Chit Chat Stocks - Investing Power Hour #51: $SQ Short Report; $COIN SEC Investigation With The Smattering Crew

Episode Date: March 26, 2023

The CCM Investing Power Hour is a live-streamed show every Thursday at 9:15 AM PST. On the show, Ryan, Brett, and a rotating list of guests have an unscripted discussion on a variety of investing topics. You can watch the show on our YouTube channel here: https://www.youtube.com/c/ChitChatMoney Follow the show on Twitter: https://twitter.com/chitchatmoney Subscribe to our newsletter: https://chitchatmoney.substack.com/ Interested in more Content like this Episode: https://podcasters.spotify.com/pod/show/the-smattering https://www.youtube.com/@TheSmatteringShow https://twitter.com/marketmusician https://twitter.com/TheSmattering ****************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ****************************** Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. It is 12.30 PM Eastern Standard Time, and it is the Investing Power Hour on Chit Chat Money. My name is Brett Schaefer, and I'm joined as always by my co-host, Ryan Henderson.

On these shows, we cover all sorts of investing, business, and finance topics with no set script. and today we have two special guests joining the show. It is the co-host of the Smattering Podcast, our friends from The Motley Fool, Jeff Santoro and Jason Hall. Gentlemen, thank you for joining us. How are you doing today? I'm doing great. Thanks for having us on. This is going to be fun. So there's one little correction, a minor correction in the introduction. It's a special guest and Jeff. Okay. Yeah. I'll make sure. We're mostly just going to make fun of each other on this. So just we'll have to roll with that. Beautiful, beautiful. That's how we like it. And today as anyone, well, we know there's only a few people listening to this back

on Sunday when the show comes out. If you follow the news this week, yes, we're going to be talking about the Hindenburg report on block that came out just this morning, as long along with a lot of the other news topics from this week. But remember, there is no script. But before we get to today's episode, this show is presented by Stratosphere, our investing home screen for fundamental research. Stratosphere, as Ryan is showing the listeners with a nice layout of the block KPIs and income statement, it has- Or should I say fraudulent KPIs? Well, we will. Hey, yeah, that's a nice little teaser for allegedly. Yeah, allegedly. Yeah, we should say that there. Nothing is proven yet. But there is a lot of KPIs here. And

Stratosphere is our investing home screen. It has dashboard tools like the ones Ryan is showing right now that let us easily track our investments and stocks. We are researching with a nifty news feed, SEC file aggregation and a fundamental churning tool to compare companies, ditch Yahoo finance and all the old clunky ad-ridden dashboards or home screens for your fundamental research. And there are plenty more that Stratosphere has to offer. And you can try it for free by going to stratosphere.io. That is stratosphere.io. We're going to be utilizing their charts throughout the show today and use promo code CCM for 15% off any paid plan. all the links are in the show notes all right let's kick things off maybe we start with our

guests today let's get i think the number one news story has got to be the hindenburg report on block i'm curious if any of you guys read it i read parts of it maybe jason or jeff we start with you guys i i read all the bullet points at the top i didn't get into the the rest of it um i i don't know i i got rid i got i sold square a while ago or block a while ago so this I'm sort of on the sidelines watching this one. I mean, I always have a mixed feeling about short reports, right? They're clearly short. They say that. So they obviously have an incentive to come out and then bash the company. They're making a lot of money today, I'm sure. But they do have a decent track record of unearthing things for companies that are not great for investors.

I'm a Jack Dorsey skeptic by nature. So it's hard for me to not look at this biased and just agree with all of it. But yeah, certainly, you know, certainly has an impact. I think the stock's down, you know, 15, 20% or something today, but I didn't get past the bullet points, but they were some pretty juicy. They even did a, they even did a super cut video of all of the rappers who've done their own music videos about using cash app for illegal things, which is just above and beyond just a written report. I thought that was a nice touch. But I don't know. What did you think, Jason? Would it be cynical of me to maybe question Hindenburg dropping a short report on a bank in the middle of a mini banking crisis? Call me crazy, but…

Are they technically a bank? No, they are not. They are a bank. They have a banking charter. Yeah. Yes. They do. Yeah, they do.

They're a bank, right? So here's the thing. Hindenburg, like a lot of these short shops, this is their thing. They're a hammer and they perceive the world through the filter of everything is a nail. And they're looking for nails. So that's their thing. and I'm going to push back a little bit on Hindenburg's hit rates. They've had a couple that they've nailed, right? That they have absolutely been 100% right on, but they've called like 9,000 of the past four frauds. Let's kind of put that out there. And the business model is you short a stock, either you short it or you use options to create like a synthetic short. You drop a report and you season it liberally with things that seem really scary. and you shake out all of the people with, um, what is it? Was it, um, strong conviction held

loosely? You shake all those people out, make money, right? I mean, step one, step two, step three, it's right there. And you also write it in such a way that you have legal cover, right? That you're again, like Ryan, like when I threw the word allegedly in there, I provided legal cover for you guys. You can pay me later, um, for, you know, um, the alleged fraud there. Does that mean they're wrong? Hell no. Does that mean there are probably problems with the business? Absolutely. So I think you have to, if you own, like thinking about that, we talk about the toolbox on our podcast a lot. In the toolbox, you have to have things like always challenging your thesis, your bull thesis. And whether it's a short house like this or like Citron used to be or whatever, even if you know they're kind of BS, maybe they stumbled across some things that are real concerns. Like Jeff, I sold because I don't trust Jack Dorsey as a leader. And as much as I like kind of see some potential with blockchain, like down the road at some point, Bitcoin is not going to solve the world's financial problems.

So, yeah. That's a great overview. I agree with Jason and Jeff in that it doesn't feel like a good system to be short, obviously have a platform where you can influence securities prices, use it to your advantage. I don't like that. But if you are potentially saving investors from you know, fraud or scams or something like that, that I think they're doing a good justice to the investing world. With this in particular, and it's always, I feel this way all the time, is that I think we all, and probably a lot of people, had some pre-existing skepticism around Dorsey.

Um, so it kind of like, I think confirms maybe any, any, uh, biases I already had. So it makes me feel more inclined to believe all the allegations, but, um, no, I would say that there's a difference too, between some of this stuff was them not safeguarding their plot. It sounds like they didn't safeguard their platform enough to prevent like criminals from joining it as opposed to like being a criminal organization like there i think there people exploited the platform which isn't as much block's fault as opposed to them like doing something malicious or malevolent yeah and the only i think and again those reports are long

so i could be missing something but the only thing poorly formatted yeah they do need someone for a new formatter but i think that might be part of the game is to make them poorly format because they are what i've read a lot of these short reports they are hard to follow and i think that's probably for a reason but yeah that's one of the main things that they talk about but i think the other thing is the inflated user numbers that they're talking to wall street about they could potentially get into trouble for that but i guess they're probably trying to like create a little bit of like think about everything that's happened with wells fargo over the past six or seven years to try you that that guilt by association of everything there you know again it creates fear

uncertainty and doubt, the things that investors run from. They're also capitalizing on the fact that there are a lot of people who are Dorsey skeptics. It's not just us. There's a lot of people out here. That's their bare thesis for not owning the stock. I saw one of our colleagues at The Motley Fool, Matt Frankel, was tweeting this morning, basically saying, would you hold Walmart accountable because someone uses gift cards to Walmart for crimes, right? So that's an obvious counter to that. So I'm a little bit less caught up in that aspect of it because you can use a lot of good things for bad purposes just generally in the world. I do think the user number thing is interesting though. If that ends up being true, if they were manipulating and trying to

tweak those numbers, I think that's worth paying attention to. It was also interesting that one of bullet points mentioned um sec investigation that about i didn't really quite understand it it was something around um how using small banks to get around some sort of like a loophole interchange fees yeah yeah thank you that's what it was but paypal is under the same investigation right so it's interesting that they sort of got name checked in there too yeah and that's that's been a known thing so i don't think that should surprise anyone that the relationship with cross river bank for the consumer stuff for the cash app as they try to be yeah that should have have been that that's known by most people i think what's interesting though is whether

executives knew that the app was being used for these malicious purposes well two interesting things is one i would if you're a listener i would and you're on twitter i would go tweet cash app without exactly how it's spelled and you will get bots and scam accounts pretending to be let me just say they're not they tend to be women that they're not and they're trying to get money from you also

that's a generous way to put it yeah so I just try that the reason I say that is that the founder of Block used to own Twitter used to be in charge of Twitter so I will be

one of the founders And was he aware of this? I think it's unlikely he wasn't. Also, it seems like one of the alleged things was being very up or maybe loose with the pandemic stimulus and unemployment payments to people, which they advertised, hey, get your checks through the cash app. It's super quick. It's super easy. And that's great. But some of the things they talked about was states asking for hundreds of millions of dollars back through alleged, say, people pretending they were multiple people to get multiple unemployment checks and doing it through the cash app without any money laundering or fraud roadblocks in place that a lot of other banking institutions have. So I don't know if that incriminates them, but maybe there are just major material weaknesses here that the company needs to address and get some more adults in the room that are focused on buying tacos with a blockchain thing that you built in here. Right. If you exclude this morning's kind of Hindenburg release, what do you guys think of Block generally? You both mentioned that you have since sold it. I think we've also sold it a while back, but what do you guys think about it?

So I've sold a lot of companies over my short time investing in individual stocks because I just felt uncomfortable with management. And so that was the main reason. like I just, Dorsey just rubs me the wrong way a little bit. And, but specifically his obsession with Bitcoin, right? Like Ryan, you and I back in the summer, I think did a, like a deep dive on Square when we were doing some stuff for the Motley Fool. And what, so I watched a lot of the investor presentations and stuff. And what stuck out to me was like, they, they seemed to find a way to shoehorn Bitcoin into everything they talked about, right? So whether, you know, this thing, oh, and then here's how Bitcoin fits in and there's this thing and here's how Bitcoin

fits in. And I just, I don't want to see anyone that obsessed with any one thing at all with their company, unless it's like part of the core part of the company. And that, so those two things for me were sort of enough of a, you know, yellow or red flag, you know, you don't have to own every stock. You don't have to swing at every pitch. Right. So you don't have to own every company. There's a short report about, so just to me, it was like a lot of little things that I was like, there's a thousand companies out there. This is not one I need to waste any more mental energy trying to, trying to figure out. So Amazon, you go back into the nineties and through the early two thousands started out selling books online, right? Um, kind of save a lot of people don't

know, kind of save the used book industry, like these small little used bookstores. Um, people, you, you could buy a used book on Amazon's website and like the local bookstore in Oklahoma would send it to Tennessee or wherever you happen to be. So this thing happened. And then you think about how Amazon changed over time and the Amazon of today is very, very different than that Amazon was in the late nineties and early two thousands. And the thing that's been its biggest winner is AWS, right? Providing clouds, like a thing that literally didn't really even exist when the company started. And anybody that bought Amazon back then has profited largely from other things that have worked out really well for Amazon. Now, take that same thing and apply it

to Block, Square, ticker still SQ. I'm just going to start calling it Square for the rest of the show, guys. But they started off like it's just like the payments provider, right? For small merchants, right? That's the thing that they do with providing the credit card processing, payments processing, right? That was the business that they built. And they've added all of these other pieces onto it that are somewhat related, right? Kind of in the same way that AWS is somewhat related to Amazon's core business, because Amazon's model was like, be your first best customer for all of the things they've done. They built them internally. And they're like, you know what? People are going to pay us a ton of money to do this. So they built all these

warehouses like, oh, you know what? Other merchants will pay us money to let us handle the fulfillment. So they've figured out the ways to do it. The key is thinking about Amazon as a business is like, and this is like that, going back to that toolbox, follow the money, right? Follow the money. And you think about Amazon, the business that it's built, all of the successes are tied to, there's economic alignment, right? Even like the bad stuff and how they're really anti-competitive. And you get crap stuff served when you search for a product on the app because they stick the ads up there and it's usually not even what you were looking for, right? So that's a bad example of it. It's bad for the consumer, but it's good for the company because

like follow the money, right? And you think about with Block, so I'm already breaking my own rule about calling it Square. And you think about Cash App and all of those things, it's all about economic incentive, right? The incentives are there for those things. You think about when Dorsey was running Twitter, all of the BS accounts and all of the DMs that were fraud and catfishing and all of that stuff, those things, hell yeah, management knew about it. Of course they did. You think about all of the stuff that happened, the political ad stuff with Facebook meta back around when the election, when the research company bought all that data that they were processing, right? Economic incentive. When the incentives are there, doing what's best for your different stakeholders, customers, users, however you want to describe them, letting fraud happen, letting illegal activity happen is far more likely.

because if you're going to push back on the thing that's bringing in your money, you're going to slow walk that process as much as you possibly can. And that's what's happening. I think what's interesting is it comes back again. We talked about it, I believe it was last week with Silicon Valley Bank, any sort of financial company or financial adjacent company, even if it's something like Square and the Cash App, if they're growing quickly, it has to throw up a few, I wouldn't say red, that's not a strict red flag, but it has to throw up something where you go, okay, why are they growing so quickly? Are they being a little bit too loose here? And that can lead to behavior that, as we saw with plenty of fast-growing

financial institutions, poor lending standards, stuff like that. And maybe that's not really the issue with Cash App, but in their case, they may be let on. Poor qualification standards. Yeah, poor, or it seems like not allowing criminals to do a lot of stuff through this app should be something they could work to solving. And yeah, you're not going to solve 100% of that, but- But you should try. Yeah, you should try.

You should at least put an effort for it. Yeah, and one thing I want to look at, and I'll share the screen here, is Cash App Monthly Transacting Actives, which is basically their Cash App MAUs. Let me share it. It'll probably pop up soon enough. It's grown at an astonishing rate since 2015, 75% compound annual growth rate going from, what is it, $1 million in 2015 to $51 million at the end of last year is it that big of a deal and look i'm trying to play i guess devil's advocate for maybe potential longs here is it that big of a deal if they were you know if their legitimate users were only growing 40 if that's cut down to 30 million i mean yeah they could get

some fines for that but it the business will still be in fine shape i think that's what i was thinking like would it be would it have been that bad to have stricter verification on users to have have stricter verification on who gets a cash card, maybe to have to submit an ID or some sort of way to verify that you are who you say you are. Because obviously, there was that example that they highlighted in the report where some guy just got a cash app card that said Donald J. Trump, and anyone could have got or pretended to be someone else. If they had those stricter controls, this would still be a good business. Maybe it's not the same size, but if you got 30 million transacting or something of that nature, that's still one of the best peer-to-peer

or consumer financials businesses in the US. But that's where hubris and the financial incentives come in. It's like, why did Barry Bonds take steroids when he was already the best baseball player, right? Like he would have hit 50 plus home runs anyway, but he wanted to hit 75 or 74. Right. So, and it's tied, you know, you mentioned as the Silicon Valley bank, Brett, you know, both of, both of our podcasts had John Maxfield on the talk about banks over the past month. And I, everything he has said keeps going through my head. You're saying that the four of us are responsible for the failure. Basically it was us. Yeah. That's exactly what I'm saying. No, but the whole point of like, you know, with the banking industry specifically, you want management to go only so far with risk and then sort of self-regulate because all the incentives are there for them to go hog wild and crazy growth, right?

It's the exact opposite of every other type of business where you try so hard to grow. Banks, you have to try so hard not to grow too fast. But I think it's all tied to the same, you know, how much is enough? How much more do you need? you know, like all the incentives are there for you to just go a little further. I'll pay a little less attention to fraudulent accounts. I'll pay a little less attention to crimes being committed using the cash app and all that stuff, allegedly. But yeah, I think it's just hubris and the incentive structure like Jason was talking about. And how much of it is it really the company's

responsibility? You know, that's a good question. You know, I think that's a really important thing to remember too. You know, there's all of us. It's great. It's easy for us to clutch our pearls right now. And how dare they, right? But when you're trying to grow a business as quickly as you can, there's a reason regulators exist is to have some sort of like, you know, fence around the sheep. But if you've ever watched sheep, they will, if there's a hole in the fence, they're going to go for it, right? They're going to find it. Even if the fence is next to a cliff, they're going to just go right off the cliff, right? So here we are. All right. Here's a good question as we maybe transition to another topic.

A lot of, well, there's been a famous short seller, Jim Chanos, who has called this era the golden age of fraud. I think Ryan, we've talked about this before and you kind of agree with me. I'm curious what you guys' takes are. Do you believe now in financial markets is the golden age of fraud maybe maybe so i i think that the the really the you know the 19 teens 1920s and 1930s yeah yeah i was gonna say those are worse it's legal you could you could be the ceo there's a book called um oh goodness i'm gonna have to look up the name of the book again but it talks about like that period of time you could be the ceo of a company and short your own company there was no regulation so free sec yeah yeah they invented because of that they made the sec

yeah entirely entirely uh once uh once in golconda i think it's the name of the book it's a great book um but the point is is i think that if like in the mind i think in the in the modern regulatory uh era i think so and for a couple of reasons i think number one money's more complex we're starting to see more businesses that are starting to kind of cross over these gray lines of what is a bank and what's not a bank, like SoFi is an example, right? It wasn't a bank to begin with, it was a lender and a fintech company. And now they've acquired a bank, so you have to think of it like a bank. Same thing with Block, right? It's exactly the same thing. You think about crypto assets, all the easy money that flowed into the global economy going, starting back in 2020.

Of course there is, right? Because there's, there's simply, there's more money and there's more opportunity to make more money. And at the same time, I don't want to say regulatory standards have become more lax. They haven't been with banking, right? We've seen that the, the, the, the threshold for being a too big to fail bank was raised substantially such that it's possible that Silicon Valley Bank's failure maybe could have been prevented because it technically would have been required to pass higher levels of stress testing and that kind of thing. But I think the bigger thing is that maybe enough focus hasn't put on regulation to do it, but you always want regulation to trail innovation, right? You always want regulation to trail

innovation. I don't know that Chanos' statement is necessarily an investable concept for most people though. And I think that's the most important thing. Right. Yeah. I mean, most individuals or maybe not the vast majority of individuals should not be short selling. I mean, it's just too hard. The chances of blowing up are just there. It's so easy to blow up. Now, Now, you talked about SEC, you talked about regulation following innovation. Some people, I know this is a controversial topic whenever we hit crypto, but Coinbase got a Wells notice. It's not really a big news topic because it was kind of hinted at that it was coming.

I'm curious, all three of you guys, how you think about or analyze whenever a company you own, and I'm not saying, I don't know if any of us own Coinbase stock. And when a company gets maybe an investigation from the SEC or something like that, that can be really scary as an individual investor. How do you think about that in general? And how do you analyze that? Maybe Ryan or Jeff, you can go first. So being a little bit newer to this whole world of paying really close attention to individual stocks that I buy, because I've been investing for my entire adult life, but not in picking my own stocks. So things like SEC investigations and notices and they're all, every time one of those comes up for me, it's sort of

like a new experience. So I have to decide to, you know, do I panic? Do I not? Generally I've learned it's best to probably not do anything right away because that's what the market will do. The market will react before you can anyway. And then, so I like to take some time, but that's why I think it's good for anyone listening. If you have anyone in your life, you can just like talk to about stuff like this, like a friend or someone who else is interested in investing like the four of us are, to sort of, you know, check yourself, check your emotions. You know, we talk a lot about on the podcast, like Jason mentioned, like the toolbox we refer to, but like so much of what we end up talking about when we just have our own conversations about investing, someone who has

a lot of experience in Jason and less experience in me is sort of like all the emotions and mindset kind of stuff you have to go through so that you don't make a rash decision. So that's sort of how I think about it. Like I try to take a step back, learn a little bit more about it, talk to someone who's seen that before. And usually it takes one or two questions to someone knowledgeable and they say, don't worry about it. These happen all the time. Or, oh no, this is something you really should kind of like first thing I ever, first time I ever came across a short report, right. Just to use an example of something we talked about earlier, I read it and was like, oh my God, this is, this is awful. This is the worst company in the world. And then someone was like, well,

hold on, let me explain to you what these companies do. And then you're like, okay, So now I see where the incentive structure is. So I don't know. My quick answer is just, you got to kind of take a second, take a step back, but I don't know what you guys think about it. I don't know. That's kind of a tough question because I think a lot of, probably most of our portfolio companies have some lawsuit against them outstanding, like something going on. And if it's like an SEC notice, first of all, I try to understand what's going on, which in the case of Coinbase, I had a very tenuous grasp on the actual – basically, I didn't take a stance on whether the staking of their specific listings was violating securities laws. But I think I probably would reiterate Jeff's sentiment, which is like, you know, take some time. This hopefully shouldn't make or break your thesis. Don't act rashly based on it. But I really care a lot about how management communicates what's going on.

That's probably one of the most important things to me because, you know, I haven't. So Twitter threads, right? Immediately tweeting out your thoughts. That's probably – yeah, that for me, I don't like. I'd prefer to see some sort of SEC filing or a press release that says we stand against this because of X, Y, and Z reasons, but here's what's going on. And I don't like – no, I do not like a Twitter thread as the primary form of communication. I know it's kind of – maybe that's just like the day and age today. But like I want management to try to be clear communicators about it. And for me, like a thorough press release that defines all your reasons to be against it or whatever is probably the way to go.

So I like Brian Armstrong. He's the CEO of Coinbase. I think he's been a really good leader. And if we think about everything that's happened in crypto in the past year and a half, like he's kind of proven his management team, that company being one of the rare, like publicly traded, held to a higher standard in terms of how deep your investors and how deep regulators can actually get in your business. Like they're the grownups in the room. I don't think there's any doubt about that at all. I'm also I'm the very best investor in the entire world. I sold my Coinbase stock on March 21st, which was the peak, by the way. So no, I'm not the best investor in the world. But I want to lay out the reason why I sold the here's the thing. So for March 10, the Friday that Silicon Valley Bank was taken over by the FDIC the day that Signature Bank was taken over by the FDIC through March 21. So a couple days ago, Coinbase stock went up 57%. And we're talking to Jeff. So we're two weeks, right? 11 days. What? Four? Do you know why?

Yeah. Oh, I know. Yeah. I know exactly why. Because Bitcoin fixes this. Bitcoin fixes bank runs. Crypto fixes all of these things, right? All the crypto I own went up substantially from the moment the Silicon Valley bank thing started through the last couple of days. When was Bitcoin born? It was born out of the ashes of the global financial crisis, right? The biggest systemic bank failure, banking failure, risk mitigation failure, and lending in the world's entire history, right? And Bitcoin was born out of the ashes of that. So, of course, you're going to see a banking crisis. What's going to happen? Everything tied to crypto is going to golden hands go through the diamond hands, whatever it's called, you know, rocket emojis. And that's what happened. Now, here's kind of circling back the reason I decided to sell. I'm one of those people, I own a little bit of crypto. I have generally believed that at some point, just like with the internet, crypto and the blockchain itself is going to have some real economic value. When it comes to things where chain of custody is complex right now, there's lots of rate takers in the middle right now that just kind of need to go away and they don't need to exist. And it's lots of money that flows away from the value creators, right? And they're just kind of ticks that suck off of that. Um, and, and I think there's some real things there, but just like with the internet, it took decades for the technology and like the stuff that sits on top of it to get to the point where people could use it in like a seamless, transparent way. Right. And I guess when I saw what happened with this crazy run in less than two weeks.

and the fact that I bought when the stock was kind of down a little bit and I had made a lot of money, but it's like, you know what? I don't know how close we really are to it. And I don't know how much money Coinbase is going to be able to make on trading fees. I need to step back and I'm going to step back now. And even though I still believe these are the grownups in the room, it's probably the best business. It's the best run business. And like the stuff they're building for developers to like make those tools, I think that's going to be the real value creator for Coinbase. I don't know if it's going to take two years or 10 years, or if regulators are just going to blow the whole damn thing up. So I'm stepping back and it's time to kind of figure out what

happens next. As I said, this might be sort of a, it's a leading question, but also a genuine question. What do you think, like you mentioned that you think the core infrastructure, the core technology will lead to better changes in the future. Where do you think it would most improve the current system? So this is like the easiest example in the world for most people to understand. And Jacob Goldstein, the former Planet Money co-host has his own podcast. He came on our show last week. And the one that he used is like title insurance, right? It's 2023. Why the hell do we need to buy title insurance, right? We have the technology to make sure every title is clean without having to buy an insurance policy for your house when you buy a house from the last

guy who bought it, who bought it from the gal who owned it before him, right? And using the blockchain for something like that is like, it's an obvious thing that could be, you have like an unassailable way to prove chain of custody without having to do things like buy insurance could be really, really powerful. And then what happens is we're still talking dollars or euros or whatever to do the transaction of whatever the asset happens to be of concert tickets is another example. We're still talking dollars and cents, but in the background, like the crypto assets, like a portion of that on the blockchain is still like the economic means of exchange. We just don't have to talk about it in terms of Dogecoin or Polkadot. We need to talk about this stuff in dollars. Say that again, Brett?

I said Shiba Inu. There you go. Exactly. So eventually it gets to a point where what really matters is the technology that can be used for things like chain of custody, not the actual token. Yeah, I agree entirely that there will be, at some point in the future, legitimate wholesale adopted uses for blockchain, things like title insurance, buying concert tickets, right? And like Jason said, we might be a decade away from that working its way into the mainstream. I don't think it will ever replace or even supplement fiat currency. And my biggest reason for not believing that is literally every country in the world would not want that to happen. And every country in the world collectively is pretty powerful in terms of influence,

right? So for as long as, not even every country, let's just pick the five biggest economies in the world, us and whoever else it is, right? As long as they're saying, no, no, no, we have a finance, going back to incentives, We have a financial incentive to make sure fiat currency remains the primary means of exchange. It's going to remain the primary means of exchange in my mind. It doesn't mean that there can't be then legitimate uses for blockchain technology. And like Jason said, but we're still going to sort of think of it in terms of just conversions of dollars or conversions of dollars to euros or dollars to yen or whatever it is.

So going back to the news today with that Wells notice, regulation needs to happen, right? And again, I think it makes more sense that regulations needs to start happening now versus five years ago. As much as a lot of people lost a lot of money, a ton of people lost a lot of money back during the dot-com boom and bust, right? And you didn't see massive reform in the way that a lot of people are calling for crypto. So it's time, but Congress has got to figure that out, right? Yeah. And I could talk the philosophy of crypto and not all day, but there are some other topics I think will be very interesting. And the one I want to do, Ryan, we'll have yours as well with the, if we can get to it, the JP Morgan metals exchange thing.

I don't have the details, but this one I think is very interesting. And it highlights another company that kind of went through the huge bubble and burst over the last few years, and that's Carvana restructuring its debt. Jason, I know we talked about it before the show. You had some interesting takes on it, but let me just sum up with a few quotes from this FT article. Carvana, the online used car retailer, is trying to drum up support from its creditors for a restructuring of its $9 billion in debt as it attempts to stay afloat at a time

of declining vehicle sales. Second quote, the terms of the transaction to be launched later on Wednesday offer between 63 cents and 81 cents on the dollar to holders of five chances of outstanding bonds maturing between 2025 and 2030. Really interesting times right now with Carvana as the stock is totally bombed out. And there is still a lot of people that are out there pitching the stock as a long, a lot of people saying the company's going bankrupt. And this stuff, but the debt is interesting as well. Maybe we start with you, Jason. You seem to have followed this a little closely. What are your thoughts? Yeah. So hat tip to Tyler Crow, one of our colleagues, a good long-term friend of mine. We made a video that's going to publish on

our YouTube channel if you want to check it out over the weekend. But the short version is a company that's burning a run rate of $1.3 billion in operating cash burn, less than $450 million in cash on the balance sheet. You do the math and it's not favorable, right? Particularly when you look at? What was the debt number? $8 billion in debt? $8 billion? $3 billion? $9 billion. $9 billion at the restructure. Yeah. And there's also some stuff that they're trying to do. It's very complicated with the Dezza auction thing that they... And they're trying to restructure it basically where they can repurchase it, I think, at a lower rate. But yeah, sorry, you keep explaining. Yeah, yeah, absolutely. So it's a substantial amount of debt. Some of it's going

to be maturing, not like next week, but sometime reasonably soon. And here's the thing, that debt's already distressed, right? It's distressed for two reasons. One, interest rates have gone up, right? Now that debt when it was issued was already at really high yields, but rates have gone up, right? So the basic math of bonds is when rates go up, they become less valuable, but it's also a distressed company, right? So those bonds are not worth a dollar on the dollar anymore. So Carvana does have a little bit of leverage with those bondholders, right? Because the market value is the market value to try to get them to re-up. But here's the thing that they're doing, and this was kind of surprised me when Tyler was explaining it to me, is these are

secured. It's secured debt, but it's secured. It's not convertible debt. It's not convertible into equity. It's secured by the company's assets. All right. So what that means, and most debt that big companies get, they're able to get unsecured debt, right? And they just stand in line with other companies and they get whatever bankruptcy says they can get in a worst case scenario, right? But their debt is literally secured, right? So they're the very first people in line. And the way this debt's going to be structured is Carvana, they converse at a discount, right? So Carvana wins there. But I think it's going to be like a 9% yield, cash yield. Here's the thing. Carvana is starved for cash. So if they can't pay in cash, and Carvana gets to choose here

from my understanding of the way they're trying to structure it, is it will be 12% yield in kind. What that means is that every time they don't pay that interest payment, instead of 9% in cash, it's 12% more of the company's assets that they get to stand in line to collect. So it steadily carves more and more of the actual value of the company's assets away from the shareholders. It's not a great position for the company to be in. It's a terrible place for shareholders to be in. This is a company that has consistently demonstrated that even with car prices skyrocketing, the business model that they've built up, they've not been able to generate operating leverage, right? It's ugly. And I would run from, I would buy this with Jeff Santoro's money.

I mean, yeah, anyone that's watching on YouTube can see the chart I was sharing about the free cash flow. It's gone in just in the absolute wrong direction. And it seems like this sort of debt tactic is something you would have seen. It reminds me of something that maybe Bed Bath & Beyond was doing, and that's a company that was clearly going for bankruptcy as well. Here's something I think about, and I worry about making this, say, mistake as well. And again, I'm going to curious to see what your guys' thoughts are, is you could have had a thesis on this stock back in, say, 2017, 2018.

It could have done really well for you. probably went up, what, like a 10 bagger? But then the $15 IPO and the stock was within about three years was over a hundred dollars. Yeah. So it made you a lot of money. You had a lot of paper wealth and then the thesis just turned on you. And yeah, none of us are going to bat a thousand. It's so hard to say, to not get attached to a company. And I worry that I do it myself. What are you guys' thoughts on that and trying to get better and not getting attached emotionally or psychologically or rationally to a stock if the thesis seems to be breaking like what's happening what happened with a lot of car you

know with carvana i i know i struggle with that personally especially the more time i spend because i'm the kind of person that wants to read everything about the companies i own it's one of my one of the reasons i'm trying to own less companies because i want to spend more time understanding them. One thing I've tried to force myself to get better with is sometimes I buy a company just because I'm interested in the story or I like what they stand for, but I don't really think through on the front end. Now I start everything with a small position. So it's like I'm backing up the truck. And I need to have a small position to kind of pique my interest and stay engaged with the company. But what I'm trying to do over time is really understand,

like, I hate, I don't like investing thesis. It sounds too formal, but I really want to understand like why I own the company beyond what just the general story is. And I also try to think through anytime there's a massive change to what they're trying to do, or there's like a big financial shift. I immediately try to ask myself, does this change why I want to own the company? And that, what I find is that, that lays some seeds of doubt that over time will eventually probably lead me to either sell it or be comfortable enough with the new thesis or the new direction that I end up staying. It's sort of what happened with Block, honestly, if I think back to like, I bought it when I was a new investor because I was like, oh, I've seen the

Square app. That's cool. And I know I've heard of Cash App. Exact same thing that I did. Yes. I bought it and then I started, then it's like, oh, this is, I'm not so sure about that. I don't know if, why would they buy title? Like, you know, all these little sort of things that start to so doubt in my mind that eventually one of the things makes me go, I'm out. Or it might have gone the other way and said, you know, this all sort of makes sense. But I'm not going to sit here and say it's not difficult. That's something I think everyone needs to kind of figure out a way through. Yeah, I totally agree. And there's, I mean, we even have, it's a lot harder when something's been a massive winner for you to not get tied to it. We're tied to companies and we

have very few massive winners. And so, and we definitely don't have any returns that mimic that of someone who held Carvana from IPO to its top. And so, but there's still times where it's like, as much as you might want to get to know a business more, it's, I think there's some advantages to keeping a distance. Like it's kind of that paradox of like, would you want to meet management for all your companies. Think of how charismatic some of these CEOs are. There's the reason that especially the mercenary ones that come in later than are the founders, the reasons they get there, or even the founders, the reason they can raise so much money is that they are charismatic, they can sell, and they can sell you.

Look at Plug Power. It's a company that for the better part of 25 years has existed on telling a great story, raising capital, and then incinerating that capital to get to the next capital raise in the next story. So it happens. But like to kind of answer my thought on this is like the two most poisonous biases for most investors are confirmation bias and the sunk cost fallacy, right? So you spend all your time. It's normal. I do the same thing. You spend all your time like what confirms your thesis? What supports your framework for a company? And you invest so much time doing it, that sunk cost of time. It's like, I've spent this much time. I can't run away now. They're so close. And then you miss out like on what, like you actually

lose like your, what is your economic incentives? I said, follow the money for companies. You have to do this all for yourself too. What are your economic incentives? And for Carvana, if you went into it with like, if you had this idea that they were going to drop their Carpez dispensers everywhere, they were going to have a great website and they were going to get operating leverage from a good business model that was going to be scalable. As the revenue went up, their operating cash was going to start to improve. And if you're learning, if you understand this business, if the first thing you race for is not the cashflow statement, say, wow, revenue went up 35% last quarter, but operating cash burn accelerates like, ooh, ooh. What are you actually

trying to learn? What are you trying to study? And if you're not starting by studying the cashflow statement with every business you own, you're starting in the wrong part. So let me ask a question back to the three of you, because I think about this a lot. For every company I own, I have a pretty detailed spreadsheet that I fill in each quarter with all the typical metrics you get, revenue, net income, margin, all the different things. Then I have my own little list of KPIs. I know that's one of the reasons I also like Stratosphere. I'll help you out with your plug here. Sometimes I wonder if I did nothing else other than fill in that spreadsheet every quarter and just keep an eye on the important metrics, where they're going.

And if something is drastically different, then only then would I go and read why, right? Oh, net income a year ago was $10 million and now it's a net loss of $30 million. Okay, I need to go see why. And oh, it was because of a goodwill write-off. So now I know the answer and then I do nothing else. Sometimes I wonder if that's not a good strategy. Like to your point, Ryan, sometimes you can learn too much and get too attached and listen to everything and then you're so invested like i sometimes wonder if i did nothing but other than

other than fill out that you know nerdy spreadsheet i have and just hold or sell or add to based on the metrics i'm following i wonder fully quantitative approach yeah i think about that a lot yeah i mean that's yeah i i like that manage to be charismatic or right yeah brian you have something the other thing i i was kind of just thinking about this morning and i i don't know why I came across my mind, but I was imagining like, if I had, if I was looking up a business and I had no connection to the investing world and I, and you could just like research the stock, you could research the business, you could research the management team, but there's no one to talk to how much, how differently would that shape my opinion of a company?

And I would probably, I think a lot of, uh, building that like affiliation or that like sense that you're a part of a team when you're investing in a company comes from having other investors that think like you. And so having the people where every time they report some quarterly earnings that you talk to and you say, oh, what'd you think about this? It feels like you're just surrounding yourself with confirmation bias. So I think maybe one way to potentially alleviate that is before you talk to anyone about a company's quarter, just read it yourself, take a few days, digest it on your own,

and try to avoid other people's opinion on the information. Find your own opinion before you find somebody else's to borrow. But it's always easier in theory because you scroll Twitter, you look online, you see something, people are going to be optimistic about it. Definitely do not go on Twitter or try to as best as possible not to go on Twitter to look at and search the cash tag of your company before reading the report.

I think one thing before we move on to our last topic that I like, and again, this is part of why we like our advertiser stratosphere, is getting a visualization of the key KPIs or really just financials out there that you are following with the company. Because a lot of times you read the press release, you read something that a company puts out and they always say, record quarterly results. And then if you put that free cash flow number, you put that gross profit number, you put whatever into a table and you chart it out, it better look like what the company is describing because a lot of the times when you visualize and you look at the growth of what's going

on or lack thereof, it can paint an entirely different story than what management is saying. But Ryan, let's move to this last topic because this one seems like a fun one to close things out. So did J.P. Morgan get swindled here? What happened? Yeah, I mean, yeah, they did. I saw a lot of funny jokes that J.P. Morgan wants their nickel back. And it was like pictures of nickel back.

But anyway, yeah, I'll kind of run through this. And then I want to throw some questions over to Jason and Jeff before we wrap things up. But so I have kind of a tenuous grasp on this. So a lot of it's just from me reading other people's writing. But I'll steal this quote from Bloomberg. Apparently, JPMorgan Chase owned the London Metal Exchange nickel contracts that turned out to be backed by bags of stones rather than metal. According to people familiar with the matter, the London Metal Exchange last week announced it had canceled nine contracts worth about $1.3 million after discovering, in quotes,

irregularities at a certain warehouse. So I guess for context, like, okay maybe i'll just read this next quote from matt levine because he does a good job describing i know i just like basically regurgitate matt levine quotes on this show half the time but just go subscribe to the money stuff email people just do it he's yeah he's really good um so he says jp morgan which does not make batteries or cars bought bags of abstract nickel years ago it took delivery of that nickel not in the sense that a full truck of nickel showed up on park avenue but in the sense that an entry was made on the ledger of the warehouse saying that the bags of nickel in row X, shelf Y, now belong to JP Morgan. JP Morgan then used that nickel for

its intended purposes for years. Those purposes were to write financial contracts referencing that nickel. The nickel worked perfectly well for those purposes. So basically to kind of give some context, when you're trading futures on nickel, there has to be some tie to the actual real world and those assets, even though it's purely a financial transaction. And this is kind of news to me. But basically, there's some obscure warehouse somewhere where you get deemed to be the owner of a certain portion of nickel. And so I'll continue here, I guess. He says, the nickel worked perfectly well for those purposes. JP Morgan's derivative contracts traded and paid off normally for years, even though the nickel was not in fact nickel,

just bags of rocks. And then one day, a warehouse worker stubbed his toe against JP Morgan's nickel and was like, hmm, that's not the sound nickel makes when you kick it and open the bags and found rocks so someone came in that's toe stubbing part is the best yeah yeah someone i guess came in and replaced it with rocks it you know it's not a huge it's kind of a funny story but it's not a huge deal in in the grand scheme of things at least for jp morgan um it's similar to the salad oil crisis from american express in the 70s if if people have ever ever looked that up someone was diluting the salad oil with something else or diluting whatever was supposed to be owned by American Express. So I guess, funny story, feel free to go read up more on that if you want,

but just know that sometimes those futures or those financial contracts are potentially slightly at risk. But I'll kind of move on because I want to wrap things up with more Jason and Jeff, since they were courteous with their time and came on the show today. So you guys run The Smattering. It's new. Why don't you give us, or listeners that are maybe intrigued and might want to go check it out, what is The Smattering? Why'd you guys decide to start it? Because Jeff texted me and said, let's start a podcast. That's exactly what happened, to be perfectly honest. So Jason and I got to know each other doing work, and this is how we met you guys as well, doing contract work for the Motley Fool. And, um, in the summer we were texting and I said,

Hey, why don't we, why don't we start a podcast? And Jason was like, sure. And we actually, we wanted to take a, there's a lot out there, right? There's a lot of podcasts. There's a lot of sub stacks in our world of financial social media. You can, it's like a dime a dozen, but we felt like we could come at it from a slightly different angle. And instead of coming on every week and giving answers that we present as being factual, this is what you should do. We really wanted to just have conversations and not answer or answer the questions, but just give our answers. And that's sort of like our tagline.

We give our answers to the questions, but everyone needs to find their own because there's not a lot of just conversations out there. And if you look at the questions that get asked in the world of FinTwit or out there, it's a lot of normal people trying to just figure some stuff out. Like kind of the stuff we talked about today. Like how do you handle when the thesis for your company changes? You know, that's a legitimate question that you could talk about in a bar with a friend for an hour and a half. So we try to bring those conversations that you would have with a friend. If you could find one that likes investing, Jason's my only investing friend. I have everyone else in my

regular life is like, looks at me like I have three heads when I talk about this stuff. But we figured if we could bring those conversations out for people to listen to, to give their own answers to, to think about, and not act like experts, because I'm certainly not one. It's true, he's not. Yeah, it's true. It's very true. We thought that would be compelling. And I think it works because- That's the key, it's different, right? Jeff, it's different.

And we didn't want to make another, we didn't want to just do a podcast that other people were already doing that could probably do it better than us anyway. chitchat money is a good example right you guys spend a lot of time doing more deep research into companies and talking about that we we don't do that that's not why would we try to do something somebody else is already doing really well you know and we felt it was important to do something new and different that we thought would help people people the people that need the help the most right the people that aren't pros at it that are trying to figure it out without any resources besides a Twitter account, right? Jeff, you were saying something else before I cut you off.

No, I was just going to say, and I think the fact that you're someone who works full-time in this world of investing and has been in buying individual stocks and thinking about investing and all the things we talked about today for decades, and I'm fairly new to it. I became obsessed with it right around the pandemic

or in 2000, or I'm sorry, 2020. And I think that's why it's a good dynamic, right? Because a lot of the questions we talk about are just things I don't know yet. And you might not have thought of those things, Jason, because you learned those 15, 20 years ago. So that's what we're trying to do. Everyone can check it out on any podcast app.

We have a YouTube channel. Just search The Smattering. You'll find it. You can find us on Twitter. If anyone wants to check out the podcast, we'd really appreciate it. Yeah, a little pitch for them. It's exactly what they described.

There's a lot of candor in the conversations. they it feels very casual um in the good way like like you're having a conversation with friends about finance and i know we've had people that that's kind of the same honestly that's that's the goal with this show in a lot of ways the power hours side of things where people have expressed to us like the same thing jeff said you know if i talk if i go on my soapbox about you know finances to my family they all just like they give you like the passive aggressive like oh that's interesting, you know? And so like having these conversations and these, these friends to listen to, uh, it makes it feel like you can chat with friends about finance, which is a lot of fun.

And I, I, along with some really good interviews, uh, I feel like I get a lot of that value out of, uh, the smattering show. So, uh, that's my little, my little pitch for the podcast. Go check it out. All right. Yeah. And I will say there is so much more room for the conversational shows because the reason we started the Power Hour is we watched and that we copied, I want to say, not directly copied, but we got a lot of inspiration from the Value After Hours show because we would look at it and we'd watch it every Tuesday or listen to it. And we'd say, I want five of these a week. Now, they're not going to do five a week, but there's plenty of room for other shows like that out there. And especially because what's interesting is, yeah,

That point of there's so many investors out there, let's say at least a few million around the world, but among your friend groups within your communities, you maybe have a few. And when you can have these types of shows out there, I think it's just great because people really want to have these investing conversations, but only a small sliver of the people within your physical geography are actually interested in that. It's also saving my marriage because I don't have to talk to my wife about this stuff where she just wants to literally throw things at me and send me out of the room. So yeah.

All right. Anything else guys, before we wrap up? Appreciate you having us on this. Yeah. Thanks guys. Yeah. All right. I just want to say real quick, I'm a, I've been a long time listener to chat money too.

So I, I super appreciate what you guys do. And it's good for me to listen to the deep dives you guys do on all the companies that I'm interested in. So thanks for having us on. We'll come over in a few weeks. Cause you're going to see these guys. They're going to come. They're going to come on our podcast too.

I know. I'm nervous to go on the other side of the mic. We've done so many shows, but when I do the other side- You'll be fine. You'll be fine. It's good, though. It's good to have a little- Be nervous. Yeah, it's perfect. All right. Let's get to the disclosure. Remember to check out our advertiser or presenting sponsor, Stratosphere, the perfect platform for anyone, free or professionals. Anyone can go check it out. If you want to watch these, they're live on YouTube, 1230 Eastern Time every Thursday. Again, that's on YouTube. We are not financial advisors. Anything

we say on the show is not formal advice or recommendation. We are gentlemen partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you to everyone who watched or listened to the replays that come out Sunday mornings. We'll see you next time. Bye.