And the S&P is the easiest thing
to tell people to own, especially since it's been on
this massive run that's kicked everybody's butt for, you know,
ever. So that's where I think that the
disagreement comes from. To be clear, our customers
invest in index funds that are diversifying bonds and the S&P
or QQQ. So I actually push people to
invest in QQ and the S&P 500. What I am doing is I'm giving
them long term duration financing to buy the S&P and
bond portfolios. So I'm not sending them a
levered ETF and we'll talk about that in a second.
So it's not like I created a new fund and I'm asking people to
buy the ETF. No, no, no.
I give you 10:15 and soon enough would be 20 or 30 year duration
financing at 6%, non recourse to buy the SNP and diversify bond
portfolios. So it's not like I'm asking you
to invest in anything new. I'm not asking you to invest in
my fund. I'm not asking you to invest in
my ETF. I'm not asking you to invest in
my SPAC. What I'm telling you is you can
go take 5 to 1 leverage to buy a house from a bank or you can
come to basic capital and get 5 to 1 leverage to buy the S&P 500
and a diversified bond fund. But going back to I, you know,
on this point of like you want people to participate.
Why is leverage important that do it?
Like why give it like why care about leverage?
Why is the leverage such a why are you so sticky about that?
Why not just buy the index? Well, that's how people build
wealth today as via this mechanism called saving.
OK, how does saving work? Bill makes 100 KA year he can't
afford to save if he lives in New York on a metropolitan
place, 2 or 3% of his income, say 2% after the taxes.
By the way, 100 K 50% is going to the government.
So you're working half a year for Uncle Sam.
So net net you're making 60K after taxes.
The medium cost of living in America, it depends on the city,
but like the medium cost of living in America is somewhat of
the 80s eighty K in places like New York it's 100K.
So you are actually in the hole about 10 grands after taxes.
And that makes sense because 60 percent, 60% of credit card
holders are revolvers. They're not transactors.
So when you have a credit card, 40% is transactor.
This is people like you and I, I assume people who pay their
credit cards on time. 60% are actually revolvers.
So these are 60% who are relying on the credit.
Some sort of Evergreen draw? Yeah, exactly.
And and 95% of Black Friday purchases were done with buy
now, pay later. So first of all, like the way to
build wealth in America today is via this mechanism called
saving. And most people are locked out
of it because they make too little compared to the cost of
living. That's the Michael Green.
A couple weeks ago he said that. The new poverty, the medium.
The medium poverty line IS140K and everybody lost their mind.
But even if that's not true, like let's say actually you can
even if that's. Not Yeah.
Well, it doesn't have to be. It doesn't have to be precisely
true. It's the it's the idea that he
is conveying. Exactly.
But even if that's not true, let's talk about how saving work
and why saving is the most anti American idea and saving is the
most anti Democratic idea. And I know I'm going to get a
lot of hate for this on Twitter because I know Dave Ramsey and
all these guys out there are telling you save, save, save,
get your credit card points. We built a nation of scammers
basically. Like we're telling people to
maximize their credit card points and to do backdoor Roth
and do all this like tax engineering instead of just
simply like giving them a more effective tool to build wealth.
Like we're literally building a nation of some sort of tax
hackers and wealth is not something to be hacked.
Wolf is not a hack. Wolf is about being able to
participate in the market. And unfortunately what we give
people is a bunch of hacks. But why is it a hack?
There is this guy called Thomas Piketty from Paris called the
economics. He Paris School of Economics, 33
years old, published a book called Captain of the 21st
Century. He's going to get a Nobel Prize
for the one day 700 page book. It was the most iconic book of
20/13/2014 I believe and his whole thesis is R is larger than
G which is stocks compound at 8%.
Wages grow at 2 which means mechanically stocks get more
expensive than your wages. Just think about that.
Long term average rate of return of stocks is 8%.
Long term wage growth is 2%. Fact.
This is not me, this is the Federal Reserve's.
What that means mechanically, mechanically, you cannot build
your way to wealth. Like quite literally, stocks are
getting are getting richer, more expensive in nominal terms, and
you're saving our worth. Every year the stock market gets
richer by 8%, but your wage gets richer by 2%.
Let me give you an example. Let's say you make 100 KA year
and you save 1% of your income a year.
That means it will take you 100 years to capitalize your annual
income. Yeah. 100 years your capital
rate assuming no compounding just for to make the math
simple, if you make 400 KA year like lawyers in New York do,
like fight like Wall Street folks do like the guys like the
software engineers on Twitter tell you these guys can save 50%
of their income because they make 400 KA year, which means it
takes them only two years to capitalize their annual income
to get to 400 K and savings. In other words, the richer you
are, the easier for you to save a higher rate that translates
into a higher dollar value. The poorer you are, the lower
the percentage of a lower number.
That's why saving is a scam. It quite literally doesn't work.
The lower income you are, the less effective a tool it is.
The higher income you are, the more effective a tool it is.
Saving is not a middle class tool.
Let's it's a rich people tool. And that's why people fear
gaslit in America. It's because they go on TV and
people tell them the reason why you are poor and the reason why
you're poor and broke is because you do not save enough.
No, no, no. The lower income you are, the
less effective to saving is as a wolf building mechanism.
Yeah. I don't know that I, I don't
know that I like how you're framing this, but I think where
we could totally agree is that the lower income you owe.
I do not like that because it's. Well, well, I don't know.
I don't know. I don't know.
I mean, we're. It's an uncomfortable truth that
nobody wants to acknowledge. Well, yes, I I think, I think
the uncomfortable truth is not that saving is a scam per SE.
I mean, we're going to argue about semantics here.
I think the the uncomfortable truth is if you make $100,000 it
is so hard to save as a sufficient amount of money.
And even if you save, it will take you so long.
Yeah, well, like how much can you possibly save, right, I
mean. Even even if you do it, it will
take you a longer time to get to like one year worth of income.
Yeah, no, no doubt, no doubt. But I think that's a function of
it's. It's hard to save a a a big
percentage. Yeah, yeah.
I mean, it's, it's almost like you talked about Vanguard, the
scale that you know, you have to have an income that enables an
asset like an, an escape velocity that you can save a
sufficient amount to really start to build.
Exactly. So now we have established that
saving is an imperfect tool. We have established that for
most, for most, for me, OK, I'm going to slowly.
Slowly I'm going to 2nd. I like you.
I just, I just want to make sure we're we're agreeing to what
we're agreeing. I'm going to wheel and I'm going
to wheel you in, slowly but surely.
Slowly but surely. All right, fair enough.
Now on we have established that saving is an ineffective wealth
building tool for most. OK, I I can agree on that.
I like. That the question is how do how?
How else can people build wealth?
And today there is no alternative.
There is the four O 1K which is basically like saving based
mechanism that you save A. Well, they could go out and buy
a house they can't afford. How do you how do you buy a
house you. Got to have a 20% down payment
and house prices are through the roof and then you got to have
access to a mortgage that you can't get but other than that
it's easy. But but you get leverage.
Yeah, no doubt, no doubt. You get leverage.
So now let's play financial advisor for a second.
Disclaimer, nothing I say on this podcast is a financial
advice. Do not think this is a financial
advice. Please do your own intelligence.
But Bill, let's play financial advisor for a second.
Imagine you go to your financial advisor and you say I want to
take my, let's say you saved up to 100K, which is a lot of money
to save. As I said, the median American
has $27,000 and their portfolio. Let's say you find a way to get
to 200 and you go to your financial advisor and you say I
want to take 5 to 1 leverage to buy a call option on my zip code
on basically the school district in my neighborhood on the local
labor market, because that's what a house is.
You're taking 5 to 1 leverage to make this highly concentrated
bet on your local labor market. And if Ford moves the factory
out of Detroit to China? That it becomes called flight.
Like what? It's like, it's like literally.
It's got a lot of negative carry.
Well, one negative carry 2 property taxes.
Three, you can be doing everything right and one day you
wake up and the pipe breaks and now you're 30K in the hole.
Yeah. Well, this, I mean, this is what
I mean. The the cost of homeownership is
quite high. You're literally, I mean, not to
mention property taxes, not to mention like, So what we have
taught people is we're giving them 5 to 1 leverage to go out
and make a highly concentrated bet on their local labor market.
And if your labor market happened to be in a highly
volatile place like Miami where some VC tweets, they establish a
bubble, then everybody moves back to SF because SF now is the
height. And you think, and now Miami is
left in the gutter. The variance between how
different markets have performed in real estate is massive.
Real estate has on average, grown at 2% in America over the
past 100 years. At 2%, you know, but you're
levered up five times. So really your rate, your
effective return is like 10% when you're housing.
But that's actually massively varied.
That's actually mostly driven by Los Angeles, San Francisco, New
York, Nashville, Austin, if you lived in like a normal city like
Minneapolis, right? Like that's a big variance.
So let's go back to what is basic capital trying to do.
Why am I talking about leverage? I am a younger guy, if people
cannot tell, not that young. By the way, I'm 30 years old.
I wanted to build wealth, but I did not have enough money for a
down payment to buy a house. And I also did not want to deal
with the headache of buying a house.
And I also did not want to be stuck in one location.
I wanted to have more money to invest, but I wanted to invest
in something more diversified like the S&P 500.
And when I went to the bank, the bank said you can borrow to buy
a house at 6% seven today, but let's say that's 7%.
You can borrow money to go to Community College at 5% called
student loan. You can borrow money to buy a
car, which is a depreciating asset that loses 30% of his
value the moment you're driving outside the house for 8%.
And I said, what about this? Give me that rate.
But I don't want to buy a depreciating asset like a car or
a concentrated asset like a house or an intangible asset
like a college degree. I want to buy the S&P 500, give
me a 30 year non mark to market, non marginable financing at a
low rate and they didn't want to give it to me and that's exactly
what I wanted to build. I wanted to combine these two
ideas, the 30 year amortizing mortgage with diversified index
investing. What is basic capital?
Basic Capital enables you to take what we call the retirement
mortgage. When you come to us, you put 20%
down. This is $20,000.
We give you 80%, we give you $80,000.
So now you're investing. The power went from 20 to 100.
This 100 is invested in a diversified portfolio of stocks
and bonds and it has a 10 year term with no mark to market.
So if the market drops 50%, nobody is going to call your
money. That's the crazy idea that we
launched and that is what drove Finn Twitter crazy.
And but really all we did is we've combined 2 very tried and
true ideas, diversified investing and non mark to market
leverage duration financing into one product.
And people who opened up and read, they became fascinated by
and they became big fans and people who said this is just a
margin loan, they got confused. Yeah.
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So why is it not a margin loan? How are you able to offer this
kind of financing to the average person?
Well, it's. I mean, I know it's not
callable, I get that, but like how how did this it's?
More expensive, it's more expensive.
So if you go to Robin Hood right now, Robin Hood will give you 2
to 1 leverage at 5%. By the way, even lower if you,
if you, if you like, if you have 10 million, I think Robin Hood
we can pull it up. Robin Hood margin rates is like
4% today. Yeah.
But here is a catch though. Well, you got.
Called out at any time. Exactly.
You get called out at any time. So margin today, Robin Hood
margin rate is 4.2% if you have a lot of money.
Well, some would argue they don't really care about their
customers, but that that some would be me.
But if you go to, if you go, if you go to your broker, you can
borrow at 4% which is basically prime.
You can borrow at prime. But this catch is if the asset
drops 10%, you go auto liquidated.
This is a horrible idea for 99.9% of people by the way.
Like hedge funds blow up that way, like sophisticated
investors blow up that way. But let's look at what private
equity guys that do which who are very different from hedge
funds. Private equity guys, when they
buy a company, they do not finance it with margin.
They don't go to their prime broker and bought a 5% or 4%.
They go to the high yield bond market and they issue A7 year
bond or a 10 year bond with no maintenance covenants, no mark
to market to take the company private.
It's called leveraged buyout. They are funding the purchase
with duration financing, long term financing.
And the reason what what we do is we provide everyday people
long term duration financing that is non marginable to buy
diversified assets. What's the problem?
The fee we charge 6%, Robin Hood charges 4%.
So if your. 6 is not fixed though, right?
It's, it's basically a spread trade on 90% of the portfolio as
I understand it, right. Yeah.
We charge S + 200 on the financing cost, so it's software
+200. Yeah.
So when people see the 6% cause 'cause this I've seen in the
comments, people like 6%, what happens if bond yields go down?
What needs to happen? And this is not financial
advice, but I would think about it this way is if you're
borrowing it at floating, you should be investing it floating.
Yeah, right. Otherwise the spread has can
create problems for you. Yeah.
And our our customers, 90% of the bond portfolio that our
customers are allowed to invest in and they choose to is
actually floating red mods. So you're investing at S + 500
and you are paying S + 200. So what are we talking?
We're talking like bank loans and PRI and like private equity
or private credit. Yeah, Double B credit, Double B
credit, I mean, let's call a spade a spade, right?
Double, you know, you're, you're, you're earning S + 500.
That's not nothing. That's very juicy.
So it's double B credit. But double B, there's a lot of
work has been done, done on double B credit.
You look at the fault rates in 2008, Double B credit reach the
12%. So if you're earning S + 512% of
your portfolio went delinquent, they stopped paying.
You would be earning S + 400 which is still much higher than
your S + 200 cost of capital. So what do you need to go
delinquent on your payment? Because this is self funding.
You're not paying the mortgage cost out of your own pocket,
you're paying it from the bond yield on your portfolio.
Basically interest you're earning used to go from S + 500
to S + 200, which means basically 60% of double B credit
needs to go bankrupt or deliquate.
Is it possible? Sure, but that would be like a
an event that is like 3 or 4 times worse than O 8.
It's entirely conceivable to have such a massive credit event
in the economy. And the only way this would work
is basically if if everybody shuts down their business and
they do not sell anything anymore.
And that's called COVID. And we saw what happened during
COVID. the Fed went out and they provided grace.
They provided primary credit facilities, secondary credit
facility facilities. They stabilized the market,
lender is extended and amended. We're becoming better at dealing
with these small bursts of, of crises.
But yes, if 60% of double B of double B companies go bankrupt,
that will be A that'll be a problem for our customers.
I mean, in a weird way, it seems like the way that from a timing
perspective, which is always impossible, but it seems to me
like the way that that this could not work.
And and it would not be unique to you, but like as if if a
customer committed to you when the when the spreads were super,
super tight right before a credit event happened that that
could be bad. So how do you do that?
How do you solve this problem? There is tried and true
principles to solve this problem.
It's two things one long time, long time hold just on it
through the down and the off because you eventually if you
you'll come back up. So just have long time horizon
non marginal financing which is what we do and $2.00 cost
average. So make equal weight
contribution over a long period of time.
I'm not saying a big credit event is not going to happen.
I'm not saying it's impossible to lose money.
You could lose money. But a really bad event needs to
happen, and you need to sell at that worst possible time for you
to actually crystallize that loss.
Yeah. Well, sometimes it's hard for
people to dollar cost average through those really bad events.
So that's why we are a four O 1K company.
So we are actually we have two product line, we have an IRA
product line that's direct to consumer and we have 4 O 1K
business where we manage 4 O1 KS.
We integrate with the payroll provider.
Customers put 80% of their money into a targeted fund and 2010 5%
of their money into our LLC. So that, that brings me to the
third best invention of the 20th century.
So we said there is 3 great inventions in the 20th century,
the mortgage which we talked about, the index fund which we
talked about and now we talk about non request financing,
limited liability. When our customers invest.
What we do is we open a comp, we open an LLC in Delaware called
Basic Capital for Bill. Bill puts $200.00 of his
paycheck in it. We give him $800.10 year non
marginable non request financing.
The borrower is not Bill, the borrower is the, it's the LLC.
So now you have $1000 in the LLC and every time you make a four O
1K contribution, you put $200, we give you $800.00.
So your dollar cost averaging your contribution, your dollar
cost averaging your leverage over a long and you're holding
it over a long period of time. So we're A4O1K platform.
Now if you say I want to put all my money in a target debt fund
that I don't want any leverage, you can do that.
We are like just like Vanguard or Fidelity in that sense.
But if you want to put some of your money into this leveraged
LLC that we create for you and get 6% duration financing on it
and dollar cost average that you can't imagine.
Basically the key is how to this is going to bend your mind.
Imagine if you could buy $1000 home, put a $200 down payment
over a 30 year period. So like.
Imagine your your dollar cost averaging your way into a
mortgage for 30 year. Yeah.
It's the same concept, but you're not buying one house,
you're buying multiple. I guess what's what I don't
understand is why am I borrowing at a lower cost than like a
private credit company? I guess because they have more
leverage maybe. Yeah.
Like, like, why is my risk profile lower than theirs when
they're like a legitimate company and I'm me?
Yeah, well, you're not borrowing, so I'm not.
You're borrowing is the answer the LLC?
And the LLC is backed by 20% equity, which is your equity
contribution, right. So there is a first lost
tranche, you're not very pursuit to the loan.
The loan is senior to you or the financing is senior to you.
So you you are you're the first lost tranche.
So there is some equity question there.
And the difference is the company you're lending money to
is concentrated Folio is diversified.
When you lend money to 1 double B company, you charge them as
plus 500 because this is 1 double B1 small business or 1
medium sized middle market PE firm or middle market thing.
So there is some concentrated risk, but the diversified
portfolio, the expected losses or diversified portfolio of a
double B credit is much slower. You see it's it's.
Diversification is you don't have like too much sector
exposure or whatever in the in the offering.
Exactly, right. So it's diversification, which
is the only free launch, right. Like basically that's what you
do is you take a, a bundled pool of assets that are high yield or
high risk and you bundle them together and the weighted risk
of the portfolio is lower than the risk of each one
individually. Now of course, every now and
then there is a big correlated event where they, a bunch of
them go bankrupt at the same time.
That's what happened in O 812% of double B companies went
bankrupt. But then you size your bits
appropriately. You do not put too much money
into this lever product. You put only 10% of your money
in it. You finance it with long term
leverage, not short term leverage like a margin loan.
And you know, you make sure that there is a meaningful spread
between your cost of financing, which is S + 200 and the
interest you're receiving which is S + 500.
So you can withstand material portfolio losses.
We put some thought into this. I mean, I hope.
No, I know you did. I were like 50 minutes into the
podcast and I hope I've demonstrated to the listener
that we're not like some sort of Yolo.
Oh yeah, like Yolo. Like, like what I'm saying is
saving, it's really hard to build wealth with saving alone.
Because if I was wrong, if I, if this is, if actually it's
possible to build wealth with saving, we would not have the
wealth inequality we have today, right?
Like we would not have the issues that we have today.
Like we would not have 50% of the market people locked out of
the stock market. You didn't have many percent of
Americans on very little like so saving is not effective way.
Let's look at what has been effective.
The mortgage, the mortgage brought home on the shift and
20% to 60 percent, 50% of the middle class wealth is home
equity. Like why not enable people to
take simple long term duration financing to buy diversify
portfolio of stocks and bonds. But we're OK giving them buy now
pay later. We're OK give them a credit card
at 24% to buy whatever they want.
We are OK giving them margin loans with, you know, mark to
market. Like the hypocrisy is hilarious.
It's like, oh, like, you know, like anyway.
Yeah. Well, the, the, I mean, the
argument is going to be against your product is going to be
you're releasing a double BA levered double B product at the
wrong time. And don't you know the private
credits going to blow up? Don't you know that it's 2008
all over? Again, I don't actually.
I actually don't I. Know that's what I'm just
saying. That's what the Dumors are going
to say. Actually, I actually don't know
I'm from smart enough to do that.
And, and I also think, I mean, there is this great paper I
somebody tweeted yesterday on Twitter, they were saying like,
I think it's a Vanguard paper where looks like buying at the
highs has the exact same returns as buying at the lows.
If you have a long time horizon, like basically it doesn't matter
if you buy at the highs because if you have long enough time
horizon, like your entry price literally doesn't matter.
If you have like 15 2013 horizon, like doesn't matter.
And I think a lot of people lose more money in trying to time the
highs and timing the lows than just if they were to dollar cost
average and be patient for 20 years.
I am not smart enough to know where we are in the cycle.
I started my career on the high yield distress credit desk at
Goldman Sachs and I used to trade high yield bonds and
distress credit and Special Situations.
And I'll tell you this, I've I've been now in my career in
finance approximately 10 years since I started.
There has been some sort of short going on.
Michael Berry has protected 50 of the last two bubbles.
Yeah. It's very easy to be a doomer.
It's very easy to say like, oh, there is a bubble coming and
eventually you'll be right. But by the way, the longer the
time horizon between you protected the bubble and when
the bubble happened, the less impressive the insight is.
If you tell me, oh, there is a bubble and then the bubble
happens after 10 years, you can't say, oh, I told you so.
Yeah. Obviously, eventually there will
be a credit event. Obviously eventually, like
somebody is going to be like, oh, what is Abdul?
Bankruptcies are high. Like I agree with that.
Eventually that will exist. But what I'm trying to say is
it's really difficult to decide to figure out when that time is.
And I don't think sentiment is a good measure to it.
Just because people are tweeting about the stress and private
credit, it does not necessarily mean that the stress is actually
material. I would argue that the fact that
people are tweeting about it is actually positive because it
means people are more diligent off it.
Yeah, they're thinking about it. By definition, the way you get a
bubble is if you're not thinking about.
It that that does seem to be correct, I, I the history would
be would agree with you. The material I saw and I don't
know, it's got privileged and confidential all over it.
So I'm not going to cite too much.
Directionally speaking, you're what like between 30 and 10% S&P
or do you want to narrow that range a little bit or does does?
That work my goal. Because most of it's private
credit, correct? Yeah, yeah, yeah.
And now, sorry, I don't mean I just want to be precise here.
Within private credit, do you also have like tradable double B
loans or is it all sort of private credit?
Yeah. It's, it's actually not private
credit. It's actually what we invest in
is interval funds, private funds that invest in a mix of public
credit and private credit, OK, asset backed securities and
corporate. Are you comfortable divulging
who runs those? Yeah, I mean the top five
private credit mastery and I'm and I'm saying like, like, you
know, we don't have. KKR, Blackstone, Aries,
whatever. Yeah, like the best of the best.
Yeah. You know, you can say you can be
skeptical of those, you can blah, blah, blah, but they are
the best at what they do, right? So I'm not going to like some
sort of like niche manager lending or some sort of like
specialty real estate thing, right?
Like this is the best of the best.
Here is my today our portfolio, you can customize and choose the
private credit funds that you like or the private funds that
you like. You can choose SPY or QQQ or
MSCI. That's like what we provide with
an equity is only these three things and the financing is 10
year term. My dream is when I come back to
the podcast again in a few years, I'll be able to tell you
that today our financing is actually 30 year instead of 10.
How could you get that done? Well, that's on me.
Let me worry about that. And two, you can go 100% spy,
100% spy. Well, that's the thing I kind of
like about the bond at allocation is the ability for
the cash flows to sort of match up fund and pay.
Yeah. Like it is tough to ask people
to, to actually, I mean, I don't know, but 100% SPY, they got to
come out of pocket to to cover them.
Correct, Right? Different people will want
different things, right? So like somebody will say, I
actually can spare the interest payment on this and I'm happy to
pay for it. And somebody might say, actually
I would, I can spare 200 bucks a month to save and I want to get
leverage on my savings and dollar cost my average weigh in
or something. You know, I mean, somebody might
somebody might be a lot. Somebody might be constructive
on equities and they want to go along equities.
Somebody might be bearish on equities and they want to be
more senior in the cap stack. Somebody might hate credit and
they just want to own equity. They hate private credit because
they read an article online because Michael Green tweeted
about it or something. I know you know, so, so the goal
is to just like you can take a mortgage to buy a ski chalet
house, right, And you can pick your own zip code.
You're going to be able to take a mortgage and pick your own
financial asset within guardrails.
You're not going to be able to go like I want, you know,
Bitcoin. But the idea is can we give
people duration financing to buy financial assets instead of
margin financing? That's the idea very simple,
like can we give people duration financing to buy assets instead
of margin, margin financing? And there will be different
rates for different asset classes, right?
There will be there like, and, and you're going to be able to
customize, you're going to be able to play around with it.
And and that's really the division here and, and I'm
really excited about that future because I think more and more
people want to participate in capitalism, but but saving is
not, is not really giving them the the participation that you
need to be an effective shareholder of our great
country. Interesting.
I do know that you did a decent amount of back testing.
What is a scenario that if you were telling people like sort of
prepare yourself for mentally, obviously nothing's financial
advice and you got to do your own work, but like when you were
going through the, the cohort level data, I mean, what, what
was a, a setup for the worst return?
Yeah, liquidating, having short time horizon, please, please,
please, please, please, please do not even consider the basic
capital if you have anything less than 1015 time Chrysler,
this product only works if you have a long term bet.
And if you to some degree, I mean, even if you do not cut
dollar cost average by the dollar cost average, it even
becomes better. But even if you do not cross
average, you need to have 10 year plus your horizon.
And by the way, this is not like an easy sell like right to go
out to customers and be like, I want who wants to invest for 10
years? There's actually the entire
photo and case space, but. Turns out anyone with a longer
time horizon. Yeah, not, not the meme stocks
guys and the meme stock guys are making fun of us on Twitter.
But that's fine. You can go buy meme stocks.
We're going to go give the Russian financing to people who
have duration. Listen, asset prices are set to
exhibit a random walk. They call it random walk over a
short period of time, but it has a positive drift.
And basically what I'm enabling people is to level up that
drift. If that drift cease to exist,
it's a problem. By the way, that drift like
cease to exist in Japan, they stagnated.
Yeah. But that's, that's Japan, that's
not America. And I don't know, there's no
like logical, I mean there is some a lot of logical arguments
I can enter here, but I just believe in America just like
Warren Buffett does. We're not Japan, we're not
Europe, we're we're the United States of America.
We're the epicenter of innovation globally.
Every great company wants to go public in our stock market.
Every great global company wants to go public in our market.
Every great company in the past 100 years came out for market
the US dollar and I really yes, if you do basic capital in
Japan, you could lose money because the market was actually
flat for like 30 years. If you do basic capital in like
assuming you are 100% equities, if you have bonds and you did
the spread thing that we talked about, you actually would have
been fine because you are just levering up the spread between
the double B credit and what you're borrowing at.
Let's say you are 100% equities in Europe or in this order in
Japan, you wouldn't have done as well.
You would have just only clipped the, the, the spread.
But but the way people get hurt here is if they have like two or
three-year horizon and they're trying to like get rich quick.
And this is, like, it could work for you, but you could get hurt.
It's kind of like house flipping, you know?
I mean, like, if you flip a house, yeah, you could get
lucky. But like, if you stay in your
house for 30 years, you'll probably make a decent return on
it. Yeah.
Nothing crazy, but a decent return on it.
Yeah. And going back to the the
information that I perused, I mean almost everything in the
models, unless I'm reading it wrong has a substantial bond
allocation. And then it looks to me like the
return clusters are higher. But the the volatility you've
got to be able to live with which would jive with having
leverage generally and having duration.
Yeah, You need to be OK with like the market being down 30%
and you are on paper down like basically your equity is wiped
out. But like you need to be able to
be like, I'm just not going to do it.
Like I'm not going to sell. Why would you?
Because like now you have a call option.
Like if you actually think about it, it's kind of like what you
what you have here is like if the market goes down 30%, if you
do not get forced liquidated, you have this like massive call
option, you have 70K worth of call option on on the upside.
So why would you? Why would you sell?
Unless like if there's like a rash?
Loss aversion is the is the real answer, right?
And panic. But yeah, you don't know how
you're going to react until you're in that situation, would
be the devil's advocate side. Exactly.
And, and I think you can educate people around them.
Yeah. How do you, how do you view your
role in that in the education process from that perspective?
Because I would think that would be a a risk to the business is
everything's going pretty well and then we do have one of those
events and then your clients kind of panic I.
Mean I, I go back to where we started this whole thing about
why there is no innovation in financial markets because it's
such an important model business dealing with people's hard like
hard earned dollars. And I go back to Jack Bogle and
Jack Bogle really had to be a prophet.
He had to like walk around basically like advocate for this
idea of the index fund for like 30 years before it became really
big. And I, I see my role the same
way. And my role is to educate
people. But the only way to get rich,
the only way to build wealth is really to have long time horizon
and to be part of the system. And, and if you use credit,
credit is like a knife. Credit is like any tool.
It's a general purpose technology, GPT general purpose
technology. That's what credit is.
You can use it for a good reason, like investing, or you
can use it for a bad reason, like consuming.
We're trying to do at basic Capital is give you credit,
which is not inherently bad. Leverage is not inherently bad.
It's it's why you use the leverage.
You use it to consume on party and buy stuff you do not need.
Or do you use it to invest? We're trying to give people
credit to invest, and our role is to educate them that credit
can be a powerful tool if it's used in the right way and you
should not use it for the wrong thing, like buying depreciating
assets or like consuming. And when you use it, when you
use credit to invest, you should have a really long time horizon.
And I plan to spend the rest of my life educating people about
this. And I hope one day we can create
a legacy where the vast majority of Americans have a material
endowment in the stock market, and it's called universal basic
capital, not universal basic income.
Whether you're relying on Sam Altman to write you a check or
some freak to write you a check, you're relying not on the
government, on your own endowment in the market.
I like how you called him a freak, not him.
A freak, he freaks. Me out.
For the record, I think he is the freest billionaire.
Anyway, I'm not. First of all, that was a very
emotional segment. I found myself very emotionally
tied to what you were saying. I didn't mean to break it up
with a joke, but when you said some freak, some of these guys
that are making decisions are freaks.
So I like your thought you'd let you let the universal basic
capital provide the universal basic income.
Exactly, exactly right. That's.
Actually, wealth. That's actually wealth.
You're not waiting on the government, you're not waiting
on anybody to give you a handout.
You are like, hey, dude, I got my own portfolio.
It spits out 10% every year and I live on it.
And I don't need your basic income.
You can keep it up. You can, you can have it.
You can't keep it. Like, I don't need your basic
income. I don't need your hand out.
I don't need your Social Security.
I have my own endowment. But the problem is it's really
tough to build endowment. If yeah, it takes a lifetime.
Leverage, if you're going to have some like ironically like
you, it's really hard to build an endowment using saving alone.
It's it's really tough to buy a house using saving alone.
Let me tell you that. Well dude, how are I mean, how
are most hedge fund managers paid?
One would argue it's leverage. How are most GPS paid?
It's leverage. I mean, it's all other people's
money at the end of the day in some way, shape or form.
It's just can you can you structure the leverage in a way
that's non recourse and not going to blow you up at the
wrong time? Yeah.
And I think, I think we created crazier things like like we made
AI and you're telling me there is no way to structure leverage
in a non recourse like like the way that doesn't blow you up.
Like I'm sorry, but we created student funds, car loans and
mortgage-backed securities, buy now, pay later.
Like the human ingenuity is, is massive.
We created AI. You have airplanes that fly.
We have we can't structure a simple way for people to buy and
hold the market. I find it difficult to believe
where there is a world, there is a way.
You just have to go out there, put yourself out there, be
willing to get the criticism, be willing to get feedback, keep
iterating, keep pushing, and eventually you will make it.
And instead of giving people prediction markets the gamble of
the Grammys, we want to give them credit to invest.
Dude, this that would you just touched on that as a father of
three boys that scares the shit out of me like we're watching
football games now and they're asking about what the lines are
because you like you can't avoid it at this point let.
Me ask a question. Would you rather your son come
to you and say hey dad I have a grant on a prediction market or
hey dad I put a grant down in an LLC I'm board for and the LLC
board for the grant and I have 5 grand portfolio. 100% the
latter. Sure, if there is big.
If there is a big bad event I guess they could lose the
grants. But like on a prediction market?
Well, I can't. I can't cite the study that I'm
thinking of because I don't want to say something wrong, but I'm
almost certain that I just, I had a guess not too, too far ago
that like proved that double B credit and and anyone in the
credit markets can probably know this, but double B is where you
want to be through the through the curve, right?
Or and I'm when I say curve I mean like.
Risk. Premium time series, right?
Yeah, yeah. So it makes sense, especially if
like the thing that that got me about the debate that was going
on on Twitter with some of the replies.
And then especially with Hunter, like I, the Hunter is a pretty
thoughtful guy about this stuff. So when I saw he was involved, I
was like, OK, there's there's probably more there than I'm
appreciating. I think people mischaracterize
your product as more equity than exists.
What the upfront fee kind of pissed some people off.
You want to address that? What's the deal with that?
Yeah, we, we, we charge 2 fees. We charge financing fee, which
is 200 basis point of our software.
We charge 50 basis point servicing fee like a mortgage
servicer. So that's like that's the
you're. Going to get that anywhere
though, you can't. You're going to get half assets
anywhere and not have. But the reason, the reason why
people went crazy is we used to charge $25.00 a month
subscription fee, which is $300 a year.
Yeah, yeah, yeah, yeah. But the reason why we did that
is we did not want somebody to put $100 in and that's it.
Interesting. So we created the fee structure
in a way to deincentivize anybody from putting less than
5K. Basically, you see what I'm
saying? Because if you put $100 and you
pay $300 subscription fee, you're paying 300% of your
principal as a fee. Now we, we thought like Finn
Twitter was able to do the math and basically say, OK, this only
makes sense if you put at least 10 grands, because if you put
less than 10 grands, the subscription fee is too high.
But but people were like, they did not say, hey, like this
doesn't make sense unless you put 10 grand.
People said if you put $100 in, you're paying $300 in fees.
This is disgusting and. I'm.
Like, no, it's like it's supposed to create a hurdle and
we, we got rid of the subscription fees since then
because like it, it created such a big backlash, not because of
the backlash, because like we just.
No. Well, I mean, look, we just have
a messaging issue. You might as well address it,
right? Yeah.
Huh.
Does this is going to sound really dumb to those that are
more informed than me, but I would imagine being an IRA is a
tax advantage way to do this right?
Tax is done. And any potential issues with
what am I unrelated business income, how is that?
Because the financing is not alone.
The financing is preferred equity.
We're core investors with you. So we're not actually giving you
a loan. It's not even a loan.
That's why we cannot call it back because it's not even a
loan. It's like imagine if there is
like a GPLP and the LP gives you 80% of the capital and you know,
they get they get 6% and then you get the rest.
That's basically like that's basically what's going on here,
right? Like we're Co investing with
you. We are, we are preferred equity
in the LOC. We're not common equity.
We're not alone, we're not credit, we're Co investors with
you. So that everything is structured
as a, as a Co investment, especially we're not, we're not
even lending you money. We're Co investing with you,
which is our structurally senior and we're entitled to 6%
preferred dividend. By the way, banks do this all
the time. Instead of issuing debt, they
issue something called Coco's contingent convertibles with the
issues on the court preferred equities to fund them, to fund
their operations because banks are not allowed to take on debt.
They're not allowed to be that levered because they're already
levers from deposits. Listen directly.
We are backed by the best investors in the space.
You know, we as lawyers, On the contrary, working, you know what
legal bills and the millions of dollars a year, we have
literally the best lawyers working with us from the
Department of lawyers, former SEC guys, former D oil guys,
we're serious about this. Like the way I get paid is in 10
years from now when basic capital is a multi billion
dollar company as big as Kaushi, as big as Polymarket, as big as
a firm, as big as Robin Hood. Robin Hood is an $80 billion
market cap business. So the way I get paid is when
this becomes really massive. I'm not trying to pull like a
quick one when you hear, you know, I mean like this is a,
this is like we have classic VCO long term oriented.
We're doing this for the home for the long.
We're doing this to change the way people invest.
We're not doing this to get a couple $1,000,000 an AM.
Yeah. So in 10 years when that comes
to fruition, do some of the Co investments that you have
basically that like create an exit event for you, is that is
that how the incentives are aligned?
Yeah, but we make more on the on the regular fee, right.
So like we're making more money on the ongoing 50 basis point
fee, we lose money on the landing.
So right now our our cost of funding is higher than what we
give to you. Interesting.
Why? Yeah, with subscale, the bigger
you you, the bigger you become, the more you have to, the easier
it is to raise more money. Yeah.
So your borrowing cost should come down.
Exactly, Exactly. Not yet.
Interesting. Not well.
Because the way it works on Wall Street is if you have a billion
dollar problem, everybody wants to help you.
If you have $100 million problem, it's too small to care.
Yeah, that's right. Yeah, that's your problem, not
mine. You know what I mean?
So it's one of those things where like you have to go out
educate the credit market. Just like the Henry Kravis when
he created leveraged buyouts in the 80s, he had to go out and
work with market market and to educate the market on higher
bonds and to the higher bonds are like this big massive space.
Just like when a firm Max Option created the firm in America, he
had to go on the road and teach people about what by now letter
is and teach the you not only have to teach the customer, you
also have to teach the capital markets.
Yeah. So I spent a lot of time on the
road talking to lenders, banks, insurance companies.
Yes, some are in the US, some are in over overseas, you know,
to educate them on this new space we'll create.
Huh. So if I have a five year line of
credit or a 10 year line of credit with you, what?
And I don't mean to ask you a scary thought for you, but what
happens if your company goes under?
Is my line of credit called at that time?
You can keep it. Who's my counterparty?
Whoever, whoever takes over the thing, so basically 10, you
know, but they can't call it back.
They have to hold it for 10 years.
So that yeah, so you would you would theoretically do some sort
of for sale and those people would have to honor the
contracts that they're buying and they basically Chapter 7.
Yeah, somebody sits down. Yeah, somebody sits down and
wait for 10 years until they get paid back, basically.
And you know, you sell at $0.50 on the dollar because, you know,
you're liquidating or whatever. It's kind of like classic like,
you know, if you, you have a, if somebody give you a mortgage,
like physical mortgage from First Republic or Silicon Valley
Bank, a second Valley Bank went under.
You still have your mortgage. She's just like, you know, at
some point you. Get the best bank in the world.
Yeah, yeah. Who's your?
Who's your kind of way, exactly? I'm saying if I was at First
Republic, now I'm with JP Morgan, that's a pretty good
place to end up. Right, exactly, exactly.
So basically, you know, you the assets end up moving to
somebody's balance sheet and they just sit on and they clip
the 6% and yeah, it's, it's very try the two things in financial
markets. It happens all the time.
So how are you funding your business?
You don't have to divulge this for the record, but is it like a
a revolver? You know, we have to, we have
the funding partners and we're diversified and I'd rather not
share more. OK, that's fair.
That's fair. I I used to work in a bank,
which is the only reason I'm, I'm kind of curious, but that
makes sense. I would also, I would, I would
err on the side of protecting proprietary information, so.
Awesome. All right, cool, man.
Well, I appreciate your time and you know, this is fun.
I'm glad that we could do it. I will get it out quickly.
It'll be out this week. But I, I sort of I saw the the
fury of activity and I was like, I, I don't know, whenever I see
highly polarized issues, I feel like that the answer is probably
somewhere in the middle or something.
Something's not being understood.
So I appreciate you taking the time to at least tell me your
story and the listeners. So thank you very much.
Thank you for having me. Appreciate it.
All righty. Have a good one.