The Pomp Podcast - #1385 James Davolos on Turning Your Land Into Bitcoin

Starting point is 00:00:00 What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. What's up, guys? This is an amazing conversation. Today, I have James DeVolis. He's a portfolio manager at Horizon Kinetics, and we get into something that I've been wanting to talk

Starting point is 00:00:38 about for a very long time. There is this brand new thing that's happening down in Texas. We have old world economy, like oil and gas, coming together with Bitcoin mining and all the AI data centers. That's right. This is going to be something that dominates headlines and becomes the talk of both Wall Street and tech in the coming months and years. And so I went and I found someone who's heavily involved, really understands this stuff and wants to explain it to us. And so James does a great job of walking us through what exactly is going on down in Texas. How do these companies work? What is going on with getting the gas and the oil out of the ground? How do we use that for Bitcoin mining? And how is that going

Starting point is 00:01:14 to impact things like artificial intelligence, the data centers needed and where the world is headed? This conversation is full of all sorts of insights that you probably can't hear anywhere else. So I appreciate you guys listening. Here's my conversation with James Davolis. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Today's episode is brought to you by

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Starting point is 00:05:06 James, I thought a great place to start this conversation is it feels like there is this brand new thing that is happening down in Texas, where we have an emergence of oil and gas and kind of the old world. We've got Bitcoin mining, and we've got these new AI data centers. And it feels like it's like the merging of the old world, the new world, and we're almost getting a peek into the future. You all at Horizon Kinetics are now kind of at the forefront of this. And I think that you guys were at the forefront of Bitcoin mining. You guys have been at the forefront, I would actually argue, of kind of land development, oil and gas, etc. Help me understand how did we get to this point where now oil, gas, land in Texas is actually going to help us drive

Starting point is 00:05:43 kind of the future? Yeah, great question. I mean, obviously, it's not that intuitive that you would have these old oil fields, which are functionally deserts in the middle of nowhere, that now might actually end up being the high tech hubs of the US and the world. But if you look at the pressure moves by Bitcoin miners, what attracted them to West Texas was a couple of things. So you have an abundance of cheap land. You have an abundance of cheap power. You have an unregulated power grid. So ERCOT, which is an interstate power system in Texas. And then now you actually have a new dynamic, which is you have cheap cooling. So they were able to go down there and get ultra cheap power, which we can talk about later with very inexpensive land. And then

Starting point is 00:06:32 because you have this unregulated power grid, they could do demand response where they could actually cycle down, sell their power back to the grid in areas when it was underserved. And so it was really basically a perfect environment for Bitcoin mining. So take me like, let's start with just the land and kind of the environment. So you said that these are oil fields that basically are like deserts. If I was to go visit one and I walk out on his land, do I even know that there's oil under the ground? Or am I just, it appears on the surface looking at empty land and somebody smarter than me is going to come and dig and drill and eventually find the oil. So I'll tell you a great story before I get into that. But so if you

Starting point is 00:07:16 remember back during the heights of COVID, when they had these tracker maps about like what counties, like the most red one had the most cases per capita. And then like the lower red had fewer. And like, this is during one of the massive waves and like the whole country is just bright red. Then in the middle of the core of the core of the Permian Basin, Loving County, the best oil wells in the world, it's blue. The reason why is that I think there were three full-time residents in Loving County. Wow. So it's literally nothing. So you would walk out and if you weren't on a, let's say you got off of the highway, you might see oil rigs or oil derricks dotting the skyline. But other than that, you would think that you were in the desert or on Mars. So you would have

Starting point is 00:08:01 no idea where you were. Got it. And so when that oil was originally found and started to be extracted from the ground, it was all purely oil and gas kind of related. There was no computing. There was no any other use case. It was just classic capitalism and economic incentive. there's oil under the ground. If we go get it, we can sell it and make money. Yeah. So actually, the real beginning of this oil era of West Texas started in about the 1950s, and that was your simple pressure well. So that's where you basically go down into a pressurized deposit. Pressure takes the oil and gas up to the surface. Super simple. that production peaked in the 1970s okay fracking came along in call it 2010 and then they realized

Starting point is 00:08:48 that fracking was a major major um development maybe around 2014 so that second iteration of fracking brought the second boom of permian oil but with it so you're going down not only are you fracking so breaking up the rock to um release these hydrocarbons you're also going horizontally But this has large byproduct of both water and natural gas and natural gas liquids. So that natural gas and natural gas liquids is extremely valuable for power generation. So you don't really use oil for powering a power plant. You use it mostly for transportation, for petrochemicals, things like that, some middle distillates.

Starting point is 00:09:30 Gas, on the other hand, is what goes into most of America's power generation from these combined cycle steam plants. One of the really interesting aspects about these wells is that they're drilled for the oil economics, not for the gas. So if oil is $85, they don't care if gas is at two bucks or eight bucks. Do they monetize the gas right now? Yeah. Great question. So a lot of the wells in the Permian, if you do not have a pipeline to get your gas out of the basin, either down to Houston or up to Henry Hub, there's another hub called Waha, which is much less valuable. Your gas is almost worthless. And so when you hear this thing, flare gas, so it was actually more expensive to transport

Starting point is 00:10:13 your gas to a basin or store it than to just light it on fire. And so this was a big problem for the environmentalists and the industry where you mentioned, you asked earlier, if I'm walking around in the Permian, would I even know if oil's there? Well, if you were there at night a couple years ago, even in certain areas today, you'd see basically all these bright lights like Christmas trees where they're flaring off their gas and the reason why they're burning it versus just letting it escape into the air is what it's actually more carbon intensive so that's called venting that's really bad you are not supposed to or allowed to vent so that's where you literally let your methane release into the air it's actually better for the environment to burn

Starting point is 00:10:55 it versus just venting it got it okay so now we've basically used fracking a couple other different methodologies to go, we found the oil, we're going to extract that, we're going to get that out, and we know how to monetize it. There's gas. That gas is either flared or it is moved to a power plant? Yes. If it can get egress, it's probably going to Henry Hub or it's going down to Magellan. Excuse me, Magellan is the hub in Houston. In Houston, it's probably going to get liquefied and put on a liquefied natural gas vessel. And it's going to be sold either in JKM for Asia or Rotterdam, which is a theoretical transfer hub in Europe. Now, is that part of why I saw a chart recently that said the United States for the first time

Starting point is 00:11:42 in a long time, or maybe the first time ever, is a net exporter of energy versus being a net importer? Yeah, that's a huge driver of that because we produce far more gas than we can consume. So when you see an LNG export facility like Freeport have outages, like they've had more times than they should, it destroys the natural gas market because now you don't have enough storage. And so if we have more gas we're getting produced, you're over injecting in the injection season. And now you might actually have a situation where you're full and you have to curtail your natural gas production. So that's why you can see gas at two bucks, three bucks, four bucks in different parts of the U.S. And then over the past couple of years, you've seen

Starting point is 00:12:29 200 or 300 equivalent prices in Europe and parts of Asia. So that's a huge part of the U.S. being fully energy independent, plus the fracking boom, where the U.S. is, depending on how you calculate it, if you include gas liquids, the largest oil producer in the world. How much of the focus on the Permian Basin and this West Texas oil boom, if you will, is because there's oil and there's not that many people that live there versus actually there are deposits like this in many places in the United States. It's just maybe in areas where there's so many people that it wouldn't be possible to go and get the oil. Great question. And so the geology of the Permian is very unique. It's two ancient seabeds. Now, there are other shales

Starting point is 00:13:15 in the United States, none are nearly as prolific for the oil. There's a phenomenal gas shale, the Utica and the Marcellus, which is in Western Pennsylvania around Pittsburgh. It stretches down into West Virginia. And that's where you've seen a lot of community backlash around the drilling. And so one of the biggest advantages of the Permian, particularly in the Delaware Basin, so the Midland Basin has Midland Odessa, they have some communities. Once you get out into Loving County, Reeves County, Culberson County, and the Delaware, there's no population to worry about. You've had some seismic activity and obviously you still have environmental issues, but this is very important for facilitating oil and gas development. And it's going to be equally,

Starting point is 00:14:00 if not more important when we start talking about data centers and their derivative uses. Got it. And now where does Bitcoin mining come into this? My understanding is, okay, we're flaring off this gas. Bitcoin miners show up and say, well, actually, why don't you just give it to me? And now I don't need to transport the gas anywhere. I can turn that gas into power and onsite right at kind of the wellhead, if you will, go ahead and just mine Bitcoin. Is that too simplistic of a view? No, that literally is happening, but there's different models out there. So you can have literally that, which is on premise where you're using that gas. You know, it's a little bit tricky because you're, depending on how big

Starting point is 00:14:42 of a oil and gas development it is, these wells have a very high initial production rate. Then it declines pretty rapidly, but it'll be there for 20 or 30 years. So as long as it's a pretty big well pad, but you are somewhat capacity constrained, the larger, more sustainable would be to have a localized gathering system to then transport it to a more permanent generation facility, which is going to be a gas turbine of some sort, then that could be what's called behind the meter. So behind the meter means this is exclusively going to be used for powering this data center or this miner. But in certain cases, when power prices spike, or the grid really needs it, I can shut down and sell the power back. And so when Dallas froze, maybe normal energy prices

Starting point is 00:15:32 might be four or five, six, seven megawatt hour, went to $9,000. So if you've got behind the meter and you're plugged into the grid, you're tickled. I'm selling that all day long. It makes no sense to run a Bitcoin mine. If you're off grid, it means you're not connected. So that's a little bit different where you can't fully monetize. But I know you've had other guests in the past, like Nick Carter, which have said this demand response adds a lot of durability to the grid. And it actually promotes renewables because these renewables would not be economic unless they had a base demand from that mine or from that data center. Obviously, it has to be supplemented by a non-intermittent source, particularly for data centers that need that continuous compute. But then also, during times of peak, those renewables and those conventional fuels alike and then sell back into the grid and just harden that grid for times of extreme stress.

Starting point is 00:16:28 And when you could like draw, let's say from scratch, the ideal scenario. So I go down to Texas, I find a place where there's much gas and I say, okay, I want to bring it to this kind of localized, you know, collection center. I need to have some sort of gas turbine where I can, you know, actually drive the power. I also want to be connected to the grid so that I can do the kind of demand, you know, balancing. How do I store the gas between receiving it and actually using it for the power generation? Or is there some sort of just-in-time logistics where it needs to be here and I need to consume it within 24 hours before it loses its value to me? Yeah. So if you're directly on premise, and especially if you have a larger facility and

Starting point is 00:17:16 you're plugged into the grid, you don't really have to worry about storing that. You could have a compression facility, you could have a storage facility, but if you're behind the meter, but plugged into the grid, you would be better off just selling that into the grid, even if it's at a couple cents per megawatt hour. But where it gets really interesting is where you could also install some wind and some solar, or you could even better yet, you could outsource that to a third party who's incentivized to have greener types of power generation. They could have the same dynamics. So now you have a mix. You've got some wind, you've got some solar, you have some traditional, it's all behind the meter and you have demand response. So if you're a hyperscaler,

Starting point is 00:17:57 and here's kind of one of the dirty secrets, let's just throw out a number. You have a massive 500 megawatt data center. If you have installed power of wind and solar of 500 megawatts, even if it only runs 20% of the time, you could say that you're green. Now, let's say you want to actually have something that is substantive. You could then take the emissions from your gas generator, and then you could inject it back into the ground through carbon capture and underground storage. So now you actually are fully green and adding sustainability and durability to the grid while having non-intermittent power to fully power your compute.

Starting point is 00:18:38 You mentioned hyperscaler, what is that? It's a catch-all term, but basically any of the massive tech companies that are doing very large compute search types of functions. So that would basically mean your Amazons, your Googles, your Microsofts of the world. Now, the Bitcoin miners, I think there's a lot of people in the Bitcoin community who understand what Bitcoin mining is. They've kind of caught on to this whole idea of gas flaring and building these facilities. They know Texas is a really big area. I think about 10% of global mining happens in Texas today. But then this AI stuff comes along. And now all of a sudden,

Starting point is 00:19:13 everyone's very interested in all the energy that needs to be consumed by the AI facilities to be able to do all this compute for these hyperscalers, etc. Are these different facilities? What is like the similarities and differences between Bitcoin mining and kind of the AI needs? So there's very different needs. So at its core, they're very high electric and cooling intensive forms of compute. But I could direct people to the recent deal for Core Scientific and CoreWeave, where they're actually converting about 200 megawatts of existing, what was originally supposed to be Bitcoin mining into HPC, high performance computing space. And so depending on the nature of the compute, you need to do things that make it suitable for GPUs

Starting point is 00:20:00 versus these ASIC chips. You'd probably add security. You'd probably add durability in terms of vibrations, resilience in terms of if power goes down, fire. Because I mean, these GPU chips are worth a fortune. And so at its core, it's not that different, but then you would basically just need to spec out the facility slightly differently. And that's effectively what CoreWeave is doing with existing core scientific facilities. So really, would it be fair to say that the Bitcoin miners, they consume the same energy, they are still doing some sort of computing activity, but there's almost this professionalization that occurs when it has to be the high-performance compute because you're using hardware that's more

Starting point is 00:20:42 expensive. There's maybe even potential to make more money in the high-performance compute versus Bitcoin money? I like that comparison a lot. I think the one distinction though is that Bitcoin can power down when the grid requires or when economics dictated you're better off selling. And so that makes it a much more dynamic activity as opposed, especially if you're training these AI models, which mostly it's going to be training down there because you don't to worry about latency. But basically, these things are running trillions and trillions of computations, then they'll power down to save their work. And that actually, you go from this massive data consumption down to very low because they have to basically hit pause and save because

Starting point is 00:21:27 you don't want to lose all that work. That's what causes brownouts in normal grids where everyone turns on and off their AC, right? So the resilience of Bitcoin by having that ability to be intermittent is a very big distinction between traditional cloud and enterprise compute, and then certainly AI and LLM compute. So, when I think of the traditional oil and gas cowboy, if you will, I have a very distinct Texas man who's walking out there looking at his oil field, whatever, kind of like out of the 1950s, 60s, 70s movies, right? When I think of an AI data center, I don't think of any of that. Are those two roles or people interacting with each other? Like the person who owns the land or is who kind of involved in the oil and gas

Starting point is 00:22:15 kind of exploration and extraction, et cetera. How aware or involved are they with like the high performance folks? Or is this like, you have somebody who kind of lays the foundation, somebody else who builds the house, somebody who lives in the house, somebody who sells the house, but the person who lives in the house never meets the person who laid the foundation. And it's kind of like sequential, but not necessarily connected. Yeah, you know, it's exactly how you envision it. And a lot of these large landowners in Texas are ranchers. You know, they're called, they're named ranches.

Starting point is 00:22:46 And, you know, there's some corporations, Texas Pacific Land Corporation, a new firm called LandBridge, where they're much more professional and they're actively accommodating the needs of these data centers. But basically, in the case of a company like LandBridge, they courted the ranchers and they said, look, we have a higher and better use for your acreage, whether it be water infrastructure, data center, etc. They've acquired it. So now you have a very professional investment-oriented manager dealing with the hyperscaler. And in the case of LandBridge, they've actually already pre-cleared six sites, which could have very large scale data centers on their land. And they're just looking for kind of the first proof of concept. So, Horizon Kinetics, I think of you guys and I'm like, man, that is a firm that most people should aspire to build. You guys are first principles thinkers. You're very, very contrarian, not for the sake of being contrarian, but just in terms of when you come at it from the first principle standpoint.

Starting point is 00:23:49 point. When I've told people about what you guys have done over the years, I think people are very impressed. Unfortunately, I don't think most people know you like they would know a Berkshire Hathaway or a Bill Ackman or anything like that. And so maybe give us a crash course on, I don't know, 30, 40 years in two minutes. But what is Horizon Kinetics and what has been this journey? Because you guys have actually been involved in a lot of these themes for a long time, just may not have been all in anticipation of AI. It's just you guys kind of find yourself here now with the knowledge, the experience, some of the assets, et cetera, that put you in a good position. All right. So I'm going to try to do this really quickly.

Starting point is 00:24:29 No pressure. No one at the firm is going to watch. So Murray Stahl, our CIO, and a lot of the credit for everything you just mentioned has to go to him. He was running a phenomenal investment strategy at Bankers Trust Company, which was a great private bank in its day. This is going back to the 1980s. It's since been acquired and absorbed by Deutsche Bank. Running an eclectic value equity strategy and the firm was changing in many ways and they decided that they needed to leave in 1994. He partners with Peter Doyle, Steve Bregman, who are still on the investment team with him, John Meditz, Tom Ewing, who are also part of the team and said, we got to go start our own shop. So they leave in 1994 and they're

Starting point is 00:25:14 like, exactly what you said. Let's do a first principle, deep value, Graham and Dodd, Buffett Munger, do what we want to do, not what a bank tells us to do. And I think that's incredibly important for firms today and not enough people are doing that. So one of the first companies that Murray found a year or less after starting the firm was a Texas Pacific Land Trust. Back then it was a trust that had a little bit over a million acres of surface land and about 25,000 net mineral acres. And basically he said, look, the land itself is worth a lot more than the market cap. They're selling land for more than the company is valuing the acres and they're buying back stock with it. So that's this basically organic compounding machine. And by the way,

Starting point is 00:26:01 we know there's a lot more oil there. They're probably going to figure it out one day. So that's a free call option. And that's really a lot of what we do is we underwrite a great business with a compounding element, but then get these free call options. Over the years, Murray's identified a lot of themes. He was very early in recognizing financial exchanges were going to just be money printing machines. He was very early in recognizing globalization and that pre-2008, 2009 period. And then the firm went through some different iterations. Then I want to say around 2013, I show up to this investment committee meeting. I was fairly junior then. I worked my way up at the firm. Murray sits down and tells

Starting point is 00:26:46 everyone he read this white paper by this Satoshi guy. I listened to him. Obviously, I respect everything he says. I went home that night getting on the subway thinking I might need to find a new job. I think he's lost it. But did more and more work, spoke with Peter, spoke with Steven, put a little bit of my own money into it, just like pretty much everyone at the firm did. I listened and was very responsible, but a lot of people are sitting on one to 200X gains on what they originally invested. But you've had Peter on the podcast, so I won't repeat our thesis, which is very similar to a lot of other people. But then as crypto got more and more momentum, Murray said, look, I need to understand this mining thing

Starting point is 00:27:32 because this is what underpins it all. So then he started a mining business. And that business is now called Consensus Mining. It's actually about to go public. But one of the things, the principles of that company was, I'm not going to throw all this SG&A and pay all of these people because you look at these public companies, all of your profit goes to SG&A and management. So he basically absorbs those costs at Horizon to run a legit, no, I don't want to say legitimate, I want to say a profitable, sustainable mining business. Again, as this is all evolving, we then recognize as part of our crypto thesis, our energy thesis, that the financial system is going to be getting more and more fragile to an inflation shock. And this is well before COVID.

Starting point is 00:28:22 So COVID hits and we decide to then kind of formalize our longstanding thesis on having hard assets into a product, which is a listed ETF called the Inflation Beneficiaries Fund, INFL, which I run, which owns companies like Texas Pacific, like LandBridge, all of these capital light hard asset plays with a lot of optionality on the future. And so I'd say kind of as you look at the firm today, so many prescient calls from Murray, but it really comes down to how he kind of unpacks and his logic. And it's always about kind of understanding what your upside is, what your free optionality is versus what your downside is. And you might think that that would not necessarily take someone from analyzing an insurance company trading at half of liquidation value to Bitcoin. And one of the things that people have said to me before is like, hey, Murray's one of the first

Starting point is 00:29:19 guys with gray hair to like Bitcoin. And this is almost a decade ago. And I say, yes, he might be on the older side, but actually he has a full head of non-gray hair, but that's besides the point. Now, what is fascinating to me is these businesses that you specifically are looking at are public companies mostly, right? If not all, but they have hard assets. And so is that a bet on long-term inflation, on long-term devaluation of the currency? How would you talk about our investment thesis is X, and that's why we ended up with these hard asset-related businesses? You want a durable business with something that's going to maintain value over the fullness of time. And I think that one component of it is a debasement of the currency

Starting point is 00:30:07 and inflation. Another is that for a confluence of reasons, we've under-invested in a lot of these hard assets. Some of them, there simply just isn't enough capital to chase. If we really do go through these types of build-outs, you look at certain raw materials and hard... We're not making more land. Copper is getting harder and harder to extract. We've radically under-invested in oil. So things like that where you're saying, look, these are phenomenal assets long-term regardless what your macro outlook is going to be. But then say, can we marry that with a capital light business model? So capital light means, am I actually going to earn these economic returns as a shareholder versus a CEO and management team that is incentivized to simply

Starting point is 00:30:53 take all that cashflow to build an empire at my expense? And so that's really the core of what we're doing is saying, we want a durable portfolio that will compound over time, that is attached to these scarce, durable, hard assets. And in those assets, you mentioned a couple of very different things. You did land, copper, right? There's things that kind of are across the spectrum. How do you evaluate what is durable, right? And there's been certain things that I think have been trends.

Starting point is 00:31:24 Like, you know, if you look at electric vehicles, maybe it's like the best example. There's all these minerals that everyone says, hey, they're really, really important. It is hard to see a world where that doesn't play out, given what we know today. But I guess maybe it's possible. There's been plenty of things over the last 40 years that people thought was going to be really big. You can look at green energy stuff where people lost a ton of money in the 2000s. And many other themes that people got excited about, they went and they sunk a bunch of money into it and ended up not actually being durable. And so I think the concept of durability, obviously, everyone wants something that's durable. But how do you go through an

Starting point is 00:31:57 investment process or first principles thinking to identify what is actually durable versus what sounds good today, but we don't know how this is going to persist over the next 10, 20 years. So the two core tenants are, one, is it scarce? And by definition, if it's scarce, there's a limited supply response. So if I dropped a trillion dollars out of the sky, it's going to be really tough to meaningfully change the copper balance in the world because these mines take 15, 20 years. I could throw $20 trillion out of the sky and you're not going to make more land. And we think that as a function of land, obviously food and agriculture is kind of a derivative of that.

Starting point is 00:32:39 So part one is, is it truly scarce? If you meet that criteria, can it be substituted or replaced? And that one's a lot harder. And so the people that are under-investing or under-allocating to traditional energy sources today are saying, yes, we're going to fully displace oil and gas. I would argue that if you look at it simply from a physics standpoint, that that is borderline lunacy. At the margin, can you have some incremental demand substitution? Yes. But if you think about the amount of things, the amount of things in the studio, the plastics,

Starting point is 00:33:18 the phone, the rubber in your shoes, the petrochemicals, I mean, forget transportation. So obviously, transportation is carrying most of that. So then look at those two. So scarcity, and then that inability to substitute. That's a great place to start. And that, it makes it a much different dynamic than, I mean, you mentioned before electric vehicles. So lithium has gone through this massive boom bust cycle where in theory, there's just a tremendous amount of lithium in the world. You could do these brines to get it out. There's hard rock. The Chinese are basically pumping the world with very low quality, but high cost lithium. And so I would argue that that's not only that's not scarce, but it's also can be replaced because you're seeing different

Starting point is 00:34:03 chemistries and batteries, whether they're nickel based or cobalt based, et cetera. And so I think that's the beginning of the way to think about it. Now, what is Horizon Connects doing with this intersection of Bitcoin, AI, oil, gas? Can you talk through the specifics of that? Sure. So one of the legacy names, Texas Pacific Land Corporation, is a company we've owned for over 30 years as a firm. Murray sits on the board and they've got over 800,000 acres in this region where we think there's a very large potential for data centers and there's already Bitcoin mining. That's a position that we love and have owned for years. A newer, more dynamic position that just came public, we were on the cover for about 80 million of the issue called LandBridge.

Starting point is 00:34:49 They assembled about 220,000 acres in the Permian. Some of it's contiguous with Texas Pacific, but the private equity firm that is the sponsor called Five Point Energy, I can't compliment the founder, David Copabianco, and then the CEO of LandBridge enough, Jason Long, where they have been very prescient in acquiring and consolidating the land, integrating it with their water business, and then pulling these value levers. whether it's fully outlining and delineating where you can put data centers, looking at where you can kind of get the egress for the power, looking at different ways that you can have redundancies in different infrastructure, but then also looking at different technologies like water desalination. So this is something else we should talk about, which is that one of the biggest costs of a data center, about 40% of the overall electricity consumption is for cooling. And the newest iteration of NVIDIA's chips in particular, but the entire industry is going towards liquid cooling or immersion. So, liquid cooling can mean two

Starting point is 00:35:56 things. So, one is actually immersion, where you're basically putting the chips to keep them cool in a fluid solution. The other is using a circulated fluid and a cold plate to basically use that in lieu of an air cooler. Both of these combined can reduce energy costs for the cooling part of the business that you can't really touch the compute side and you can't touch the other IT maybe 70% to 90%. So, LandBridge and TPL actually both have technologies to desalinate. There's massive amounts of water that comes out with the oil and gas from fracking. It's toxic stuff that historically, it was a liability. You'd have to remediate it, transport it, and then put it into a saltwater disposal well. Now, if you can economically desalinate it, now you can use

Starting point is 00:36:42 it for your different liquid cooling. So now you're checking another box for Bitcoin miners and for data centers. So kind of looking at this, again, a full circle, you've got all this cheap gas, you've got an unregulated power grid, now you've got the cooling option, and you've got the cheap land. I'd say the last area that we touched on briefly was also the lack of population centers. So you're seeing a lot of backlash around the country about data centers where Amazon's trying to co-locate with a plant, a nuclear plant in Pennsylvania. Two of the utilities are actually suing them and the plant itself because they're saying you're getting a free rider. So you're co-locating with this plant that's plugged into the grid. You're getting a

Starting point is 00:37:26 free rider for basically the grid. And it's basically going to increase the cost for the grid and the community. So not sure exactly where that lawsuit, I mean, Talon's on one side and I think you've got AEP and I forget the name of the other counterparty that's suing them. But that's one issue. But imagine you have brownouts. Imagine you have rising power costs. Imagine you have intermittency. So the fact that you're in the middle of nowhere is another massive advantage. And so whether it's LandBridge with their footprint, TPO with their footprint, just two really interesting assets in the basin. When I think of a lot of American infrastructure, I think of bridges, roads, the traditional infrastructure. But we live in this digital

Starting point is 00:38:10 world. And the lack of data center capacity that we have feels like there is this entire infrastructure that the United States has to go build. How involved do you think that the government should or will be involved there versus it's more private enterprise and the economic incentives will people who have land, people who have the ability to build this stuff, they'll be the ones to solve this problem. So on the utility side, most utilities and most rate-based utilities are heavily regulated. And so their returns on equity are regulated. They issue equity, they issue debt. And so the government's going, can do things at the margin to help them. But a lot of that's going to come through the private sector. And you've got the

Starting point is 00:38:53 CHIPS Act, you've got the Inflation Reduction Act, which is extremely inflationary. So they're definitely going to throw money at it. They by default have to be involved when you're talking about regulated utilities, but then there's two other areas we're talking about. So one is independent power producers. So these are power plants, which they're basically designed to only... So I mentioned earlier that event where it was $9,000 a megawatt hour in Texas. These peaker plants, so they're peaker because they only come on when the grid is peaking. So if you go above the reserve requirement of the regulated grid, they turn on their plant and sell it to you at these outrageous prices.

Starting point is 00:39:31 That's actually one of the companies getting sued is actually one of these IPPs, independent power producers, where they're basically selling wholesale power and they're trying to do a co-location while being plugged into the grid. they can do things that the regulated utilities cannot. And that can be a lot of that funded through the private sector. But then to your point, I think particularly in Texas, because A, Texas is very business friendly. B, you have ERCOT, which is interest state. So you don't have to deal with FERC and all of these federal agencies. I think you're going to see a massive amount of private capital coming there for that reason. And you're going to

Starting point is 00:40:09 see kind of the best results. Before I let you go, your offhand comment is one that I can't let you escape with, which is the Inflation Reduction Act was actually inflationary. I don't disagree, but explain to people how a piece of legislation that should be reducing inflation based on its very clever name actually had the opposite effect. Yeah. I mean, look, the amount of money that the government is spending, we're spending 6%, 7% fiscal deficits in an economic expansion. So that's growing to $2 trillion. And so, forget where all of the end uses are going to be admirable as they may be, whether it's infrastructure or security or all these other areas. If you're handing out what's effectively free money that's going into the private sector,

Starting point is 00:40:57 that is going to be pro-inflationary, especially in a capacity-constrained economy when you're already seeing a big wave of onshoring. And so, the more that you're kind of handing out this money, particularly when it could potentially be non-economic because it's a government grant, that has this kind of feedback loop of just adding to rising prices through kind of flowing through the economy. And so, net-net, I don't see how people have these views that inflation is going to normalize and or the economy is going to collapse when we're continuing to throw $2 trillion added a year. There's going to be consequences at some point in time. I don't think the election is going to change the amount of the deficit. It might change the composition

Starting point is 00:41:41 of where those dollars go. But net-net, this is just money printing Congress forever until there's something that causes them to stop. And I think that that really speaks to why you want to own hard assets, why you should certainly look at crypto, Bitcoin, and things outside of the the conventional asset mix politics is very easy to get tribal and kind of everyone pick sides Etc but one of the things that um I always remind people is you know the debt has gone up under Clinton Bush Obama right we just go down every single one of them uh both sides of the aisle and um it feels like it's structural like it doesn't actually feel like barring somebody who's willing to go in rip the Band-Aid off uh balance the budget uh make a lot of people unhappy know

Starting point is 00:42:25 they will be a one-term president, right? Kind of all these things that just naturally the incentives don't kind of push towards, you don't see it stopping. And in that case, I think you're right. It's like, if you believe that this will continue on the path that we are, there are some very obvious things that you should own. First of all, you should not own dollars, right? You should own hard assets. You should own things like Bitcoin. Equities also, I think, have become this inflationary hiding ground. I think a lot about historical valuations may actually not be a great guiding path today because there's this monetary premium now that equities have because people are using the stock market to insulate themselves from inflation. And so when you start

Starting point is 00:43:14 putting this stuff together, you're like, yeah, maybe actually investing is all about just understanding this one trend and it will drive a whole variety of assets higher. And if you get that one thing right, you're probably better off than anything else you can get right. Yeah. It's funny that you mentioned that. Just the amount of macro noise that's driving everything else has just been so strong for almost a decade now. And it's only been ratcheted up. But to your point, if we're just going to print like this, and now I would argue, so the Federal Reserve technically has two mandates, price stability and full employment. I would argue they've added a third, which is financial stability. So they've stepped in every time you've had something.

Starting point is 00:43:59 They don't really care about equities, but when you have an issue, that could be systemic. They bailed out Silicon Valley Bank. They didn't have to. They got involved in reverse repo before COVID. They went ballistic during COVID. So you've seen it in the UK when LDI blew up the guilt market. So if you have no moral hazard, and if you have the Fed willing to step in when there actually is a market disruption, and you have $2 trillion of money printing, that by definition is going to be positive for risk assets. So I think it's more just thinking about what assets will do the best. And I think the one caution is, I think there's a lot of zombie assets out there, for lack of a better word, because clearly, if we're going to be running this kind of policy, it's going to

Starting point is 00:44:43 be really, really tough to get inflation sustainably back to a number that's palatable. I think that they're going to implicitly, not explicitly change the target, but that means rates are going to stay higher. Are they going to stay this high forever? Who knows? But there's a lot of assets that were underwritten at two, 3% cap rates and that had these massive exit multiples. I'm talking venture capital, real estate, private equity that might never get those value or might take years or decades to get those valuations again. So there's a rate sensitivity component, I think, that people need to consider. But otherwise, I completely agree with your premise. Yeah. I really enjoyed this. I think that it's this very interesting dynamic of

Starting point is 00:45:27 kind of where we started. It's like the old world has to interface with this new world. But maybe that's the wrong way to look at it. It's actually like the new world better figure out how to work with the old world. And I think a lot of technologists, a lot of even finance folks, et cetera, they kind of thumb their nose and say, hey, we're disrupting something, we're doing something new, et cetera. But I think you guys are a perfect example of if you understand history, if you understand the time-tested strategies for investing and value accrual, there's a lot of opportunities still out there. And in a world of software and this high leverage, no hard asset, asset light type business, whatever, you can still make a really,

Starting point is 00:46:14 really good return by going and finding these hard assets and doing the work that you guys do on a day-to-day basis. So it's pretty cool to see that. Yeah, thanks. Look, we think we're doing some interesting things. And what you just mentioned reminded me of a great line. It was Jeff Curry when he was at Goldman running their commodities business. Now he's at Carlisle, but he calls it the revenge of the old economy. And I feel like that's really what it is. all these new things cannot happen without the old economy. And so figure out a way to make money from that. I love it. Well, thank you so much for doing this. We'll definitely do it again in the future. Yeah, this has been great. Thanks for having me.

The Pomp Podcast - #1385 James Davolos on Turning Your Land Into Bitcoin

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