E152: Real estate chaos, WeWork bankruptcy, Biden regulates AI, Ukraine's "Cronkite Moment" & more

Following the early-November 2023 Time magazine story on Zelensky, U.S. public opinion over the subsequent few months (roughly through mid-2024) will increasingly shift toward viewing the Ukraine war as unwinnable and favoring negotiations, while the bipartisan political establishment in Washington will largely maintain its existing pro-funding, pro-war policy stance over that same period.

“So I think that this week was a watershed in terms of the way that public perception is going to evolve over the next few months, but it seems like the policymakers in Washington are the last ones to get the memo.” View on YouTube

The Israel–Gaza conflict that escalated in late 2023 will, over time (within the next couple of years), revert to the historical pattern of intermittent "conflict, time out" cycles rather than expanding into a broader, ongoing regional war; as markets perceive it as another temporary flare-up, they will de-risk it, contributing to a supportive environment for equities and startups and giving the Federal Reserve room to begin cutting interest rates once inflation and growth data permit.

“Now that leaves, I think, Israel Gaza as a risk. And I think people and I think the markets still view that as a potential war. And the longer that goes on. I think that there's a very good chance that we de-risk that as well as, again, not a war, but part of that cycle between Israel and Palestine, which is conflict, time out, conflict time out, conflict time out. And so if what we think is now this is just a version of conflict timeout and the market de-risks that, then it's actually pretty positive for equities for startups, because now the fed has a reason to actually say, okay, the economy has cooled off, inflation is calm. It looks like the markets are stable. Let's cut rates.” View on YouTube

Conditional prediction: If, from late 2023 onward, the probability of Federal Reserve rate cuts exceeds the probability of further rate hikes (i.e., the tightening cycle is effectively over and a rate-cut cycle begins), then public market valuations—especially of growth stocks and distressed real estate—will experience a broad rally during that rate-cut cycle.

“Well, maybe. I mean, I don't know, it's so hard to predict the markets, but if you believe that there's more upside to rates than downside, meaning that the odds of a rate decrease are much greater than the odds of a rate increase from here, then there is upside to valuations, particularly for growth stocks. Also for distressed real estate, because all these things get more valuable when rates are lower. So if you believe that we're going to be in a in a cycle of rate decreases and that whole thing has played its way out, then everything's going to rally.” View on YouTube

San Francisco will experience substantial budget deficits of roughly $0.5 billion in fiscal year 2024–2025 and around $1.3 billion by fiscal years 2027–2028, as projected by the city controller, creating acute fiscal stress that will force difficult policy choices.

“there was an article here saying that the city controller's office for San Francisco has released its projected budget shortfalls for the coming years. It's almost half a billion for 20 2425, reaching 1.3 billion in 2728. So what do they do about this? I mean, they don't have the money.” View on YouTube

The Biden administration’s $45 billion office-to-residential conversion initiative announced in late 2023 will be only the first in a series of U.S. federal programs over the coming years that are publicly framed as supporting affordable housing or similar goals but are substantively aimed at mitigating economic losses and balance-sheet impairment in the commercial real estate sector.

“I personally think they're just trying to find more ways to pump money into supporting commercial real estate markets because of the issues we just highlighted, and I think this is the first of what will likely be several programs to support, framed as things like affordable housing, but really designed to support the economic loss impairment. That's going to be inevitable at some point.” View on YouTube

Assuming the current fiscal and policy trajectory continues from around 2023, San Francisco will not significantly reform its governance and fiscal practices for roughly 5–10 years; meaningful policy "rationality" or major course correction is unlikely to emerge before approximately 2032–2033.

“that delta t of incompetence tends to be about 5 to 10 years. I would say the midpoint is eight. So if we're starting now, you'll probably see some rationality by 2032, 2033.” View on YouTube

San Francisco will continue its current progressive policy and fiscal "experiment"—including relying on municipal borrowing to cover growing deficits—without major structural reform for at least another decade from 2023 (i.e., through roughly 2033).

“So they'll keep running this experiment for at least. I think if you want to be conservative for at least a decade, another decade.” View on YouTube

Following WeWork’s expected Chapter 11 filing (signaled for early November 2023), a private equity firm will acquire WeWork’s assets out of bankruptcy, restructure its leases and locations, and ultimately generate very large financial returns from the restructured business relative to the distressed purchase price.

“There's no question that that WeWork has been a capital destruction machine. That being said, I actually think that some private equity player is going to buy this out of bankruptcy and make a fortune.” View on YouTube

Post-bankruptcy, a buyer of WeWork’s assets who aggressively sheds unprofitable locations and renegotiates remaining leases (including converting some to operator/revenue-share structures and cutting others to roughly 60% of prior rent levels) will be able, within a few years of emergence from bankruptcy, to operate WeWork as a profitable, cash-generating business.

“So I think the landlord will take the bird in the hand. So think about it. Some private equity player goes in there renegotiates all these leases sheds the bad ones, and all of a sudden the business is going to make a lot of money.” View on YouTube

By around late 2026, the Biden October 30, 2023 AI executive order’s model-size/parameter-based standards and technical definitions will be largely obsolete and inapplicable to the then-current state-of-the-art AI models and practices.

“It's going to look like medieval literature in three years. None of this stuff is even going to apply anymore.” View on YouTube

Within 2–3 years of October 30, 2023 (by roughly late 2025 to late 2026), the Biden AI executive order will be widely viewed as outdated and ineffective (“medieval”) relative to the then-current AI technology and policy needs.

“So it just seems like anybody who had the ear of the people writing this had a chance to write something in. So it's a little confusing. It's not going to do the job. And I think that you're right. In 2 or 3 years we're going to look back and this is going to look medieval.” View on YouTube

As a result of the Biden AI executive order and subsequent overlapping regulations from many U.S. federal agencies, technology companies will eventually lobby for and obtain the creation of a single, dedicated federal agency (a “federal software commission” analogous to the FCC/FDA) that regulates AI and large-scale software in the United States.

“What's going to happen is that with all of these different bodies issuing new regulations, it's going to get more and more burdensome on technology companies until the point where they cry out for some sort of rationalization of this regime. They're going to say, listen, we can't keep up with FCC and Department of Commerce and this Entity Standards Board, just give us one agency to deal with. And so the industry itself is eventually going to cry, uncle and say like, please just give us one. And you already hear people like Sam Altman and so forth calling for the equivalent of Atomic Energy Commission for AI. This is how we're going to end up with a federal Software commission, just like we have an FCC to run big communications, and we have an FDA to run Big Pharma. We're going to end up with a federal software commission to run software. Big software.” View on YouTube

Over time, U.S. federal regulation will expand from narrowly targeting AI to covering essentially all large software companies, subjecting the software industry broadly to direct federal regulatory oversight.

“now we are headed to a place where not just AI, but basically all software companies are headed for regulation.” View on YouTube