AI, Tech, Industrial Policy and Baby Equities with Brad Gerstner (Altimeter Capital Founder and CEO)

>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century podcast, an official podcast of the Hoover Institution Economic Policy Working Group where we talk about economics, markets and public policy. I'm Jon Hartley, your host. Today my guest is Brad Gerstner, who is the founder and CEO of Altimeter Capital, the Silicon Valley tech investing firm with over 10 billion in assets under management.

Welcome, Brad.

>> Brad Gerstner: Hey, Jon. It's great to be here. Huge fan of the pod, huge fan of Hoover, so thanks for having me.

>> Jon Hartley: Well, thanks so much, Brad, for joining us. Before we get into technology, industrial policy, and all these related concepts to your expertise, I want to first get into your origins before you became a Silicon Valley investor.

You're a Midwest guy in terms of where you grew up. You were born in Indiana, you did your BA at Wabash College, you spent some time at Oxford, you did your J.D at IU's law school, you worked in Washington D.C. you served some time as Indiana's Deputy Secretary of State.

Then you did your MBA at Harvard Business School. I mean, how did you first get interested in economics, technology and investing? And who were some of your early heroes in that process of discovery?

>> Brad Gerstner: Well, maybe a little bit of context because I think we're all byproducts of, of where we grew up and how we grew up.

So I grew up in a small rural town in northwest Indiana. You know, I was coming of age in the late 70s and early 1980s. My dad, who was one of my early heroes, was first generation college and he was the general manager of a company that made auto parts and employed a lot of the men in this small town.

And like was happening across America, a big corporate came to town, bought the company and laid off a lot of his men in 1977. And my dad felt this obligation to start his own company, hire them back and compete on making parts for the auto industry. But unfortunately, despite him working heroically, the combination of Japanese low priced cars, 13% interest rates, 13% inflation, he just couldn't keep the credit in the business to keep the business going and eventually shut down.

And so they started calling the part of the world that I was in the Rust Belt. It was pretty depressing. It all started kind of under Carter and you know, and the big changes came with Reagan and Volcker in 1981. So you have to understand that that's what I was growing.

That's what was really going on around me. When I was in middle school, I started to pay attention to how the world works. I started to ask questions and then as I started high school, I found my way to the stock pages, into Adam Smith and to Milton Friedman and to Warren Buffett, which would start this real long journey, decade long journey.

Really, into kind of classic liberal thinking around free market capitalism, around limited government, you know, and at the same time, my mom was working two jobs and she was sacrificing everything for our family. And I'll Never forget, in 1985, she shows up with this IBM 5170, right? Like one of the first personal computers.

And I knew we didn't have the money to buy this computer, but it turns out she bought it on a payment plan that was deducted from her paycheck every week because my mom was just hell bent on helping, you know, the kids have a better journey than the one they were they were on at that point in time.

My school newspaper in middle school that I was helping to edit bought its first Macintosh PC in 1985. And so I got introduced to these early PCs and then this early email network called CompuServe. And I realized this technology thing could be my ticket out of the Rust Belt.

And so I just started getting really, really excited about both learning why the world was operating the way it did, why this happened to my dad, why the Reagan policies seemed to be working, and also just fascinated by technology.

>> Jon Hartley: That's fascinating. And yeah, certainly Hoover. Milton Friedman is a big part of Hoover transformation in terms of building out a public policy think tank.

And Freeman came to Hoover after he won the Nobel Prize in the late 70s. And then while he was here, he started really becoming more of a public intellectual and doing producing the Free to Choose series. And it's amazing to see just how many people that's influenced over the decades.

It's awesome. I mean, it's very interesting how, or I guess just how influential that that's really been. So you founded altimeter capital in 2008 in the depths of the Great Recession. You know, Altimeter does lots of VC investing. It does lots of investing in public equities, a lot of public technology names.

I'm just curious, like, what compelled you to start an investment firm in the middle of a financial crisis? I mean, who does that? And who does that so successfully?

>> Brad Gerstner: Well, first, before, before we go there, I have to go back to Milton Friedman and, you know, kind of this formative period because it really informs the decisions I make, like with Altimeter down the line, you know.

Of course, of course, the first thing I read of Milton Friedman's Was free to choose, right? This idea, you know, because remember in the early 1980s, it just felt like government was oppressive. Like it felt like the thing that took my dad down was, you know, 50% tax burdens, you know, these super high interest rates.

And so you read Free to Choose, it was all about.free markets allow for innovation and efficiency and personal freedom. And that really spoke to me, right? And this idea that government tends to distort incentives and create all these unintended consequences. And so that was really important to me.

But then I kind of went backwards in order to go forwards. You and I have talked about your own journey and your own study, and so I think unpacking a little bit of that, you know, Adam Smith, in this wealth of nations, you know, this idea that free markets and competition, you know, the individual is generally pursuing, pursuing what's in their own economic best interest leads to the best public good, right.

And I mean, if you think about the political machinations going on today, all of these things is this tension between, you know, kind of freedom and allowing this thing we have in the United States, right. What makes the United States great is not government, right? It's government sets the creation, the conditions for all of this incredible innovation that comes from our system of risk takers and risk capital, the very DNA of the country.

And so, you know, and I remember the first time I read, you know, John Stuart Mills on Liberty, same thing, it was like this idea of, you know, limited government that was so appealing to me. And of course, when I looked at the world around me, you couldn't help but to pick up a newspaper again in the early 80s and you were reading about Volcker and what he was doing to, you know, really smash and change monetary policy and, you know, and bring an end to this hyperinflation.

And of course then the debate over supply side economics, Laffer and the fact that, we could actually lower taxes and get higher tax revenues, right. And so that to me was fascinating. I went off to college, you mentioned at Wabash College. And I was lucky, you know, the reason I went to Wabash College, I couldn't afford college.

I was terrified of debt. And they were lucky enough to give me a full ride scholarship to come study. They were going to pay for me to study at Oxford. And so I thought, I can't pass up this deal. And I was lucky that their economics department had a partnership with the University of Chicago, right?

So that like, really unpacked. So when I started. Started studying economics there I was introduced to the likes of Gary Becker and applying these economic theories to better explain what was happening in society, which appealed to me much more than the stuff I was reading in political science or the stuff I was reading in philosophy or Stigler.

I was particularly interested in the law, so Richard Posner, and this idea that, all the law can be explained through the lens of economic reasoning, and it should aim to allocate resources efficiently. And so then when I went off to study at Oxford, I studied PPE, right? Politics, philosophy, and economics.

And there it was, just a lucky time, right? I dove into the works of HLA Hart, which really expanded on John Stuart Mills, Ronald Dworkin, who was not of the liberal economic school, but was exploring some really interesting things about abortion, euthanasia, the meaning of life, and applying economic theories to that.

But I'll tell you what really made Oxford such an interesting time, Jon, was that you gonna think about the moment. The war had just come down, right? So the Cold War was ending. I'm in Europe. I had never traveled outside the country before in my life, and I'm out at Oxford.

And the big debate at the time in England is whether or not they should join a single monetary union, right? This was leading up to the Maastricht Summit, which was going to occur in 1991. And so that debate, I remember, I was a member of the Oxford Union, which is the debating chamber, and I remember the debates between Edward Heath, the former prime minister, and Norman Tebbit about whether or not they should join the single union.

And think about this, right? This has really foreshadowed what we've now seen. The conservatives were saying, this could lead to fiscal irresponsibility, right? You had a monetary union, but you didn't have a fiscal union. And so it's just going to lead to a bunch of bailouts of countries that weren't going to be financially sound.

And so it led to all these moral hazards and potential bailouts that we've come to see, frankly, across Europe. And I would argue as part of the reason that Europe now, for decades, has underperformed the United States, and the national advantage of the United States has only increased.

And so those were absolutely formative things for me leading up to this period. And then on the technology side, I mentioned that I saw some of the early email servers, but then you get Netscape Navigator in 1994. And I remember, first reading, some of Joseph Schumpeter's work on creative destruction.

And to me, this became an important thing that drove me into technology, which is not only was it a way out of the Rust Belt for me in the 80s, but this idea that capitalism is not just about companies staying around forever. But there would actually be technology that would come along, it would disrupt what came before it, and it would be the source of our innovation and efficiency and economic growth.

And that we ought to as a government society, we ought to embrace creative destruction, not be fearful of creative destruction. And so that was it. I went to law school, graduated in 1996, and I made my way out to Silicon Valley to see what this place was all about.

And so when I think about that part of this is just getting lucky, right? It's being, I think, the adversity that I had trying to understand what happened to my family, why dad's business didn't work. And that led me to the excitement about what leads to human prosperity.

And so I went to law school, graduated, and I started at this big law firm in Indianapolis, and I was the only one who knew how to build. I built our first webpage for this law firm. I was the only one who knew about the Internet. And so as a young associate, I was getting all of the Internet assignments and technology assignments.

And I got appointed Deputy Secretary of State, as you mentioned, by our former Senator Dick Lugar, who really pushed me to do that. And I got behind this fledgling work in Indianapolis around venture capital. But I realized pretty early on, I grew up on a small lake in northern Indiana, and I realized if you wanna catch big fish, you got to go to the lake with the big fish.

And Indianapolis was not going to be the hotbed of startups or the hotbed of venture capital. And so going back to business school in 1999 was really my off-ramp out of Indianapolis to get to eventually get to Silicon Valley. So, I give you that as a predicate for what was really kind of the framework and motivation for me ultimately to start Altimeter.

And so I'm happy to jump into that, but maybe explore a little bit more. What? Some of that journey.

>> Jon Hartley: Yeah, well, I mean, it's amazing, just I think your story that I think you're very curious in terms of these key questions of why are countries rich and poor and what drives innovation.

I think it's amazing to hear your story saying contrast to others, who have lived in some way through the call, the decline of the Rust Belt or the decline of manufacturing in the United States. And a lot of the response to a lot of that I often find is very different, in the sense that people are very upset about being left behind and very upset about this sort of technological displacement.

Whereas I feel like your drive and curiosity sort of led you to a very different place and different conclusion.

>> Brad Gerstner: Yeah.

>> Jon Hartley: Do you still keep in touch with a family in Indiana? And I mean, what's your thinking around, I guess, where they. Obviously, it's been fast-forward a couple decades later.

Those states are one critical in terms of determining electoral outcomes of presidential elections in the US, and obviously the China shock has become very front and center and also is an economic policy issue in terms of what to do in response to it. And we have a lot of discussion about trade policy, terrorists, industrial policy.

Do you have any thoughts on any of that in terms of what works and what doesn't? I mean, we could talk a little bit about.

>> Brad Gerstner: For sure.

>> Jon Hartley: We'll talk about that in a little bit.

>> Brad Gerstner: Yeah. No, I mean, I think there's this assumption that just because these people are being disaffected in that part of the world, that therefore they must want to have a lot more government. But I find just the opposite generally in that part of the world. If you go to those places that frankly just shifted back into the Trump column, you know, Michigan, Indiana, Wisconsin, Pennsylvania, generally, they find government to be burdensome. They find taxes to be high, and they're not looking for more help.

They're just looking to keep more of what they make. These are hardworking folk like my dad. And they wanna have stable interest rates. They want to have stable inflation. They wanna have an economy that. Generally is growing. They're not looking to get bailed out. And so, again, I think we're all formed in those early years.

For me, I saw the solution was not more government. The solution was less government, right? The reduction in tax rates, the reduction in interest rates, the reduction in inflation that occurred in the early 80s unleashed decades of expansion. And the more I watched, the more I got convinced that when government got out of the way and allowed individuals to innovate, right?

And allowed the private market to provide the risk capitals to those individuals who were innovative. Remember, 200 years earlier, the entire American experiment was an entrepreneurial experiment, right? It was not a centrally planned experiment. And if you look at, I know you and I were pretty mesmerized by the speech that Milei gave at Davos now a year ago.

And if you look at the economic growth, I've shown some charts on Twitter, right? 100% of the economic prosperity and GDP growth the world has ever seen. We have 2,000 years, you have no GDP growth. And it all happens to magically line up with the founding of America, the Wealth of nations, limited government, entrepreneurialism, et cetera.

Government is important to create the conditions, but government did not manufacture that GDP growth. That was manufactured on the back of hardworking people who had the incentives to do it. They got to keep the products of that labor and innovation. And the interesting thing is, if you look at the last 200 years, right?

The number of years it takes GDP to double, and GDP, right? We have a fixed amount of labor and capital, and so what's the productive output of that fixed amount of labor and capital? Well, it's gone up at an accelerating rate. So the number of years it takes GDP to double has shrunk.

Said in other words, the number of years it takes to improve the human condition has shrunk, right? And so whether we're talking about literacy rates, whether we're talking about life expectancy, whether we're talking about GDP per capita, whether we're talking about conveniences and modern luxuries, education, healthcare, et cetera, it's gotten unequivocally better.

And I think that is not by coincidence. The United States advantage is not a coincidence. I think the US's advantage is inherently because we have a government that's in balance with allowing individuals, particularly in places like Silicon Valley, to create. And I've gotten worried, frankly, over the last decade, watching particularly in the state of California, people turn against entrepreneurs, people turn against capitalism, people turn against, right?

The productivity that, frankly, is the golden goose that creates the prosperity for these places. And so part of my mission, both as an investor, I mean, I benefit and entrepreneurs benefit, and the country benefits from providing risk capital, building the next great things. All the new AI companies, Jon, are coming out of Silicon Valley.

That's not by accident, but there is a concern that the natural drift can be away from capitalism if people feel disaffected, right? And so, that's been something that I've studied, I've talked a lot about, and I think a lot of that was informed by what I observed over those decades and the people that I studied.

But I'm more convinced of it now than I ever been. Not that markets are perfect, not that the government has no role to play, but in the balance between government and the invisible hand of the markets, the United States has benefited for 200 years by erring on the side of markets, by erring on the side of innovators.

By erring on the side of this limited government, that is in stark opposition to what Europe's done over the course of the last 20 years. And look at the dramatic differential, we have left Europe in the dust. And our advantages are compounding the next, people talk about the last century being the American century.

I hate to tell Europe and everybody else, this century is also going to be the American century.

>> Jon Hartley: Absolutely. And no, I totally agree. I mean, in the sense that, one, I think you're absolutely right. I mean, what I would call liberal economic institutions are a huge part of why growth started in the 1700s, 1800s, and is a huge, I think, part of what makes the US different from rest of the world.

It's not a coincidence that Silicon Valley just popped up in the US, and I think, not a coincidence that the US continues to grow on a GDP per capita basis coming out of the global financial crisis. Whereas all these other Western European countries, Canada and Japan, even part of the global financial crisis, have stopped growing on a per capita basis.

And it's very interesting. I mean, you do have some technology stories of Spotify in Sweden or Shopify in Canada or a blip like BlackBerry in Canada or something like that. But it's very clear that the US has a massive advantage in technology, and that's a big part of that growth differential.

I think you're absolutely right in the sense that technology isn't something that just comes out of nowhere exogenously and that the incentives matter. Incentives to innovate matter. And that really sort of goes back to ease of doing business and liberal economic institutions. And right now, like for example, Canada is raising its capital gains tax rate, and you know, the CEO of and founder of Shopify is saying, why would I want to stick around in Canada, if you're making it so inhospitable for a founder like that to keep the firm there. So speaking of starting firms, so you started Altimeter in 2008 in the depths of the Great Recession.

>> Brad Gerstner: Yeah, so let's talk about that.

>> Jon Hartley: Yeah, what compelled you to start an investment firm in the middle of a financial crisis at that time? And how hard was it?

>> Brad Gerstner: Yeah, I mean, so with the backdrop that we just talked about now, perhaps it makes a little more sense. If you think about it, the financial crisis in 2008 was in many ways just that a crisis of the financial institutions of the United States. I was paying attention to the technology companies, right?

And there's nothing about 2008 that slowed down the success of those technology companies. We were in the middle of my first super cycle. So Altimeter tends. My investment theory going way back had been to know and understand something particularly well to gain a competitive advantage, to build a moat.

In terms of my understanding of how the world worked. And if I understood it better than other people, then I could invest at a price today that would compound for a longer period. And the reason I was getting that price today is because I understood it better. So going back to that first personal computer and those email networks and all the things that got me excited about technology, I had studied technology as an anthropologist, right?

As a researcher, as an analyst from when I helped start General Catalyst back in 1999 and 2000. So we were still right in the middle of the compounding that came from the Internet. And it unleashed massive benefits for individuals. Just think, anybody could Google anything in the world and discover any information.

And again, it wasn't the government that provided that innovation. To humanity it was a private company, you know, in Google. And it was still compounding at super high rates, as were other vertical search companies, companies like Zillow and companies like booking.com that I was an investor in. And so I was really excited.

And some of my heroes of investing, right, guys I had grown up with in Boston as Seth Klarman, the founder of Balpost, he founded BalPost in 1981 in the teeth of the 1981 recession, right? We're just talking about that when Volcker was trying to imagine founding bauposts in the teeth of that recession.

Or Paul Reeder, who became a dear friend and my mentor in the business, who founded PAR Capital, he founded it in 1991 in the depths of the SNL crisis. Or my good friend Chase Coleman, who founded Tiger right after the Internet bubble burst in 2001. So I knew it could be done I understood the path to do it.

And so I wasn't afraid of the events of 2008. Of course. I remember talking to investment banks. I had to set up a prime brokerage to get the business started. And several of them said to me, I don't know if my bank's going to exist in six months, but I'm happy to sign you up as a customer.

That's how bad it was. And so I knew that it was incredible moment in terms of price of entry. And my enthusiasm for technology had not been diminished at all, right? If anything, I was buying companies that were, you know, as Warren Buffett says, I mean, these were deep, deep discounts in sales.

I bought my first stock that I bought in the public fund in 2008. October 1, 2008, was Priceline at $45 a share, today it's over $4,000 a share. That is a venture capital return in the public markets. Okay, and that was the opportunity that was presented at the time.

And I knew I wanted to build a firm that looked different than the other firms that I saw. I wanted a firm that would benefit from understanding all the way from early stage venture capital all the way through the public markets. I had a belief that if you, if you could take advantage of and combine these networks, you would.

The work on the public side would give me advantages on the venture side, and the work on the venture side would give me advantages on the public side. And I promise you, back in 2005, when I started doing that at PAR Capital and then in 2008 at altimeter, that was not a common belief.

In fact, most allocators of capital said Brad, we don't want you to do both. Pick one, we want you to be great at one. And I said, you don't understand there are inherent advantages, right? Network effects by doing them together. And so we launched what was one of, you know, the first crossover funds is what they call them now.

At the time they weren't calling them that. I moved to Silicon Valley and we've had great success in both the public fund as well as the venture fund. And I attribute that really to two things. Number one, I just bet on America and I bet on the future of technology.

And Jon, if you look at the last 15 years of technology, technology companies have compounded earnings at 15% and their stocks have compounded at 17% for 15 years. Non tech companies in the S&P 500 have compounded earnings at 4% and their and their stocks are compounded at 6%.

Technology as a percentage of global GDP has gone from 5% to 15%. So it seems to me that, you know, if you're going to invest, pick a boat that you know is rowing downstream like this is the best advantage, you know, that we have in this country. And so I figured if I was planted in the heart of Silicon Valley investing in technology, public and venture, not only did I have the tailwinds of just a great industry sector, you know, that was going to continue to compound at higher rates than non tech, that was going to continue to become a bigger percentage of global gdp, but that I would be able to find the best of tech.

So if I could pick the best 25% of tech and avoid the 25% that was being disrupted, that we could provide a lot of alpha on top of the decision just to invest in tech. And so that was really the motivating principle behind it. But I have to tell you, those early days, basically I had no money, I was passing a hat and I started with very little and you know, but I'm certainly happy I did.

>> Jon Hartley: That's amazing and I think very unique in the sense that you're investing in both public equities and vc, you know, with this focus on technology and you know, obviously, you know, you've had some big VC winners like Snowflake and being very early to Nvidia, that's a publicly traded company, I mean, it's had a very big recent run up which you were ahead of.

And just the explosion in interest in generative AI which has driven a lot of that. You've also really influenced some of the more established firms out there, like you compelled United Continental to change its board directors of report performance. And in 2022, you wrote an influential letter to Facebook recommending that they reduce their headcount and shift their focus away from the Metaverse.

Remember, Facebook changed its name to the Metaverse, or sorry to Meta, just because it wanted to sort of signal that it was all in on the Metaverse. And this is something that they subsequently did. They listened to your letter and they were responsive and they reduced their head Cambridge significantly and pivoted away from the Metaverse.

I mean, tell us, you know, what is your overall, you know, approach to investing? What's your investment philosophy?

>> Brad Gerstner: Well, first it's, I think to be successful at anything, you have to be deeply passionate about it. I'm two things, I'm a researcher and an analyst, and I'm deeply passionate about technology.

Right. And I think the byproduct of what we do is great for the country because I think it provides economic productivity and growth, which drives our economy. So that's what the animating feature of what I get up and do every day. If I had to say, what defines our approach?

Number one, I'm a thematic investor in technology. We have super cycles, the Internet, mobile, cloud, and now artificial intelligence. And so it's identifying the super cycle, identifying what you think will be the biggest winners and the biggest losers in the super cycle. A lot of that is established in the first three to four years of the super cycle.

And then those companies will compound for a long period of time. Right? And so it's following that passion, investing thematically. And then we think like owners, we tend to hold things for a long time. In the venture capital world, that means owning things for 10, 15 years, right?

Our holding period on the public side also is much longer, you mentioned Meta. We owned that company for over a decade. And so we compound in these companies for a long time. So long as they continue to benefit from the super cycle and so long as they're benefiting from what's going on in terms of their management and leadership.

I love the fact that Meta, you know, is led by just an incredible founder. But when you think like owners, you know, like, it also leads you to some other conclusions. Number one, I don't want to buy cigar butts, you know, like, like Ben Graham used to talk about, I want to buy fantastic businesses at fair prices.

Now what's a fair price? Okay, because in technology, everything always looks expensive. But in my, in my world, I look out 10 years and say, what can possibly happen here? And then I discount that. Back. So in the case of booking.com I talked about that company. I teach a class at the old Graham and Dodd securities analysis class as a visitor maybe now for 12 or 13 years at Columbia Business School.

And I used to feature this case as a case study because every sell side analyst on Wall Street had the opportunity in 2005 to figure this out. But most of them were so focused on the next quarter or two quarters ahead, they couldn't possibly imagine what could happen over a period of 10 years.

And that, that longevity, that ability to see where this was going, that is your alpha, that is your competitive advantage, and that's what allowed us to buy it at a time that other people might have thought it was expensive, but if you looked out three or four years, it was actually really cheap.

Or in the case of Meta, I remember in the summer of 22, I couldn't have been more excited for Meta, right? People said to me, you didn't believe in what Mark was doing? Totally different. Like, I love the fact that he had total control over the company. I think he's one of the most gifted founders of our time.

But I thought that the world was changing under our feet. I thought artificial intelligence was going to be the next big wave. And I was worried that Covid had led all companies into this age of excess. We hired too many people. We had these negative interest rates, this ZIRP period that just led to gross excesses across the economy, misallocation of resources.

And so my conversation in the letter, ultimately I said, was an open letter to all of Silicon Valley. We all had gotten lazy, out of shape, and we needed to get more efficient. And, you know, my rallying cry to Mark was he was the type of leader that could lead all of Silicon Valley, not just Meta, to be more efficient, and he did.

When he launched the Year of Efficiency and all the credit, by the way, 100% of the credit goes to Mark and his team. But when he wrote the Year of Efficiency, a few months after I had written the letter, Time To Get Fit, he said, flatter is faster, leaner is better.

And this is really important because he didn't say, I went from 87,000 employees to 62,000 employees just because I wanted to expand my margins. He actually said, by getting in shape, you become a better company. Less layers in the decision making process. You become faster, you become better.

And that really, you know, and I could tell you because all of these CEOs were texting and calling, they all wanted to follow his lead, right? And so that was, you know, a super important move. And remember, his stock was at $90 a share. The headline in the Wall Street Journal was Meta is dead.

And it couldn't be further from the truth. He doubled down on artificial intelligence before ChatGPT was launched, which wouldn't be launched until five months after we were having those, those interactions and that letter was written, he doubled down on AI. They continued to focus on the metaverse, just didn't grow it as much, and they reduced their headcount, they got flatter and faster, and they've been a huge beneficiary of AI.

And we still own Meta. So now I've owned it since 2011, 2012, shortly after the IPO. And so we think like owners and ultimately building a trusted brand where we partner with the world's most iconic founders from sometimes the earliest stage, right? Snowflake, you mentioned it was before they had their first client, before they had any revenue.

You know, we were one of the largest shareholders in that company. And then we invest along the cycle. We continue to invest in them. When Sequoia came in, one Iconic came into that round. We did the same thing with Mongo, we did the same thing with so many other companies along the way, Zillow, etc.

But we also, sometimes we don't, we don't see it until they come into the public markets. Remember, a lot of these companies have grown 100x in the public markets. Finally, I would just say that companies tend today to stay private longer. So there are two features, two things that have happened.

Number one, we've imposed a lot of regulatory burden on going public. Jon, and remember, follow the incentives. What happens when you impose a lot of regulatory burden? Well, the private markets respond. So the private capital markets have gotten much deeper, and they said, just like on private credit, on the private equity, on the growth equity side of things, we said, fine, if you don't want to go public, we'll provide IPO like capital to you in the private markets.

I think this is a shame because now because of a lot of this regulation, small retail investors don't get a shot on goal on investing in OpenAI early. They don't get a shot on goal in investing in Uber early. They don't get a shot on goal, investing in amazing companies like Stripe or Databricks early, because they stay private much longer.

So Altimeter invests in those companies just as though they were public, but we're investing out of private capital. I think that needs to change, by the way. I think we need to tackle those regulatory burdens. I think we're better off as a country when these companies are coming public sooner, but that's in fact what's happened. 

So we invest early, we invest along the way as they become very big companies, many of these valued at 20-60 billion, 100 billion in the private markets or in the case of OpenAI recently at 150 billion. And then, oftentimes, we lead their IPOs. We're one of the major buyers in the IPO, and we continue to invest.

Why? Because market leaders in super cycles tend to compound for a very long period of time.

>> Jon Hartley: And absolutely, I mean, it's fascinating just how fewer public companies are today than it's a decade or two ago. And I agree, I think the regulation is definitely a part of it, going public.

Also, I think there's just a lot of companies that don't wanna be publicly traded, and they don't want mark-to-market valuations all the time. Whereas, if you can be owned by private equity, your marks are a little bit more infrequent. And there's this whole concept of volatility, laundering and so forth.

And so public markets, or sorry, private markets offer this sort of ability to hide a public scrutiny in a certain way. So it's interesting how it's evolved a little bit over time. I wanna talk a little bit more about generative AI and chips. It's obviously a very front and center topic right now.

And I wanna in particular talk a little bit about tech industrial policy and really how you see it. As an investor, you actually understand these companies that are being subsidized and there's this whole challenge. So let's talk about like the Chips and Science Act, for example. So it was passed in 2022, and they had this partial goal of re-shoring chip supply chains to the US, obviously chips are a big component of generative AI GPUs in particular.

And I'm just curious how is that re-shoring going in your mind? Is Intel kind of a dead company? That industrial policy is just propping up? Did the struggles to build TSMC chip fabs, facilities, production facilities in places like Arizona? There's been a lot of discussion about that. Does that suggest that we should maybe be instead like encouraging to build, fabs in, in sort of friendly, cheap labor places like, like Mexico, you know, so-called friends.

>> Brad Gerstner: Really, you're really trying to get me going here. Let me first just say, we've been working on artificial intelligence for decades now. I made my first kind of AI investments, if you will, all the way back in 2005. Backing one of the heads of AI out of the University of Washington at the time. 

We invest in Cerebras, another chip company. Yeah, some period of time ago, well before ChatGPT, so. So like ChatGPT brought AI to the public consciousness. But think about this at a big level. The Internet was laying down the rails. Mobile created ubiquity, the cloud created data ubiquity in the cloud.

But really artificial intelligence brings it all together, right? I was at a dinner once maybe in 2015 or 16, where Bill Gates was asked, haven't all the interesting things been done? And he said, we haven't even started. And somebody said, well, what do you mean? He said, we won't even start until computers go from calculators to actually helping us think, right?

We are at the dawn of the moment where computers went from 10 blue links to giving us answers, right? To becoming agents, to becoming assistants, to helping us think, to solving problems on our behalf, harnessing all of the information humans have ever seen. Okay, I think this super cycle is gonna be bigger than all the other super cycles put together.

Like, I think this is what we're going to be investing again against for decades to come. It doesn't mean that we won't have bubbly valuations and lots of companies won't work. And that's part of the creative destruction with Schumpeter that we talked about. That's good. That's not a sign of failure, that's a sign of success that we actually allow companies to fail in this country.

And this is one of my problems, frankly, with the CHIPS Act. So let's talk about the goal, right? It's a noble. I have a concern about our national security dependency on a single country that is in dispute, ie Taiwan, as the source of all of our advanced chips.

So I think everybody can agree on this, right? That having 90% of the advanced chip supply chain in the world in Taiwan and an adversary in China makes us very uneasy that we have this big dependency. Whether you're Nvidia having the dependency for the manufacturer of all those chips or any other chip manufacturer having that dependency.

And so it's in the US national security interests to reduce its dependency, a single threaded dependency on Taiwan for advanced chips. But there are a lot of ways to achieve this goal. And what I concerns me, I have a podcast, BG2 pod with my good buddy Bill Gurley.

And one of Bill Gurley, you know, things he and I just resolutely agree on, going all the way back to Stigler and regulatory capture is the problem is when we start picking winners and losers, when the central government starts picking winners and losers, it generally Always ends bad, right.

Markets allocate resources actually quite well. And so I think the government has a role to play to say, listen, we need to incentivize businesses, lots of ways to incentivize them to build fabs in other parts of the world other than the United States or other than Taiwan. Now it's nice that they build them in the United States.

So TSMC building fabs in Arizona may be a very good thing. Maybe we wanna give them tax breaks and other things to get the best companies in the world. And TSMC is the best fab in the world to get them to do it here. So we reduce our dependency on Taiwan.

I think that again is in our national security interest. But the idea that we should prop up a bad dying US manufacturer because we have some nostalgia about intel, I think is a really bad idea, right? I don't think that the government should be involved in that sort of industrial policy.

I don't think, you know, the company is too complex today, has too many different areas of focus. Right. This is the process of creative destruction. Intel's in the situation it is because of choices intel made, right? And so I think in that situation I would rather see us figuring out ways to get TSMC to multi source its manufacturing in places like Mexico and Japan and Southeast Asia and India and other places, much like Apple is moving a lot of its production to India to reduce its single threaded dependency on China.

I think that is all smart national security interest decisions, but I think you have to be very, very careful as, as you know, Gurley likes to warn about regulatory capture. I think this is another area. So when government is handing out all this money, right, when they're picking the winners and losers, I think more often than not it leads us to a worse place, not a better place.

>> Jon Hartley: Yeah, no, I totally agree with that. And I do think that there is, I mean, some rationale for non economic objectives in construction policy. You think about sanctions, it's like, I think it certainly makes sense to use sanctions as a geopolitical tool, particularly when you're dealing with threats, people that threaten U.S. interests.

And there have often been libertarians that have harshly criticized sanctions, say on Iran. But at some level if these are nuclear countries or potentially a nuclear threat to the United States or their allies, taking a sort of even a short term economic hit from those sanctions or industrial policies.

Say to, I guess subsidized chip manufacturing either in the US or in allied countries might be kind of a second best option if you're sort of dealing with this potentially hugely disruptive event that could occur, like the Chinese party of China invading Taiwan or something like that. So I want to shift just a little bit to, you know, your.

Your advocacy of baby equities. It's a concept that's similar to baby bonds, where every child receives at birth, a publicly funded trust account, which is invested, in the case of baby equities, invest in stocks. And you spent a lot of time on this as part of your nonprofit that you run called Invest America.

I mean, tell us a little bit more about that. I mean, I'm curious what some of the main obstacles are. I mean, your Democrats, like Cory Booker have long championed this cause. It was once part of Hillary Clinton's 2008 presidential campaign platform. I mean, why should free market Republicans or Democrats be interested in. And I know you're a limited government kind of guy. How do you square that with being in favor of baby equities?

>> Brad Gerstner: Well, first, it's radically different than what they were proposing with baby bonds. And I'll get to that. But it's the right question to ask, right? I am a limited government proponent all the way.

But the thing that scares me the most is seeing the misalignment we have in America and the attacks that are going on on capitalism that I think. So if we just think about the natural hand of the market here, all this prosperity is terrific. But it's undeniable that it's also led to a lot of wealth concentration, because that's the natural byproduct.

Today, a single founder of a company can service 3 billion customers like Mark Zuckerberg, okay? And so I fear the attack on capitalism is coming. And Ray Dalio talks about this being the greatest threat to America. And so, ironically, I believe Invest America, making every child a capitalist participant from birth, is by far the greatest and cheapest insurance policy in defense of free market capitalism that we could ever create.

3.7 million individual accounts created every year, a 401k from birth where it's, each of those families has control and title. And then the private market flywheel can turn, right? Those families can save and compound in the upside of the American economy. We have all sorts of companies from Dell to Uber who say they'll contribute to the accounts of the kids of their employees, so it will compound in that way as well.

So, there's no government program and there's zero government account. That is a radical difference from the concept of baby bonds, but why do we need this? Right, and I think it comes down too few people are participating in the upside of the American economy today, and this is a very simple way.

Okay, let's talk about the cost here because I'm really excited about DOGE and the Department of Government Efficiency and know and what we're gonna to do to bring our budget into balance. So, if you give a thousand bucks in a seed capital count to each of the newborns in this country, every year, it costs $3.7 billion.

Okay, $3.7 billion, to put that in perspective, that's about the cost of a single Patriot missile system. To put it in further perspective, the $175 billion that we poured into Ukraine, that many of us think is a misguided adventure that has not made Ukraine Safer. Okay, that $175 billion would pay for this for 45 years, and 170 million American children.

It's time that we start making trade offs. So, you and I both would agree markets aren't perfect. There are places that the government can coordinate private market participation to unlock human potential. So, this is a massively NPV positive investment, how do we know that? We have controlled studies, right, by our friend Kevin Hassett, who was Trump's chairman of the Council of Economic Advisers, by economists on, on, on the left like Rob Shapiro, and what do we know?

We know that kids who have an investment account for birth, they're more likely to graduate from high school, they're more likely to be financially literate, they're more likely to graduate from college, they're more likely to buy a home, they're more likely to start a business, they're less likely to be imprisoned.

We know those facts, okay? Think about all the wasteful programs we have in this country, that is redistributing wealth right after the problem occurs, right? Trying to help kids graduate from high school, trying to help kids graduate from college. The problem is we don't have the incentives for enough of these kids from early on.

So, I know a little something about this. I was born on the wrong side of the tracks, I was born with nothing, I was born poor. Trust me, I understand, pull yourself up by the bootstraps. But the reality is, if we just give a little nudge, a tiny little nudge, doesn't even have to be a thousand, if we think that's too much money, make it 500 bucks, it only cost us 1.8 billion a year.

Here's what we have, the behavioral economics economists know two things. Number one, we have a cold start problem, okay? We know that savers save more, once they get that little snowball rolling down the hill, and they see the compounding, it incentivizes them to save more. Even if you study the cohorts of the poorest people in this country, if they have a savings account, those cohorts act just the same way that rich folks do.

They will save money, obviously a lesser amount, but they will save money. And so for me, the market failure here is that we have a cold start problem. It's very difficult to set up a custodial account that compounds in the stock market from births, government can help us there.

And the second thing, you know, beyond that cold start problem is we don't have an infrastructure, right, that is universal, so it's super simple, everybody a kid when they're born. I have two children, when they were born, we had to fill out paperwork that got them a Social Security number.

All I'm saying is they should also be able to check, everybody has a box check and they get an Invest America account. Now, the Invest America account will be administered by private market participants, right? A private label to the U.S. Government, every kid can open their phone, they see their Invest America account, their name, the amount they have in it.

And that they own a little slice of Berkshire Hathaway, of Apple, of Nvidia, of United Healthcare, of the upside, of America, right? This isn't about creating millionaires there, these concepts around universal basic income, et cetera. This is the problem, this is what we're going to get if we don't get more people in the game from the start.

So, I want to harness the power of the private markets. I wanna empower individuals and families, and start them on a journey that by the age of 18 they'll have $40,000 in these accounts because the American economy is the most powerful in the world.

>> Jon Hartley: You know, it's a fascinating idea, I think, in the sense that, like there is this I guess behavioral challenger, I think you call it, cold start problem, which is like one, you know, only, I think 40, like less than 50% of Americans own stocks to begin with.

And very, I think a very suboptimal number of individuals own, even if it's, you know, say, through a public pension plan or so forth. So I think, you know, how do you develop those habits? And I think part of this idea is, you know, trying to expose people to those, you know, good habits and kind of endowing them with a tool that would allow them to do that. And I guess, part of it's like, you know, tracking, your performance, the performance of the stocks over time, I mean, so. Exactly, like, how would it work in the sense that, like, so you get it at birth. I mean, you can't, I guess your parents or the child that receives the accounts can't really sell this until like age 18 or something like that.

Or how does it work in terms of when can they first sort of begin to liquidate, or draw down some of that account?

>> Brad Gerstner: Yeah, no, it's a great question and of course it will ultimately be determined by the legislative process. But we have a great list of champions on the right, from folks like Senator Hagerty and Ted Cruz to the left, and you mentioned folks like, Mark Warner and folks like Cory Booker.

But ultimately they'll have to, hash that out, I'll tell you from my own perspective, right? Imagine this, your parents will be able to opt in just like they would if they set up a custodial account for you at birth. They get to see, you know, this compound, but by the time you're in the fifth grade or in middle school, every kid has a phone.

They'll open it up on their phone, and they'll see and button and trust me, you know, you talk to Fidelity or Schwab or Franklin or, you know, JP Morgan, the number one page everybody looks at who owns stocks is what they call that money page. What's my net worth, and what do I have?

It's gamification, it gets people excited. It gives them a reason to learn, we have financial literacy courses now in school, demanded in curriculum in 30 states. Here's the problem, if none of these folks own anything, if their parents have never participated in compounding or savings, then it's really hard to learn about it.

But if instead, I'm the seventh grade teacher, I say, pull out your phones, open up your Invest America account, whether I'm in rural Indiana or rural Mississippi, right? Whether I'm in urban Trenton or urban la, kids who would not otherwise participate are now in the game. And I'll tell you that unlocks Massive human potential.

And it's going to save us a lot of money down the line by getting these folks into the game early. But here's what, here's what kind of the going rate is. At 18, they can take up to 25% of this dollars to buy a house or to start a business or to go to College.

At age 30, a certain amount more would come unlocked. At age 40, it's all yours, right? And by age 40, if you start with $1,000 and just add $750 a year. So this could be your birthday money, bar mitzvah money, a little summer mowing money. Or it could be that your parents work at a company that matches, right, puts money into the accounts of the kids.

And we have dozens and dozens of companies that have already committed to doing that. Or it can be philanthropically. We know across the country there are ready people from Maine to Texas who will contribute philanthropically to this. So imagine we're going to have 14 trillion of wealth transfer that comes up over the course of the next 15 years.

Jon. imagine if folks like Michael Dell or Warren Buffett said, hey, I want to create a trust account with $10 billion in it, and it will match for every kid in the state of Texas whose family earns under $150,000. Now, that's an efficient way, right, to get more people into the game.

And so that is the current thinking, you know, that they will have control over these accounts starting at age 18, but it's going to lead to a lot more economic productivity, a lot more people in the game. And here's the number one thing it's going to. And our good friend Joe Lonsdale, I was doing the American Optimist Podcast with Joe, and Joe is also a limited government guy.

And so he's, I think starts off suspicious at this. And then he became a big supporter because he said, brad, my biggest fear is that we're losing alignment with America's kids. Less than half of people under the age of 40 believe in capitalism, okay? He said, the Marxists are gonna hate this because every child from birth is going to be aligned with capitalism, right?

We help them understand what America is all about. It reengages them both civically and economically. Jon, in the upside of America. And doesn't create a big government program to do it right. It does it on the back of the growing American economy. It's simply a 401K from birth, and it's a tiny little seed from the federal government.

That is an absolute rounding error, less than one-tenth of 1% of our federal revenues. So let's stop spending all this needless money, right, helping these kids later down the line when they're incarcerated or not graduated, and let's just redeploy a tiny amount of that money, right, to see them and then get out of the way.

Government. Get out of the way. No government administrative agency just let the Treasury Department administer it. And let's get that snowball growing for every child in America. And I'll tell you, there'll be a hell of a lot more aligned with American capitalism.

>> Jon Hartley: Well, it's a fascinating, I think, financial education kind of idea.

And, you know, could, I think teach a lot of people potentially about obviously diversification, time value of money, compound growth, I think is a really, really fascinating idea. And certainly, you know, someone who's actually. It's was my 35th birthday the other day and I was.

>> Brad Gerstner: Happy birthday.

>> Jon Hartley: Born, thank you, I was actually born when the Berlin Wall was falling. It's amazing how many people born after me kinda have no memory of the USSR or socialism and kinda the negativity or that some of the negative effects of that on the economy. And I think how do we develop tools in a post Soviet, post USSR kind of world to teach people about the benefits of free market capitalism, even if there's some small cost of government, I think is a very interesting idea.

A real honor to have you on, Brad, and hear about your career and ideas. Thank you so much for joining us.

>> Brad Gerstner: It was a lot of fun, Jon, I look forward to a little walk around Stanford here soon and continue the conversation.

>> Jon Hartley: Thanks so much, Brad.

This is the Capitalism and Freedom in the 21st Century podcast, an official podcast of the Hoover Economic Policy Working Group where we talk about economic economics, markets, and public policy. I'm Jon Hartley, your host. Thanks so much for joining us.