Barron's Streetwise - Bitcoin Doesn't Fix This. Plus, Pets and Profits.

Episode Date: March 11, 2022

Jack hears from a crypto skepti-bull, and catches up with Kristin Peck, CEO of Zoetis. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to the Barron Streetwise podcast. I'm Jack Howe, and the voice you just heard is Alex Picard. He performs investment research for a large money manager called Research Affiliates, and he personally invests in a number of cryptocurrencies. But he says that claims about the disruptive power of crypto are misplaced. They are, as he puts it, a meme, not a certainty. In a moment, we'll hear his case. We'll also check in with the CEO of Zoetis, the leader in animal medicines, and hear why a pandemic boom in pet adoptions still has legs. pandemic boom in pet adoptions still has legs.

Listening in is our audio producer, Jackson. Hi, Jackson. Hi, Jack. You've got your ear to the crypto street. What's new out there that's got everyone excited in crypto land? Yeah, I was looking at the accounts using the most energy on a few different crypto networks. And there's one right now using a ton of energy that belongs to a game called Krabata. It's a game with hermit crabs and you fight them. And if you defeat the crabs, you win crypto? Yeah, that's part of it. But you can also loot treasures and mine and breed more hermit crabs. I have a lot of questions, but they're all about crab reproduction and we should move on. I agree.

Now, I try not to be a crypto crank, even though I'm skeptical about the market values cryptocurrencies have achieved. I see a disconnect between the claimed usefulness of the networks and the price of the coins that I can't explain except to point to speculative fervor. But I've shared a range of outside views in this podcast. We've heard from crypto enthusiasts like Liz Young, the head of investment strategy at SoFi, and Meltem Demirors, the chief strategy officer at CoinShares. It's never too early and it's never too late to get involved in Bitcoin.

We've spoken with top executives from two of the most valuable crypto networks, Cardano and Polkadot. Mohamed El-Erian, the chief economic advisor to Allianz, once told us that he owned a bit of Bitcoin. And we've heard from fellow skeptics like David Kelly, the chief global strategist at J.P. Morgan Asset Management, who told us he just doesn't get it. I cannot understand simply why Bitcoin is any better than Bitcoin or Zitcoin or Ditcoin,

or for that matter, Davidcoin, which I'm thinking of launching next week. And I'm only going to hold on to 20% for myself. There's a meme on Twitter that goes, Bitcoin fixes this. It started off sincerely in a conversation about deficits or inflation. A crypto fan would post post Bitcoin fixes this. The claim started getting broader with users posting the phrase in threads about politics or housing or the environment. And inevitably, some people started posting the phrase as a joke. Your car broke down? Bitcoin fixes this. But what exactly does Bitcoin or crypto more broadly fix? In recent weeks, we've tracked Russia's invasion of Ukraine, which has set off a refugee crisis

at Ukraine's borders and a currency crisis in Russia. I've been watching for signs that crypto was proving a crisis haven, but its price hasn't moved like that, and it hasn't looked like a hedge against inflation. It continues to mostly track risk appetite in the stock market. In other words, when speculation increases, crypto rises, and as near as I can tell, that's the beginning and end of its price behavior for now. well, that's the beginning and end of its price behavior for now. This past week, President Biden signed an executive order on cryptocurrency regulation. It's an order to create a plan, so I wouldn't exactly call comprehensive regulation imminent.

But it's another reason to take a fresh look at whether crypto is proving as disruptive as promised and what's driving its value and where it could be headed. And if there's such a thing as someone who's both a skeptic and a bull, I think I found him. I work on risk management projects and I do writing on cryptocurrency. That's Alex Picard. He's vice president of research at Research Affiliates in California. Research Affiliates was an early leader in what it calls fundamental indexing. The most popular stock indexes, like the S&P 500, weight companies by their stock market values. So when the share price of a company rises faster than the market, its weighting goes up. Research Affiliates publishes indexes that weight companies by fundamental measures of value. Sales, cash flow, dividends, book value. If you've

ever seen an exchange-traded fund with the acronym RAFI, that stands for Research Affiliates Fundamental Index. The indexes have more of a value tilt than the S&P 500, and with interest rates poised to rise, investor preference has shifted away from growth stocks and speculative investments and toward value stocks, which has served the RAFI index as well in a down market this year. Invesco Fuzzi Rafi US 1000, the ticker is PRF, was recently down 5% for the year. That's less than half the decline for a cap-weighted index with the same number of stocks called the iShares Russell 1000 ETF, ticker IWB. Now, being that Alex works at a firm with a value-based approach, I would expect him to view crypto as frivolous. But he says he personally owns a bunch of cryptos. I have basically the top 10 or top 20, something like an equal weight portfolio. And Alex says that back around 2015, before his current job, he was all in.

before his current job, he was all in. And so I quit my job and I moved to Washington in the central valley of the Cascade Mountains where they have very cheap hydroelectric power. And so I was paying $3,000, $4,000 a month in electricity bills to run my Bitcoin mining equipment. A price slump in 2018 convinced Alex it was time for a career change, and he says he didn't end up with a super yacht, but that he did hold on to some of his crypto and he's done well. He has also made a deep study of crypto and has concluded that there are structural dilemmas that are stopping it from disrupting traditional finance or gaining widespread use. stopping it from disrupting traditional finance or gaining widespread use.

Let's agree first on the premise. Crypto has not gained widespread use. I know many people who've traded it. I have yet to walk into a store and see it offered as a means of payment. There are stores like that, but not many. Tesla briefly accepted Bitcoin as payment for its cars. That offer doesn't seem to have had many takers. I don't know of anyone with a crypto mortgage. You might have heard that El Salvador adopted Bitcoin as legal tender. Businesses have to accept it. The government has introduced its own digital wallet called Chivo. That sounds revolutionary, but surveys show few businesses in

the country have done Bitcoin transactions. Some citizens have protested the Bitcoin adoption. El Salvador's president, Nayib Bukele, made large Bitcoin purchases using public funds at prices from $46,000 to $59,000 between September and December last year. Bitcoin's recent price is lower, around $39,000. Alex at Research Affiliates says that the public database or blockchain technology underlying cryptocurrency, which can be used to create digital scarcity, is innovative, but that not all things that are innovative are disruptive. He says there are three things standing in the way of crypto fulfilling

its promise of disruption, which he calls the profitability problem, the power problem, and the community problem. Let's look at each of them, starting with the profitability problem. at each of them, starting with the profitability problem. Have you heard the word hodl? It's another meme, switching the L and D in the word hold for comedic effect. Hilarious, I know. Early Bitcoin enthusiasts focused on winning broader adoption for the currency, but the more the price climbed, the more calls went out to HODL. And that's a problem. Here's Alex. Over time, though, the HODL meme, you know, cryptocurrencies are for HODLing.

Like, hold on to them and don't sell them because they're going to go up in value. But, you know, for a currency to be a useful medium of exchange, you have to have some desire to part with it and for other people to want to accept it. So it's just become like something that people want to hoard and not use for its intended purpose. And I think disruption, the idea of cryptocurrencies disrupting traditional finance, it's a meme. It's a thing to get people to buy. In Alex's view, the threat to traditional finance by Bitcoin went into retreat seven or eight years ago when Bitcoin enthusiasts began using the phrase store of value and backed off on trying to convince mom and pop stores to accept the currency. Since then, as he puts it, more time, money and energy has been spent on the proliferation of disruption memes than on work toward actual disruption. He says you can deconstruct the price of crypto into component values.

And two of the most important ones are the utility value and the speculative value. There's not much utility value today because crypto isn't widely used, but there's loads of speculative value tied to the hope that crypto will disrupt traditional banks. Now, if crypto did disrupt banks, the utility value would go up, but the enormous speculative value would go down by more because there'd be little need to speculate on something that has already happened. And that's the profitability problem. For crypto to work as promised, it would have to become less profitable to speculators. Next is the power problem. The Federal Reserve is more than 100 years old.

Bank of New York Mellon, America's oldest bank, is more than 230 years old. That might make these institutions seem ripe for disruption, but there's something called the Lindy effect, which holds that the life expectancy of a technology or idea is proportional to its current age. Bitcoin, the oldest cryptocurrency, is 13 years old. Here's Alex. In the battle of life expectancy, these long-lived institutions have the upper hand. And what we've seen so far is not really any disruption at all, but coexistence. Part of what the U.S. government is now looking into is whether it should create a digital currency of its own to fulfill some of the technical uses of cryptocurrency while holding a stable value in dollar terms. In the battle for innovation, don't count out the entrenched powers.

The third problem is the community problem. Here's Alex. It's an asset because there are so many people that are super excited about it and they want to invest, they want to hold. But it's a liability because they don't want to actually work to disrupt anything. They just want to make money. It's a community formed around speculation. And that's the problem is that nobody wants to do the work to actually go and convince local businesses to actually accept these currencies. They just want other people to do them and expect it to happen at some point in the future. I asked Alex what he thinks crypto will look like in the future, and he said people will still be hodling. I asked why he still holds crypto himself, and he said it's better than going to a casino,

but also that his current crypto holdings are small relative to his allocations to stocks and other traditional assets. I don't own any crypto. When people ask me whether they should buy them, I say only with your entertainment money, not your investment capital. And I don't own any crypto. When people ask me whether they should buy them, I say, only with your entertainment money, not your investment capital. And I don't recommend buying top quality cryptos because I'm not sure there's any such thing as a crypto blue chip. I recommend the hot garbage approach. Look for something that might be of questionable quality, trading at pennies or a fraction of a penny, but which also has plenty of recent price momentum. I think price momentum matters most. If there's such a thing as crypto value investing, I'm not sure how it would work because I'm not aware of any good gauges of the fundamental value

of cryptos to begin with. But Alex is the experienced crypto investor, so I asked what he would look for in a new coin. I would look at whether or not there is support around the coin in terms of a community of people who are going on social media, advertising it, talking about it. That'll tell you whether or not it has some staying power. If it's just something that somebody told you and you can't find anybody really talking about it online and it's gone up in price recently. It might be a pump and dump. I think a joke name might be a negative indicator. I'm thinking about that ass coin that I had a while ago.

Australian safe shepherd. Well, there were some really vulgar sounding coins that did really well. Could go either way. Thank you, Alex. really well so it could go either way thank you alex coming up bow wow wow yippee yo yippee a pet health in the puddle jumping house jackson did you write this tease i was trying to get people excited you should apologize to people for that. That's next after this short break. Whether you own a bustling hair salon, a painting company that just landed a big job,

or the hottest new bakery in town. You need business insurance that can keep up with your evolving needs. With flexible coverage options from TD Insurance, you only pay for what you need. Get a quote in minutes from TD Insurance today. TD, ready for you. Welcome back. Shares of Petco jumped 8% this past week after a well-received earnings report. Jeffries, the investment bank, wrote,

Woof, that's the ticker for Petco, Woof provides a reasonable proxy to allay fears of widespread pet abandonment as workers return to offices part-time and socialization experiences re-emerge. That's good news. Back in August 2020, we spoke on this podcast about a pandemic boom in pet adoptions with Kristen Peck, the CEO of Zoetis, a Pfizer spinoff and a big player in animal medicines. The following month, B of A Securities did a survey and 37% of respondents said they had adopted a pet within the prior six months. 37%. Well, the concern was that as life began to return to normal, pet adoptions would stall, or worse, as Jeffries noted, that there would be widespread abandonments. B of A

just did a follow-up survey, and this time, 12% of respondents said they'd adopted pets within the past six months. Not bad at all. The analysts wrote about a rising, quote, installed base of pets, which bodes well for future spending. That's a term analysts often use in connection with the iPhone, installed base. The idea is that even if buyers don't go nuts for the next phone, they'll keep spending plenty with Apple on apps, services, and accessories. In the case of pets, the now larger installed base could fuel sales of food, toys, and medicines. A group called Mars Veterinary Health is predicting a 33% rise in spending on pet healthcare services over the next decade. And by the way, a shortage of veterinarians.

I had a chance recently to catch up with Kristen Edsoedis. I think last I spoke to you, I had one dog. Now we have two. Ginger has a friend? Ginger, yeah, Ginger has a friend. Ginger's friend is Coco. Coco, what kind of dog is Coco? She's like more German Shepherd.

Ginger is more Labrador. So Ginger has short hair and Coco is quite furry. That's right. I'm one of the 12% that adopted a new pet over the past six months. We double dogged it and they have a lot of fun together, but I'm holding it too. Kristen is coming off 15% revenue growth last year and 19% profit growth. She talked about some top sellers and pending launches, including combination medicines for parasites and drugs for itchy skin and arthritis. Products like Apoquil for itch, for itchy dogs, and Cytopoint, which was the first monoclonal antibody, and that's a monthly injectable. And then looking at new products we're launching in areas like pain, like Librella, which is a monoclonal antibody for osteoarthritis pain in dogs, and Silencia for cats. You know, there really

have not been great products for cats anywhere in the world for pain, so this is truly revolutionary. Cat pain. How do you tell when a cat's in pain? I asked Kristen. It is actually hard to sort of tell when cats are in pain because cats tend to hide often how they feel. But what you can tell is they're hiding. They're not spinning. They're not as active as they used to be. And you can tell right away whether or not it works. But once it's relieved, you can see the animal, you know, going back to behaviors they had before, spending more time with you, you know, more willing to jump up on a couch or whatever they did before. So part of what we have to do to build this market is to help pet owners understand that their cats are in pain. Kristen says pet adoptions are rising not just in the U.S., but worldwide, including in China, where there's a preference for cats.

She says millennials and members of Generation Z are driving adoptions and that they're more involved with their pets and they spend more on them. and she mentioned heart disease and kidney disease for pets and for livestock vaccines and something called immune modulators which can reduce the use of antibiotics. Zoetta shares have returned around 30 percent a year over the past five years, twice as much as the S&P 500. That includes this year when they're down twice as much as the market, about 22 percent amid a broad sell-off in growth stocks. I asked Kristen, for investors who are thinking about the pet medicine business, how is it the same as human pharma and how is it different? She says it has some of the same oversight, including from the Food and Drug Administration,

but that the animal medicine business can begin tests in animals right away, and that those tests are generally faster than human trials. That makes it less expensive to develop new drugs, and there's not the same widespread system of third-party payers like Medicare and private health insurance. There are generic animal medicines, but Kristen says generics for human drugs can take away 70 to 80 percent of the revenue for branded drugs over the first two to three years, whereas for animal drugs, it's more like 20 to 40 percent, in part because the drugs aren't as expensive to begin with. One more thing. Here's Kristen. We do a lot of incremental innovation that really has an impact. So if you can make a product more palatable, so from a pill to a chewable that has liver, they'll actually pay for that. If you can

make it easier on a farm and a livestock producer who's got to pull an animal to do one injection, you know, to make an animal healthy instead of three or four, that has real value to them. So incremental innovation is valued in our space probably more than it is in human health and it's paid for. Thank you, Alex and Kristen, and thank all of you for listening. Jackson Cantrell is our producer. Jackson, my wife has the dogs on this raw food diet and I've made some inquiries. I think we might be spending an amount equal to half the average american mortgage that's not normal is it are you feeding them sushi from nobu and that's just like logs of meat and then really weird treats like ears and assorted parts

and assorted parts. Does Bitcoin fix this? I think Costco fixes this. Subscribe to the podcast. Write us a review. All the cool people are following me on Twitter. Just saying. It's at Jack Howe, H-O-U-G-H.

See you next week.