The Breakdown - Elon’s Twitter Deal Is Back On!

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Circle, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, October 5th, and today we are checking in on October and Elon buying Twitter. Before we dive in, one quick note, there are two ways to listen to the Breakdown podcast. You can hear us on the Coin Desk Podcast Network, which comes out every afternoon and also features other great Coin Desk shows, or you can hear us on the breakdown-only feed, which comes out a few hours later in the evening.

Starting point is 00:00:46 Wherever you choose to listen, I would so appreciate it if you would take the time to leave a five-star rating or a review. It really helps new people discover the show. Also, a disclosure, as always. In addition to them being a sponsor of the show, I also work with FTX. And finally, I want to tell you about CoinDesk's new event, the investing in digital enterprises an asset summit or ideas. Ideas is designed to facilitate capital flow and market growth by connecting the digital economy with traditional finance. Join CoinDesk October 18th and 19th in New York

Starting point is 00:01:15 City for a 360-degree investment experience where you can source and invest in the next big deal in digital assets. Use code breakdown 20 for 20% off a general pass and register today at coindesk.com slash ideas. All right, folks, well, let's dive in and let's first check on the state of October. As we discussed yesterday, Monday was a great day in markets. It was the second or third best first day of October since 1930 across stocks, and in general, October is historically a very good month. Certainly, that's the case for Bitcoin where it's been up every month of October in its life except for two. However, as we also discussed, the initial October excitement didn't really seem to be based on anything super strong. It was largely driven by this

Starting point is 00:02:00 peak rate Fed pivot discussion, which feels honestly like it's a mini cycle within this larger cycle. Basically, what happens is markets convince themselves that a pivot is on the horizon, that the Fed will stop tightening. This is based on either fed speak tea leaf reading or some random data input or a central bank raising by 25 basis points instead of 50 basis points, or just boredom at the markets being kind of crappy and not all that interesting. Based on that, we turn green for a few days and there's some excitement, but then, from there, some number of Fed officials up to an including Powell, are deployed to remind us that we're really getting ahead of ourselves and that we've got a long fight ahead. Then there is some data

Starting point is 00:02:40 that reminds us that we do, in fact, have a long way to go, surprise high inflation numbers or continue tight labor numbers or whatever it is. Markets then retreat and we swirl around the bottom for a while until we've sufficiently forgotten and it starts all again. Well, at least on Tuesday, wasn't happening, October was still going strong. Galois Capital tweets, I submit to the October narrative. It feels ripe. On Tuesday, the Dow Jones rose by 2.8% for the day and is up more than 700 points on consecutive days for the first time in the history of the index. The S&P 500 moved up 3.1% with the NASDAQ up 3.3% both exceeding their large gains from Monday. Bitcoin rose 3% on Tuesday to move above 20,000 for the first time in three weeks. Alas, by Wednesday morning, we

Starting point is 00:03:26 We're in come-down mode. We got data from ADP Research Institute in collaboration with the Stanford Digital Economy Lab on business payrolls for September, and they found that 208,000 jobs were added last month following a 185,000 job gain in August. That 208,000 number was slightly above the median forecast in a Bloomberg survey of economists. Three quarters of the increase was driven by employment growth around trade, transportation, and utilities, whereas manufacturing and mining declined and financial activities also fell to their lowest level since December 2020. This data comes out in advance of the official

Starting point is 00:04:01 government payrolls report, which were slated to get on Friday. Along with these numbers, the narrative is shifting along the lines of that mini cycle I just described. Bepen Rai, the head of North American currency strategy at CIBC, said, over the last few sessions, the market was too quick to price in the peak rate story in markets. Price pressures are set to remain sticky for some time, and while the Fed might be closer to smaller incremental hikes than not, playing this via a peak rate view is fairly dicey. End quote. What's more, I'm definitely seeing another new narrative among analysts as well.

Starting point is 00:04:32 It's not just that arbitrarily stocks haven't experienced enough pain or specific data like the historical volatility index being lower than when other markets have bottomed. Instead, there's an emerging concern that markets aren't properly pricing in the damage that would ensue from a recession. A piece in Bloomberg today declares, U.S. stocks have just started pricing in recession, City Quants say. The piece is full of quotes like, we are still in the early stage of positioning for a recession, and there's more downside risk for the markets in the earnings season. It's not just city as well. Goldman Sachs, Bank of America,

Starting point is 00:05:04 have all recently expressed concern that the S&P 500 has yet to reach its bottom, even though it's seen three straight quarters of declines, which, by the way, is the first time it's seen that type of consecutive decline since the global financial crisis. It seems to me that the main takeaway right now is uncertainty. According to data from Bloomberg, executives at the 1,000 largest U.S. firms have mentioned uncertainty or its synonyms when describing their outlook on the market 484 times in the past three months. That's the highest tally since the quarter-ending March 2021. Now, in terms of other things to watch for this week, we get U.S. initial job claims tomorrow, which are sort of a weekly indication of whether there's anything changing.

Starting point is 00:05:43 Then on Friday, we get the full September U.S. payrolls data. Finally, across Thursday and Friday, four Fed officials are scheduled to speak at various events, so I think that we will likely get some interpretation there based on how markets behave. In any case, as of this morning, the S&P 500 was down about 1.73%. However, for a variety of reasons, I was delayed by a couple hours finishing this show, and things seem to be clawing their way back. So, I don't know, man, we're going to have to just keep waiting and seeing whether October really has it in it to keep going. Want to keep more profits when trading? Get the best. possible prices and trade with 50% lower fees on NexO Pro. The new spot and futures trading platform

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Starting point is 00:07:14 When you trade NFTs on FTCX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. These big general macro things aren't all that markets have been chattering about. Elon's Twitter deal is back on and has Matt Levine put it? Well, that was stupid. Let's do the quick recap of what happened. In April of this year, Elon Musk announced that he had bought 9.2% of outstanding Twitter shares. He also agreed to join Twitter's board, but then quickly took it back.

Starting point is 00:07:48 A couple days later, he offered to take Twitter private at 5420 per share, and then actually lined up the $46 billion in financing necessary to do it. As Levine put it, Twitter's board of directors consulted its financial advisors who stage whispered say yes, and it said yes. On April 25th, three weeks after the initial announcement, Elon signed a merger agreement. Then, less than a few weeks after that, he changed his mind again. There has been lots and lots of speculation about what made Elon change its mind, so here again Matt Levine's write-up of the three leading explanations. Quote, he wanted to buy Twitter in April, but now it was May and he had moved on to other japs and frolics. Two, the stock market had fallen,

Starting point is 00:08:28 the market for social media stocks had fallen even further, and the price of Tesla stock, which Musk was relying on to pay for Twitter was also way down. Twitter looked like a bad deal at 5420 and Musk would have to stretch a bit to pay for it, so he decided he didn't want it. Three, Musk himself had a story about how Twitter tricked him into buying the company by lying about how many spam bots were on its platform. The story never made even the tiniest bit of sense. We have talked about it endlessly, and now we never have to again. Buy spam bots, end quote. Anyway, when Musk canceled the deal, Twitter sued and it was set to go to trial this month, but then, as of this week, all of a sudden, the deal is back on. Musk's lawyers wrote a letter

Starting point is 00:09:05 to Twitter on Monday re-offering effectively the initial deal. Twitter said it received the letter and it tends to close. So we are right back to where we were. Now, there still are a couple ways that there could be shenanigans in this situation. The first is that they could end the trial, with Twitter effectively saying that Elon's word is good enough for them that he's going to go through with the deal, and then he could turn around and terminate it again. The other issue, however, is that financing could fall through. From the Wall Street Journal. Twitter is now arguably in worse shape than it was when Mr. Musk said he was walking away, buffeted by a deteriorating outlook for digital advertising, the emergence of its former security chief as a whistleblower

Starting point is 00:09:41 who claimed a range of failures by its management, and uncertainty over the company's future stoked by Mr. Musk himself. On top of all that Twitter-specific stuff, financing in general is just harder now than it was in April. From Bloomberg this time, bankers may struggle to sell the risky Twitter buyout debt just as credit markets begin to crack. With yields at multi-year highs, they're potentially on the hook for hundreds of millions of dollars of losses on the unsecured portion alone should they try to unload it to investors. That's because they would almost certainly have to offer the debt at a steep discount. When it comes to the narrative, it seems to me most likely that Elon thought that he was unlikely to be able to win this battle in court, and so that it might be

Starting point is 00:10:19 even less distracting to just do the deal the way that was originally structured and to try to get himself excited about what he was excited about in the first place. Last night, he tweeted, buying Twitter is an accelerant to creating X, the everything app. And when it comes to what X might do, the financing actually offers something interesting to look at as well. In addition to the debt financing we were just discussing, Elon also has to put up $33.5 billion of his own money or syndicate it. One of the interesting things we learn from the pretrial process with Elon's text messages coming to light is that there were lots and lots of people who wanted to get in on this deal with him.

Starting point is 00:10:53 They also present some insight into how he was thinking about things. So let's read a couple. On March 26, 2022, Jack Dorsey, the co-founder of Twitter, shares Elon's tweet about Twitter serving as a de facto public town square and failing to adhere to free speech principles. Jack says, yes, a new platform is needed. It can't be a company. This is why I left. Elon says, okay, what should it look like? Dorsey says, I believe it must be an open source protocol funded by a foundation of sorts that doesn't own the protocol, only advances it. A bit like what Signal has done. It can't have an advertising model, otherwise you have surface area that governments

Starting point is 00:11:27 and advertisers will try to influence and control. If it has a centralized entity behind it, it will be attacked. This isn't complicated work, it just has to be done right, so it's resilient to what has happened to Twitter. Musk says super interesting idea. Dorsey says, I'm off the Twitter board mid-May and then completely out of the company. I intend to do this work and fix our mistakes. Twitter started as a protocol. It should have never been a company. That was the original sin.

Starting point is 00:11:49 Musk says, I'd like to help if I am able to. Dorsey said, I want to talk with you about it after I was all clear because you care so much, get its importance, and could definitely help in a measurable ways. Back when we had the activists come in, I tried my hardest to get you on our board, and our board said, no. That's about the time I decided I needed to work to leave as hard as it was for me. Dorsey goes on.

Starting point is 00:12:08 I think the main reason is the board is just super risk-averse and saw adding you as more risk, which I thought was completely stupid and backwards, but I only had one vote in 3% of the company and no dual-class shares. Hard setup. We can discuss more. Musk says, let's definitely discuss more. I think it's worth both trying to move Twitter in a better direction and doing something new that's decentralized. Now, what might that new look like? In the intervening couple weeks, the board appointment was announced and then rescinded. But on April 9th, Elon was tweeting with his brother Kimball. Elon says, I have an idea for a blockchain social media system that does both payments and short text

Starting point is 00:12:42 messages links like Twitter. You have to pay a tiny amount to register your message on the chain, which will cut out the vast majority of spam and bots. There is no throat to choke, so free speech is guaranteed. The second piece of the puzzle is a massive real-time database that keeps a copy of all blockchain messages in history, as well as all message sent to or received by you, your followers and those you follow. Third piece is a Twitter-like app on your phone that access the database in the cloud. This could be massive. Kimball says, I'd love to learn more. I've dug deep on Web 3, not crypto as much, and the voting powers are amazing and very. Lots you could do here for this as well. Elon says, I think a new social media company is needed

Starting point is 00:13:17 that is based on a blockchain and includes payments. Kimball. Would you have them pay with a token associated with the service? You'd have to hold the token in your wallet to post. Doesn't have to be expensive. It will grow over time and value. If you did use your own tokens, you would not need advertising it's a pay-for-use service but at a very low price. With scale, it will be a huge business purely for the benefit of the users. I hate advertisements. Kimball goes on. There are some good ads out there. the voting component of interested users only vote if you want to could vote on ads that add value. The advertisers would have to stake a much larger amount of tokens. But other than that, there is no charge for the ads. It will bring out the creatives and the ads can be politically

Starting point is 00:13:51 incorrect, art, activism, or philanthropy. Voting rights could also crowdsource kicking scammers out. It drives me crazy when I see people promoting the scam that you're giving away Bitcoin. Lots of bad people out there. Now, it seems like it wasn't long before Elon soured on this blockchain idea, because a little while later, Morgan Stanley banker Michael Grine, apparently wanted to introduce Elon to Sam Bankman-Fried, the CEO of FTX. Now, I will say for disclosure that I knew nothing about what Sam was thinking about this then, and I know nothing now, so I can't give you any sort of inside insight. Sam has been very public about his interest in this problem, completely outside of FTCs,

Starting point is 00:14:26 just in general as it relates to society. However, when Grimes proposed that introduction, Musk fired back, quote, blockchain Twitter isn't possible, as the bandwidth and latency requirements cannot be supported by a peer-to-peer network, unless those peers are absolutely gigantic, thus defeating the purpose of a decentralized network. So I don't really know where this all lands for Twitter. If you want the optimistic take, Elon deciding he doesn't actually want to spend the $33 billion himself

Starting point is 00:14:50 and wants to open it up to a larger coalition, could bring some interesting, different, diverse players into the fold. Now, of course, at the same time, many people remain concerned about what Elon's going to do with all that power. Even before all of this, he had stirred up a ton of controversy by tweeting out his ideas for a peace plan for Russia and Ukraine. He tweeted out a poll asking whether or not the people of the contentious regions should decide whether or not they join Russia. When people questioned him, he defended his stance. He said, you are assuming that I wish to be popular. I don't care. I do care

Starting point is 00:15:22 that millions of people may die needlessly for an essentially identical outcome. Russia is doing partial mobilization. They go to full war mobilization if Crimea is at risk. Death on both sides will be devastating. Russia has more than three times the population of Ukraine, so victory for Ukraine is unlikely in total war. If you care about the people of Ukraine, seek peace. When Ukrainian President Zelensky reacted with his own poll, asking if people prefer the Elon Musk that supports Ukraine or the one that supports Russia, Ukraine supporting Musk received 78.8% of the vote. Musk responded, saying, I still very much support Ukraine, but am convinced that massive escalation of the war will cause great harm to Ukraine and possibly the world. He then followed up with the outline of a peace deal, which got even more

Starting point is 00:16:01 consternation, and led to liquidity tweeting, Elon got ratioed by the Ukrainian government and a few hours later decides to move ahead with buying Twitter, L-M-A-O. As we wrap up here, I have no idea what an Elon-led Twitter will be like. I certainly don't think a prioriates worse. I think the energy that might be brought could be powerful. And in any case, I don't necessarily know that it much changes the reality, that we're living in a world where people can get 80, 90, 100 million followers or more, and speak to them all at once. The big shift is the structure of social media in general. And ultimately the question will be, can that be changed in a meaningful way?

Starting point is 00:16:39 Or are we stuck with the negative externalities of whatever good we think comes associated with it? That is undoubtedly a big picture power shift question. But for now, I want to say thanks again to my sponsors, nexus.io, circle and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Elon’s Twitter Deal Is Back On!

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