The Pomp Podcast - #367: John St Capital Breaks Down Public and Private Companies

Episode Date: August 24, 2020

John St Capital is the pseudonym used on Twitter by one of the smartest people I know on Wall Street. He works at a large family office during the day and spends nights and weekends producing content on Medium that showcases a high degree of intellectual rigor. You'll see what I mean in this episode. In this conversation, we discuss asset allocation, structural shifts in 60/40 portfolios, interest rates, public vs private companies, metrics on various public equity verticals, Square/Lemonade/Zoom/Tesla, SPACs, and Bitcoin. ============================ Athletic Brewing is re-imagining beer for the modern adult. We love beer. But we also love being healthy, active and at our best. No matter your motivation, if you want to keep a clear head and drink healthier, we are here for you. Athletic makes non-alcoholic beer that you don't have to compromise to enjoy. The beers are fully flavored, clean ingredients, and a fraction of the calories of full strength beer - they fit in any occasion. Check out www.athleticbrewing.com for more details and free shipping nationwide. ============================ Pomp writes a daily letter to over 50,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. John Street Capital is the pseudonym used on Twitter by one of the smartest people I know on Wall Street. He works at a large family office during the day and spends nights and weekends producing content on media that showcases a high degree of intellectual rigor. You'll see what I mean in this episode. In this conversation, we discuss asset allocation, structural shifts in 60-40 portfolios, interest rates, public versus private companies, metrics on various public equity verticals, Square, Lemonade, Zoom, and Tesla, SPACs,

and Bitcoin. I really enjoyed this conversation with Mr. John Street Capital, and I hope you do as well before we get into the episode though i want to quickly talk about our sponsors the first is blockfi blockfi has three different products they can allow you to buy and sell crypto on a crypto exchange they can allow you to deposit crypto and earn up to 8.6 apy in an interest bearing account or they allow you to deposit crypto and take out a us dollar loan against your crypto collateral. They just raised a $50 million Series C and I joined the board of directors. I'm a big fan of the business and I couldn't be more excited about the growth that they've seen and what they're building for the future. So go check out BlockFi, the best wealth

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first order at athleticbrewing.com. Go do it and stock your fridge like I have. Lastly, don't forget that I write a daily letter to over 50,000 investors about business technology and finance. I break down complex topics into easy to understand language while sharing my personal opinion on various aspects of each industry. You can subscribe at pompletter.com. Again, the daily email that I write is at pompletter.com. Go subscribe. All right, let's get into this episode with John Street Capital, the best pseudonym on Twitter. I hope you guys enjoy it. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek

Digital, or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. I've got a special treat today, which is a little bit different. I have a gentleman who goes by the name John Street Capital on Twitter, but he's not going to tell you who he actually is um but definitely if you follow on along on twitter um produces what i think is some of the highest quality analysis uh both of the public and private markets and also some structural um analysis as well so uh super excited to talk to him today so

thanks so much for doing this i appreciate you having me it's uh it you guys cannot see him but he's literally sitting in a dark room we were joking before not only will he not reveal his identity, but it actually looks like he's in witness protection. So let's start maybe with asset allocation. I know that you've done a whole bunch of work here around kind of the evolving 60-40 portfolio. Kind of just maybe elaborate a little bit there. Yeah, absolutely. So when you think about asset allocation, a lot of this ultimately depends on the type of investor group that you're talking about, right? So you buy for K between retail, high net worth, ultra high net worth, endowments, pensions, foundations, and sovereigns, and they have different liquidity

needs and mandates. We probably get the most visibility from pension plans. So if we start there, I think it'll come as no surprise to anybody that's listening to you. Pension plans have a funding crisis going on. Depending upon your model or assumptions, the underfunded pension liability in the US is expected to be anywhere between $1.5 to $6 trillion. So you have to go about thinking, how do you try and reduce that gap? You need to either contribute more, pay less, or generate higher returns. First two clearly aren't that popular, so everyone chases the third. If we rewind the clock for a second back to 1981, the 30-year US Treasury peaked at 15%. Today, that's 1.44%. If you think about how you derive expected returns, you start with that

risk-free rate, you had a risk premium on top of that. So top pension funds over time disclosed what their assumed annual returns were and what their actual annual returns were. And back in the 1960s, these guys were all estimating 4% returns, which was roughly in line with the 10-year treasury at that time. That drifted to 7% in the 1980s, which was actually a slight discount to treasury yields. And the expected return has been roughly flat ever since, hovering in that 7% to 8% range, while the 30-year has gone from 15% to 1.5%. So that implies you've seen risk premium expand significantly over that time period from arguably negative to 1% to 6.5% plus, pushing these allocators out the risk curve.

So no surprise, that's exactly what's happened. If you look at pension plan allocations, they've taken allocations to alternative assets from roughly 7% in 1990 to 30% last year. So they managed an estimated $4.5 trillion of assets. So that's roughly a trillion dollars that had to get moved around between those two different buckets, right? So that's pretty significant. If you switch gears for a second towards endowments, there's $600 billion of assets held by endowments. And they saw an even bigger shift in asset allocation, taking allocation to alternatives from 6% in 1990 to 53% last year.

You know, Dave Swenson at Yale really pioneered what people call the modern endowment model or the Yale model. And it's based on a heavy alternative asset allocation while simultaneously avoiding asset classes such as fixed income and commodities. If you look at Yale's annual disclosures, they actually won't even break out bonds on a standalone basis. They tie it in with cash and they say bonds and cash are at less than 7 percent. You know, from endowments, you can kind of keep going downstream to sort of what we'll call like the broader retail allocation. And if you start with RIAs, there's roughly $10 to $12 trillion of investable assets with RIAs in the U.S. You have $7 trillion that sit at wirehouse banks and another $3 trillion that sit at what we'll call the regional RIAs. So while those pensions and endowments might have a 30% to 60% allocation to alt, if you're at a wirehouse bank, your allocation is somewhere to the tune of 10% to 12%.

At a regional RIA, you're kind of in that 1% to 2% range. And the difference isn't really sophistication of financial advisors or a net worth of clients, but it comes down to infrastructure forming and access, which is why a lot of those companies on the private side are of interest to us. And then getting to your question about that 60-40 portfolio, I kind of consider that 401k, other retirement assets, do-it-yourself investors. The 60-40 portfolio has been talked about for decades. It was popularized by Jack Bogle at Vanguard, and for a really good reason. It's had an outstanding track record for the past 50 years. It's generated positive returns 82% of the time, 93% over a trailing three-year period, 99.5% over a trailing five-year period.

The loan exception was a great financial crisis. It's posted annual returns of 10.5% for 50 years. So you'd be hard-pressed to find any active manager that can compete with that on a pre-fee basis, let alone post-fees. And stocks were definitely a big component of that, but bonds were just as important. So they had an average return of 7.5% over the past 40 years. So it all comes back to yields, right? So the average 10-year during that time period was 6.2%.

Today, it's 65 basis points. So in this new yield environment, that 60-40 portfolio just isn't going to generate the same return that's going forward. You've had people like Warden Professor Jeremy Siegel come out and say 75-25 is the new 60-40. I think that's probably too simplistic. I think you have to get smarter than that. And given the data available, depending upon your age, your liquidity needs, your time to rise into retirement, I think you see a pivot towards 95-5-100-0 in this type of interest rate environment. And when you talk about $30 trillion of retirement assets, $5 trillion that sits in 401ks, $1.5 trillion that sits in target date retirement funds, that's the potential for another real significant reallocation of assets. And so obviously, there's not a kind of one size fits all, which I think previously people had kind of fallen victim to. When that shift occurs, which really is kind of already underway, what is the impact on the market side, right? So where do you see that capital going? If that 60 goes to 75, 90, even 100, where does the capital go? And then kind of how do you see that changing the market dynamics as well? Yeah, so a couple things there. First, if we look at the AUM of hedge funds, VC firms, and PE firms over that time period, they've clearly been the biggest beneficiaries. Back in 1976, there was less than $1 billion allocated to hedge funds in total. In 1996, that was $130 billion. Today, that's $1 trillion. Those are really public market and some public credit investment opportunities for the most part. In 1976, there was less than $4 billion in venture capital funding.

In 1996, it was $39 billion. Today, that's approaching $500 billion. So that starts to matriculate itself in the private markets. And then probably most impressively for PE firms, there's less than $1 billion in 1976. In 1996, there was $160 billion. And today, that's $1.5 trillion. And they had two tailwinds. Lower interest rates make LBOs a lot more attractive.

But they also have the genesis of the high-yield bond market by Milken and all the folks over at Drexel. So you kind of have the birth of an asset class concurrent with this massive capital allocation shift. So you're seeing people go into private equity. You're seeing people go into venture. And you're seeing people go into public markets. And what becomes interesting is at the same time that you have these assets flowing into the public markets, the number of public companies has been cut in half. So from 1996 to today, you have half the number of publicly traded companies that you do. we're just at three quarters of where we were in 1974. So you have greater assets chasing less

than less opportunities. There's a really good academic paper published called the U.S. Listing Gap by folks out of, I believe, Cornell and Ohio State. And they showed that back in 76, the market cap of U.S. stocks was $3.3 trillion, which was 49% of GDP. And today it's $38 trillion, which is the 176% GDP, right? The average market cap of a company was 650 million bucks back then, and today it's $10 billion. So when you think about that, it naturally leads to the price appreciation because there's only so many places you can allocate that capital. Got it. And so obviously, not only are we seeing this movement of capital, but this is all happening simultaneous to a pandemic, an economic recession, all of the macro shifts that we've

seen, how does the kind of catalyst for all of this, and then the reaction of lower interest rates and a bunch of quantitative easing, how does that kind of perfect storm of events change or accelerate kind of this shift? Sure, absolutely. So, you know, what I've said historically is QE infinity kind of push people out the risk curve, right? So it changed your savings account into your checking account, the bond market into the savings account, the equity market, the bond market, the venture market, the equity market,

and it gave rise to the crypto market as a new venture market, right? And you're kind of seeing that happen. So, you know, in the 30 years before the global financial crisis, the Fed balance sheet expanded by $700 billion. That took 10 days in March, right? You know, we've injected $7 trillion of liquidity into the system year to date, with another trillion to two on the way, which is crazy when you're bid-ask is now at trillion dollars. But it's not just the Fed, right? So cumulative central bank balance sheets have exploded. So from 2000 to 2008, the balance sheets of the Fed, the BOJ, the Swiss National Bank, the BOE, and the ECB went from $2 to $4 trillion. Then post-crisis, it went from $4 to $10. This year alone, we've gone from $16 to $22.

So basically, eight months, we saw as much cumulative central bank balance sheet expansion as we did seven years post, not only the global financial crisis, but the euro crisis as well. and three times as much during the decade prior to the POSA.com crash, right? So you've seen this insane amount of liquidity that's entered the market. And I think in March, it was really a seminal moment where we crossed the Rubicon, where no one asked, how do we pay for this anymore, right? The fact that the Democrats and the Republicans right now are arguing over $1.2 trillion is asinine if you think about where we were 10 years ago.

And I think that's really the big difference today versus our father's QE generation, right, where a lot of people said, oh, inflation is going to come, inflation is going to come, but it never really materialized. And I think you had a completely different macro backdrop then versus now, right? So prior to the gold financial crisis, banks had zero excess reserves. They were right against their limits. So when the Fed started to expand its balance sheet, that went into the excess reserves that the banks had to help. It never really materialized in M1 and M2. This year, you have money going directly into checking accounts with a stimulus check. It looks like we're going to have another one on the way before the election.

You have federal unemployment benefits topping people up at greater than the median salary in this country. You have money going directly to companies with PPP and EIDL. You have the Fed literally backstopping corporate bond purchases. So you're actually seeing a significant increase in M2. So the Fed publishes all this data. If you look at Fred's charts, you can look at a chart of M2 throughout the totality of the global financial crisis. It's grown in a linear fashion up until this year, where it's up $3 trillion year-to-date. To put that in perspective, it took seven years to expand by $3 trillion. That just happened in four months. So in June, which is the last metric we have, M2 is up 25% year over year. That's the highest reading all time.

The last time it increased anywhere remotely close to the space was during World War II. So you think about the inflationary pressures that we have right now. Where does money go? I know you've spoken about this letter a lot on this podcast. Paul Tudor Jones talks about backing the fastest horse in this race, and he highlighted NASDAQ 100 stocks, Bitcoin and gold, and he pointed to Bitcoin there. But I think you're seeing that materialize not only in the credit markets, which have gotten incredibly tight, therefore in the equity markets, which have rallied now back to all-time highs. And of course, in this long tail of alternative assets, whether it be gold, whether it be Bitcoin, or whether it be private markets. Yeah. And so I think one of the things that becomes really interesting is not only do you have some structural differences that you just highlighted, but also the rhetoric around inflation is changing, right? You now have multiple people throughout the Federal Reserve System that are talking about overshooting that 2% target and potentially not even taking any action to rein it in until we hit two and a half or higher.

Does that kind of change the analysis or give you more confidence that we will see those higher levels of inflation because they're literally talking about it now as well? I think that helps. So I guess just for the listeners, there's still that vocal deflation camp that says monetary expansion alone isn't sufficient enough to generate inflation. If you look at Japan, that's still the poster child of debt deflation, where monetary financing of the deficit has been ineffective. But I'd point out since 1999, their M2 has never grown by more than 5% per year, right? We're E4X that and it's just August. There seems to be this consensus out there that we're going to have high unemployment and weak demand, which is going to lead to deflationary pressures. And that starts to have sort of this downward demand spiral, which is a lot of fear mongering and it's going to cause people to save and not spend.

So I think positioning this as an inflation trend is trying to incentivize people to spend. And then there's also concerns about job displacement. Technology inherently creates deflationary pressures, but COVID-19, a lot of people are talking about it as just societal accelerating structural changes, but are those cyclical or structural, and what does that do for the job market? So that's sort of the deflation camp. I still fall in favor of the inflation camp for what we just talked about. But also, you look at things like the savings rate. In April, it jumped up to 32.2%, which is the highest all time. Prior to COVID, that number was never higher than 17%. It's come down a bit since then, but in June, it's still 19%. checking accounts. You have Brian Moynihan from BAML talking about checking account balances at all-time highs. You think about some of these industries that were closed right now, whether it be travel, restaurants, entertainment, even gambling. It's $2 trillion to $3 trillion a year spent annually that's pent up. Earnings are much better than expected for a lot of these public companies. You have the Fed messaging that they're going to be okay overshooting because if you think

about what our paths are to get out of this money printing, the only way to really do it is to inflated away. So they're trying to guide the market that way. And then you have a bunch of inflationary pressures that I think are going to materialize over the next two years, which goes to the benefit of, you know, really tech stocks, Bitcoin and gold. I tend to think that you're onto something there. Let's talk a little bit about what the potential places people can go to. There's obviously a very interesting dynamic playing out in the public and private markets. Talk a little bit about kind of the framework that you use to evaluate companies staying longer in the private markets and how that's playing out?

Yeah, look, I'd say, you know, up until probably 25 years ago, you didn't have as much delineation between public and private markets, right? What happened as these fund sizes got larger, and as capital allocators got more sophisticated, they started to put people in boxes. So you were my long short equity hedge fund manager, you were my macro hedge fund manager, you were my early stage venture investor, my growth stage venture investor, you're my buyout private equity shop, you're my mid-market private equity shop, you're my private credit fund. 25 years ago, investing was investing. We look at things opportunistically in terms of where can we expect to get the best risk-adjusted return on our capital. I think in this market, it's always changing. In March,

you saw some really significant buying opportunities in public markets that you really haven't seen in the past decade. And that was the bulk of our focus. And in March and April, you didn't see a ton of early stage venture investing get done. Now you start to see that market keyed up like there's never been a problem, which is quite fascinating. But I also think about where you have bubbles in different parts of the market. So one of the beauties about early stage investing on the venture side and why we focus so much there is it's really difficult to create a bubble in that part of the market right no matter how much capital is in the ecosystem uh if you're raising a pre-seed or seed round unless you're jack dorsey going at it for the third time you

know your valuation is going to be somewhere between you know four to five million to ten to twelve million right you have those occasional repeat founders that'll get above that but if someone's going to build a unicorn a decacorn or a generational company you know that's all a rounding error as it pertains to sort of your return on capital investment it's going to be more important whether or not you have the capital to participate in those subsequent rounds and avoid the dilution than anything else. So, you know, we continue to be really interested in that part of the market. On the public market, you've seen, you know, a bifurcation of these really cloud-based versus land-based stocks. And thematically, they're starting to trade as

baskets, which is really fascinating to watch. You know, you could always look at the internals of the market to try and get the sentiment any given day. And as people look at these COVID test results and hospitalization results over time. You start to see land-based stocks, whether those be restaurants, casinos, energy companies, industrials, trade with the correlation of one in those cloud stocks, whether they be SaaS companies, TMT more broadly, trade with the correlation of one, even though there are a lot of different underlying drivers behind that. So what we're trying to do is identify those best-in-class companies that can continue to compound over time and buy them at attractive entry prices, right?

So we got super into cloud stocks in March and April when we were talking to our early stage portfolio companies and, you know, heard some common themes, right? Everyone was looking to cut costs and we'd say, okay, can you cut Datadog? It's this big expense. No, I can't cut that. Can you cut Okta? Can you cut Twilio? No, but I can stop paying my rent and I can fire 25% of my workforce. It's like, okay, well we should be buying Datadog, Okta, Twilio, AWS,

and Azure for Amazon and Microsoft because you don't have a business without those companies right now. So those companies that are mission critical, we wrote a post where we called them central nervous system stocks. Those are things that are interesting to us. And so as you kind of think through those,

walk me through how you guys think about valuation metrics in an environment where it became very obvious that they were mission critical. Yeah, sure. So I think it's always helpful to kind of, again, start at the macro and dive down. So if you think about the S&P 500, trading multiples over time have trended gradually higher. No one's making a call on what 2020 EPS will be. So we'll

leave that aside for a second. But 2019, you were at $163 a share. And next year, street consensus is sort of 170 in a Trump administration and 150 in a Biden administration. And that really depends upon corporate tax reform. So at current levels, you're sitting between 20 to 22 times next year's earning versus a three or four year average of 19 to 20 times and a 10 year average of 18 times. So, you know, people talk about how frothy this market is. We're in line with recent averages, which is much more important than sort of that 60 year average of 15 and a half times earnings, because, you know, it's just a different macro environment, right? So part of this is due to the lower interest rates, which we've kind of discussed at Tosia now, but you

can't look at equity valuations without considering what interest rates are, right? So you have to look at that equity risk premium. In the 2010s, it was actually the highest equity risk premium on record, given those artificially low interest rates, and interest rates have only gone lower. And it also has to do with the capital that we talked about going into that market. It's never been easier to index and diversify, right? So diversification across 500 stocks for the S&P 500 or 2,000 stocks for the Russell 2000 with a single click of a button, that inherently supports higher multiples because you're getting a diversified basket without doing as much work. So very different in the 70s and 80s and early 90s when you didn't have the proliferation of these ETFs at low or no cost.

Given some of the technological progress we've made, margins have been trending sectorally higher, which I think is really important. And tech stocks have become the largest constituent of the S&P 500. So it's very different than when financials, which are going to trade anywhere from 0.75 to 1.25 book value and 8 to 12 times earnings are the biggest component of the S&P 500. When you have tech stocks that are trillion-dollar market caps compounding at 30% per year still, just defying all laws of gravity, making up that. So I think multiples are trending technically higher. And from there, you kind of dive into the subsectors. So if we look at these SaaS companies, which have really outperformed, Bessemer is a pretty good emerging cloud index. It's up 55% year-to-date versus the NASDAQ up 23% versus the S&P up 4% and the Dow actually still down 4%.

You know, the market's bifurcated based on a couple of key metrics that we look at, you know, prominently growth rates and net dollar retention around DR, right? So we cure them into high, mid, and slow growth based on what sort of top, you know, quartiles are for these companies right now. And these high growth names are trading 25 to 30 times revenue, and those mid growth names are trading 14 to 16 times, and those low growth names are trading 8 to 10 times. You know, to put that in perspective, last year, high growth names were probably 15 times. You know, those mid-growth names were 10 and the low growth were 5. So you've definitely seen multiple expansion, which makes us wary, but the results have been there, right? So we look at what those EV to revenue numbers are versus its peer set versus itself over time. We'll look at net dollar retention, right, which is just that beginning of period revenue plus upgrades, plus downgrades, plus churn over that beginning period revenue.

And I think that starts to show how sticky that business is for their clients. So, you know, if you look at some of these companies that had 120%, 130%, 140% net dollar retentions, those are the companies that were up 100% plus year to date. If you look at those companies that were below 100 or hovering in that 95 to 105, those were the companies that were up single digits, which is still significant in this market. But the market was clearly getting smart. They showed that was what was important. What are people not going to cut? You have that classic rule of 40 for SaaS companies where you'll get growth rate plus profit margin be greater than 40%. Right now, everyone's there.

So people are talking about the rule of 60, the rule of 70. We'll see where it goes. You know, you're still not coalescing around what profit margin is as whether it's, you know, EBITDA X stock based comp or unlevered free cash flow or cash from operations. But, you know, that's something that we try and keep an eye on. And then, you know, for our early stage companies, we're always looking at revenue growth and sales efficiency and customer retention and burn rate and CAC LTV and all sort of the common ratios. And you can kind of do this through each subsector of the market. Right. So for your tech companies that are non-SAS-based, you're looking at your EV to EBITDA and your PE multiples. You get into sort of financial services depending upon the subsector.

You're looking at some combination of PE or price to book once you start getting to the banks or dividend yields. Your consumer discretion, your consumer staples, your materials, your communications, your utilities, it's all in that EV to EBITDA or unlevered free cash yield. And, you know, we're always comping companies versus their peers today versus ourselves over time and where the broader market is. One of the things that somebody I respect a lot was talking to me about that I thought was really interesting is they said, look, value investing has historically been a great way to invest. The difference is that there's a lot of people who misunderstand how to determine value of these technology stocks, right? And that's basically kind of what you're talking about here of just like, what are these things actually worth? We know what the prices are, but what is that value? And so as you kind of do this, how do you guys think about that actually changing over time, right?

So you're talking a little bit about kind of the macro environment. You're talking a little bit about kind of the shift over the number of years. But are there other things that you guys look at from a factor standpoint of how value can actually change to peer sets to themselves over time or anything like that outside of just the macro environment? Yeah. So why do people look at valuation multiples to begin with? Usually, it's just a heuristic to try and back into valuation, right? What is the value of a company? It should theoretically be the discounted value of the cash flows today, right? So I think for some of these high-growth SaaS companies, that works out really well. If you're willing to put in the time to build about 20-year DCS and you moderate these growth rates that are 150%, 200% year-over-year, and you're able to show that margin expansion that a lot of them have shown over time, they don't look overvalued today despite trading at 15 times revenue. But most people don't do that. They say it trades at 15 times revenue, which is asinine.

But it's funny because of the margin potential these companies have. So you look at something like Facebook, which is approaching a trillion-dollar market cap and it trades at 10 times revenue, which would seem crazy, but they have 50% EBITDA margins and 40% net income margins. So it's not that crazy when they trade at 30 times earnings when the S&P 500 is trading at 22 times earnings. So you can't look at any of this stuff in a vacuum, and I think that's where value investors really get caught up is they're missing the non-stationary aspect of financial markets. So, the best quant funds in the world are the ones that are able to detect that sort of instantaneously, right? When are the market internals changing? And I think a lot of quant funds struggle with that, which is why you saw a bunch of blowups in March and April when it was sort of an unprecedented time period. But that's why you see the folks at Renaissance just continue to print money time over time because they understand that non-stationary element. Now, we won't pretend to understand it at those micro speeds, but you have to understand that in the context of what your entry points are and be comfortable paying up over time for companies that you think can compound. And if you're buying up too much today for the next 18 months, but you think these companies become critical parts of software infrastructure over time, they will grow into those valuations.

There are plenty of times where people bought Apple or people bought Amazon, people bought Google or Microsoft, and it was overvalued versus where it should have been. And it disappointed for a period of time. But if you believe in those companies long term, you should kind of see what happens. Yeah. I want to throw out a couple of names for you and just kind of let you riff on them. The first being Square, which has kind of become a darling, I think, for many people. How do you evaluate that? Yeah.

But so if you think about Square, they have two significant ecosystems they're growing, right? They have their salary ecosystem. They have cash app. And I think they're aiming for the holy grail of payments, which is this closed-loop payment system that cuts out intermediaries. So on the seller ecosystem, Square notes there's 20 million businesses in the U.S. with $6 trillion of gross receipts, which is an $85 billion cap for them. They think they can get $39 billion of transactional profit, $30 billion in software sales, another $12 billion from Square Capital, and $5 billion from what they call other financial services. But Cash App is really this hidden gem there, which was started in a hackathon internally. It's the second largest peer-to-peer payment application digital law in the U.S. behind Venmo, even though it had a much later start.

And it allows for direct deposits, cash cards, boost rewards, equity trading, and, of course, Bitcoin trading. They think this is a $9 trillion addressable market. Last quarter, they announced 30 million monthly active users with more than $7 million spending on the card itself. The Cash app generated $1.2 billion of revenue and $8 million of gross profit. Now, a lot of that was Bitcoin, and it's really transactional notional volume. But even if you strip the Bitcoin out of that, it's $325 million of revenue, which is up 140% year-over-year. And perhaps most impressively, they had $1.7 billion of cash deposits. So you start getting in the realm of over a billion-dollar cash deposit bank, and I put that in quotes, although they've just filed for their OCC charter.

That becomes a really interesting company. Jack was talking about moving to Africa for six months prior to all things COVID, and Twitter shareholders were sort of up in arms about that. But if you think about sub-Saharan Africa from a macro perspective, it's home to the world's largest free trade area, got the youngest labor force in the world. Over the next 20 years, it'll be home to the 10 fastest-growing cities in the world. It's 1.2 billion people that are undergoing their first real urbanization genesis moment. And they've been dealing with mobile money since 2007 when M-Pesa first launched it there, right? So 20 years, half the world's population is going to be in Africa. And I think fintech is going to be the area that really accelerates that growth.

So I think he's spot on in looking there. And I think if Square can replicate what they were able to do and, you know, quite frankly, some more rural parts of the U.S. to start, which is where they started. I think that becomes such an interesting point for them. So, you know, stocks up 140% year to date. It's got a $65 billion market cap versus $7 billion in projected revenue, $325 million to be, but so, you know, there's no valuation metric that justifies Square's valuation today. It's really, this is a scarce asset in fintech that has a ton of upside optionality. And for me, if I was a banker, I'd be pitching them on M&A right now, right?

So I've written about this. I know you've spoken about it. I think, you know, combined Square and Twitter, you have a vertically integrated payment processor with the Twitter social media feed, integrating to message functionality, you could send investments, spend money, you really create that WeChat or Alipay of the West. I think you could do that in an all stock transaction. And, you know, bankers are going to sit there and look at the relative trading ratio over different periods of time. And, you know, Square has never been more attractive relative to Twitter. I think that's quite interesting. But say they can't get over conflicts there, I think there's a lot they could do with the currency today, right? So at a $67 billion market cap, they can go buy Discover Financial Service and actually get to the card network game directly, right? That's a $15 billion market cap. It had $8 billion in revenue and $4 billion in EBITDA and $3 billion in net income.

That becomes really interesting for them. But if they're really trying to stick to that closed-loop network, maybe they try and do something to go after Shopify's business and they acquire the Wix set of $15 billion. Anytime your currency is this overvalued versus any metric, you want to be on the offensive. And I think there's a ton that they could do there. I think it's a scarce asset. I think Jack has really done a lot to innovate around the core product. I think they went about building the business in the right way, starting with deposits, and then expanding into this other functionality. So I think there's a ton of optionality there, which is why it trades where it does, because people are just forced to own it.

Yeah, to me, that's the whole thing, right, is the idea of going after the deposits first and not going after brokerage just is a much more scalable, bigger business that can be built. It's got better margins. And one thing that's interesting to me kind of going tangentially related to this is just a lot of the financial service stocks, there's kind of this bifurcation between things that trade like banks or things that trade like fintech companies, right? I think Square's been able to kind of navigate itself very nicely, obviously, into the fintech space because it would be not the position that they're in and not a position of strength if they were just trading like any old bank stock, right? For sure. Yeah. Next name is Lemonade. uh this one is uh is i think confusing a lot of people yeah well consider me confused right

uh i don't i don't want to pretend to be an expert on it but you're talking about three and a half billion dollars in market cap versus 67 million dollars in revenue and 109 million dollars in net losses compared to 116 million in gross written premium that math just doesn't add up right like b2c insurance is hard you know in their s1 they said their gross loss ratio was 161 percent and Now, it's down to 80%, but their net loss per dollar of gross written premium went from 312 to 94%, so they're losing 94 cents for every dollar of gross written premium. That math doesn't work. They're going to need to raise more capital. They do not have enough cash on their balance sheet to continue to run this business.

I don't usually give credit to sell-side analysts, but Keith Terry over at Goldman initiated coverage on Lemonade at a Sale, and he said, And it's essentially venture investing in public markets. And he said that they're going to have five years of operating losses before breaking even, mentioned that they're going to need more cash. I think there's a retail bid for these type of assets because they can't get into venture, and it seems like early-stage venture. But there are a lot of names I would own before I touch this because insurance is hard, and they try and play up this data angle. you know insurers have more data than anybody and they've been collecting it for hundreds of years and they do not have you know 94 cents per dollar gross written premium and net losses right that's just a difficult business scale when i read the s1 uh it cracked me up because uh you're saying

this whole idea of like a startup but in the public markets uh there was a lot of the like buzzwords you know artificial intelligence oh yeah i mean it was littered throughout it and so when you can see why if you don't look at startup decks all day long like okay this sounds super sexy and kind of technology enabled. But I think also the second thing that's really interesting is similar to in the finance service side, there's old school insurance companies that traded a certain kind of multiple, and then you get into these more kind of technology enabled companies that are getting these outrageous valuations. And what it appears is going to happen is all the old school guys are going to now either go M&A, or they're going to try to

start convincing the market that no, actually, we have technology, right? And whatever form After they do that, that seems to be the only way that they can kind of compete, right? I'm very bullish in sure tech as a subsector of fintech when it's enabling technology for incumbent insurance providers, right? The insurance game is all about balance sheet, and it's all about scale. And that's what makes B2C models incredibly difficult because you don't have that insured base to pull the risk off of, right? Which is why you're seeing these loss ratios. So I think there's a huge opportunity for the tech enablers. It's still an industry that's dominated by pen and paper, and you have all these different organizations that don't have that cross-organizational reconciliation. So I think there's a huge need for startups. I'm just not convinced that B2C insurers for home insurance and property insurance, at least not at 100 million times revenue. It makes sense. Zoom has gone on an epic run here. And I think that everyone has Zoom fatigue, everyone is using it. And it seems like they've kind of been the winner that's pulled an entire sector up. But how do you evaluate that business and kind of that vertical?

Yeah, sure. So Zoom's gotten into verb territory, right, which is always an enviable place to be in. And I think that speaks to sort of scarcity value. You know, collaboration software has become a critical component of the tech stack, right, especially over the past six months now. They quote a net dollar retention figure of 130%, which puts them in the top decile. My concern with that is I don't know if that's structurally high or if it's cyclically high given the environment that we're in. You have a lot of people that talk about some of the privacy concerns and some of the large banks are using Microsoft Teams and Microsoft is trying to cross-sell that with Azure, which is becoming a stickier and stickier product, particularly within financial services. You obviously have Google Hangouts, so when you're competing with Google and Microsoft and anything at pause, but then again, Microsoft acquired Skype, and Skype should have been Zoom before Zoom, so Zoom clearly won there. It's a $75 billion market cap trading north of 50 times run rate sales, so even though revenue is growing at astronomical rates north of 150% year over year, you have a ways to go to grow into that valuation. I think this is sort of the quintessential stock that traded as part of what I call a COVID basket, right? You had Zoom, you had Peloton, you had Moderna, you had, you know, any of these other sort of work from home stocks that got caught up in that.

And it will continue to trade with high correlation there. I think it's a name you could trade. I think it's hard to own for the long run here at that valuation. But if you have it earlier, you know, there's no reason to cut it. I always think about the like millennial stock basket, which is, you know, not even all stocks, but like the Bitcoin, the Teslas, whatever. And then I think of like the boomer pack and the boomer pack is exactly some of the companies you just described, right? Where they're like, oh, new digital stuff, right? Like, get excited about it.

Speaking of Tesla, what are thoughts there? Yeah. So I wrote a piece entitled, you know, invest in what you know. What is democratization of equity investing mean for valuation and performance? And it was a really poor attempt at trying to describe how these stocks could trade at these valuations. And if you look at the most frequently traded names on Robinhood or fractional equity aggregators like an Apex or DriveWealth or anyone else that reports these metrics, it's the same names. It's Tesla. It's Apple.

It's Facebook. It's Google. It's Amazon. And if those names continue to be owned by everybody, there's sort of a persistent bid in the market. Now, what's interesting about Tesla and why I think it has this upward bias is because it's actually not an index today. So when you start talking about micro market internals, Tesla reported its four straight positive quarter net income. So it's going to be added to the S&P 500 probably at some point before year end. The way it works is you have to have a company removed.

Right now, there's a few M&A deals on the tape. Tiffany's is probably the next one to drop out if that deal closes, which is kind of mid-September business. So that could be when. When Tesla gets added to the S&P 500, it's going to be the single largest add of all time with something like $60 billion to buy. It depends upon what the price is at that point in time. So what is mind-blowing to me about Tesla is revenue is up mid-single digits year over year, but the stock's up whatever, 4X. It's trading at a $350 billion market cap, which is 13 times trailing revenue and 10 times forward revenue. It's not profitable.

So you're really making a bet on Elon, and over time that it could become this software-slash-battery play, which he's shown the ability to continue to innovate. I think the Tesla bears of two or three years ago were right to be skeptical in that Tesla was not profitable. There was not a path to profitability, and you needed to continue to raise capital to fund this business, and there were questions of whether or not capital markets would be there. There were a couple of those really scary converts that barely got done. They had to do follow-on offerings, and when Tesla did SolarCity, everybody was up in arms. There will not be a question of whether or not Tesla can raise capital anytime soon. They can announce a massive secondary tomorrow. It'd probably be down like 2%.

You'd be fine. So I think it becomes a stock in and of itself, given people's perception of it on a retail basis. What's interesting is once it gets added to the S&P 500, most people think that's a great thing. you have all these indexes that have to own it, then it starts to trade with a much higher correlation to the rest of the market, right? So when the market has these down days, you have these index funds that have to continue to rebound. And I think it starts to act more like a $350 billion stock would act and not be gapping 10%, 20%, 30%, 40% month over month. So it's interesting. There's definitely, you know, I don't want to ever bet against people like Elon, but for me,

it's definitely one you could trade. It's difficult to own unless you have a stomach for, you know, 50 to 70% drawdowns like we saw in March. And if you do, you know, God bless. Yeah, one of the things I've been thinking about, and I don't have a good perspective on this, I'd love to hear your idea is, you mentioned earlier that kind of venture capital has become the equity markets, right? And kind of that this shift in risk, what that does is it now brings entrepreneurs who are used to a more venture capital fueled company building exercise, and also investors who understand this stuff. So if you look at, for example, in March, One of the things that was very obvious very quickly was most companies in the private markets that are venture-backed are used to losing money.

And so if all of a sudden you go to revenue zero, like if you had capital on the balance sheet because that's what you were expecting anyways, maybe your runway got cut shorter, but you still kind of were in the mode of being able to operate in what I'll call kind of a pandemic-proof way, whatever the hell that means. But how do you think about the way that these companies are funded and the way that entrepreneurs raise capital in the public markets if there are more and more of these folks who kind of have come up building these businesses through venture capital funding? Yeah, it's a really good question. It's something that we've thought about quite a bit in terms of are there different funding mechanisms structurally for public companies that could be of interest, right? So for some of these super high growth SaaS companies where you have really sticky customers and you have net dollar retention north of like 130%, you know, can we systematically do revenue shares where you're not taking dilutive equity, but you're able to grow faster as opposed to sort of discount your annual SaaS contract at 20%, right? That becomes interesting. For these companies that continue to lose money, I think it depends upon the path to profitability, right? So someone like Square is very different than someone like Lemonade, where Lemonade, you know what the tried and true path to profitability is for an insurer, and it's not losing $0.94 from the dollar, and it's not going from $3.12 to $0.94.

That's a very difficult path. I'm not sure what public market appetite will be for continual financing. For something like Square, if Jack had to go to market for a second, Derek, I think people understand that holy grail of sort of a closed-loop payment ecosystem. I mean, just look at Visa and MasterCard. Those are two of the best businesses in the world since Visa went public in 2005. Its EBITDA margins went from 20% to 70%. Its net income margins went from 10% to 50%, right? They're literally a global tax on payments.

Anytime somebody pays money anywhere, they're making money, which is terrific. And I think people can see that in squares. So, so much of it, I think, is business model dependent and industry dependent. I think there's a couple of these long-only fund complexes with heroes of fidelity to the world that are playing in both the public and private markets, and therefore, you have those crossover PMs that will continue to fund them. You have the hedge funds like a Tiger or KOTU that do the same. So I think there is funding there. I think you have to justify and I think you have to be pretty transparent with forward guidance. And you have to play the game with the indices and the exchanges on a listing requirement basis, right? So there's a lot of hoops you have to jump through, but I think it could definitely be more common. It also depends upon at what point in your life cycle you go public, right?

You look at Uber and Lyft. They were able to raise insatiable amounts of capital privately, and everybody thought it was going to be continued up to the right. No one could have predicted COVID and what that would do for ride sharing or transportation. But because those businesses are so capital intensive and haven't really proven out the unit of economics for that to work, they're going to be challenged a lot more than, say, a company like Marquette in the fintech space. If they decide to go public tomorrow and needed to raise more capital, I think they'd be capital behind. Yeah. Amazon is another one that I think is very misunderstood for a long period of time. And now all of a sudden has become, you know, the company. How do you guys kind of evaluate that one? Yeah. So, you know, Amazon for us is really the AWS story, right? It's a $43 billion in run rate revenue. You know, Azure's at $25 billion. They added $3.5 billion in run rate revenue during the first half of this year.

You know, AWS itself has 30% operating margins compared to the rest of the business at 3% for North American, 0% for international, right? So it is the cash cow of Amazon. Nobody has the time horizon of Jeff Bezos except for maybe Zuckerberg, right? But no one has the goodwill of the public markets that Bezos has, which I think is really important, building the business that he's built, being able to systematically expand the new product categories. He's failed. He's failed plenty of times and continued to succeed. I mean, the first mention of the cloud, I think they called it Amazon Elastic Cloud Compute, AECC, back in probably 2003 or 2005, they had it in their 10K for the first time. And you'd see two or three mentions, and I don't think they broke it out until 2012 or 2013 as an actual segment. And then over the past five years, you've seen astronomical growth. We are in such the early innings of the migration to the cloud. Financial service and legal industries are still so on-prem. If you have startups that sell into them, you're kind of mind-blown every time you say, wait, you have to go install this on-prem now. They don't even have people in their office. They can't put software in the cloud. It's crazy.

So I think that becomes really interesting. What they've built in this moat around Prime being a loss leader for all these other verticals becomes incredibly important. They have a senior leadership team that has a lot of continuity, which I also think is critical, right? So for a lot of these founder-run companies, you sort of have that key man or woman risk, and you saw it with Apple when Steve Jobs passed away. People today are still doubting Tim Cook despite the performance of that stock since jobs passed. With Amazon, you have senior leaders that have been there for 20 years, and they really all preach the same discipline. I think that's very, very difficult to ingrain in a company, particularly a company that's been along that well. So it's one of monopoly or duopoly in so many different areas, and those are the best businesses to own. So while it screams rich at so many different points in time, it's just a scarcity value of an asset, whether it be transportation and logistics, AWS, or the core North America merchant business, or Prime itself can just get spun out.

There's a ton of optionality there, and we like quite a bit of it. Yeah, one of the things that's very obvious is Bezos over the years took all the cost centers, turned them into these profit centers, and has built very, very large businesses with great margins in some cases. Do you guys see, either through regulatory pressure or from a business case, actually going ahead and spinning some of these off as individual kind of companies? So what is now today just a line item or a product? Yeah, I think part of it's going to depend upon what happens in November, right? I think it's hard to make the case that Amazon is doing anything that's anti-consumer, though, right? So you're going to have to change antitrust laws, which we haven't been able to do in 60 years here. And we probably should. Right. But I think I think that becomes pretty difficult.

Like if they spun off AWS into its own business to be one of the most valuable companies in the world, then, you know, they could enter into a preferred relationship with them and they could do that. Anything else I just think would be too problematic. Now, Facebook is a little bit different in terms of like if they were forced to spin up WhatsApp or Instagram because of data privacy concerns or as they get into Facebook financial services, they're like, we don't want the largest country in the world to have their own sovereign monetary unit. I think that some of the parts story is actually more interesting at Facebook than it is at Amazon, where both those properties could have much more stronger embedded finance play standalone, right? Instagram on the e-commerce side, WhatsApp on the payment side, ad brokerage functionality, ad cash deposit functionality. You can't do that within the umbrella that is Facebook, given its size and scale. So I think that in a forced breakup becomes interesting. Amazon, I think you get to what's the point, right?

And during the pandemic, how many people were just relying on Amazon Prime packages coming to their door? You need that scale to deliver that service. I think the regulators would have a tough time arguing that case in court if they were forced to. I always laugh at the joke in New York City is that every apartment building's lobby looks like an Amazon warehouse during the holidays, right? Every time. Or during the totality of the pandemic. Absolutely. One of the ways that companies are starting to get into the public markets, especially when it's so frothy right now, is using SPACs.

So we've seen kind of direct listings and SPACs become more popular. How are you guys looking at maybe SPACs specifically, but even direct listings? Sure. So, you know, we spent a lot of time looking at SPACs over the years and sort of the original formation of SPACs, they were really viewed as a payment scheme for third tier private equity firms. Right. So they had a very negative stigma on them. Sponsors would put up risk capital of 4% to 5% in exchange for 20% of the post-IPO shares plus penny warrants, which entitled them to usually another 10%. They'd buy kind of beat up private companies and take them public and milk those fees for what it was and try and sell it over time to another company or raise another stack. um and that was the case in the the early 2000s late 90s you had uh all-time high SPAC raises

in sort of the 06 07 time period you started to see a little bit higher quality sponsors but the same type of targets where it never really got people going then in you know it was dead for three years there was no appetite for SPAC funding uh you saw a little bit of a resurgence in 2014 to 2015. And for the first time, he had some really high quality sponsors, you know, people like Martin Franklin, who rolled up Jarden, he did platform specialty, Nomad Foods. And I think that got the hedge fund community interested. And then what happened last year, which I think was really sort of the transitional moment was when Chamath went after Virgin and when DraftKings went public, right? Those were two companies that would have had a path to go public. You know,

Chamath has his reputation publicly. I know you've had him on the podcast before. And while both of those are incredibly overvalued on any traditional valuation, it showed there was a path and people started to say, okay, why are they doing that? And I think what really changed, if you think about mechanically how SPACs work, you have a sponsor, they raise a pool of capital, it goes into a trust, it stays into that trust until they announce an acquisition, shareholders vote on that acquisition. If it goes through, great, capital is transferred.

That becomes an operating company. If they voted down, their capital is returned, right? So it's really a lockbox fund. So the biggest buyers of SPACs day one are merger ARB funds because they view it as an alternative to a cash carry. Every once in a while, you get some long homies in there, and their view is I buy this at $10, I have a free put at $10, I get my warrants. And if they announce a deal anytime in the next 12 to 18 months, and this pops to $10.50 to $11 a share, I can kind of sell that out at a 5% to 10% IRR, which is in line with some of the safer spreads. And given the fact that you have that embedded put in there, they don't mind putting capital to work. Historically, you had a big gap in ownership from the ARB funds who bought it at the IPO to the transition to long, short hedge funds and long-only asset managers who had to own it after.

right because deal gets announced the arb fund settled down there was no buyer in that middle part uh that changed this year when you know you have the robin hood mafia as we refer to it as just buy up those specs in that transitory period they look at things like nicola and shell and fisker and you know bought those stocks hand over fist and they became top 50 owned uh you know companies on uh robin hood which is pretty wild to think about um and structurally you can't short of SPAC, right? So prime brokers can't rehypothecate shares when it's in that SPAC period until it transitions to an operating company. So the only sellers are those people that are one of those who were selling it previously or people who were inherently wrong. So I think as you look at those

dynamics, people said, okay, what's going on here? And it got smarter. And the headline numbers are crazy, right? 74 SPAC offerings this year over $28 billion, which is 40% of the IPO market. But if you look at SPACs versus what you can do in a direct listing or IPO, you have a lot of benefits. So on the SPAC side, you do have greater speed to closing versus an IPO or direct listing. Like a typical lemonade process, you can kind of get things done in three months once you come to that price point. You have valuation certainty, which you don't have in an IPO or direct listing. I know Bill Gurley has been incredibly public about sort of his opposition to what he thinks to be systematic underpricing of IPOs. You don't have that here.

In a direct listing, you get a little bit better price discovery, but you don't have that price certainty, which I think is important. You have the management continuity, which you don't have in a private equity sale. You have a lot more flexibility in terms of the structure of the deal, right? How you can kind of incentivize management with some of these warrants which aren't afforded to people in IPO or direct listing. Usually, you get the strategic benefits of the sponsor, right? You're now public, so you have the currency to do deals. And you have really this quasi-permanent capital vehicle, right? So I think it becomes quite interesting.

And I think now that you've seen some folks that weren't using it as a funding resource of last resort, It's starting to get a lot more interest from both bankers, sponsors, and venture funds. And that's why you've seen all of the above-raised vehicles. I think what Ackman did was also a pretty seminal moment. He took away that sponsor promote. He took away the magnitude of the Warren overhang. Goldman has since advised on a couple of deals they've brought down that Warren overhang. So I think given the sheer amount of capital that's chasing deals in the SPAC world right now, the sponsors have to become more economically incentivized and aligned with management team founders and investors.

And now you're getting SPAC 3.0, which are cleaner structures that offer a mechanism through which people will go public. So I think it's interesting. I don't think it should be kind of brushed aside as just like the next crazy fad because it's been a capital markets mechanism that's been around for 30 years. It's just been misused and abused in different ways. Yeah, I think what's really interesting is when you talk about kind of 07, 08, and before that, just the negative connotation or kind of negative viewpoint people had mainly was because the structure was so ridiculous, right? And there was such misalignment between the sponsor and the company. I think now as you get kind of higher tier or more respected people coming in, doing it like the Ackmans, et cetera, you're seeing those economics change. I think people warm up to the idea that, oh, wait, there is way more alignment here, and this could be a vehicle moving forward.

It seems like those two things are kind of happening simultaneously, and really, it's just higher-quality people coming into the market. And if you think about venture growth companies that we just spoke about and your question of whether or not they can go public and continue to raise capital, when you go via an IPO or direct listing, you cannot give forward-looking guidance. You can with a SPAC deal, which is why you're seeing all these EV companies, besides the fact that they're getting bid up crazy. And Nikola doesn't have a dollar in sales and it's worth $30 billion. But you can give pro forma guidance for some of those story stocks. I think that's important. You have your time to message to the street, right? You have three plus months of trading before you convert to an operating company.

You're not kind of rushed together in that two-week roadshow or the pre-roadshow test the water to save, which I also think is an important differentiator. Um, you have a, uh, a very unique and thorough view of many markets assets and, uh, in kind of valuation metrics, which brings us to a kind of a world series of finance right now, which is Bitcoin. Um, there is, uh, somebody, uh, in the financial media who told me that they could bring 10 people, uh, that are the most respected financial managers in the world, put them in a room, uh, say, discuss Bitcoin and come back in an hour and five will be on one side as bulls. five will be on the other side as bears, but they literally will think the other side is idiots for believing whichever side they don't believe.

So it's very controversial and kind of debated. What's kind of your viewpoint on it? And how do you just think through both the asset itself and then the valuation? Yeah, it's funny. I think it's becoming seemingly a little bit less polarized than it was even two years ago, three years ago, and definitely five years ago, where I think now the sides will agree to disagree, but won't say the other people are idiots. Whereas even just like 12 to 24 months ago, that was the case, right? And whether that's Renaissance adding it to their ADV or Paul coming

out publicly, you know, saying that they put 2% of the fund in it, or, you know, Fidelity and some of these other institutional, you know, platforms that are starting to offer it in different ways, I think that helps. I think, you know, the craziest thing is Bitcoin as a percent of gold is still sitting, you know, at like 2%. Right. And Bitcoin as a percent of store value gold might be three and a half percent, 4%. You know, we can argue how much gold is store value versus actual, you know, practical limitations. I think you've had Travis on your podcast a couple of times, and I think he really says it best when he calls Bitcoin a non-sovereign, hard-cap supply, global, immutable, decentralized digital store of value. And I think that's exactly what it is. And I think when you talk about the sheer amount of balance sheet expansion, quantitative easing that we've seen globally, risk for inflation, you sort of need this sovereign-grade, resistant, non-sovereign store of value. If you think about gold, it has some of those properties. We can check with Tyler and Cameron and Davey Day Trader whether or not Elon's going to be mining it from asteroids or not. But it does have a quasi-fixed supply, although Bitcoin's stock-to-flow is going to flip gold next year.

So it's going to be even more scarce, given the fact that we've just had the halving. It has its own slew of micro-catalysts for Bitcoin-specific, which is why I like it over gold here. It's a lot smaller. You're seeing this generational wealth transition from boomers to millennials and Gen Z who have shown a propensity to favor it. Tom Lee over at Fundstrat's done a lot of really good work on that. You're starting to see increased institutional access points and adoption, whether it's Fidelity offering up to RIA platforms, whether it's backed, seeing record highs or CME seeing record highs. You and I were talking before we got on about some of the private wealth divisions at some of the gold bracket banks talking about this. You got the recent guidance from the OCC saying chartered banks can custody digital assets, right?

Once you start to see that institutional adoption, the story really becomes, well, what is it? And if you think it's an alternative store of value, what's that worth, right? Well, there's trillions of dollars held offshore in Swiss bank accounts for certain reasons, right? There's trillions of dollars held in gold and are in sports teams, right? There's a ton of capital that's held in these assets that are perceived to be store of values. Why not a fixed supply sovereign list global money that's portable and divisible and has all the properties of store of value incremental to that of gold? So quite bullish on it. I think if you look at over time, we put a piece out showing Bitcoin around halvings, how it acts on an annual basis, right?

So the year of the halving tends to be pretty good, up 100%, 150%. It's really that year after where you've seen the biggest growth periods. That was 2013 and 2017. I think that's a bit of a normalization of supply-demand between miners that were sitting on excess inventory that they had to sell down. It's a bit of a story getting out there. And I think you could have never asked for a better macro backdrop for Bitcoin to succeed, right? We could debate about how good the macro backdrop is for everything else. But if you're a Bitcoin bull and proponent, I think that becomes really interesting.

So as you look at just even assets to hedge against the sort of potential macro headwinds that we're talking about, you know, tech stuff can continue to outperform. But at some point, you know, they're bound to the gravity of valuations and they're going to be measured on cash flows. This becomes a real scarcity game. And with China trying to usurp the US dollar as a global reserve currency and a lot of sort of our monetary enemies, if you will, pissed at what the Fed did with the central bank lines during March and April for all these people that are short dollars. You need to start to look at alternatives. And alternatives aren't the central bank digital currencies, which are just the same thing subject to the same inflation risk, just natively digital so they can move around faster. Alternatives have to be separate from states and countries. And that's why I think Bitcoin is so unique, even within sort of the cryptocurrency world. And a lot of the people say, oh, the first one doesn't win. What about MySpace or AltaVista? I don't think that's true with money.

And I definitely don't think that's true here because none of these other cryptocurrencies can replicate the Bitcoin origin story, which I think is so critical to the value proposition, right? Anonymous founder, anyone had the opportunity to mine it. There's no pre-sale. So when people start talking about some of these stablecoin projects, whether it was Basis or Maker or the next one that was supposed to use Bitcoin, I always said, I don't think Andreessen or Polychain or Paradigm or anyone is going to own 15% of the next global reserve currency. It's just not going to happen. And I think that uniqueness, the longer we go, the longer it stays true. So incredibly bullish.

I think you can start to see it make a real dent as that percent of gold over time, and especially as macro funds start to trade it. Seeing a firm like Renaissance add this is big. And that's very different than a Jane Street or DRW or BERT2, which are market makers by nature, right? There's an arbitrage opportunity. They're going to take that. And we know in 2017, 2018, and today, there are a ton of arbitrage opportunities given the fragmented nature of it. That's not what Renaissance is doing. Renaissance very likely has this in a pool of a macro asset and how frequent they're trading it is one thing.

But I think you start to see that. You start to see people like Paul in a discretionary, you know, Mike Novogratz and Galaxy partnering with Case to try and get it to RIA's Fidelity, you know, launching their product. I think it's really interesting right now. Yeah. And so obviously, we see very eye to eye, I think, on a lot of what you just said. And I can't, you know, state enough the macro environment just being this like rocket fuel for what normally happens around the halvings. And, you know, to me, it's just a thing where the halving was already going to happen. All of the analysis you guys did is pretty spot on.

Then you added that macro backdrop and it's like, you know, do we see another blow off top next year? Probably at some point, just given that the retail demand, but all of this is happening without the institutions, right? Or very few institutions coming in. And so, you know, I go back to like two, three, 4%, whatever the gold market cap is that the Bitcoin is captured. That's pretty much retail. What happens when these big guys do come in? A $200 billion asset, I keep trying to remind people, there are asset managers in the world that have more assets than that. The market cap is so small. How do you think about the balance between, let's go first with Bitcoin and gold's market cap. Is this a thing where it's kind of a zero-sum game and you'll actually see gold's market cap drop as Bitcoin rises? Is it an expansionary thing where you'll just get kind of two very large market caps?

And then timeline-wise, how do you think about Bitcoin's market cap growing in comparison to gold's market cap over, let's say, the next 10 years or so? Sure. So I definitely don't think it's one or the other, right? You've seen both rally year to date. I think you continue to see both rally given this macro backdrop. As much as we like to think Bitcoin is ready for prime time, it's still not ready for prime time in terms of institutional adoption. But all those concerns we had about inflation and sort of central bank easing and sort of debasement of fiat currency hold true. So whether you're institutional asset managers, pension funds, sovereigns, or central banks, you need to own gold, right? And I think that's one of the big things that people forget about is central banks are some of the biggest buyers and holders of gold in the world, which is unique and differentiated versus Bitcoin today. So until that happens, I think it'll be tough to equal or surpass gold.

So I think rising tide lifts all boats. I think Bitcoin will start to meaningfully dent into that because of how small it is, right? Just low, large numbers, it's going to be a lot easier to grow a $200 billion asset than it is to a $9 trillion asset. And there's a lot less capital there. Right. Like gold, if you look at sort of ownership and the number of holders of the ETFs and physical, it's at all time high. That's right. So I think Bitcoin is a lot cleaner from a positioning standpoint. It remains under owned. You know, Real Vision had their summit a couple of weeks ago, and I think it might have been said, you know, if you don't own Bitcoin, you're effectively short a call option. right and for those people that understand option markets in that point your short gamma as it goes up you have to buy more and more and more and more and i think that starts to happen with uh

these institutional managers who don't own it within a portfolio so i think that becomes interesting i think over the next 10 years you could start to meaningfully infect uh you know on that i think 25 50 percent of gold's uh theoretical store of value tam can be dented by bitcoin um and i think it just continues to become part of that asset allocation which we started with up top, right? As institutional investors allocate to alt, this falls within that alternative sleeve. And whether it's direct, whether it's through a fund, you'll start to have look-through exposure there. I think it also ties back to what we talked about with Tesla and Apple, right? As all these fintech firms globally aggregate assets and are forcing people to

invest for the first time, you have your Disney stock next to your Bitcoin. And in my opinion, next to your Michael Jordan rookie card and everything else right there is sort of your holistic portfolio. And I think Bitcoin is a critical portion of that, which will also have a bid. And then you talk about that generational wealth transition over the next 10 years, you're going to see several trillion dollars migrate from boomers to millennial and Gen Z, which is only going to continue over the next 20 years. And I think you start to get that reallocation as well. Yeah, I don't know how exactly the transition happens. And obviously, that's what we're trying to figure out. And as we're deploying capital, but it feels like the

end game here is every stock, bond, currency, and commodity is digitized, which empowers that ability to hold them all in the same place. And the technology stack is very similar, if not identical. And then what you get is you just get differentiation of the actual asset. So what's the difference between holding a digital stock certificate versus a digital currency versus whatever the next digital asset is? They're all pretty much the same. It's just you're getting exposure to the actual asset itself that's different. And so in that vein, how do you think about the actual usage of Bitcoin today, right? So one of the things that the metric that stands out in my mind is, if I remember correctly, it's the adjusted on-chain transaction volume

is greater on an annual basis than the transaction volume inside of like a Venmo, PayPal, Apple Pay, whatever it is. Do you buy that as important statistics or is that the stuff that is kind of more cherry picking and confirmation bias? Look, it's important in the sense that it's happening it's occurring and there haven't been any flaws bugs theft you know from that right there's obviously been hacks up in this thing um i think the difficult part in that metric is we don't know what that really is calculated using right i know the coin metrics guys have done a really good job cleansing that but how much of that is me buying something on chain transferring it to myself off train or you know moving different uh bitcoin from difficult storage

solutions or uh you know how much of it is actual use case versus what we know what demo and paypal are being used for within that closed loop ecosystem so i think it's a little bit apples to oranges but i think it's important in terms of like look you're talking about trillions of dollars of year being processed on this network and it continues to work without a glitch right which is the most important thing in my mind um and as you get those to be bigger and larger size transactions uh you know the safety and security of the network starts to become confirmed right so We had the public company last week deploy $250 million of treasury in what was probably only seven days. And you start to see stuff like that.

That size would have been unfathomable in 2017. You would have taken Bitcoin up 50% in a week doing that, and it didn't move. It was up 5% or 6%. Maybe that's negative for near-term positioning. I don't know. But I think that's more relevant than trying to compare and say it's better. And I also, as you think about that store value narrative, how much is gold used any given day? I don't think we need to get into the whole medium exchange payment mechanism for this to start to materially appreciate from here.

I think it's an upside that COVID is starting to force people into – in America, this is already happening all over in Asia and even in parts of Africa – use QR codes at the point of payment, increase adoption of NFC technology. If you start to see QR codes at the point of payment more, maybe you start to see some of these Bitcoin wallets being used. But I think people don't want to spend it right now, which is the most important thing. I think what becomes more relevant is doing things like paying dollars to receive Bitcoin. If you had a Venmo and you owed me $25, and I could say every time I get a Venmo, I just want to receive Bitcoin or Square Cash, that becomes more interesting for me. And if that starts to be indicative of the transaction volume, it's just so tough to bifurcate what people are actually using it for. um you uh i know you've looked at a block five before and uh one of the things that is really interesting about that business to me uh is the fact that one they uh are going to come out this

credit card that pays in bitcoin rewards right so kind of similar uh and then the second thing is that they do these flex payments so if you're earning interest for example you can basically choose your currency so you can take a bitcoin digital dollar whatever uh i don't think that there's an appetite yet in the venmo's the you know paypal's whatever but i agree with you that the second you start really shifting the mindset of like, wait a second, there's multiple currencies that we support. And do you want to take this in dollars or in Bitcoin? I think you start to really highlight the competition at the monetary policy level of like, why would I take Bitcoin over dollars? And you educate people. For Bitcoin, I always recommend to anybody that's not doing

this full time, and even for those that are to dollar cost average, right? And there's no better way to dollar cost average. And if you could say, well, I'll take my reward points on my credit card back in Bitcoin or every time I get a payment on this peer-to-peer wallet, I'll take it in Bitcoin or I'll take 10% or 20% of my paycheck and take it in Bitcoin. There's so many different ways you can naturally dollar cost average if the infrastructure is there. And I think there's enough demand for that to start to make sense. I'd love to see Square look to build something like that on payroll processing and on peer-to-peer payments because I would just have everyone pay me on Square Cash and keep my balance there. You have a couple of hundred dollars, a couple of

thousand dollars in demo or cash up at any given point in time convert that to bitcoin and never take it out right your money's kind of fungible just keep that as a separate distinct pool it's just part of your you know dca allocation which i think is interesting so great to hear the block five guys are doing that we'll love to see them uh white label it to all these fintech companies so we everyone can start getting uh some bitcoin don't give them too many ideas they got to stay focused um listen you've uh you've done a fantastic job i think um kind of sharing a lot of your knowledge through the John Street Capital account and the medium piece that you've written, help us understand where do you get the information that you get in terms of what are the

information sources that you put some level of importance on? And then also, what are some of the other things that maybe you've done to develop the frameworks and intellectual rigor that you use to evaluate some of this stuff? Sure. So a lot of it really just comes down to classic mosaic theory like anything else right you're really trying to put together the different pieces of the puzzle so i think that's again one of the benefits of looking at both public and private markets is you can start to see the future on the private side but it's not quite there yet you can see what the public companies are doing and sort of you know their public disclosures would be earnings calls the management discussion analysis and the k's and the q's and going through that

talking to management teams on both the public and private side you know talking to their clients and trying to put the pieces together. What are the pain points and how are people solving them? What is this business doing for somebody? I think too often in public markets, people think of them stocks as just numbers and valuations and ones and zeros, and they move up and down, but those are companies. Those are companies with employees, with customers, clients that have to be happy with the product. I think that's why the work that someone like Kathy Wood, who I've really enjoyed on your podcast, and the people at ARK have done so well and have been so differentiated It is, you know, they have the ability to look beyond the next quarter, the next year, the next two years to say, what could this business actually be worth?

And they really treat it like a business, you know, very different investment style and velocity than someone like Warren Buffett, but still similar nonetheless in terms of these are businesses with cash flows that you're owning, right, which I think is important. So, you know, it's a mixture of all of the above. I think on the private side, it's great because you can get the actual underlying data from these companies. The more active you are, the more information and data you have, which you don't quite have on the public side, of course. But on the public side, given the disclosure requirements, there's a ton of information out there. So it's talking to industry experts. It's talking to founders. It's talking to their large customers and figuring out what pain things are and putting this stuff out there for people to push back and say, I don't agree with that or here's something.

The number of good conversations that have resulted out of this that have changed my thinking are really the biggest reason for doing it. You have founders that will reach out to you and be like, you completely mischaracterized what we're doing. You're like, oh, okay, well, nice to talk. You wouldn't pay attention to me prior, so good we're having this conversation now. That's part of it as well. I love that. What's the most important book you've ever read? That's a tough one.

um i wouldn't say it's the most important book i've ever read but sort of the most recent one that was impactful uh jerry weinstraub has a book when i stop talking you'll know i'm dead uh for people that don't know jerry's a self-made guy from the bronx he started his career as a talent agent he basically ended up in every role across entertainment he worked with everyone from melvis to sinatra to pop dylan to led zeppelin to cluny and matt damon and brad pitt and like he just hustled and outworked everyone like he literally just talked his way at the top he had no business doing any of the things that he was doing he was in his probably mid-20s when he started to tour elvis around um and he knew he had no business doing it but he

didn't care and those will be always the stories that resonate with me right like i'm not like a fan of the smartest guys in the room long-term capital management blowing things up i'm a fan of jerry weintraub from the uh the streets of the bronx just making his way to sort of the upper echelon of hollywood i i read that book and it is absolutely fantastic and uh and he's definitely got a sense of humor as well oh for sure uh last question then you'll get to ask me when to finish up uh aliens believer or non-believer uh definitely a believer i mean yeah the universe is just too big for them not to be here if you look at all the stuff coming out and like the ufo projects the pentagon slowly you know redacting or unredacting some information like uh i think

you know you have to think there's other life form out there it's just it's just too big not to be And I know that you're intellectually curious, so I'm guessing that you went and looked it up after the other day. What's the story with mining gold on asteroids? Any insights there? It looks like it could actually be feasible. TBD, we'll see. Elon might be onto something.

I love that. You could ask me one to finish up. What question you got? So, you know, you obviously have Morgan Creek Digital. You have the podcast. You have the newsletter. This year you launched the YouTube channel. you have twitter uh you know you rebranded this from off the chain to to make it more generic and

have some more of these conversations sort of what's your goal with all of this and where do you see sort of the content creators going and where's your role in that ecosystem i have no clue uh short answer um kind of more nuanced answer is uh i just think that a lot of the content creation similar to i think what kind of what you've seen the value of just as you put things out in the world you get tons and tons of feedback right and sometimes they're um i think it's joe rogan's like don't read the comments it's uh bad for you whether it's good comments or bad comments right and so like there's definitely that element of just you got to kind of you know remain uh somewhat grounded in uh in reality but what i do find is you know when we get

to have this conversation i've learned a bunch today uh and i get to do this kind of every single day with people who are um you know i've specialized uh knowledge or spent a lot of time thinking about certain areas so i get kind of a crash course um through the podcast and the writing stuff um i'm shocked at how many people respond right and it's just like trying to put a piece out every day um sometimes it's not gonna be as great as you know other days and that's fine you should be comfortable with that but um the number of people who will write back and be like oh today you wrote you know you wrote about insurance i work at an insurance company and i actually run you know this huge thing blah blah whatever like here's what you got wrong you're like cool like thank

you right like i can't believe that you're reading this um and even to the point of uh it's like there's politicians and regulators and you know like like all these people who just i would never ever think that i would have the opportunity to uh to kind of talk to and gain data points from um all that's really valuable uh what do i think is the long-term play for creators in general uh i think a lot about like creators used to uh just create then you had kind of creators who got smart like oh maybe i should like make some money by advertising you know whatever now you're entering this world of like uh creators who uh want to invest so i think like angel is rolling funds like all this stuff's gonna like unlock a whole world of hey i have a reputation in an

audience so like give me your money and then i'll go invest some people will be really good at it some people will struggle just it's still investing at the end of the day right and so that's gonna kind of play out how it does uh but the thing i'm most interested in is people who build these really big brands uh either personally or even behind like some sort of you know more um non-personal brand uh and then build companies um and are able to kind of hype those companies through and so if you kind of think about uh the egregious examples that everyone laughs about are like the kylie jenner's the kim kardashians the kanye west like yeah they got famous for xyz reason uh and we don't think of them as creators as much as celebrities and they create companies right

then you go and you even look at um uh uh was it ryan reynolds or whatever with uh the gin company right like he invested in it but he kind of became the face ends up uh you know selling it so like this is not a new mechanism it's just that we're gonna go i think downstream to kind of the the more niche players or or different types of creators so not necessarily celebrities but actual content creators and they've pretty much done this with like merchandise before you know kind of like the the easy low-hanging fruit type stuff um but what happens when all of a sudden you know the biggest youtuber in the world creates a software product right you know and i uh one of the examples i gave some of the other day is casper just took a massive down round right

yeah what celebrity or content creator could step in tomorrow own that company and basically completely change the unit economics because cac would go to zero right and so it's like you actually can change the dynamic of a business um and change the unit economics which then can change the valuation and how attractive that business ends up being it's like d to c is an easy one there's probably a bunch of others but i think that's a world that is like very unexplored um but will become important in the future uh and so like if you think the world's going there then like you should create the content now and build audience and kind of do all those things not having necessarily kind of a finish line master plan but just like directionally this

is going to be valuable in the future right makes a ton of sense well you're doing a great job with it so uh keep it up where uh where can people go find uh the right and by the way i'm going to say i would say this without you here like uh you probably do some of the most thorough analysis especially for somebody who posts pseudonymously, which is ridiculous. But when you read these medium pieces and stuff, it's just like, Jesus, like this took a lot of time, effort, and is obviously very thoughtful. So how can people go find those? Yeah. So, you know, it's on Twitter and on medium at John Street Capital.

And to finish up, where did the, where did John Street Capital name come from? So a couple of buddies of mine were pulling together some money when we were trying to invest uh early on at a school and we lived on john street new york and uh create an llc and it's stuck ever since nothing like uh using the really simple things in life for inspiration exactly awesome well listen i appreciate it very much and i'll have to do it again in the future likewise appreciate it have a good one