michael-saylor-preston-pysh-economic-calculation

A Masterclass in Economic Calculation | Michael Saylor on The Investor’s Podcast

Check out The Investor’s Podcast Episode Page & Show Notes

Key Takeaways

  • Technology companies turn products and services into information networks, and they become trillion-dollar companies in the process
  • Bitcoin is an accretive asset, a store of value, and the world’s first engineered monetary network, and everyone is incentivized to plug into it
    • Think of Bitcoin as a globally accessible, decentralized, banking franchise
  • Inflation defined: “The rate of price appreciation in a basket of goods, services, or assets that you desire to acquire in the future” – Michael Saylor
  • CPI is a basket of cherry-picked deflationary goods. In reality, we have hyperinflation in scarce desirable assets
    • For instance, Apple stock doubled in 8 weeks, and Bitcoin is up 400%.
  • “When you buy a bitcoin you are buying a scarce piece of property on a global liquid monetary network” – Michael Saylor
    • Compared to other assets, Bitcoin is liquid, global, fungible, portable, the hardest to produce, and has no property tax
  • “The interest rate is the value of time and so when you turn interest rates negative you are trying to stop time and make it flow in reverse” – Michael Saylor
    • But consider this, bond investors get destroyed if rates rise, and bonds bleed off value if rates don’t keep dropping, till the bubble collapses
  • Central bank buying assets is a nice way to say print public money to support things that no rational individual would buy. In the process, nationalization takes over and market mechanisms break down
  • “The Road to Serfdom consists of working exponentially harder in order to earn a currency growing exponentially weaker” – Michael Saylor
    • The answer: Sweep your cash flows into bitcoin. Even better, the yearly income from bitcoin’s growth will quickly surpass your business revenue
  • In order to preserve value, companies either leverage up to buy back stock, or they perform risky acquisitions
    • Even riskier, companies combine these 2 ways, “I borrow money to buy another company”

Ponder These Quotes

  • “The interest rate is the value of time and so when you turn interest rates negative you are trying to stop time and make it flow in reverse”
  • “The Road to Serfdom consists of working exponentially harder in order to earn a currency growing exponentially weaker”
  • “Inflation is “The rate of price appreciation in a basket of goods, services, or assets that you desire to acquire in the future”
  • “When you buy a bitcoin you are buying a scarce piece of property on a global liquid monetary network”

Intro

Preserve the Value of Your Treasury

  • CEOs have to preserve the value of their treasury over time, 3 scenarios to consider:
    • In a deflationary currency environment, the currency will appreciate in value, so sit on the money and wait
    • If monetary expansion matches economic growth, then treasury value will remain stable
    • In a stagnant economy with 5% inflation, prices appreciate for anything scarce, but not for mass-produced goods or services
  • The economy of most large countries traditionally grows at about 2% a year

Technology Turns Products into Energy

  • Technology companies turn products and services into information networks, and they become trillion dollar companies in the process
    • For instance, Google dematerialized information and Apple dematerialized physical devices (VCR, CDs, Cameras, music players, maps, calendars, etc.)
  • Information products have no variable cost (e.g. Digital photos, videos, music, services)
    • “Everything that Google, Apple, or Amazon touched became deflationary”
      • “The variable cost of deploying a Netflix movie to a million people is the cost of electricity” – Michael Saylor

Inflation is a Vector

  • CPI is a hideous inflation metric, it’s a basket of goods cherry-picked to never indicate any inflation and thus allow unchecked money printing
    • How Michael defines inflation: “The rate of price appreciation in a basket of goods, services, or assets that you desire to acquire in the future” – Michael Saylor
  • If you aspire to be wealthy, you have to acquire income-producing assets (e.g. stocks, bonds, commercial real estate, franchises, etc.)
    • However, consider this: the number of hours you have to work to buy a share in the S&P has doubled
      • Similarly, the cost of buying Apple shares doubled in 12 weeks
    • “Politicians have assumed no one wants to be wealthy” – Michael Saylor

Bitcoin as a Scarce Asset

  • Fundamental observation: the asset inflation rate is the cost of capital
  • “The asset supply isn’t expanding as fast as the monetary supply, ergo the price is going up” – Michael Saylor
    • We have hyperinflation in scarce desirable assets
  • “When you buy a bitcoin you are buying a scarce piece of property on a global liquid monetary network” – Michael Saylor
    • Compared to other assets, Bitcoin is liquid, global, fungible, portable, the hardest to produce, and has no property tax
      • Keep in mind, “Any great investor would tell you that 40% of the challenge of investing is just the tax efficiency of the investment” – Michael Saylor

Economic Calculation

  • Monetary expansion stood at 24% in 2020, with an optimistic forecast of 10% to 15% for the next 5 years
    • It’s politically correct to forecast a V shape recovery, whereas no one is forecasting an L shape recovery
    • Under 15% annual money supply expansion, a company that makes a 5% margin on its business will lose 10% of its value per year, every year
      • In other words, half of its wealth is gone in 4 years
  • Since bonds don’t keep up with the cost of capital, the solution is to leverage up or, equivalently, to keep lowering interest rates
    • Thus, “If you decide to hold a debt portfolio, you are really a slave to the whim of the central banks” – Michael Saylor
      • Bond investors get destroyed if rates rise. Moreover, bonds bleed off value if rates don’t keep dropping, till the bubble collapses
  • In 2008, interest rates were at 5.5% on the 10-year treasury bonds, this is not the case today
    • Keep in mind, $100Tr worth of US bonds are now negative-yielding
  • “The interest rate is the value of time and so when you turn interest rates negative you are trying to stop time and make it flow in reverse” – Michael Saylor

Store of Value Buckets

  • To preserve your wealth, you have to beat the hurdle rate and risk premium
  • The main store of value buckets are fiat instruments (Bonds, commercial real estate, stocks)
    • For Bonds, investors must beat the hurdle rate, or leverage up and drop interest rates
    • Similar case for commercial real estate, rent has to keep up with hurdle rate (aka increase rent by 15% per year), coupled with crashing occupancy rates
      • Consider this, “How good do you feel about real estate that is rented out to a retailer that’s getting crushed by Amazon?”
  • Central bank buying assets is a nice way to say print public money to support things that no rational individual would buy
    • As a result, nationalization takes over and market mechanisms break down
    • “Companies that shouldn’t exist and assets that don’t really have any value to society anymore continue to soak up the monetary energy of the civilization, that creates hyperinflation in assets” – Michael Saylor

The Road to Ruin

  • “The Road to Serfdom consists of working exponentially harder in order to earn a currency growing exponentially weaker” – Michael Saylor
  • As we crank up the hurdle rate, individuals have to either work harder or take more risks
    • Even more, they have to compete against big tech monopolies that have infinite free money and power
      • As a result, many small and midsized businesses are getting crushed
  • In order to preserve value, companies either leverage up to buy back stock, or they perform acquisitions
    • Integrating 2 companies together is a massive risk with 90% failure rate
    • Even worse, companies combine these 2 ways, “I borrow money to buy another company”
      • “This is the road to ruin, the road to serfdom” – Michael Saylor

MicroStrategy Bitcoin Investment

  • It took MicroStrategy 30 years to accumulate $475MM in retained earnings. In 2020, they used it all to buy bitcoin and had a double on their hands in 8 weeks. Their reasoning:
    • Cash is a liability, not an asset. Every fiat instrument based on cash need to be discounted at 15% per year (e.g. stocks, bonds, real estate)
      • Thus, “we are going to have to do something to remain solvent”
    • Think of it as a $500MM acquisition of a big tech monopoly growing 100% per year
  • Additionally, MicroStrategy took a 5-year unsecured loan at a fixed interest rate with no covenants and isn’t marked to any market, then used it to buy bitcoins
    • While Bitcoin is volatile short-term, “you can’t find a period of 5 years over the history of bitcoin where it wasn’t worth more at the end of the 5 years”
  • MicroStrategy is unencumbered by debt and has free cash flows, it can still pay off the loan even if Bitcoin goes to zero
    • Moreover, the debt comes with the ability to be paid in shares above $389 per share
      • Thus, debt holders are exposed to the upside and protected against the downside

The Big Idea

  • If you generate cash flows in fiat currency that are growing slower than the hurdle rate, you can cure the problem by sweeping your cash into bitcoin
    • Moreover, at a conservative bitcoin growth estimate of 20% per year, the yearly income will soon surpass the company revenue
    • “As people start to see this then I think there is just a wall of money” – Michael Saylor
  • It’s logical for individuals to borrow at a low-interest rate and then invest in an accretive asset with a high tax differed yield, and to sweep cash flows into the accretive asset
    • Alternatively, use bitcoin as a saving account
    • That said,  don’t confuse smart debt with unintelligent debt
      • “It’s pretty foolish to go and buy bitcoin on an exchange with 10-20x leverage on margin loans where you could be liquidated on a big move down or up” – Michael Saylor

Big Tech Adopting Bitcoin

  • Bitcoin is an accretive asset, but it’s also the world’s first engineered monetary network growing faster than 100%
    • Corporations can plug their PnL or their balance sheets into this accretive monetary network
  • Square and PayPal are upstart challengers that simultaneously compete against both big tech companies and monster banks
    • They enable a high-speed bitcoin payment rail and offer their customers a savings account in a currency that accretes 100% per year tax-free
      • Contrast this with a bond that offers a 10% taxable return
  • To keep up with the competition, Apple or Google have to offer Bitcoin. It then makes sense to build a secure wallet into the iPhone
    • Facebook then realizes their stable coin is irrelevant, people want Bitcoin
      • “The game-changer is making everybody rich” – Michael Saylor
  • To sum up, individuals are incentivized to own the best performing asset and big tech is incentivized to give users access

Mutual Funds Enter the Game

  •  “If you are in the mutual fund business, then you need to build bitcoin into your product offering if you want to stay competitive” – Michael Saylor
  • Traditional banks need to build bitcoin into their business (trading, banking, lending, yield, custody, etc.)
    • Big banks will move at their pace while new entrants like Kraken will move rapidly
    • “How many billions of dollars have to flow out of your bank before you realize that you lost the custody and the yield and the carry on that money?” – Michael Saylor
  • The entrance of institutions, big tech, and banks forms political support around Bitcoin

Public Companies Enter the Game

  • People will understand public companies can buy bitcoin, then realize they can even use debt to buy it
    • That said, tech companies have trillions in corporate treasuries to deploy before considering to borrow
  • Retirement and investment funds can’t directly buy bitcoin, but they can buy publicly traded stocks
    • They will be looking for companies with bitcoin exposure, especially companies that are strong on the balance sheet or PnL or both

A Layered Cake of Money

  • The simplest way Bitcoin grows in 2021 is when current bitcoin investors ask “why did I buy 3 times as much gold as I bought bitcoin?” – Michael Saylor
    • In other words, when investors transition from “Bitcoin is a great idea” to “it was really stupid of me to invest in anything that underperformed”
  • As people accept Bitcoin as an investment grade treasury reserve asset, it will attract $100Tr worth of sovereign debt looking for a safe haven
    • That said, Bitcoin needs to be able to accommodate Billion dollar trades without moving the market

Michael is an Optimist

  • “I don’t think it’s that constructive to speculate about the zombie apocalypse” – Michael Saylor
    • Bitcoin is a stabilizing influence in a modern society where people are free to make their own choices
      • For instance, a bank improves customer service when it sees a billion dollars exiting, or monetary printing slows down when a trillion dollars exists in the system
    • However, if you have no alternative to your local currency, then you will have a complete collapse
  • “Everybody has the same problem at a different level, some of them don’t recognize this [bitcoin] is the solution yet” – Michael Saylor
    • Think of Bitcoin as a globally accessible, decentralized, banking franchise
    • “Bitcoin is going to, in a constructive way, infect everybody’s minds” – Michael Saylor
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