The Pomp Podcast - #412: Peter Doyle on Modern Value Investing

Episode Date: October 21, 2020

Peter Doyle is a Managing Director and co-founder of Horizon Kinetics. He is a senior member of the research team, along with being a member of the Investment Committee and the Board of Directors.  In this conversation, we discuss inflation, how technology is deflationary, why capitalism is broken in the US, saturation of tech companies, and how Peter currently views the global macro environment.  =========================== LVL is a new crypto investing platform that I'm an investor in. They allow anyone to trade an unlimited number of times per month for only $9. If you buy or sell more than $500 in Bitcoin on any exchange, you're spending too much on trading fees. Use LVL to save money and trade as many times you want, but only pay $9/month. https://lvl.co/ =========================== Coinbase Wallets are adding support for .crypto and .zil domains through their partnership with Unstoppable Domains. Unstoppable Domains provides an all-in-one solution for blockchain domains. You can send money using these new domains instead of long Bitcoin wallet addresses, while also storing your domain in Coinbase's collectibles section. Go to unstoppabledomains.com in the dapp browser to register and manage your domains.  =========================== Pomp writes a daily letter to over 80,000 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. Peter Doyle is a managing director and co-founder of Horizon Kinetics. He's a senior member of the research team, along with being a member of the investment committee and the board of directors. In this conversation, we discuss inflation, how technology is deflationary, why capitalism is in the United States, the saturation of tech companies, and how Peter currently views the global macro environment. I really enjoyed this conversation with Peter, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors.

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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, pompletter.com. All right, let's get into this episode with Peter. I hope you guys enjoyed this one. 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 guest here. Peter has joined us. Thank you so much for doing this, sir. Happy to do it. For sure. Let's just jump right into your background, kind of what you did before you joined and started Horizon Kinetics. Sure. My first professional job was working at Bankers Trust Company, which ultimately got acquired by Deutsche Bank.

I worked in the trust department or the investment advisory department, and I was a portfolio manager there, and I worked there for approximately a decade. And we left there as a group, myself and a number of individuals, and started a company called Horizon Asset Management in 1994. And then two years later, I started a second company called Kinetics Asset Management. And the idea was that I was going to use the research and analytical capabilities of Horizon to build up the Kinetics business. And the Kinetics business has the distinction of being the first company to start an internet mutual fund in the United States. Got it. And so where did the names Horizon Asset Management and Kinetics Asset Management, those two are

known now as Horizon Kinetics, but where did those two names come from? Sure. That's a great question. It gets into our investment philosophy on the Horizon side. Horizon is meant to be long horizon, look out into the future. And one of the things that we observed, my colleagues observed it, and other people had observed it as well, is that if you extend your time horizon based on how the financial industry is structured, i.e. everyone's looking at calendar year results, what you find is

that the market will discount certain securities at a very high rate because it doesn't fall within that very discrete time period that most investment managers are looking for. I need something that's going to do well in the year 2020. If I think it's going to do well in the year 2021, 2022, it has little utility to me. So that was meant to show that we're long-term value-oriented investors, Horizon. In the case of Kinetics, it's a name that my brother picked up, just dealing with energy and things of that nature. So he's the one who came up with that. Got it. And then how do we get to Horizon Kinetics today?

So we went through the financial crisis, and there's a lot of confusion in the marketplaces. why is this product over in Horizon? Why is this product over in Kinetics? It just made sense to basically consolidate the two businesses, bring them under one roof and run it that way. Got it. And maybe talk a little bit, just you started to mention the investment thesis being longer term focused, kind of how do you describe the interest that you guys have and the assets and industries that you look at? Kind of what is that investment thesis or that investment philosophy? So before we even put pen to paper to determine whether or not something is good or not, you have to think through the qualitative aspects of a business. So what is the product? Does this

product have a long product lifecycle? Is it going to be demanded five years from now, 10 years from now, 20 years from now? So if you think about Berkshire Hathaway buying Geico auto insurance, it was needed 50 years ago. It's going to be needed in another 20 years. So what's his advantage. I can provide that auto insurance generally at 15% less because I'm going direct to the consumer. So he understands that business. He says, I want that long product life cycle business. That's really kind of what we're thinking about. We want to compound our money. We want to capture the business returns. And we want the businesses themselves to have a high degree of predictability. And that's really our goal. And then paying a price that we think

we're going to get that reasonable rate of return. Absolutely. And so obviously, being value investors, the price you pay is a big determinant to the return you're going to get. Maybe let's just start with the macro environment. It's tough being a value investor right now. How have you guys looked at the macro environment before COVID, then when COVID hit, and then the Fed's response afterwards? So we recognized pretty early. I would say that we probably even picked up during the Greenspan era of the Greenspan put, saying, okay, there's a lot of debt building up in the economy, a lot of debt building up on balance sheets, et cetera. And it seems like anytime there's a problem, they're willing to step in. Obviously, the financial crisis, you saw that the

Federal Reserve was willing to step in in a big way. And it became really obvious to us that there was a point of no return. So you can go through the national debt of the United States right now was at $27 trillion, the total debt of the entire country is something like $80 trillion. If you start thinking about what it would mean to refinance at two percentage points higher, three percentage points higher, it would choke off the economy very quickly. So we obviously didn't see COVID-19 come. It was predictable. And in our opinion, coming out of the financial crisis, we felt that the Federal Reserve was kind of locked in a position where they're going to keep interest rates for a long period of time. We're talking possibly multiple decades. And that

was pre-COVID. Now it's a guarantee. And you saw what happened at the end of 2018, the quantitative tightening that they tried. Two and a half, three weeks, market traded down 20%. And they quickly reversed themselves. So my guess is that they're going to, they recognize the problem. There's a debt problem in this country. There's a debt problem globally. And central banks around the world are going to keep rates down artificially low, and they're going to try to inflate you out of their money to pay you back in cheaper dollars. So that's kind of how we saw the backdrop. Now, couple that with the rise of ETFs and indexation. And there's nothing wrong with indexation. In fact, it makes a lot of sense at a certain price. The problem with indexation is

that the more money that flows into a particular index, they buy the same securities. Now, It may make perfectly great sense at 10 times earnings. It may make reasonable sense at 15 times earnings. You start buying at 30, 40 times earnings, it makes no sense. You're not going to get a good return. You're going to probably lose money over a 10-year period of time. So that was really, that's kind of the headwind that the value investor has been facing for the last decade plus.

And it's, you know, I like to say it's pure insanity. But so far, it's been working out that way and money continues to flow in. I think ultimately, I think we're at a tipping point. I think the scale of it is so large that they're not ever going to get 100% of that. And if you look at the S&P 500 as an example, the top five names represent 25%, 26%. It defeats the purpose of indexation. You don't want that concentration. You want it to buy the asset class.

You want it to get the long-term return on the asset class. Now you're making a bet on a handful of names. And I think people are going to recognize that. I think certainly standard employers recognize that. Invesco, all the people that put out these products are saying, okay, this is not really achieving its goal. I think it's going to end up being a real problem for people. We're about as far away from that as you can possibly be. Describe a little bit in terms of where that puts you. If you're not doing indexing and all the passive investing, where exactly are you

looking for investment ideas for putting capital? One of the things that we talked about that I just mentioned was the probability of inflation, i.e. the government needing to inflate their way out of the debt crisis. And so we're looking at hard assets and tangible assets and asset-like companies. So when I say something like hard assets, we're looking at a company that derives its revenues from the underlying commodity, but doesn't necessarily have a business operations attached to that. So a royalty company. So there's a handful of companies like that, maybe 10 globally. We own all of those companies. And those companies have extraordinary rates of returns from a business operation standpoint. They rival the best monopolistic businesses

around in terms of operating profits and net profits. Can you give us an example of one of those? Sure. One of the biggest positions of ours is a company called Texas Pacific Land Trust, and it's been around since the 1880s. Nobody knows about it. It is unquestionably the most valuable piece of real estate in the world. And they collect royalty on a certain number of acres, about 456,000 acres of the collective royalty interest. So if Chevron wants to drill on that, they pay them a royalty check.

And then they own about another 900,000 acres of surface acreage. So if anyone wants to drill in the Permian Basin and Delaware Basin, they need to cross onto Texas Pacific Land Trust land, and they pay them a royalty. So essentially, it's a check-cashing business, and it's been around since 1888, and it's quietly taking itself private. It has paid dividends over the passage of time. It's also acquired its stock. So when we looked at the underlying value and the developments in technology on fracking, we said, okay, the fracking technology continues to improve.

They've only scratched the surface at a very small amount of the amount of oil that's in there. There's an ocean of oil underneath that ground, and they're going to collect ever larger royalty checks in the future. So the price of oil from the year 2014 through today, in 2014, it was $114. It's now down around $40, West Texas Intermediate Oil. You made four and a half times your money in Texas Pacific Land Trust. That's with oil being down very substantially. If you ever had the wind at your back, oil went up, you can see how you can make a lot of money. So we're really the only company that you can get any type of meaningful exposure to that to that business. And it's ranks on if you look at the long term stock returns of Texas Pacific Land Trust, it's among the best on the New York Stock Exchange going back 50, 60, 70 years.

Yeah, that's really, really interesting. And it sounds like you guys are pretty convinced that the Fed's actions, right, they've publicly stated they're going to shoot for over 2% for some persistent amount of time in the inflation. It sounds like you have confidence that they will actually be able to do that. Or are you more playing the fact that just them saying it drives inflation fears, and therefore, kind of there's the flow of capital into inflation hedge assets? Well, for us, if everyone has their money in the high-growth tech companies, et cetera, we're saying, what if you're not 100% certain? You're not going to be 100% right. What if you think there's a 1% chance that you're going to be wrong? Maybe you should allocate 1% to us because we're a safeguard against that world coming apart. The CPI has been manufactured, and they can come up with a number, whatever they really want. And they've reconfigured it a number of times.

And the way they formulated the use of calculated, the CPI has been running at about 6%. And if you look at the things that you really desire in life, that's probably running at 10%, 11%. And if you look at the money printing that's going on, it's running at 15%, 20% more recently. But it's been running historically, MTO has been increasing about 6% or 7%, which is a pretty good benchmark for the inflation rate. So if you look at a 10-year treasury, you're getting 78 basis points today. The stated mandate is to get inflation up to 2%. That means your real return is going to be negative in all likelihood. And if you really look through the stated numbers to what's really important,

you see that the inflation rate is substantially higher than that. So let me just, I want to digress one second, just to show you how the inflation is going through the economy and affecting people. So when they bring interest rates down to near zero, financial institutions make their money. Banks make spread. Insurance companies make money on their investment portfolio. So I have homeowners insurance. And now the homeowners insurance, they know they collect a premium from me. Many times they're looking to collect the premium and break even and they're going to make it on the float.

Right. That's how Warren Buffett became a multimillionaire, earning money on tens of billions of dollars with no cost. So now they bring it down to zero. They say, OK, I can't make money in my investment portfolio. I'm going to have to charge you substantially more for your homeowner's insurance. So my homeowner's insurance policy is up 20% year over year. So that's inflation. That's a real expense. I'm not going to give up homeowner's insurance. So people aren't appreciating that.

So unless you have upped your homeowner's insurance, you haven't noticed that inflation yet. But that's coming. That's around the corner for most people. And so when you think through this, it feels like the Fed has to bring, you know, I keep calling it like a monetary stimulus bomb to the table in order to get inflation anywhere near this 2% official number, right? Because I'm with you in that the unofficial numbers are much worse than are being reported. Everyone doesn't experience the same level of inflation, right, which is a whole other kind of can of worms. But in order to get the CPI numbers up over 2%, it feels like they've almost brought like this water gun to a pistol fight, right?

In that they've got rates down to zero, they've printed a good amount of money, but it doesn't feel like we're going to get there with what they've already done. So what do they do? Do they go negative rates? Do they just print and print and print? We see $10 trillion more, like how do we get to that two plus percent in the official numbers that they're targeting? So I don't think they ever really care if we get there or not, to be honest with you. I think the plan is that, oh, we're trying so hard to do it. Let us print up more money and we'll inflate you more and pay back in cheaper dollars the debt burden that we have. So that's kind of my take on that. I would say that, you know, the things that I mentioned, like the Chalkwood Index, the things that you really desire, the inflation rate is running at much, much higher levels than that. And they're also going to do fiscal stimulus, right? So the bill is likely to pass, and after they get done with their squabbling in the next month or so, they're going to spend another $1.82 trillion that is going to go into repairs, and they'll start doing those types of things.

And the Federal Reserve will monetize that. They won't call it monetary, but it's basically going to be spending. They'll send checks to people's homes, et cetera, to get people to spend. Yeah, and the fiscal side, to me, everyone's focused on the monetary side because that's the ones that have the really clear-cut numbers. That's the ones that everyone writes about over the last couple of months coming out of the COVID kind of market crash. But the fiscal stuff almost seems more dangerous, right? Would you agree with that? Or do you think that they're kind of both equal?

Well, that's where you can see the real spending. So if they send a check directly to your home, it's not, oh, it's sitting on the bank. The banks are better capitalized. They don't need to lend out the money. It's coming into my pocket. I'm going out, and I'm going to spend that money. Typical American is going to do that. They need to do that, I think, now because there's so many people in arrears on their mortgages, in their rents, et cetera, and go to whatever level it is.

So, you know, for the first time in my life, I really came to the conclusion that capitalism is broken here in this country. And, you know, it used to be if I took risk and I made a mistake and my judgment was bad, I was going to get knocked in the teeth with that, and I'd take my losses. I, you know, earlier this year, I made a bet about being short volatility, and it obviously went against me fairly dramatically in March and April. And then I started to deleverage my portfolio, and I see that the Federal Reserve is stepping in and buying bonds. I said, I don't need to sell these bonds. So they went from being down 20% to basically being up 10%, 12% in a couple of weeks' time.

And that's a problem. That's a moral hazard for investors. So I don't see how they're getting out of this. And I think they're going to see this spend like they have been. And I think it's going to accelerate. And, you know, for the first time in my life, I said, what is the charade of me paying taxes? If you can just print up money out of thin air, why am I paying taxes? Just print up a little extra more, you know, and pay my taxes for me.

You know, just add it to the tab. So it's a problem. This is a really important point. And I think that when people first started saying it, it was kind of the smart asses on Twitter and stuff like that. and everyone just kind of disregarded it because it was coming from people who don't manage capital, don't spend a lot of time

kind of talking about the economy. You are probably the 10th or 12th person who runs a large asset management firm that I've had this conversation with. And my point to people is, it's one thing when it's a pseudonymous account on Twitter kind of looking for retweets and memes and all that kind of stuff.

It's another thing when you start to get kind of the most sophisticated investors in a market saying, wait a second, what's going on here? What's the end game? Where are we headed? And also, why are there certain things like the tax collection, et cetera, going on? Does that feel like that's a new talk track or a new focus for investors, in your opinion? Or is this something that's maybe been going on forever and people just didn't talk about it? I think the debt burden, there was always hope that new technologies were going to lead to growth in the economy, you're going to grow your way out of this, and you could handle the debt burden.

I think it's got to the point where that's not an option anymore and they're going to continue to print up or spend what they need to spend. So it's the first time that I ever thought about it. It's the first time in my life where I really said, this is not right. What they're doing to the typical saver, to the typical investor in there. If I made a mistake, I was always happy to basically take the hit and, okay, I learned from that. Let's move on. I'm not going to be right on all things. And I think they really created a situation where they're not going to be able to get out of that and they're just going to continue to devalue and devalue it at a faster and faster rate yeah um when you think about kind of what's going on now i think you and i see eye to eye that

this is not good where does this end up is this a default situation is this hyperinflation of the dollar um is there some other scenario that kind of you see as the natural end state uh if they kind of continue doing what they're doing i i think they're just going to continue to you know will take a decade or two decades or three decades to basically grow their way out of this and pay back the debt in cheaper and cheaper dollars. So I'm not sure that it's going to be a doomsday scenario. I think you need to protect yourself against that. And I think, you know, obviously you're a believer in Bitcoin. I'm a believer in Bitcoin. I think that's one of the ways that you can protect yourself against that. Yeah. So it sounds like you actually do think that there's

a way for them to kind of get their way out of it. It's just by simply devaluing the dollar so much that they use that to kind of pay back that debt. That's correct. All the debt holders are going to be left holding the bank. That's really what it amounts to. That brings us to the 60-40 portfolio. Is that safe to say that's not going to be the standard, or at least it won't work for the foreseeable future no if you're looking at a 10-year treasury at 78 basis points um that's just not going to work for you right so a hundred thousand dollars getting you seven you know a hundred thousand dollar investment getting you 780 dollars a year people just can't live on that you know a million getting you at 7 800 and i used to get you 60 55 000 you could maybe live

on that if you have two million dollars in retirement etc or even less than that um so that's a real problem. So people are going to be pushed out of that. And that's what that's the hence the rally in the stock market, even though the economy is has rolled over. Yeah, you know, you've seen a V shaped recovery in assets, and you're not seeing that in necessarily in the economy. Yeah, what's really interesting to me is, I think if you had asked most people, okay, we're going to have a kind of liquidity crisis due to this public health crisis. when that happens, the Fed's going to step in. And between the elected officials and the Fed, we're going to get a zero rate environment and trillions of dollars of quantitative easing,

like what's going to happen, right? Inflation would absolutely be part of that conversation. And inflation hedge assets, I think most investors would say would do well. It almost feels like to some degree, equities are getting put into the inflation hedge bucket in some weird way, right? And so maybe some of it people running from the bond market, Some of it is, you know, we're sending stimulus checks to young people and now it's got lower barriers or entry to get into the stock market. Like, how do you see kind of equities and the demand having such an explosion in this environment? Yeah, I think it's a natural reaction. I don't think people have thought through where the inflation might show up.

So you could be in equities and you could actually maybe benefit from that and avoid the inflation because your company was able to pass up along through prices and they could hold down their wages, etc. or you could get hit where your earnings suddenly collapse by 50%, 60%. It doesn't ripple through the economy in an even way, and that's what's coming up in the future for a lot of people, and I think you're going to start to see that. Now, you couple that with the valuations. The valuations are very extended for many companies, and it's hard to see the typical stock that, you know,

investing through a basket in the S&P 500, how you're going to get an adequate rate of return looking out over the next decade. I think you're going to end up with a very poor rate of return, possibly a negative rate of return. Yeah. One of the things that a couple of people have come on the podcast and talked about in the past that I find fascinating is this idea of technology being very deflationary, right? And so you can use the trend of technology to continue to eat up all of this liquidity. You won't see the high levels of inflation. You'll be able to continue to drive

equity returns in those types of businesses. How do you guys see the technology companies and the sector, and maybe their relationship to the macro environment? So certainly in the leading companies, I would be very concerned just based on valuation. You know, you're looking at Apple at a $2 trillion market capitalization. So if it's going to grow at 20%, that means it has to increase by $400 billion in size. And then it has to grow by a bigger number in year two. It just doesn't seem possible to me. So, you know, there's a saturation point for a lot of technology and the fact you you tweeted out something the other day about apple releasing new phone my old phone's going to slow down so the fact that you and i may because of that dynamic

you and i may run out and buy new phones but we're not growth to the market right they need to find 20 more users or come up with better products than that so i think just the sheer scale of that um is is really kind of unnerving and you know i look at you know whether facebook or twitter and kind of there's going to be backlash because of potential censorship, etc. Those things don't have a lot of margin of safety there. So they may work. But I don't I don't think that's a great bet. Yeah, one of the things that's very obvious just between conversations that you and the rest of the team have had kind of publicly content you've put out, etc, is it feels like you're not looking for the grand slams. Instead, you're looking for the high probability wins, right? Kind of that

value investing mentality. And what I think I hear you saying is that these technology companies, especially the top five or six of them, just violate almost everything in the value investing kind of framework. That's correct. That's correct. I think what's going to end up happening because the dysfunction that had gone on in the marketplace, and before we got on, I was telling you that when I got in the business, the energy sector was 30% of the S&P 500. Today, it's 2.1%. Now, when you think through the implications of that, what does the energy sector truly mean to the global economy? It's something substantially more than 2%. If I was an evil genius and you put me in charge of all the hydrocarbons in the world and I shut off the spigots tonight, everyone would

come to me looking to cut a deal and give me whatever they needed to basically restart their business. So when I see that going on, the functional equivalent is actually happening through environmental concerns, through lack of investment, through people basically not giving exploration companies the money they need to replace reserves. You're starting to see that basically the supply is falling off a cliff. And if you look through, typically you wouldn't see commodity prices up in a year that we've had so far, right? They're connected to the economy. you're starting to see certain commodities not not oil yet but natural gas is up 20 some odd percent why is natural gas up 29 because natural gas is really a derivative of drilling for oil

but the demand for natural gas doesn't fall off in the same way you still want to run your air condition etc etc you need to do the power plants so the support the same amount of oil and the same amount of natural gas. The demand is still there. You see the correcting mechanism is the price. There's a lot of deflationary issues that have gone on in the last six, seven years as a result of the price of oil coming down very substantially. Earlier this year, it went negative 30 plus. If the price of oil, because of a lack of supply, reverses itself, you could see inflation come back in a very ugly way. So that would be one of the main concerns that I would have looking out in the world.

And we're positioning our portfolios for that potential. Now, you don't have to agree with us, but maybe you should have 1% or 2% or 5% with us because the way you're looking at the world may not play out in things are going to always be rosy. Technology is going to grow to $10 trillion in the case of Apple to get an adequate rate of return. Absolutely. So not only are some of the tech companies a violation of kind of that value investing framework, you mentioned Bitcoin. And I think most value investors, when they look at

Bitcoin, would say that violates everything to do with value investing. Where does your interest and kind of bullishness come from when you're looking at that digital asset? Sure. So let me give a little background on how I got into it. So back in late 2015, my colleague Murray Stahl, who's a brilliant financial mind and had a history, had a degree in computer science, has an interest in cryptography, et cetera. He had the Bitcoin white paper on his desk. And that day he came in, he goes, you know what?

I need to read this. I'm hearing some things about it. It's only 9, 10 pages long. He reads it. he gets up out of his desk he tells me about it within no exaggeration a minute and a half i said i'm in okay so now why am i in i said well if you tell me that you think that they solve the double spend problem you can't copy and paste and can't spend bitcoin multiple times right and you think that the security is actually going to hold in terms of the blockchain you're telling me there's

a fixed amount of coins that are going to be produced. This could potentially be a global currency. This is literally within a minute and a half time. And the demand for this is going to grow exponentially, but the supply is going to be very finite. And basic economics, that's a win. So I didn't get into Bitcoin. And let me just show you that I'm not reckless. The way I was going to control my risk, as I hadn't read the paper as of that moment, I took it home that night and read it and started doing more homework on it. I said, I can control my risk by putting a small amount of capital. And the asymmetric nature of this potential investment is such that I'd be foolish not to have an exposure to it. So I would say within probably four or five days, we had

in our accounts and personally ownership of Bitcoin that quickly. And we sized it in a way that if it went to zero, we'd lose 1%. If it went to zero over a two-year period of time, we lost 50 basis points per year. It's kind of a rounding error in terms of performance. It wouldn't be the end of the world. But in success mode, I didn't get into Bitcoin to make 25, 30 times my money, which I've already done.

I got into it to make many thousands of times my money. So if I didn't own it today and I heard the same story, I would get up and go find a way to buy it immediately. Yeah. And do you guys hold it with the assets that you manage or just in the personal accounts? Both. We bought it professionally. And when you do that, what is the kind of conversation like with investors? Is this part of kind of the hard asset thesis that you have? And yes, you're owning kind of cash producing land and Bitcoin's kind of part of that thesis.

Or is this something completely separate in terms of a thesis? This is something completely – there's no cash flow, as you pointed out, right? You can't – but the true value of it or the quoted intrinsic value, you can argue about what intrinsic value means, is that it has better monetary properties than anything else out there. So when you think through, I went back and I looked at what Hal Finney said almost immediately when he was starting to mine in the early days of Bitcoin, he made it hypothetical that this could equal all of the value of the assets outstanding, which he calculated to be $100 trillion to $300 trillion. And if you think through about what he said there, you say, yeah, that's right, that Bitcoin

could equal all of the other nominal stores of value, could equal what gold equals, cash around the world, short-term treasuries, short-term bonds, et cetera. And that number is staggering. So in success mode, and so far it's been successful, in success mode, it really should be a non-arbitrageable thing. People should say, this is a better store of value. Let me get out of my yens, my dollars, my euros, and move it into this. So there's a lot of data points as we went along there. In 2017, I just gave you one of the things that I said, okay, my lens initially was very small.

It was from an economic lens and an incentive lens. And I said, you know, I can see how the investment community is going to get onto this because the fees in running money through indexation are collapsing. And if there's one thing I know that Wall Street desires, it's fees. And cryptocurrency is going to offer them that in the future. So I said, OK, that's an incentive that I see that ultimately the financial industry is going to get behind this. but one of the things that that made me convinced that it was going to come along was in in early 2017 abigail johnson of fidelity right she's she's born into a family of billionaires she takes over control of fidelity investments which is highly regarded right has a great reputation

she's very publicity shy she seems like a completely normal person and the first speech that she gives is about Bitcoin. Okay, so now I said, why does she need to do that? She doesn't need to do that, right? So the only reason she's doing that is because she's laying the foundation for fidelity to get into the custody, fidelity to be recommending it to their clients, etc. And you saw the report that came out, you know, yesterday, two days ago, about moving 5% of the customer's assets into Bitcoin. And I can see that coming. And that wave is still in the very, very early stages so my anticipation i don't worry about day-to-day i don't know where bitcoin is going to be three weeks from now but looking out i expect it to rival all of the nominal stores

of value out there and that number is absolutely staggering so if it got to you know when i first made the investment i said okay it's eight billion dollars in market capitalization and i said if it just got to 80 trillion dollars that wouldn't even be all close to all of the nominal stores of value out there, that would be making 10,000 times my money. So that's kind of how I looked at it. So the asymmetric nature of what the upside potentially could be. Yeah, what's so crazy is, you know, I usually walk people through the math of let's say Bitcoin's a $200 billion asset, give or take gold's 8 trillion, you're talking about a 40x just to get to gold's market cap, right? And then on the expectation that I think you and I both have that it eventually

eclipses that right then you start looking at things like okay well what about the global money supply right and that kind of 80 90 trillion what about global real estate right you kind of can really see um you know very very large market caps but one of the things that i find fascinating about it is um not only is it oh let's just go and eclipse gold right and kind of gold will coexist with bitcoin but actually is there a world where you start to to uh not be additive market share or market cap, but actually you are extractive to these other store of value assets, right? The whole reason why people get out of dollars into art or real estate or any of this stuff is because they're trying to protect their wealth, right?

They're inflation hedge type assets. And so if I actually can just hold the Bitcoin and not have to go into those assets, could we see a contraction in some of the store of value market caps, right? As there's an inflation in Bitcoin's market cap. Now, I don't know if that'll happen or not, but it's really interesting to start thinking about. Right. Absolutely could.

You know, and that number grows every day as central banks around the world continue to print, right? It's going to go up another $2 trillion or more. It's going to go up $5 trillion probably over the next year in the United States. So absolutely. Yeah. And how do you see Bitcoin in the macro environment, right? So right now, it feels like there's some portion of the population who already was a Bitcoin believer, investor, holder, whatever. Now you've got almost the Federal Reserve running this like trillions of dollars in marketing campaign for things like gold, Bitcoin, whatever.

Is this something where we see the longer that the Fed continues to do what they're doing, Bitcoin just becomes more and more attractive? Or is there some kind of just natural cap to early adopters around the technology or something where maybe they can't continue to see the adoption at the rate that we're seeing right now? No, it's, you know, if you speak to somebody from Brazil or Argentina or Venezuela, they instantly get it, right? Because in their own lifetime, if they're my age, in their own lifetime, they may have seen their currency base down to zero three, four times. Here in the United States, we're going to be a laggard because people think the dollar, you know, no, that's good. I get my money back. It's all good. They don't think in relative terms and they don't think in real terms in what their purchasing power is going to be a decade out.

So that's becoming obvious. And if you're an investment professional and the gatekeeper for that, if you're not paying attention to that, you're not doing your job, right? And that world is coming here in the United States and Fidelity is going to usher it in and Goldman Sachs is going to usher it in. this is going to be a big deal you know and and you know obviously people talking about what's on the in the treasuries of corporations is four to five trillion dollars and if you're you're a controller for a company or treasurer for a company or cfo for a company you're you need to think about that that cash asset that i have is being eroded at a very fast rate what can i do to save it and when you go down the list bitcoin makes a lot of sense yeah what do you think it'll take for central banks to put it as a reserve asset you think we can get there you know uh it's funny you say that i i go to bermuda a lot and i actually pitched the premier uh basically

that he should take a million dollars two million dollars and they had a debt burden there i said this one or two million dollar investment could basically alleviate all your problems you'd be the best capitalized country in the world. So, yeah, I do. I think there's going to be some intelligent finance minister somewhere that's going to say, you know what, we should own this immediately and get ahead of the curve. And if I was having a conversation with Donald Trump,

I would tell him that he should tell Steve Mnuchin to basically do that. So, absolutely, I think it's going to happen. Yeah. I'm already past the point of is it going to happen and now questioning who's done it already, right? Absolutely correct. And, you know, unfortunately for the narrative, it's probably going to be some of the fringe countries, right? The people who are a little nefarious, maybe under sanctions, that type of stuff would be financially incentivized to do it first.

But when you kind of get past those countries, it would not surprise me if there's one or two countries that have already, you know, again, 1% of their assets, right? It doesn't have to be anything that is super material, but more of that chaos hedge type approach, given all of the monetary stimulus that's going on. Yeah, I agree. And that person is likely to go down in the history of that country as a hero. Absolutely. Other than Bitcoin, is there anything else that you guys are doing in cryptocurrencies, blockchain, mining, and anything else? So we got into the mining business. And I'm probably the fourth or fifth person qualified to speak about this within my firm.

So we're of the belief that the mining industry is going to be among the biggest industries in the world. And I'll just give you an example as to why I say that. So right now, based on the new equipment that we've purchased and how cheaply we can source the electricity, we can mine a Bitcoin for about $5,600 to $7,500, depending on that. So now if you think about it, that's 100% rate of return if the price stays at 11.4. I just mentioned that you know it as well as I do, the 10-year treasury, that's 78 basis points or 73 basis points. So people are going to say, you know what, I'm willing to do that. Let me allocate.

You don't have to take a large amount of money. The machines themselves aren't that expensive. So I'm willing to start doing that. And they're going to find people that have that capability and seek that out, and that's going to continue to grow. And you see that on a daily basis with the ashen rate of the network itself. So that's going to continue to be a massively big operation and potentially a very large industry. And we're going to continue to grow that. Got it. And in terms of kind of merging these two worlds, so you talked a lot about energy.

And then now you're talking about Bitcoin mining. There's obviously a need for energy in Bitcoin mining. Do you see opportunities for kind of these new players around Bitcoin mining to work with the old incumbents on the energy side? Or is that something that'll take a little bit longer to start happening? No, you're already seeing that. So if you go out to the Permian bases, you know, they're drilling for oil and they're flaring off the natural gas, right? They're just burning it off. It's not helping the environment.

So now you're seeing people are bringing trailers out there full of Bitcoin mining machines and starting to use that energy basically to power their machines. So that's going on. I don't know to the extent, but it's going to grow. That will grow exponentially in the next five years. Yeah, I completely agree. What else are you guys looking at, right? So you've got kind of the hard assets, you've got Bitcoin, Bitcoin mining. Where else sitting from kind of this value investing seat, given the macro economy, are places that are interesting to you? So, the various financial exchanges around the world. So, if you think about a financial exchange, it generally is a license, right? There might be a clearance license associated with that. They generally give out one or two, so they're very rare to get.

And the influx of additional money being printed up finds its way into financial markets to trade. So, those are really scale businesses. They have tremendously great operating characteristics. So the more volume that goes through an exchange, there's really no marginal cost of trading additional shares. It falls right to the bottom line. So we are, you know, very big investors in various exchanges around the world. Got it. And the thought process there is that those will continue to grow as businesses and just kind of the more financialization of everything.

There's going to have to be exchanges and marketplaces where that stuff is traded. Correct. Correct. Yeah. And then let's talk a little bit in the private markets in terms of venture capital and technology companies. Do you guys do anything there or is everything pretty much focused on the public entities? So it's ninety nine point nine nine percent public. But, you know, when we first found Bitcoin, we initially did it for clients through GBTC, Grayscale and Digital Currency Group. We made a small investment in that company.

And I would have I did do a little personally. I would have made it a much bigger position if they were willing to sell me that. So I would say on the private side, it's done more on a personal level than it is from an investment standpoint professionally. Got it. And just any thoughts or outlooks there? I think that there's been a lot of kind of well-known money managers who've, over the last 12 months or so, started talking a lot about some of the most interesting places

to invest in equities is in that private market and kind of the venture capital type model. And any thoughts there as to what's interesting or anything that you've looked at? So, you know, you actually were leading me in the direction, digital art. You know, I don't know that much about it. I haven't really followed the NTF market

and how that all works. So that's on my list to look at next. So that's potentially a big, big area. So anything that's tradable that's going to have value is certainly something that you should be looking at. I'll get you up to speed. I don't know if I know everything. I may be the 90th or 91st best person to talk to about it,

but I'll tell you what I know. Now, Peter, this is awesome. Last question for you before we get into kind of the final questions is what about markets around the world, right? So kind of we've talked a lot about the more North American viewpoint. Are there other emerging markets or other superpowers markets around the world that you find interesting or have been spending time on? So we have exposure to Japan and, you know, of interest that, you know, I don't know if you know, you notice that Warren Buffett a number of months back invested six billion dollars in Japanese commodity trading houses. He's obviously doing that for a reason. I think he thinks that inflation is going to be a problem.

The trading platforms are very desirable operating characteristic. So we have exposure through that. We found other publicly traded Bitcoin exposure. I professionally bought MicroStrategy in a very small position in a number of accounts. So if we were entering a stock competition and I had to select a company that could do the best over the next five years, that certainly would be in the category. because that's the single position of Bitcoin. I don't love the underlying business itself, but that position of Bitcoin could grow to some staggering number and that stock could just be off to the races. So we have a number of companies like that. Got it.

And what about Square putting the Bitcoin on the balance sheet? It's only 1% of assets, but I've got to imagine that's another kind of positive data point, your opinion? Absolutely. You know, if you're skeptic about what we're saying here, you can kind of ignore Square. He can lose 1%. You can kind of ignore MicroStrategy. This guy's a little bit off the beaten path. He could be wrong. He's going to be known as that guy if it

goes south on him. It's hard to ignore Fidelity Investments. So when I saw that in 2017, it really solidified for me that this wave is coming. And they spent the last several years, as has other firms getting up to speed where they can custody, they can trade, et cetera, and they're now going out and they're going to recommend it. And we didn't talk about Gresham's Law, but the whole concept of bad money drives out good. Good money is Bitcoin. Bad money is currencies around the world. And you're seeing that basically a lot of the Bitcoin is not traded in the last year. I think you even tweeted something like 63% recently has not traded in the last year. That's because people are hanging on to it and there's going to be a scarcity value to that and basic economics

right the first thing that you'll learn supply and demand the demand is going to grow in ways that it's just going to be tremendous and the supply is very limited so the correcting mechanism is the price so you know i have you know i have no doubt that i'll wake up one morning and bitcoin won't be 11.4 it will be 27.2 and then it will be 107 000 like very quickly um because somebody wants to get in on that. And there's a scarcity value for a company like MicroStrategy. If Bitcoin is successful, somebody is going to want to own those $38,000. So it makes it an acquisition. Absolutely. I tend to think that nothing is a sure thing. But in terms of supply and demand, there is very few things that have as an attractive asymmetric risk reward kind of

framework than uh than bitcoin right now and so it's uh it's gonna be fun to watch for sure yeah and i echo that nothing is there's not a sure thing i'm i'm not i don't have a degree in computer science i didn't go line by line on the code you know if there's the back door some way that they can ultimately issue 23 million i don't think that's the case but just you know there's unknowable unknowables um and you don't need that you don't need a staggering amount right so i i put you know personally i put two three percent in back in you know, 2016. I'm not selling a single one. I think it's going to some crazy level. And again, if I heard the story today for the first time, knowing what I knew then, I would say, I'm in.

I love that. I finish up with the same two questions you're going to ask me, one to end it. The first is, what's the most important book that you've ever read? so most i would say there's probably been three books in my life that have been kind of impactful uh there's a book called spoon river anthology um i read it when i'm pretty young uh by a guy named edgar lee masters and it's a fictitious town in the midwest and people are writing from their grave wow um so it's you know some of the stories are absolutely beautiful in it literally they're a page or half page each and then some are just very dark and it kind of when i was a kid reading that i was like wow people really had this inner life that they're not going to reveal

to you so that was kind of an awakening to me um and then i would say that um how to win friends and influence people has been an important book in my life um and every time i think i'm acting like a jerk i go back and read it because i think it's such common sense and i think how you treat people and you don't have to be nasty and get a lot done that way um so that's been important influence and then a company uh book called influence by robert chiodini um just persuasion and techniques like that so you know i follow scott adams on twitter and and some of his podcasts and kind of puts things reframing things and and positions that you have and and how to look at the world a little bit differently um i think so you know i've read most of those when i was very young

but i i would say that those really were impactful for me yeah those are great recommendations i've read two of the three and uh and very very good ones uh second question is a little bit more fun uh aliens believer or non-believer um so i listened to stephen hawkins before he passed away a number of years ago and um you know he thinking about the vastness of the universe the probability that there's other forms of life is probably pretty high so and the more disturbing part of what he thought was that it's probably not looking too good for us humans, the way we treat other people. So yeah, I would say I'm a believer. Yeah, I'm with you. I always say that we want to find them. We don't want them to find us, right? And if we find them, we hope they're

nice. Absolutely. You could ask me one question to finish up. What do you got for me? So if you, your wife and your brother decide to form a business, will you allow me to invest, be an early investor. Yes. Uh, I, uh, uh, they will appreciate that question more than, uh, more than even I will. Now, Peter, listen, thank you so much for, uh, for doing this. Um, I think people will really enjoy this. Where can we send people to find you, uh, on the internet and also find out more about what you guys are doing at horizon kinetics. So horizon kinetics.com. And again, you know, we're, we're not meant probably to be everyone's portfolio and we're we're saying this is our we're staking out a position that we're concerned about

inflationary issues that are down the pike and we think we found very novel ways to basically invest in that um that even if it doesn't play out that way we're going to get an adequate rate of return um so it's for the people that say you know what we make you make a lot of sense i'm not sure i'm going to sell all my apple or or google but i'm going to give you two or five percent um And you can find us at HorizonKinetics.com. Awesome. And then where can they find you? Hopefully not at all.

I generally don't give these. You know, I'm really kind of just a lurker. I don't really tweet or do things like that. My wife said, do not talk about politics. But the reason I actually got on Twitter, it's the only social media that I'm on, is that the 2016 election was really fundamental and profound in the sense that you had this guy that turned upside down, but the Republican Party and the Democratic Party, and he did it with essentially Twitter and a red hat. So that made, I said, wow, that is incredibly powerful. So

that's why I got on that. So it is absolutely wild to think about that, these social media platforms. But when you break it down, it's the ability to communicate directly to a group of individuals, whether it's for politics, business, whatever, is just a very powerful thing that changes the structure of how ideas are communicated, right? So you no longer have that filter of a media organization or somebody else kind of telling your story or building their narrative with your quotes. And I think that there's good and bad impact to that, right. But it's just very fascinating to kind of watch this play out across industries. Now, I can't agree, you know, you tweeted more recently about, you know, you don't need television to get your

product out there, go down the list. And absolutely correct. I mean, it's, it's, it's changed the life for the better, I believe. But there is some negative. But yeah, so you know, for people listening, you know, the advice that you give, believe in yourself, do the work, and basically get out there and hustle that's the secret don't tell everyone the overnight secrets all right peter listen thank you so much for doing this i think people are going to love it we'll definitely have to do it again in the future thank you pom bye