The Breakdown - What Elon Musk's $21B Tesla Sale Gambit Says About Markets

Episode Date: November 9, 2021

This episode is sponsored by NYDIG. Today on “The Breakdown,” NLW looks at why the fracas around Elon Musk’s Twitter poll about his selling 10% of his Tesla stock is about much more than Tesla. It has implications for domestic politics, market structure and why crypto is the future.  Additionally, the Brief covers: The NYC mayor-elect says bitcoin should be taught in schools  The latest on the infrastructure bill  Pension funds are moving into alternative assets to find yield  NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: Samuel Corum/Bloomberg/Getty Images, modified by CoinDesk.

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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Monday, November 8th, and today we are talking about what Elon Musk's $21 billion Tesla sale Gambit says about markets. This story is nominally just about a stock sale, but really actually touches. on so many different parts of what's going on in markets in the macro environment right now. It touches on the state of American political discourse. It hits stock market structure and how crypto is forcing changes in that structure. And of course, it is centered around the significance

of new social channels and how they are changing power in the world. But first up, let's do the brief. First on the brief today, the new New York City mayor is not messing around on crypto. Last week, of course, we covered the story of New York City mayor-elect Eric Adams. He had spoken positively about Bitcoin before. He reinforced that in the days after the election. He got into a little bit of a tete-a-tete with Miami Mayor Francis Suarez around who was going to take more paychecks in Bitcoin, with Mayor Suarez responding to a pomp tweet saying that he would be the first mayor to take his paycheck in Bitcoin, and then Eric Adams

saying that he would take his next three paychecks in Bitcoin. Well, over the week, this whole conversation continued. On Sunday, Adams was on CNN's State of the Union, and when they asked him to explain Bitcoin, he laughed, saying that even the experts had a hard time with that. But he gave it a try. He said, when I talked about blockchain and bitcoins, young people on the street stopped and asked me, what is that?

Bitcoin means a new way of paying for goods and services throughout the entire globe. And that's what we must do. Open our schools to teach the technology and teach this new way of thinking. So we've now gone from just accepting a paycheck in Bitcoin to actually finding ways to get this and other technology education into schools, which is obviously much more significant in the long term. CNN also asked him if he would be encouraging businesses to accept Bitcoin or other cryptos, and he said, we're going to look at it and we're going to tread carefully. We're going to get it right.

So why do I keep covering this? Is it just because I live in New York State and so I am biased? Well, almost for sure that's a part of it. But New York is the home of finance in the U.S. and really is one of the undisputed global hubs of finance. So the fact that it is so behind on crypto has always stood out like a sore thumb to me and to so many others. What's more, the normalization of this sort of discourse from local politicians is so hugely significant to the mainstreaming of Bitcoin and cryptocurrency. People have a much closer relationship in general with their local politicians than they do with, for example, their senators. And so this access strikes me as super powerful.

Finally, I love that Eric Adams is coming at this from a different angle, social justice, economic empowerment. First of all, I think there's a lot of merit to that angle. And second, I think it is extremely bullish how long Bitcoin has remained by and large a bipartisan issue. All these mayors competing for the Bitcoin City title are not from the same party. And that's a great thing. Speaking of politics, though, second up on the brief today, the infrastructure bill has past sort of. So here's how the Wall Street Journal put it. Biden gets $1 trillion down payment on domestic

agenda, obstacles loom for spending bill. Now, this thing has been absolutely mired in process, and it's fairly likely that if it weren't for that provision that shoved new definitions of brokers into the infrastructure bill to try to get a bunch of it paid for by taxes that the U.S. government claims that we aren't paying, the crypto industry wouldn't even have noticed. In any case, Congress and the senator taking a week-long break and then coming back to try to deal with the two trillion-dollar spending bill that hasn't been passed yet. From a political perspective, this thing has been extremely dubious. First, the $1 trillion bill didn't get passed in time to make a difference with recent elections. Pretty much all political commentators in the U.S. are calling last week's election

results a warning shot to Democrats, focusing specifically on Virginia where Republicans cleaned up in a state that was deep Biden territory just a year ago. There's a lot of malaise around the Democrats right now, and Biden's low approval rating reflects it. Inflation is going up, feels like the pandemic recovery is taking too slow, and as Tim Cain, the former Virginia governor said, people are in show me, don't tell me mode. This bill specifically had 13 Republicans vote in favor and six progressive Democrats oppose it. Laura Davidson, a tax reporter at Bloomberg, did a tweet thread about 30 progressives who held a closed door meeting on Friday that they literally wouldn't let other Dems like Congressional Black Caucus chair Joyce Beattie into because she wasn't

in the progressive caucus. Davison called it, quote, middle school cringeworthy. And yet even with that, the progressives weren't able to get the $2 trillion bill they had wanted either. That one has an even harder path because it has zero Republican support. But ultimately, I'm just trying to give a little bit of context around the fractured political system. The thing that matters, obviously, to this industry and to our conversation are these crypto provisions. So let's get a little more commentary from two that are on the front lines of the crypto side. Jerry Brito from Coin Center writes, despite our best efforts, the infrastructure bill has passed with the terrible crypto tax reporting provisions.

The fight is not over yet, however, we have several paths to continue to pursue a fix. It's important to note that the crypto provisions will not take effect until January 1, 2024, so there is time to roll back this law before it affects anyone. So what can we do? First, the Senate will now work on a second major spending bill, and it's possible an amendment could be included in that bill. We are lucky that Senator Wyden as Finance Committee chair will be a key to that bill. Second, we've been working with several members of the House to introduce standalone bills

to amend the new crypto tax reporting provisions. We would have over two years to get these passes. Third, although the broker definition is now very broad, that doesn't mean it actually covers minors, note operators, developers, etc. Treasury will now interpret its authority and decide who it will apply requirements to. We will engage in that regulatory process. Finally, we believe that some aspects of the law, like the 6050I individual reporting requirement, are unconstitutional. If they are not fixed by later legislation, we will mount a court challenge. Jake Trevinsky echoed this writing, here's the truth. We've dodged most of the regulatory fire so far, but things will

get worse before they get better. To the extent I seem overly optimistic, that's a strategic choice. It's the best way to be effective, and when I do need to sound the alarm, you'll listen. But when I say we will prevail, as I often do in the course of explaining some enforcement action or proposed legislation or whatever, I mean it. It won't be easy, there'll be hard days, and I don't know exactly what path will take to get through, but we will. It's inevitable. One of our huge advantages is our ability to coordinate online. We're digitally native. This makes us fast, broad, and effective in a way fewer other movements have been. It's the same reason Bitcoin took off in the first place. The same reason everything we're doing has momentum.

The outrage machine has turned its eye toward us. We can't fall for it. We can't feed it. We have to stay focused. We have to be patient. I expect the next few years to be the most important in the history of crypto policy before or after. It's up to us to create the future we want for the world. Nobody will do it for us. Clearly a lot more to come on this. But let's move to the last section of the brief. A little story that shows just how much macro factors are wrapped up in decisions to move into specific asset classes. The Wall Street Journal writes a piece, newly flush with cash, retirement funds struggle to find appealing investments. The story is about a historic windfall for state and local pension funds that are thanks to billions of dollars in stock

market gains, as well as surplus tax revenues. But now they're trying to figure out what to do with that money, $800 billion that was injected into state retirement systems, for example, last year, according to Pew Charitable Trusts. But here's how the article puts it. Just when they finally have cash to play around with, every investment opportunity seems perilous. What does this mean? Well, stocks, vulnerable to 2008-2009-type financial crises. Bonds destroyed through inflation. Any Bitcoiner could tell you that. What about alternative investments? Well, there is tons of competition for good deals in private equity and real estate, and also those take a long time to see gains and for that money to actually be put to work. So where's this money going? Well,

some funds are branching out. From the article, quote, the Houston Firefighters Relief and Retirement Fund in October bought $25 million worth of Bitcoin and ether. This is deserving of a full show, but I comment on this just to point out that it is all connected and that macro factors impact how and who gets into things like Bitcoin. NIDIC sponsors this podcast and they are helping banks, corporate treasuries and fintechs, integrate Bitcoin into their products and balance sheets. See why Bitcoin means business at nydig.com slash NLW. That's nydig.com slash NLW. With that, let's move to our main topic. On Saturday around 3 p.m., Elon Musk tweeted, Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock.

Do you support this? I will abide by the results of this poll whichever way it goes. Note, I do not take cash salary or bonus from anywhere. I only have stock, thus the only way for me to pay taxes personally is to sell stock. 3.5 billion people voted. 57.9 said they supported this and 42.1% said they don't. So WTF is going on. First of all, what's on the line? Well, Elon holds about 170.5 million shares of Tesla. Selling 10% of them would net about $21 billion. This year has been huge for Tesla. It's up 73% on the the year and stood at 1222 and 9 cents per share on Friday valuing the company at 1.2 trillion. Elon himself is worth around $338 billion, 25% of which is in stock options that he can exercise any time and which come from awards in 2012 and 2018. Now the 2012 contracts are the significant

ones for the story. They expire next August. And should he plan on exercising them, he will have a nice fat tax bill when he does, a tax bill that, of course, has to be paid. in cash. And that is really the net of this. On its surface, this appears to be something related to the increasing clamor to tax billionaires, right? I mean, first of all, Elon sets it up like that. Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock. That is literally how he started the tweet, couldn't be clearer. Second, Ron Wyden, who we were just discussing about before and who I should remind you before you hate on him through his body between us and the infrastructure tax bill crypto provisions.

He tweets, whether or not the world's wealthiest man pays any taxes at all shouldn't depend on the results of a Twitter poll. It's time for the billionaire's income tax. Third, Elon has been engaging in this discussion more and more in general. About a week ago, when the director of the UN's World Food Program said that $6 billion from billionaires could help 42 million people, quote, that are literally going to die if we don't reach them. It's not complicated. Elon responded, saying, if the World Food Program can describe on this Twitter thread exactly how $6 billion will solve world hunger, I will sell Tesla stock right now and do it.

But it must be open source accounting so the public sees precisely how the money is spent. Cut and dry, right? It's about the billionaire tax proposals floating around. Well, not so much. Many are pointing out that this is far more likely to be about this upcoming stock options exercise and is just good timing. Pierre Faragu writes a very interesting follow-up here. Next summer, Elon can exercise options of 23 million shares. He will face a $15 billion tax bill anyway, whether he sells shares after exercising

or not. Selling 10% to cover this looks good and improves liquidity could make sense. Darrow Bassano says Elon Musk has Tesla options expiring this year which he must exercise or lose billions of dollars. When he does, he'll incur a tax bill. The Twitter poll was basically a strategy credit since he was going to pay the taxes anyway. He's a PR genius. Dare is a year off or so on the Tesla options expiry, but the point remains the same. So it feels to me pretty clear that this is a both and situation. It seems pretty obvious that there is a dementia. of needing to be able to cover the tax bill that's coming when these options are exercised. At the same time, doing it in this way is a direct counter to the unrealized gains critique.

By the way, it's worth noting that there seems almost no chance that the unrealized gains proposals move through Congress now in the context of the political environment we were just discussing. For that reasons, it seems like Elon's fight is more about winning the narrative war, not the actual war, which looks likely to not see a battle anytime soon. There are other narrative benefits to this approach as well. There are, on the internet, many Tesla bulls who are freaking out about the idea of Elon selling anything, but this does kind of create a blow-softening effect. It's easier for those bulls to rationalize this as just appeasing the politicians in playing the political game rather than losing faith in Tesla. Although,

one other dimension of this is now swirling questions of insider trading. The day before this tweet, Elon's brother and Tesla board member Kimball Musk sold 88,500 shares at a price of up to 123689. in each. He basically sold over $108 million in Tesla stock on Friday the day before Elon Musk asked if he should sell 10%. Insider selling or not, this contributed to an overall nervousness about the move. But the fact that this all happened on a Saturday meant that the market couldn't really react to it, right? Wrong. 24-7 regulated stock synthetics built on crypto protocols are and have been for a while now a thing, not for the U.S. but regulated in Europe. So what happened to the synthetic? versions of Tesla stocks on crypto markets. The short answer is, they went down. Fungeable 3 tweeted a chart and

said, hey, stock market, what's it like having business hours? Reason 212 why crypto is the future and NASDAQ is for your grandparents. One reasonable question was how much these synthetic markets would reflect real markets when they opened. At first, the synthetic markets were down much more than after hours OTC trading. The synthetic Tesla stock dumped about 7%. But if you head over to Bloomberg wealth, this morning, they're quoting the number Tesla fell as much as 7.2% in pre-market trading compared with Friday's close. There is finally a last dimension to all of this, which is just the way that information moves and the ability that people have to control the public narrative. Elon has been dinged by the SEC before for tweeting in ways that moved markets.

It's hard to imagine that he cleared these tweets with them beforehand, especially the one where he discussed Ron Wyden's genitalia. You can almost be certain that this ruined some SEC staffers' weekend, But the question is really, what can they do about it? Is there an argument that this was actually the most public disclosure you can possibly make, even if it wasn't disclosed through the SEC's normal system? All in all, it was a pretty fascinating moment that touched on so much of what's going on and what's unique about markets right now. And to top it all off, as I'm recording this early on Monday morning,

Bitcoin seems to be threatening a new all-time high. Muhammad Al-Irion writes this morning, Bitcoin flirts with another record high as private sector adoption of crypto continues to grow, powered in part by both inflation concerns and investors worrying that massive central bank intervention has undermined the use of government bonds as portfolio diversifiers. More on that later this week. Until tomorrow, guys, be safe and take care of each other. Peace.