#412: Peter Doyle on Modern Value Investing

Peter Doyle is a Managing Director and co-founder of Horizon Kinetics. He is a senior member of the research team, along with being a member of the Investment Committee and the Board of Directors. In this conversation, we discuss inflation, how technology is deflationary, why capitalism is broken in the US, saturation of tech companies, and how Peter currently views the global macro environment. =========================== LVL is a new crypto investing platform that I'm an investor in. They allow anyone to trade an unlimited number of times per month for only $9. If you buy or sell more than $500 in Bitcoin on any exchange, you're spending too much on trading fees. Use LVL to save money and trade as many times you want, but only pay $9/month. https://lvl.co/ =========================== Coinbase Wallets are adding support for .crypto and .zil domains through their partnership with Unstoppable Domains. Unstoppable Domains provides an all-in-one solution for blockchain domains. You can send money using these new domains instead of long Bitcoin wallet addresses, while also storing your domain in Coinbase's collectibles section. Go to unstoppabledomains.com in the dapp browser to register and manage your domains. =========================== Pomp writes a daily letter to over 80,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Peter Doyle is a managing director and co-founder of Horizon Kinetics. He's a senior member of the research team, along with being a member of the investment committee and the board of directors. In this conversation, we discuss inflation, how technology is deflationary, why capitalism is broken in the United States, the saturation of tech companies, and how Peter currently views the global macro environment. I really enjoyed this conversation with Peter, and I hope you do as well.

• 0:38Anthony Pompliano?

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• 1:20Anthony Pompliano?

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• 2:03Anthony Pompliano?

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• 2:10Anthony Pompliano?

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• 2:52Anthony Pompliano?

  If you want the domain name and you're not the first to get it, you can't get it. It's first come, first served. So go to unstoppabledomains.com and go buy the domain that you want today. If somebody else gets it before you, then you don't get it. So go check out unstoppabledomains.com and get the domain that you want today. Lastly, don't forget that I write a daily letter to over 80,000 investors about business, technology and finance. I break down complex topics into easy to understand language while sharing my personal opinion on various aspects of each industry. You can subscribe at pompletter.com. Again, pompletter.com. All right, let's get into this episode with Peter. I hope you guys enjoy this one.

• 3:34Speaker 01

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 4:00Anthony Pompliano?

  All right, guys. Bang, bang. I've got a special guest here. Peter has joined us. Thank you so much for doing this, sir. For sure. Let's just jump right into your background, kind of what you did before you joined and started Horizon Kinetics.

• 4:18Speaker 02

  Sure. My first professional job was working at Bankers Trust Company, which ultimately got acquired by Deutsche Bank. I worked in the trust department or the investment advisory department. And I was a portfolio manager there and I worked there for approximately a decade. And we left there as a group, myself and a number of individuals and started a company called Horizon Asset Management in 1994. And then two years later, I started a second company called Kinetics Asset Management. And the idea was that I was going to use the research and analytical capabilities of Horizon to build up the Kinetics business. And the Kinetics business has the distinction of being the first company to start an internet mutual fund in the, in the United States.

• 5:02Anthony Pompliano?

  Got it. And so where did the names Horizon Asset Management and Kinetics Asset Management, those, those two are known now as Horizon Kinetics. But, but where did those two names come from?

• 5:12Speaker 02

  Sure. That's a, that's a great question. It gets into our investment philosophy on the, on the horizon side. Horizon is meant to be long horizon, look out into the future. And one of the things that we observed, my colleague observed that and other people had observed it as well. Is that if you extend your time horizon based on how the financial industry is structured, i.e. everyone's looking at calendar year results. What you find is that the market will discount certain securities at a very high rate. Because it doesn't fall within that very discrete time period that most investment managers are looking for. I need something that's going to do well in the year 2020. If I think it's going to do well in the year 2021, 22, it has little utility to me.

• 5:53Speaker 02

  So that was meant to show that we're long-term value-oriented investors, Horizon. In the case of Kinetics, it's a name that my brother picked up, just dealing with energy and things like that nature. So he's the one who came up with that.

• 6:07Anthony Pompliano?

  Got it. And then how do we get to Horizon Kinetics today?

• 6:11Speaker 02

  So we went through the financial crisis and there's a lot of confusion in the marketplaces. Why is this product over in Horizon? Why is this product over in Kinetics? It just made sense to basically consolidate the two businesses, bring them under one roof and run it that way.

• 6:27Anthony Pompliano?

  Got it. And maybe talk a little bit, just you started to mention the investment thesis being longer term focused. Kind of how do you describe the interest that you guys have and the assets and industries that you look at? Kind of what is that investment thesis or that investment philosophy?

• 6:44Speaker 02

  So before we even put pen to paper to determine whether or not something is good or not, you have to think through the qualitative aspects of a business. So what is the product? Is this product have a long product life cycle? Is it going to be demanded five years from now, 10 years from now, 20 years from now? So if you think about Berkshire Hathaway buying GEICO Auto Insurance, it was needed 50 years ago. It's going to be needed, you know, in another 20 years. So what's his advantage? I can provide that auto insurance generally at 15% less because I'm going direct to the consumer. So he understands that business. He says, I want that long product life cycle business. That's really kind of what we're thinking about. We're like, we want to compound our money.

• 7:27Speaker 02

  We want to capture the business returns and we want the businesses themselves to have a high degree of predictability. And that's really our goal. And then paying a price that we think we're going to get that reasonable rate of return.

• 7:39Anthony Pompliano?

  Absolutely. And so obviously being value investors, kind of the price you pay is a big determinant to the return you're going to get. Maybe let's just start with the macro environment. It's tough being a value investor right now. How have you guys looked at the macro environment, you know, kind of before COVID, then when COVID hit and then the Fed's response afterwards?

• 8:02Speaker 02

  So we recognized pretty early, I would say that we probably even picked up during the green sphere, green span era of the green span put, saying, okay, there's a lot of debt building up in the, in the economy, a lot of debt building up on balance sheets, et cetera. And it seems like anytime there's a problem, they're willing to step in. Obviously, the financial crisis, you saw that the Federal Reserve was willing to step in in a big way. And it became really obvious to us that there was a point of no return. So you can go through the, you know, the national debt of the United States right now is at $27 trillion. The total debt of the entire country is something like $80 trillion. If you start thinking about what it would mean to refinance at two percentage points higher,

• 8:46Speaker 02

  three percentage points higher, it would choke off the economy very quickly. So we obviously didn't see COVID-19 come.

• 8:56Speaker 02

  It was predictable. And in our opinion, coming out of the financial crisis, we felt that the Federal Reserve was kind of locked in a position where they're going to keep interest rates for a long period of time. We're talking possibly multiple decades. And that was pre-COVID. Now it's, now it's a guarantee. And you saw what happened at the end of 2018, the quantitative tightening that they tried. Two and a half, three weeks, market traded down 20% and they quickly reversed themselves. So my guess is that they're going to, they recognize the problem. There's a debt problem in this country. There's a debt problem globally. And central banks around the world are going to keep rates down artificially low and they're going to try to inflate you out of their money to pay you back in cheaper dollars. So that's, that's kind of how we saw the backdrop.

• 9:40Speaker 02

  Now couple that with the rise of ETS and indexation. And there's nothing wrong with indexation. In fact, it makes a lot of sense at a certain price. The problem with indexation is that the more money that flows into a particular index, they buy the same securities. Now, it may, it may make perfectly great sense at 10 times earnings, may make reasonable sense at 15 times earnings. You start buying at 30, 40 times earnings, it makes no sense. You're not going to get a good return. You're going to probably lose money over a 10-year period of time. So that was really, that's kind of the headwind that the value investor has been facing for the last decade plus. And it's, you know, I like to say it's pure insanity, but so far it's been working out that way and money continues to flow in.

• 10:24Speaker 02

  I think ultimately, I think we're at a tipping point. I think the scale of it is so large, the, that they're not ever going to get 100% of that. And if you look at the S and P 500 as an example, the top five names represent 25, 26%. It defeats the purpose of indexation. You don't want that concentration. You wanted to buy the asset class. You wanted to get the long-term return on the asset class. Now you're making a bet on a handful of things. And I think people are going to recognize that. I think certainly Standard and Poor's recognize that. Invesco, all the people that put out these products are saying, okay, this is not really achieving its goal. And I think it's going to end up being a real problem for people. So we're about as far away from that as you can possibly be.

• 11:04Anthony Pompliano?

  And so describe a little bit in terms of like where that puts you, right? So if you're not doing indexing and kind of all of the passive investing and where exactly are you looking for investment ideas for putting capital?

• 11:16Speaker 02

  So one of the things that we talked about was that I just mentioned was the probability of inflation, i.e. the government needing to inflate their way out of the debt crisis. And so we're looking at hard assets and tangible assets and asset-like companies. So when I say something like hard assets, we're looking at a company that derives its revenues from the underlying commodity, but doesn't necessarily have a business operations attached to that. So a royalty company. So there's a handful of companies like that, maybe 10 globally. We own all of those companies. And those companies have extraordinary rates of returns. From a business operation standpoint, they rival the best monopolistic businesses

• 12:00Speaker 02

  around in terms of operating profits and net profits.

• 12:04Anthony Pompliano?

  Can you give us an example of one of those?

• 12:06Speaker 02

  Sure. One of the biggest positions of ours is a company called Texas Pacific Land Trust, and it's been around since the 1880s. Nobody knows about it. It is unquestionably the most valuable piece of real estate in the world. And they collect royalty on a certain number of acres, about 456,000 acres of, and they collect a royalty interest. So Chevron wants to drill on that, they pay them a royalty check. And then they own about another 900,000 acres of surface acreage. So if anyone wants to drill in the Permian Basin and Delaware Basin, they need to cross onto Texas Pacific Land Trust land and they pay them a royalty. So essentially the check cashing business. And it's been around since 1888 and it's quietly taking self-private.

• 12:48Speaker 02

  It has paid dividends over the passage of time. It's also acquired its stock. So when we looked at the underlying value and the developments in technology on fracking, we said, okay, the fracking technology continues to improve. They've only scratched the surface at a very small amount of what the amount of oil that's in there. There's an ocean of oil underneath that ground and they're going to collect ever larger royalty checks in the future. So the price of oil from the year 2014 through today, in 2014, it was $114. It's now down around $40 West Texas Intermediate Oil. You made four and a half times your money in Texas Pacific Land Trust. That's with oil being down very substantially.

• 13:31Speaker 02

  If you ever had the wind at your back, oil went up, you can see how you can make a lot of money. So we're really the only company that you can get any type of meaningful exposure to that, to that business. And it's ranks on, if you look at the long-term stock returns of Texas Pacific Land Trust, it's among the best on the New York Stock Exchange going back 50, 60, 70 years.

• 13:52Anthony Pompliano?

  Yeah, that's really, really interesting. And it sounds like you guys are pretty convinced that the Fed's actions, right? They've publicly stated they're going to shoot for over 2% for some persistent amount of time in the inflation. It sounds like you have confidence that they will actually be able to do that? Or are you more playing the fact that just them saying it drives inflation fears? And therefore, kind of there's the flow of capital into inflation hedge assets?

• 14:17Speaker 02

  Well, for us is, if everyone has their money in the high-growth tech companies, et cetera, we're saying, what if you're not 100% certain, you're not going to be 100% right? What if you think there's a 1% chance that you're going to be wrong? Maybe you should allocate 1% to us because we're a safeguard against that world coming apart. The CPI has been manufactured and they can come up with a number, whatever they really want. And they've reconfigured it a number of times. And the way they formerly used it calculated, CPI has been running at about 6%. And if you look at the things that you really desire in life, that's probably running at 10, 11%. And if you look at the money printing that's going on, it's running at 15, 20% more recently.

• 15:00Speaker 02

  But it's been running historically, MTO has been increasing about 6 or 7%, which is a pretty good benchmark for the inflation rate. So if you, if you look at a 10-year treasury, You're getting 78 basis points today. The stated mandate is to get inflation up to 2%. That means your real return is going to be negative in all likelihood. And if you really look through the stated numbers to what's really important, you see that the inflation rate is substantially higher than that. So let me just, I wanted to digress one second just to show you how how the inflation is going through the economy and affecting people. So when they bring interest rates down to near zero, financial institutions make their money. Banks make spread.

• 15:42Speaker 02

  Insurance companies make money on their investment portfolio. So I have homeowners insurance. And now the homeowners insurance, they know they collect a premium for me. Many times they're looking to collect the premium and break even, and they're going to make it on the float. Right? That's how Warren Buffett became a multi, multi billionaire earning money on tens of trillions, tens of billions of dollars with no cost. So now they bring it down to zero. They say, OK, I can't make money in my investment portfolio. I'm going to have to charge you substantially more for your homeowners insurance. So my homeowners insurance policy is up 20% year over year. So that's inflation. That's a real expense. I'm not going to give up homeowners insurance. So people aren't appreciating that. So unless you have re, you know, upped your homeowners insurance,

• 16:27Speaker 02

  you haven't noticed that inflation yet. But that's coming. That's around the corner for most people.

• 16:32Anthony Pompliano?

  And so when you think through this, it feels like the Fed has to bring, you know, I keep calling like a monetary stimulus bomb to the table in order to get inflation anywhere near this 2% official number, right? Because I'm with you in that the unofficial numbers are much worse than than are being reported. Everyone doesn't experience the same level of inflation, right? Which is a whole nother kind of can of worms. But in order to get the CPI numbers up over 2%, it feels like they've almost brought like this water gun to a pistol fight, right? In that they've got rates down to zero. They've printed a good amount of of money, but it doesn't feel like we're going to get there with what they've already done. So what do they do? Do they go negative rates?

• 17:16Anthony Pompliano?

  Do they just print and print and print? We see $10 trillion more? Like, how do we get to that 2% plus percent in the official numbers that they're targeting?

• 17:25Speaker 02

  So I don't think they ever really care if we get there or not, to be honest with you. I think the plan is that, oh, we're trying so hard to do it. Let us print up more money and we'll inflate you more and pay back in cheaper dollars the debt burden we have. So that's kind of my take on that. I would say that, you know, if the things that I mentioned, like the Chalkwood Index, the things that you really desire, the inflation rate is running at much, much higher levels than that. And they're also going to do fiscal stimulus, right? So the bill's likely to pass and after they get done with their squabbling in the next month or so, they're going to spend another 1.82 trillion dollars that is going to go into repairs and they'll start doing those types of things. And the Federal Reserve will monetize that. They won't call it monetary, but it's basically going to be spending.

• 18:09Speaker 02

  They'll send checks to people's homes, et cetera, to get people to spend.

• 18:12Anthony Pompliano?

  Yeah, and the fiscal side, to me, everyone's focused on the monetary side because that's the ones that have the really clear cut numbers. That's the ones that everyone writes about over the last couple of months coming out of the COVID kind of, you know, market crash. But the fiscal stuff almost seems more dangerous, right? Would you agree with that? Or do you think that they're kind of both, you know, equal?

• 18:31Speaker 02

  Well, that's where you can see the real spending. So if they send a check directly to your home, it's not, oh, it's sitting on the bank. The banks are better capitalized. They don't need to lend out the money. It's coming into my pocket. I'm going out and I'm going to spend that money. You know, typical Americans are going to do that. They need to do that. And I think now because there's so many people in arrears on their mortgages and their rents, et cetera.

• 18:56Speaker 02

  And you go to whatever level it is. So, you know, for the first time in my life, I really came to the conclusion that capitalism is broken here in this country. And, you know, it used to be if I took risk and I made a mistake and my judgment was bad, I was going to get knocked in the teeth with that and I'd take my losses. I, you know, earlier this year, I made a bet about being short volatility and it obviously went against me fairly dramatically in March and April. And then I started to deleverage my portfolio and I see that the Federal Reserve is stepping in and buying bonds. I said, I don't need to sell these bonds. So they went from being down 20 to basically being up 10, 12% in a couple of weeks' time. And that's a problem. That's a moral hazard for investors.

• 19:41Speaker 02

  So I don't see how they're getting out of this. And I think they're going to see this spend like they have been, and I think it's going to accelerate. And, and you know, for the first time in my life, I said, what is the charade of, of me paying taxes? If you can just print up money out of thin air, why am I paying taxes? Just print up a little extra more, you know, and, and pay my taxes for me, you know, and just add it to the, to the tab. So it's, it's a problem.

• 20:04Anthony Pompliano?

  This is a really important point, and I think that when people first started saying it, it was kind of the smart asses on Twitter and stuff like that. And everyone just kind of disregarded it because it was coming from people who don't manage capital, don't spend a lot of time on, you know, kind of talking about the economy. You are probably the 10th or 12th person who runs a large asset management firm that has, I've had this conversation with. And my point to people is it's one thing when it's a pseudonymous account on Twitter, kind of looking for retweets and memes and all that kind of stuff. It's another thing when you start to get kind of the, the most sophisticated investors in a market saying, wait a second, what's going on here? Right. What, what's the end game? Like where are we headed?

• 20:47Anthony Pompliano?

  And also, why are there certain things like the tax collection, et cetera, going on? Does that feel like that's a new talk track or a new focus for investors in your opinion? Or is this something that's maybe been going on forever and people just didn't talk about it?

• 21:02Speaker 02

  I think the debt burden, there was always hope that new technologies were going to lead to growth in the economy. You're going to grow your way out of this and you could handle the debt burden. I think it's got to the point where that's not an option anymore. And they're going to continue to print up or spend what they need to spend. So it's the first time that I ever thought about it. It's the first time in my life where I really said, this is, this is not right. You know, what they're doing to the typical saver, to the typical investor in there. You know, if I made a mistake, I was always happy to basically take the hit and okay, I learned from that, let's move on. You know, I'm not going to be right on all things. And I, I think they really created a situation where they're not going to be able to get out of that. And they're just going to continue to devalue and devalue it at a faster and faster rate.

• 21:45Anthony Pompliano?

  Yeah. When you think about kind of what's going on now, I think you and I see eye to eye that this is not good. Where does this end up? Is this a default situation? Is this hyperinflation of the dollar? Is there some other scenario that kind of you see as the natural end state? If they kind of continue doing what they're doing?

• 22:05Speaker 02

  I think they're just going to continue to, you know, take a decade or two decades or three decade, three decades to basically grow their, grow their way out of this and pay back the debt in, in cheaper and cheaper dollars. Um, so I, I'm not sure that it's going to be a doomsday scenario.

• 22:23Speaker 02

  I think you need to protect yourself against that. And, um, I think, you know, obviously you're a believer in Bitcoin. I'm a believer in Bitcoin. I think that's one of the ways that you can protect yourself against that.

• 22:32Anthony Pompliano?

  Yeah. So, so you, it sounds like you actually do think that there's a way for them to kind of get their way out of it. It's just by simply devaluing the dollar so much that, uh, they use that to kind of pay back that debt.

• 22:44Speaker 02

  That's correct. All the debt holders are going to be left holding the bank. That's really what it amounts to.

• 22:50Anthony Pompliano?

  That brings us to the 6040 portfolio. Uh, is that safe to say that's not going to be, uh, going to be the standard, uh, or at least it won't work for, for the foreseeable future?

• 23:00Speaker 02

  No, if you're looking at a 10-year treasury at 78 basis points, um, that's just not going to work for you, right? So a hundred thousand dollars getting you seven, you know, a hundred thousand dollar investment getting you $780 a year. People just can't live on that. No, a million getting you $7,800. And that used to get you $60,000, $55,000. You could maybe live on that if you have $2 million in retirement, et cetera, or even less than that. Um, so that's a real problem. So people are going to be pushed out of that. Um, and that's what, that's the, hence the rally in the stock market, even though the economy is, is, has rolled over.

• 23:35Anthony Pompliano?

  Yeah.

• 23:35Speaker 02

  You've seen, you know, you've seen a V-shaped recovery in, in assets and you've not seen that necessarily in the economy.

• 23:42Anthony Pompliano?

  Yeah. What, what's really interesting to me is, uh, I think if you had asked most people, um, okay, we're going to have a kind of liquidity crisis due to this public health crisis. Uh, when that happens, the Fed's going to step in, uh, and between the elected officials and the Fed, we're going to get a zero rate environment and trillions of dollars of quantitative easing. Like what's going to happen? Right? Inflation would absolutely be part of that conversation. And inflation hedge assets, I think most investors would say would do well. It almost feels like to some degree equities are getting put into the inflation hedge bucket, uh, in some weird way, right? And so maybe it's some of it, people running from, uh, the bond market. Some of it is, um, you know, we're sending stimulus checks to young people and now it's got lower barriers

• 24:26Anthony Pompliano?

  or entry to get into the stock market. Like, how do you see kind of equities, uh, and the, the demand having such an explosion in this environment?

• 24:34Speaker 02

  Yeah, I think it's a natural reaction. I don't think people have thought through where the inflation might show up. So you could be in equities and you could actually maybe benefit from that and avoid the inflation because your company was able to pass it along through prices and they could hold down their wages, et cetera. Or you could get hit where your earnings suddenly collapsed by 50, 60%. It doesn't ripple through the economy in an even way. And that's what's coming up in the future for a lot of people. And I think you're going to start to see that. And you couple that with the valuations. The valuations are very extended for many companies and it's hard to see the typical stock that, you know, investing through a basket in the S and P 500, how you're going to get an adequate rate of return looking out over the next decade. I think you're

• 25:17Speaker 02

  going to end up with a very poor rate of return and possibly a negative rate of return.

• 25:21Anthony Pompliano?

  Yeah. One of the things that a couple of people have come on the podcast and talked about in the past that I find fascinating is this idea of technology being very deflationary, right? And so kind of you can use the trend of technology to continue to kind of eat up all of this liquidity. You won't see the high levels of inflation. You'll be able to continue to drive equity returns in those types of businesses. How do you guys see the technology companies in the sector and maybe their relationship to the macro environment?

• 25:49Speaker 02

  So certainly in the leading companies, I would, I would be very concerned just based on valuation. You know, you're looking at Apple at a $2 trillion market capitalization. So if it's going to grow at 20%, that means it has to increase by $400 billion in size. And then it has to grow by a bigger number in year two. It just doesn't seem possible to me. So, you know, there's a saturation point for a lot of technology. And in fact, you tweeted out something the other day about Apple releasing new phone, my old phone's going to slow down. So the fact that you and I may, because of that dynamic, you and I may run out and buy new phones, but we're not growth to the market, right? They need

• 26:30Speaker 02

  to find 20% more users or come up with better products than that. So I think just the sheer scale of that is, is really kind of unnerving. And, you know, I look at, you know, whether Facebook or Twitter and kind of there's going to be backlash because of potential censorship, et cetera. Those things don't have a lot of margin of safety there. So they may work, but I don't, I don't think that's a great bet.

• 26:55Anthony Pompliano?

  Yeah, one of the things that's very obvious just between conversations that you and the rest of the team have had kind of publicly, content you've put out, etc., is it feels like you're not looking for the grand slams. Instead, you're looking for the high probability wins, right? Kind of that value investing mentality. And what I think I hear you saying is that these technology companies, especially the top five or six of them, just violate almost everything in the value investing kind of framework.

• 27:20Speaker 02

  That's correct. That's correct. I think what's going to end up happening, because the dysfunction that had gone on in the marketplace, and you know, before we got on, I was telling you that when I got in the business, the energy sector was 30% of the S and P 500. Today, it's 2.1%. Now, when you think through the implications of that, what does the energy sector truly mean to the global economy? It's something substantially more than 2%. And if you, if I was an evil genius and you put me in charge of all the hydrocarbons in the world, and I shut off the spigots tonight, everyone would come to me looking to cut a deal and give me whatever they needed to, to basically restart their business. So when I, when I see that

• 28:03Speaker 02

  going on, the functional equivalent is actually happening through environmental concerns, through lack of investment, through people basically not giving exploration companies the money they need to replace reserves. You're starting to see that basically the supply is falling off a cliff. And if you look through, like typically, you wouldn't see commodity prices up in a year that we've had so far, right? They're connected to the economy. You're starting to see certain commodities, not, not oil yet, but natural gas is up 27 odd percent. Why is natural gas up 29%? Because natural gas is really a derivative of drilling for oil, but the demand for natural gas doesn't fall off in

• 28:45Speaker 02

  the same way. You still want to run your air condition, etc. You need to do the power plants. So the supply...

• 28:55Speaker 02

  The same amount of oil, amount of natural gas, and the demand is still there. You see the correcting mechanism is the price. There's a lot of deflationary issues that have gone on in the last six, seven years as a result of the price of oil coming down very substantially earlier this year with negative thirty plus. If the price of oil because of a lack of supply reverses itself, you could see inflation come back in a very ugly way. So that would be one of the main concerns that I would have looking out in the world. And we're positioning our portfolios for that potential. Now, you don't have to agree with us, but maybe you should have one percent or two percent or five percent with us because the way you're looking at the world may not play out in

• 29:39Speaker 02

  things are going to always be rosy. Technology is going to grow to, you know, ten trillion dollars in the case of Apple to get an adequate rate of return.

• 29:47Anthony Pompliano?

  Absolutely. So not only are some of the tech companies a violation of kind of that value investing framework, you mentioned Bitcoin, and I think most value investors, when they look at Bitcoin, would say that violates everything to do with value investing. Where does your interest in kind of bullishness come from when you're looking at that digital asset?

• 30:09Speaker 02

  Sure. So let me give a little background on how I got into it. So back in late 2015, my colleague Murray Stahl, who's a brilliant financial mind and had a history, had a degree in computer science, has an interest in cryptography, etc. He had the Bitcoin white paper on his desk. And that day he came in, he goes, you know what? I need to read this. I'm hearing some things about it. It's only nine, 10 pages long. He reads it. He gets up out of his desk. He tells me about it. Within, no exaggeration, a minute and a half, I said, I'm in. Okay, so now, why am I in? I said, well, if you tell me that you think that they solve the double spend problem,

• 30:51Speaker 02

  you can't copy and paste and can't spend Bitcoin multiple times, right? And you think that the security is actually going to hold in terms of the blockchain. You're telling me there's a fixed amount of coins that are going to be produced.

• 31:07Speaker 02

  This could potentially be a global currency. This is literally within a minute and a half time. And the demand for this is going to grow exponentially, but the supply is going to be very finite. And basic economics, that's a win. So I didn't get into Bitcoin. And let me, let me just to show you that I'm not reckless. The way I was going to control my risk as I, as I hadn't read the paper as of that moment. I took it home that night and read it and started doing more homework on it. I said, I can control my risk by putting a small amount of capital. And the asymmetric nature of this potential investment is such that I'd be foolish not to have an exposure to it.

• 31:47Speaker 02

  So I would say within probably four or five days, we had in our accounts and personally ownership of Bitcoin that quickly. And we sized it in a way that if it went to zero, we lose 1%. If it went to zero over a two-year period of time, we lost 50 basis points per year. It's kind of a rounding error in terms of performance. It wouldn't be the end of the world. But in success mode, I didn't get into Bitcoin to make 25, 30 times my money, which I've already done. I got into make many thousands of times my money. So if I didn't own it today and I heard the same story, I would get up and go find a way to buy it immediately.

• 32:25Anthony Pompliano?

  Yeah. And do you guys hold it with the assets that you manage or just in the personal accounts?

• 32:33Speaker 02

  Both, both. We bought it, we bought it professionally.

• 32:36Anthony Pompliano?

  And when you do that, what is the kind of conversation like with investors? Is this part of kind of the hard asset thesis that you have? And yes, you're owning kind of cash producing land and Bitcoin's kind of part of that thesis? Or is this something completely separate in terms of a thesis?

• 32:55Speaker 02

  This is something completely, there's, there's no cash flow, as you pointed out, right? You can't, but the, the true value of it or the quoted intrinsic value, you can argue about what the intrinsic value means, is that it has better monetary properties than anything else out there. So when you think through, I went back and I looked at what Hal Finkney said almost immediately when he was starting the mine in the early days of Bitcoin. He made, you know, hypothetical that this could equal all of the value of the assets outstanding, which he calculated to be 100 trillion to 300 trillion. And if you think through about what he said there, you say, yeah, you know, that's right. That Bitcoin could equal all of the other nominal stores of value could equal what gold equals, cash around the world, short-term treasuries, short-term bonds, et cetera.

• 33:41Speaker 02

  And that number is staggering. So when in success mode, and and so far it's been successful in success mode, it really should be a non-arbitrageable thing. People should say, this is a better store of value. Let me get out of my yen, my dollars, my euros and move it into this. So there's a lot of data points as we went along there.

• 34:03Speaker 02

  In 2017, I just gave you one of the things that I I said, okay, my my lens initially was very small. It was from an economic lens and an incentive lens. And I said, you know, I can see how the investment community is going to get on to this because the the fees in running money through indexation are collapsing. And if there's one thing I know that Wall Street desires, it's fees. And cryptocurrency is going to offer them that in the future. So I said, okay, that that's an incentive that I see that ultimately the financial industry is going to get behind this. But one of the things that that made me convinced that it was going to come along was in in early 2017, Abigail Johnson of Fidelity, right? She's she's born into a family of billionaires.

• 34:46Speaker 02

  She takes over control of fidelity investments, which is highly regarded, right? Has a great reputation. She's very publicity shy. She seems like a completely normal person. And the first speech that she gives is about Bitcoin. Okay, so now I said, why does she need to do that? She doesn't need to do that, right? So she the only reason she's doing that is because she's laying the foundation for fidelity to get into the custody, fidelity to be recommending it to their clients, et cetera. And you saw the report that they came out, you know, two days, yesterday, two days ago, about moving 5% of the customers' assets into Bitcoin. And I I can see that coming and and that wave is is still in the very, very early stages. So my my anticipation, I don't worry about day to day.

• 35:31Speaker 02

  I don't know where Bitcoin is going to be in three weeks from now. But looking out, I expect it to rival all of the nominal stores of value out there. And that number is absolutely staggering. So if it got to, you know, when I first made the investment, I said, okay, it's $8 billion in market capitalization. And I said, if it just got to eighty trillion dollars, that wouldn't even be all of, close to all of the nominal stores of value out there. That would be making ten times, ten thousand times my money. Uh, so that's, that's kind of how I looked at it. So the asymmetric nature of what the upside potentially could be.

• 36:03Anthony Pompliano?

  Yeah. What, what's so crazy is, um, you know, I usually walk people through the math of, let's say Bitcoin's a two hundred billion dollar asset, give or take, gold's eight trillion. You're talking about a forty X just to get to gold's market cap, right? And then on the expectation that I think you and I both have, that it eventually eclipses that, right? Then you start looking at things like, okay, well, what about the global money supply, right? And that kind of eighty, ninety trillion, what about global real estate, right? You, you kind of can really see, um, you know, very, very large market caps. But one of the things that I find fascinating about it is, um, not only is it, oh, let's just go and eclipse gold, right? And kind of gold will coexist with Bitcoin.

• 36:42Anthony Pompliano?

  But actually, is there a world where you start to, to, uh, not be additive market share, uh, or market cap? But actually you are, are extractive to these other store of value assets, right? The whole reason why people get out of dollars into art or real estate or any of this stuff is because they're trying to protect their wealth, right? Their inflation hedge type assets. And so if I actually can just hold the Bitcoin and not have to go into those assets, could we see a contraction in some of the store of value market caps, right? As there's an inflation in Bitcoin's market cap. Now, I don't know if that'll happen or not, but it's really interesting to start thinking about.

• 37:16Speaker 02

  Right. Absolutely. Good. Um, you know, and that, and that number grows every day as central banks around the world continue to print, right? It's going to go up another two trillion dollars or more. It's going to go up five trillion dollars probably over the next year in the United States. So absolutely.

• 37:30Anthony Pompliano?

  Yeah. And, and how do you see Bitcoin in the macro environment, right? So right now it feels like, uh, there's some portion of the population who already was a Bitcoin believer, investor, holder, whatever. Uh, now you've got almost the Federal Reserve running this like trillions of dollars in, in marketing campaign for things like, you know, gold, Bitcoin, whatever. Uh, do, is this something where we see the longer that the Fed continues to do what they're doing, Bitcoin just becomes more and more attractive? Or is there some, you know, kind of? Just natural cap to early adopters around the technology or something where maybe they can't continue to see the adoption at the rate that we're seeing right now.

• 38:09Speaker 02

  No, it's, you know, if you speak to somebody from Brazil or Argentina or Venezuela, they instantly get it, right? Because in their own lifetime, if they're my age, in their own lifetime, they may have seen their currency debase down to zero, three, four times. Here in the United States, we're going to be a laggard because people think the dollar, you know, no, that's good. I get my money back. It's all good. They don't think in relative terms and they don't think in real terms in what their purchasing power is going to be a decade out. That's becoming obvious. And if you're an investment professional and the gatekeeper for that, if you're not paying attention to that, you're not doing your job, right? And that that world is coming here in the United States and Fedeli is going to usher it in and Goldman Sachs is going to usher it in.

• 38:56Speaker 02

  This is going to be a big, you know, and, you know, obviously people are talking about what's on the, in the treasuries of corporations is four to five trillion dollars. And if you're, you're a controller for a company or treasurer for a company or CFO for a company, you're, you need to think about that, that cash asset that I have is being eroded at a very fast rate. What can I do to save it? And when you go down the list, Bitcoin makes a lot of sense.

• 39:25Anthony Pompliano?

  Yeah. What do you think it'll take for central banks to put it as a reserve asset? You think we can get there?

• 39:31Speaker 02

  You know, it's funny you say that. I go to Bermuda a lot and I actually pitched the premiere of basically that he should take a million dollars, two million dollars and they had a debt burden there. I said, this one or two million dollar investment could basically alleviate all your problems. You'd be the best capitalized country in the world. So, um, yeah, I do. I think there's going to be some intelligent finance minister somewhere. It's going to say, well, you know what? We should own this immediately and get ahead of the curve. And if I was having a conversation with Donald Trump, I would tell him that he should tell Steve Mnuchin to basically do that. So absolutely, I think it's going to happen.

• 40:11Anthony Pompliano?

  I'm already past the point of is it going to happen and now questioning who's done it already.

• 40:17Speaker 02

  Right, absolutely correct.

• 40:19Anthony Pompliano?

  And, you know, unfortunately for the narrative, it's probably going to be some of the fringe countries, right, the people who are a little nefarious, maybe under sanctions, that type of stuff, would be financially incentivized to do it first, but when you kind of get past those countries, it would not surprise me if there's one or two countries that have already, you know, again, 1% of their assets, right? It doesn't have to be anything that is super material, but more of that chaos hedge type approach, given all of the monetary stimulus is going on.

• 40:52Speaker 02

  Yeah, I agree. And that person is likely to be, go down in the history of that country as a hero.

• 40:58Anthony Pompliano?

  Absolutely. Other than Bitcoin, is there anything else that you guys are doing in cryptocurrencies, blockchain, mining, and anything else?

• 41:06Speaker 02

  So, so we got into the mining business and I'm probably the fourth or fifth person qualified to speak about this within my firm. So, so we're of the belief that the mining industry is going to be among the biggest industries in the world. And just, I'll just give you an example as to why I say that. So, right now, based on the new equipment that we've purchased and how cheaply we can source the electricity, we can mine a Bitcoin for about $5,600 to $7,500, depending on that. So now, if you think about that's 100% rate of return if the price stays at 11.4. I just mentioned that you know it as well as I do, the 10-year Treasury that's 78 basis points or 73 basis points.

• 41:48Speaker 02

  So, people are going to say, you know what, I'm willing to do that. Let me allocate. You don't have to take a large amount of money. The machines themselves aren't that expensive. So I'm willing to start doing that and they're going to find people that have that capability and seek that out. And that's going to continue to grow and you're starting, you know, you see that on a daily basis with the ash rate of the network itself. So that's going to continue to be a massively big operation and potentially a very large industry. And we're going to continue to grow that.

• 42:17Anthony Pompliano?

  Got it. And in terms of kind of merging these two worlds, so you talked a lot about energy, and then now you're talking about Bitcoin mining, there's obviously a need for energy in Bitcoin mining. Do you see opportunities for kind of these new players around Bitcoin mining to work with the old incumbents on the energy side? Or is that something that'll take a little bit longer to start happening?

• 42:39Speaker 02

  No, you're already seeing that. So if you go out to the Permian Basin, you know, they're drilling for oil and they're flaring off the natural gas, right? They're just burning it off. It's not helping the environment. So now you're seeing people are bringing trailers out there, fill up Bitcoin mining machines and starting to use that energy as basically to power their machines. So that's, that's going on. I don't know to the extent, but it's going to grow. That will grow exponentially in the next five years.

• 43:05Anthony Pompliano?

  Yeah, I completely agree. What else are you guys looking at, right? So you've got kind of the hard assets, you've got Bitcoin, Bitcoin mining. Where else sitting from kind of this value investing seat, given the macro economy are places that are interesting to you?

• 43:21Speaker 02

  So the various financial exchanges around the world. So if you think about a financial exchange, it generally is a license, right? There might be a clearance license associated with that. They generally give out one or two, so they're very rare to get. And the influx of additional money being printed up finds its way into financial markets to trade. So that's, those are really scale businesses. They have tremendously great operating characteristics. So the more volume that goes through an exchange, there's really no marginal cost of trading additional shares. It falls right to the bottom line. So we are, you know, very big investors in various exchanges around, around the world.

• 44:01Anthony Pompliano?

  Got it. And the thought process there is that those will continue to grow as businesses and just kind of the more financialization of everything, there's going to have to be exchanges and marketplaces where that stuff is traded?

• 44:12Speaker 02

  Correct, correct.

• 44:13Anthony Pompliano?

  Yeah. And then let's talk a little bit in the private markets in terms of venture capital and technology companies. Do you guys do anything there? Or is everything pretty much focused on the public entities?

• 44:24Speaker 02

  So it's 99.99% public. But, you know, when we first found Bitcoin, we

• 44:32Speaker 02

  Initially did it for clients through GBTC, Grayscale and Digital Currency Group. We made a small investment in that company and I would have, I did do a little personally. I would have made it a much bigger position if they were willing to sell me that. So I would say on the private side, it's done more on a personal level than it is at a from, from investment standpoint, it's professionally.

• 44:55Anthony Pompliano?

  Got it. And just any thoughts or outlooks there? I, I think that there's been a lot of kind of well-known money managers who've, over the last 12 months or so, started talking a lot about, you know, some of the most interesting places to invest in equities is in that private market and kind of the venture capital type model. And any thoughts there as to what's interesting or anything that you've looked at?

• 45:19Speaker 02

  So, you know, you actually were leading me in the direction, digital art.

• 45:26Speaker 02

  You know, I don't know that much about it. I haven't really followed the NTF market and how that all works. So that's my, that's on my list to look at next. So that's potentially a big, big area. So anything that's tradable, that's going to have value is, you know, is certainly something that you should be looking at.

• 45:43Anthony Pompliano?

  I'll get you up to speed. I don't know if I know everything. I may be the, the 90th or 91st best person to talk to about it, but I'll tell you what I know. Now, Peter, this is awesome. Last question for you before we get into kind of the, the final questions is what about markets around the world, right? So kind of we've talked a lot about the more North American viewpoint. Are there other emerging markets or other superpowers markets around the world that you find interesting or have the spending time on?

• 46:12Speaker 02

  So we have exposure to Japan and, you know, of interest that, you know, I don't know if you know, you noticed that Warren Buffett, a number of months back, invested $6 billion in Japanese commodity trading houses. He's obviously doing that for a reason. I think he thinks that inflation is going to be a problem. The trading platforms are very desirable operating characteristic. So we have exposure through that. We, we found other publicly traded Bitcoin exposure. I professionally bought micro strategies in very small. A number of accounts. So if I was, if we were entering a stock competition and I had a select company that could do the best over the next five years,

• 46:50Speaker 02

  that certainly would be in the category because that the single position of Bitcoin, I don't love the underlying business itself, but that position Bitcoin could grow to some staggering number. And, and that stock could just be off to the races. So we, we have a number of companies like that.

• 47:04Anthony Pompliano?

  Got it. And what about Square putting the Bitcoin on the balance sheet? It's only 1% of assets, but I've got to imagine that's another kind of positive data point, in your opinion?

• 47:15Speaker 02

  Absolutely. You know, there, if you're skeptic about what we're saying here, you can kind of ignore Square. He can lose 1%. You can, you can kind of ignore MicroStrategy. This guy is a little bit off the beaten path. You know, he could be wrong. He's going to be known as that guy if it goes south on him. It's hard to ignore fidelity investments. And so when I, when I saw that in 2017, it really, you know, solidified for me that this wave is coming. And they spent the last several years as, as other firms getting up to speed where they can custody, they can trade, et cetera. And they're now going out and they're going to recommend it. And, you know, we didn't talk about Gresham's law, but the whole concept of

• 48:00Speaker 02

  bad money drives out good. Good money is Bitcoin. Bad money is currencies around the world. And you're seeing that basically a lot of the Bitcoin is not traded in the last year, right? I think you even tweeted something like 63% recently, right? It has not traded in the last year. That's because people are hanging on to it and there's going to be a scarcity value to that. And basic economics, right? The first thing that you learn is supply and demand. The demand is going to grow in ways that it's just going to be tremendous and the supply is very limited. So the correcting mechanism is the price. So, you know, I have, you know, I have no doubt that I'll wake up one morning and Bitcoin won't be 11.4, it will be 27.2 and then it will be 107,000, like very quickly, because somebody wants to get in on that.

• 48:46Speaker 02

  And, and there's a scarcity value for a company like MicroStrategy. If Bitcoin is successful, somebody's going to want to own those 38,000.

• 48:57Speaker 02

  So it makes it an acquisition.

• 49:00Anthony Pompliano?

  Absolutely. I tend to think that, you know, nothing is a sure thing, but in terms of supply and demand, there is very few things that have as an attractive asymmetric, you know, risk reward kind of framework than Bitcoin right now. And so it's, it's gonna be fun to watch for sure.

• 49:18Speaker 02

  Yeah, and I echo that. Nothing is, there's not a sure thing. I'm, I'm not, I don't have a degree in computer science. I didn't go line by line on the code, you know, the backdoor some way that they could ultimately issue 23 million. I don't think that's the case, but just, you know, there's unknowable unknowables. And you don't need, you don't need a staggering amount, right? So I put, you know, personally, I put 2%, 3% in back in, you know, 2000.

• 49:45Speaker 02

  It's a meaningful position for my portfolio, but I'm not selling a single one. I think it's going to some, some crazy level. And I, and I, again, if I heard the story today for the first time, knowing what I knew then, I would say, I'm in.

• 49:59Anthony Pompliano?

  I love that. I, I finish up with the same two questions you'll get asked me. One to, to end it. The first is, what's the most important book that you've ever read?

• 50:08Speaker 02

  So most, I would say there's probably been three books in my life that have been kind of impactful. There's a book called Spoon River Anthology. I read it when I was pretty young, by a guy named Edgar Lee Masters, and it's a fictitious town in the Midwest, and people are writing from their graves.

• 50:26Anthony Pompliano?

  Wow.

• 50:27Speaker 02

  So it's, you know, some of the stories are absolutely beautiful, and it, literally they're a page or half page each, and then some are just very dark. And it, kind of when I was a kid reading that, I was like, wow, people really have this inner life that they're not going to reveal to you. So that was kind of an awakening to me. And then I would say that. How to Win Friends and Influence People has been an important book in my life. And every time I think I'm acting like a jerk, I go back and read it. Because I think it's such common sense. And I think how you treat people and you don't have to be nasty and get a lot done that way. So that's been important influence. And then a couple of book called Influence by Robert Cialdini. Just persuasion and techniques like that.

• 51:10Speaker 02

  So, you know, I follow Scott Adams on Twitter and some of his podcasts. And kind of puts things reframing things and positions that you have and how to look at the world a little bit differently. I think so. You know, I read most of those when I was very young, but I would say that those really were impactful for me.

• 51:29Anthony Pompliano?

  Yeah, those are great recommendations. I've read two of the three and very, very good ones. Second question is a little bit more fun. Aliens believer or non believer?

• 51:39Speaker 02

  So I listened to Stephen Hawkins before he passed away a number of years ago. And, you know, thinking about the vastness of the universe, the probability that there's other forms of life is probably pretty high. So, and the more disturbing part of what he thought was that it's probably not looking too good for us humans, the way we treat other people. So, yeah, I would say I'm a believer.

• 52:05Anthony Pompliano?

  Yeah, I'm with you. I always say that we want to find them. We don't want them to find us, right?

• 52:10Speaker 02

  And if we find them, we hope they're nice.

• 52:14Anthony Pompliano?

  Absolutely. You could ask me one question to finish up. What do you got for me?

• 52:18Speaker 02

  So if you, your wife and your brother decide to form a business, will you allow me to invest, be an early investor?

• 52:26Anthony Pompliano?

  Yes.

• 52:30Anthony Pompliano?

  I, they will appreciate that question more than, more than even I will.

• 52:36Anthony Pompliano?

  Now, Peter, listen, thank you so much for, for doing this. I think people will really enjoy this. Where can we send people to find you on the internet and also find out more about what you guys are doing at Horizon Kinetics?

• 52:46Speaker 02

  So HorizonKinetics.com. And again, you know, we're not meant probably to be everyone's portfolio. And we're saying this is our, we're staking out a position that we're concerned about inflationary issues that are down the pike. And we think we found very novel ways to basically invest in that, that even if it doesn't play out that way, we're going to get an adequate rate of return. So it's for the people that say, you know what, we make, you make a lot of sense. I'm not sure I'm going to sell all my Apple or Google, but I'm going to give you a 2% or 5%. And you can find us at HorizonKinetics.com.

• 53:20Anthony Pompliano?

  Awesome. And then where can they find you?

• 53:23Speaker 02

  Hopefully not, not at all. I generally don't give these. You know, I really kind of just a lurker. I don't really tweet or do things like that. I, my wife said, do not talk about politics. But the reason I actually got on Twitter, it's the only social media that I'm on, is that the 2016 election was really fundamental and profound in a sense that, you know, you had this guy that turned upside down, but the Republican Party and the Democratic Party, and he did it with, you know, essentially Twitter and a red hat. So that made, I said, wow, that is incredibly powerful. So that's why I got on that. So.

• 54:04Anthony Pompliano?

  It is, it is absolutely wild to think about that, these social media platforms. But when you, when you break it down, it's the ability to communicate directly to a group of individuals, whether it's your politics, business, whatever, is just a very powerful thing that changes the, the structure of how ideas are communicated, right? So you no longer have that filter of a media organization or somebody else kind of telling your story or building their narrative with your quotes. And I think that there's good and bad impact to that, right? But it's just very fascinating to kind of watch this play out across industries.

• 54:43Speaker 02

  Now, I can agree. You know, you tweeted more recently about, you know, you don't need television to get your product out there. Go down the list. And absolutely correct. I mean, it's, it's changed the life for the better, I believe. But there is some negative. But yeah, so, you know, for people listening, you know, the, the advice that you give, believe in yourself, do the work, and basically get out there and hustle.

• 55:07Anthony Pompliano?

  That's the secret. Don't tell everyone the overnight secrets.

• 55:12Speaker 02

  Yeah, exactly.

• 55:13Anthony Pompliano?

  All right, Peter, listen, thank you so much for doing this. I think people are gonna love it. We'll definitely have to do it to get in the future.

• 55:18Speaker 02

  Thank you, Paul. Bye bye.