WBD355 Audio Transcription
ESG, Tesla and Energy FUD with Lyn Alden
Interview date: Monday 31st May
Note: the following is a transcription of my interview with Lyn Alden. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this interview, I talk to Lyn Alden, a macroeconomist and investment strategist. We discuss new sources of demand for bitcoin, ESG, Tesla, and misconceptions about fossil fuels and “green” energy.
“I’m wary of greenwashing, things that basically consist of virtual signalling about being green... we’re more interested in looking like we’re solving the problem rather than actually solving the problem.”
— Lyn Alden
Interview Transcription
Peter McCormack: Lyn, the world is going mad. Can you make me feel better? Lyn, what's going on?
Lyn Alden: Well, it depends; what, you mean in Bitcoin land or in macro land or in both?
Peter McCormack: Everything! Everything seems to be going mad. Bitcoin's mad, Biden's mad, everything's mad, everything's gone crazy. Are you calm; do you think everything's okay?
Lyn Alden: Well, I mean these things go in cycles and so, one of my approaches is basically to have some degree of diversification and that kind of minimises some of these big volatility moves. So usually, there's something in a portfolio that's not doing well and there's something else that is doing well.
Basically, what we saw with Bitcoin, I think one of the things that's not a discussion enough is the impact of Grayscale. And so Elon, for example, is getting a lot of the attention as well, some of these government crackdowns; but the way I see it is that really, Grayscale's kind of set the stage for this. So, if we look back, for example, from say the second half of 2020 into January 2021, they bought literally hundreds of thousands of Bitcoin. They were the biggest buyer, there were multiple MicroStrategys' worth of purchases.
Some of that was actually people that just wanted to be long Bitcoin, but another big chunk of that was people doing the arbitrage trade, where they would buy into Grayscale at that asset value so they'd issue new shares; basically that converts liquid Bitcoin into illiquid Bitcoin and it gets locked into their cold storage. Then they hold it for six months for the lockup period while they short Bitcoin on the side, so they have a Bitcoin neutral position; and then after six months, they can sell those GBT shares on the market, including whatever premium to NAV they trade at. That often gets as low as 5% sometimes, but it often got as high as 40% or 50%. So, they could do that twice a year.
Every time they did that trade, when they were done with the position, those Bitcoin are permanently in Grayscale; they're not redeemable or anything like that, so they stay in there. And every time they do the trade, those neutral arbitragers keep basically putting more and more Bitcoin into that big honeypot of Bitcoin. And, when the discount turned negative, that's something we'd talked about I think on the previous show, that basically -- Grayscale's not harmed by that in the sense that there's no solvency issues or anything like that; it's normal for those funds to trade at a discount outside of the Bitcoin world, closed end funds often do; but basically what it did, it removed that arbitrage trade and so they're no longer issuing new shares. That's basically the downside to Grayscale, is that there's no way to grow really when you're trading at a discount to NAV.
So, that whole kind of neutral arbitrage source of Bitcoin demand dried up. So we saw, as Grayscale stopped buying, we saw this kind of multi-month consolidation where Bitcoin was making new highs there but not very strongly. It was from February to May, it was kind of in that range-bound pattern. Then eventually, you have some price weaknesses, when you get the Elon news and you get the China FUD and you get the US tax crackdown, and today we had Japan comments; so basically, all these things hit it while it was somewhat weak.
So, what we have to look for now is basically we say, okay, we got that couple of quarters of that neutral demand basically removed to the market now and so the big question is, what is the next source of demand? Are we going to see more institutions come in; are we going to see hodlers keep holding? And I think, one of the main things I'm looking at for the next cycle is this whole topic of Bitcoin rewards, things like with the Fold app, things what NYDIG is doing to partner with banks; a lot of that's going to launch, based on their public comments, in the next year or so.
Peter McCormack: And the BlockFi card coming out?
Lyn Alden: Exactly. So, when you have all those kinds of things together, that's another source of demand that I think can come in and pull Bitcoin off the market. But in the meantime, we're in this intermediate period, where we've lost one source of demand and the market's adjusting to that. So, that's normal when things get excessive.
Peter McCormack: Right, so it was a frothy market because of the arbitrage with GBTC. Okay, so the supply and demand schedule has kind of changed?
Lyn Alden: Yeah, got a bit more balance now essentially, and then when you have some kind of bad news, I think the market's now repricing some of the probabilities of other corporations putting in, say Bitcoin, into their balance sheet, because now they have to weigh if it's an ESG concern or not. My view is that it's not an ESG concern, but the narrative that it is an ESG concern is a risk to keep monitoring.
Peter McCormack: Typical Bitcoin crazy world. Were you trading or looking at Bitcoin back in 2017, or is this your first --
Lyn Alden: Yeah, I first wrote about Bitcoin in late-2017 and I always often use that in my origin story when I talk about Bitcoin, essentially, that I covered it in November 2017 and I passed on it for a couple of reasons. But then over the course of 2018, 2019, Bitcoin largely addressed those concerns. One concern was the euphoric price action, so we had a multiyear consolidation; that took that away. And then, two, basically I was worried about the Bitcoin fork that happened; I was worried about just alt season and dilution in general, whether Bitcoin's network effect is strong enough to hold the tide against 1,000 altcoins; and I was just watching that play out.
So, when I saw the build out, the strengthening of the network effect over the next couple of years and the buying in early 2020 at the same price that I passed on in late-2017, basically in my view it got de-risked. So, I have been covering it more or less since then.
Peter McCormack: What was the Japanese comment this morning? Sorry, it's 7.00am in LA, so I haven't seen it yet.
Lyn Alden: It's just basically that the Central Bank Governor came out and, I don't know exactly what he said, I only looked at it briefly; basically the same thing that the UK and Fed officials have said, that basically it's kind of a speculation and basically it was a dismissive remark against Bitcoin.
Peter McCormack: I've never experienced what feels like such a coordinated set of attacks. The timing of everything that happened all in the last two weeks is, I feel, kind of incredible. But then at the same time, with Bitcoin, you get used to things being a bit strange and trying to ride it out. I mean, I'm hodling through. I still think the long-term picture's awesome.
Lyn Alden: I agree.
Peter McCormack: I do want to come back to Bitcoin, but I actually just want to shift gears a bit and talk a little bit about ESG and what happened with the stuff that came out from Elon. So, how much of a consideration are you having to take in your now macro picture and your updates with regards to ESG and how strong is this movement?
Lyn Alden: Well, it's definitely a strong movement. I think my subscribers, some people are interested in ESG, whereas other ones are just interested in whatever has the best risk-adjusted returns on different equities. And, one of the things, I do think it factors in a number of ways. For example, aside from Bitcoin, I think one of the things we're going to run into is some energy price issues later in this decade, because the world's kind of now assuming that we're going to move off of oil and natural gas and coal, pretty quickly and that therefore, investing in them is bad and that companies should be punished for doing exploration or capex in that area.
The issue is, the world's never moved to a less dense primary energy source. So basically, we went from wood to coal to oil to nuclear hydro, while still using all those things, and we started adding solar and wind on top of that as a very small piece; but those are less dense energy sources. A lot of those are made with, ironically, you make them with fossil fuels. So, it's kind of a challenge there to move to a world where you're not even relying on these at all.
Another thing I'd like to point out is that, whenever we find a new energy source, we actually never diminish the previous energy source. So, for example, humanity used to rely on biomass and then we found coal. We never reduced our biomass consumption, we just added coal to it. Then when we found oil and gas, we added that to our coal. But coal pretty much flatlined; it never really went down in any meaningful way, at least not yet. And now we've got oil and gas, we added nuclear and all these others, but we still have rising gas and oil demand overall. So basically, we keep adding energy sources without ever subtracting energy sources.
Peter McCormack: Is that also due to technological advancements, where you say we added oil and gas, but was that kind of growth in line with the growth of transport, air travel, car growth; does it relate to that at all?
Lyn Alden: Well, yeah. Each new energy source was essentially, at least up to a point, was a technological revolution; they enabled new types of things. You couldn't have airplanes with coal, for example; you needed these oil and gas derivatives to do that. And so basically, as we've come this far, we've added these better energy sources, denser energy sources and so, I think going forward, the big challenge is, the world's kind of assuming that we're going to go these less dense energy sources and it's going to be smooth. But I think basically, this lack of capex is probably going to cause some shortages, looking a few years out.
So, I think that the ESG overall viewpoint, it's one of those things where I'm certainly in favour of a greener world where possible, better air quality, better water quality, things like that; but I'm wary of green washing, things that basically consist of virtue signalling about being green, or checking boxes, or trying to do things to get the non-green stuff off your balance sheet onto someone else's balance sheet, so it's like a hot potato. So, that's the kind of stuff I worry about, where basically we're more interested in looking like we're solving the problem, rather than actually solving the problem.
Peter McCormack: And are you seeing that, though?
Lyn Alden: Well, I think we are seeing that. I mean, for example, some of it has good impact and some of it has bad impact. So, for example, one issue is that we've had so much aggressive, say, oil and gas drilling in the United States over the past decade, a lot of that was unprofitable. So basically, you had the combination of really cheap money, so central bank, low interest rates, quantitative easing, things like that combined with improvements in technology made these shale industries somewhat viable even though, over the course of the decade, the full investing cycle never really was free cash flow positive. So basically, people just kept piling in.
But now, with the whole ESG concern, a lot of those pensions have pulled back their investments, which helps the energy market kind of right-size itself; but I think it's one of those things, the pendulum can go to far, where we had a period of over investment and I think, as we go out a couple more years, we're increasing the odds of seeing a period of underinvestment.
Peter McCormack: So, will that be good for the price of oil, if you're an oil investor?
Lyn Alden: Yes. If that plays out, basically -- right now, we still have a period of oversupply, in the sense that OPEC has significant amount of spare capacity, which is normally what you see in weaker economic periods. But as you look out a couple of years, assuming there's no major second lockdown or some sort of curveball, basically on a normal trajection, oil market looks tight a couple of years out, so that would be good for the price of oil and probably energy stocks that are just bedding in it.
Basically, it's one of the concerns overall that we might be shifting from a period of overinvestment to underinvestment and basically, that there's a lot of interest in companies to look green more so than be green.
Peter McCormack: Do we know the mix for the usage of oil; what is air travel, what is motor vehicles, etc?
Lyn Alden: No, I don't have it off the top of my head. So, oil itself is not used very much for the electrical grid; that's mostly natural gas and other things. Oil's heavily used for transportation. So, a big chunk of it is diesel, so trucks, ships and construction equipment, all that. Then you have a large portion obviously for automobiles. Derivatives of it are used for air travel, it's a sizeable chunk; and then another huge chunk of it is used for petrochemicals, so literally the casings of the computers we're using and the mice and probably part of our clothes, probably part of your hat. A lot of that is just made from oil derivatives and so, that's a big chunk of things as well. So, it's kind of a big mix.
Peter McCormack: With the oil derivatives, as you're talking about my hat and probably my iPod case which I'm using and my EarPods, outside of waste pollution, do you know if the processing of these products adds much in terms of pollution?
Lyn Alden: I haven't looked into the details of the refining process in too much detail, but that's not the biggest source of it. I mean, the biggest source of it, it kind of goes down the list. So overall, the dirtiest one would be coal, in terms of burning it for energy, because not only the CO2 issue; but then aside from the CO2 issue, it's the particulates. So, the CO2 issue's more of a longer-range concern that people have, whereas the particulates are a here-and-now concern. That's basically the air is dirtier because you're burning coal.
There are studies that show, for example, over 1 million people worldwide die from direct causes of air pollution and we know from living in certain -- say, if you go to certain cities, like in India or China, where they're unusually coal-driven, on the higher end of that curve, they're generally very dirty cities and that contributes to health issues. The same thing for concentrated, you know, a lot of cars in one area; that contributes to air smog.
Whereas, when you go up to, say, natural gas, so they're cleaner when you go up to nuclear and hydro has some of its own ecological issues, but generally it's considered cleaner. Nuclear's statistically cleaner. The refining process itself is certainly an energy intensive thing and there are, for example, pipeline leaks during the transportation process, or the refining process; but overall, I don't view that as the problematic area.
Peter McCormack: Well, what I'm trying to get at, it feels to me that when you talk about virtue signalling, it feels to me, with also everything else you're saying, that actually moving away, changing the energy mix, is a hugely difficult complex, probably multi-decade process, that might change the mix, but the total output might not change?
Lyn Alden: Exactly, yeah. Basically, over time, for example, like I've mentioned, every time we find an energy source, we add to the previous one. So, the previous one becomes a smaller percentage of our total energy mix, but doesn't actually go down in a meaningful way. So hopefully, we can change that with coal eventually; I'd like to see coal diminish over time with some of these better energy sources that we have.
But it is very hard to change your primary energy mix by eliminating previous energy sources, and especially the new thing overall would be moving to a less dense primary energy source, rather than using those optimal locations where possible; to actually move primarily to lower dense energy sources, that's a big technological challenge.
Peter McCormack: Is there much investment going in this area; is there much interest in some of the companies who are investing in these less dense energy sources?
Lyn Alden: Well basically, I would say that the EV stocks, for example, they're working on battery technology. They've obviously had a ton of excitement by investors over the past couple of years. Solar companies have had these ways of investment. They've historically not been super profitable companies. There's work being done in hydrogen cells.
One big thing to be aware of is that a lot of this transfers, you know, instead of using fossil fuels, it's not like you're getting energy from nothing; you're transferring it so you're getting energy from metals. So, you're relying on more nickel, copper, steel, which iron and coal. You're basically shifting that, if that's successful, if you have, say, solar and wind and some of these other sources and batteries have more of the energy mechanism that we're using; it's more metals intensive type of economy.
Peter McCormack: Yeah. The other thing that's been interesting has also been looking at the other impacts of moving to less dense energy sources, or more renewables. I've been reading about cobalt mining, lithium mining. I've also been looking into the waste produced from wind farms, in construction. It feels like whatever we try and do here, whatever form of energy source we move to, there is still going to be some form of ecological impact.
So, I don't know, I feel almost a bit confused by it all, because we hear these messages, we hear things from different people explaining the problems with the environment, the problems with pollution, yet everything seems to be producing something?
Lyn Alden: That's the biggest challenge. And again, a lot of the industries are blaming others and getting these off the balance sheet. So, one trend I've seen is, we keep emphasising how much energy uses China's using, for example, and they're pretty coal driven. But there are two things about that: one is they're using far less per capita than we do in the Western world.
Peter McCormack: Who's the worst offender?
Lyn Alden: On a per capita basis, it's probably some small country; it's probably one of the Gulf states or like Singapore. It's probably one of those small ones when you get down to that. But the United States is one of the biggest users. Basically, the countries have a lot of land mass relative to population, they generally have single family homes and stuff. So, when you have Canada, United States and Australia, things like that, they tend to be pretty heavy per capita energy users. Europe is generally less, but it varies across the continent. Then when you get obviously into emerging markets or frontier markets, they use a lot less per capita.
So, China uses like one-sixth of the oil per capita as United States. Then, India uses less than half per capita of the Chinese. So, that's kind of the environment we're in. Another thing is that, for example, the Western world has partially shifted our supply chains over to China, so some of our most energy-intensive things are making stuff; we hand it all over to China and then we blame them for their energy consumption. Whereas, the funny thing is, even the fact that they're using less oil, some of that oil they're still using for us, essentially. We've outsourced some of our most energy-intensive things to them.
So it's like, okay, we'll write the software and we'll design the healthcare molecules and we'll run the financial system, which is less directly energy-intensive, then we pushed over some of the manufacturing to these emerging markets and then we're like, "Oh, look how much coal they use".
Peter McCormack: I did an interview with Nic Carter and Alex Gladstein this week regarding the petrodollar, and Alex was explaining the petrodollar is likely the cause of a lot of the manufacturing moving out from the US into China. Have you ever looked into that?
Lyn Alden: Yeah. I wrote a big article back in December on the petrodollar and Alex's piece was great. He mentioned my piece as well, so bitcoiners in general have been more focussing on this over the past several months. You basically compare -- because people often say you're comparing Bitcoin to the current system, so there's more interest, in the recent months, about looking into the system.
From my perspective, the reason I analysed the petrodollar system so much is because the dollar is the crux of global macro. So, even in my investing decisions outside of Bitcoin, really understanding the dollar's details are a key part of getting macro right; whether you're going to get inflation or deflation; commodity boom, commodity bust; emerging market boom, emerging market bust; whether or not US growth's going to be fast or slow; a lot of it's based on the dollar.
So basically, because you structured things, ever since the 1970s, around this petrodollar system, it's basically exported a lot of supply chain, especially from the United States, to these emerging markets, led by China, but also others.
Peter McCormack: One of the most interesting things Alex talked about, and this is just completely off topic, but I just found it fascinating; he talked about the second Gulf War and he talked about, at that time, the Iraq Government were selling their oil for the petroeuro, I think it was the petroeuro, and he said one of the interesting things is that, what seems to be out of the debate for a war which we know nothing about for why it happened seems to be, for absolutely no reasons at all, that it actually might have been to defend the petrodollar, which I found fascinating.
Lyn Alden: That's one of the theories and so, for example, that got some publicity when Ron Paul spoke in Congress about it, which is the highest stage that that idea's had, where he was basically -- there was a big speech. I actually link to it in one of my pieces. Yeah, so basically, there's not a good track record of these countries trying to sell oil outside the dollar-based system.
So far actually, the most successful country that's doing it now is Russia. So, over the past few years, they switched to selling oil increasingly in euros to Europe and, as far as we can tell, into China. But they're obviously big enough that the United States can't do anything militarily about it; they're a major nuclear power. And so, instead, we've had these big sanctioned debates about the Nord Stream 2 pipeline; we've had these other issues; and it's kind of a chicken and egg scenario.
So, countries that are generally, for whatever reason, on the margins, for political reasons, it could be extremism, whatever the case may be; when they're sanctioned, they increasingly turn to selling oil outside the dollar-based system. But also, if a country sells oil outside the dollar-based system, there tend to be these relentless sources of sanctions. So, we've basically structured things in such a way that we have kind of an in or out system. If you're not in, then you're pushed on the margins and you generally struggle as a country.
Peter McCormack: Do you think the petrodollar is gradually being replaced; do you think it will collapse; do you think countries will continue to look at other currencies to trade oil in?
Lyn Alden: There are signs that it's changing and I went over these in my article, but essentially there are a couple of key things to look at: one is, when the petrodollar system began in the 1970s, the United States was something like 35% of world GDP; we were the biggest commodity importer. So, you could argue that it makes more sense to price commodities in dollars. But now, over time as that's deteriorated, the United States now, depending on how you measure, is somewhere in the ballpark of 20% of GDP. So, we've grown; just the rest of the world's grown faster, because you had the rise of China and India and some of these other countries. So, we're smaller share of global GDP.
We're still outsize, of course, compared to our population. We're something like 5% of population, 20% of global GDP; but now, we're the second biggest commodity importer. So, it's kind of a funny situation where the biggest commodity importer, China, has to go through our currency in order to get commodities. So, they're interested in increasingly using their currency to buy commodities where possible, and then you have Russia, which is also no particular friend to the United States. They've kind of aggressively de-dollarised their reserves. They went increasingly to golden euro-based assets instead and then they announced, a couple of years back, that they were interested in selling oil in euros. If you look at their trade over time with Europe and with China, it is de-dollarising gradually and shifting more towards euro for both of them.
Also with China, they're also using a little bit of local currencies as well; neither a dollar nor a euro, but primarily they're replacing a big chunk of the dollar portion with euros. So over time, we're looking to see probably more diverse reserves among countries, and it looks like there could eventually be say three currencies that could be used to buy oil, rather than just one.
Peter McCormack: That feels a lot more healthy.
Lyn Alden: It is a more decentralised system and even ironically for the United States. So, one of the biggest misconceptions is that this is some benefit to the United States and it's one of those things where the first few decades, it might have; basically the Cold War era-type thing, strategic positioning, that sort of thing. But especially since the 1990s, it's really accelerated to the downside, even for the United States.
So, it's one of those things where there's probably the top 10% of the people in the United States benefit from it, including me; I probably benefit from it. But anyone who, in the United States, works in blue-collar work or wants to make things, essentially, they've taken the brunt of this in the United States. So, the system's one of those, it's working for a few export-heavy countries that are really milking the system and it's working for US elites and it's working for these groups around the world; but it's really not working well for most emerging markets and it's not working well for most of the United States, probably at least the bottom two-thirds.
Peter McCormack: Is there anything you don't know?! I feel like I throw any question at you any week and you know everything!
Lyn Alden: Well, I think you smartly asked things in the field today. Now, if you ask me about -- I didn't know your refining question, about how energy-intensive or how polluting is refining.
Peter McCormack: You'll know next week! How many hours a day do you work?
Lyn Alden: Too many.
Peter McCormack: Do you? Do you actually take enough time off?
Lyn Alden: No, but I'm working on it.
Peter McCormack: I'm still hugely disappointed you're not going to be at Bitcoin 2021.
Lyn Alden: I actually am now.
Peter McCormack: You are coming?!
Lyn Alden: Yeah, changed, yeah.
Peter McCormack: Yes! Are you speaking?
Lyn Alden: Yes, I'm scheduled to do an event with Elizabeth Stark. We're going to talk about basically Bitcoin for Billions, rather than billionaires.
Peter McCormack: Yeah, I had a similar conversation with her on Twitter Spaces when I was in El Salvador, because I was down there looking at the project. Obviously, I think Elizabeth is amazing. Well, that's incredible. Do you know what day you get in?
Lyn Alden: Mine's on Saturday; it's Saturday around noon time or so is when I'm talking.
Peter McCormack: So, you're just coming for that?
Lyn Alden: I'll be in, I think, the 2nd I think it was, offhand.
Peter McCormack: I'm going to send you an invite to my party if you can make it?
Lyn Alden: Yeah, trying to clear up my schedule there is kind of hectic!
Peter McCormack: There's so much going on.
Lyn Alden: Yeah, and also, it's my first time travelling in this whole era. I haven't gone through the hassle of wanting to wear masks on an aeroplane and things like that.
Peter McCormack: It's not too bad. There is a trick on the aeroplane, because they have these moronic rules whereby you have to wear a mask; but if they've served you a drink, you don't. So, you can just take slow sips constantly from your drink and leave your mask on your chin; that's what I've been doing! The travelling isn't too bad. It wasn't as bad as I expected. The worst bit for me was trying to just get from El Salvador to Guatemala.
What was really interesting is, those countries seem to be a lot more hot on their tracking of people coming in and providing of information; it really surprised me. So, when I left the UK, they asked to see my COVID certificate, but I could have easily just made that on my computer, and that was pretty much it. Whereas, when I went between El Salvador and Guatemala, they wanted that; they wanted proof of the receipt to check that I hadn't just made that on my computer. They also wanted to do a temperature test; they made me clean my hands; there was just a lot more done on it and I was really surprised that the US and the UK, our COVID operations seem to be a little bit more basic. It was just really surprising.
Well, I'm glad you're coming, that's amazing. You're going to love it, it's going to be crazy, 10,000 bitcoiners going wild all week and I look forward to seeing your speech.
Okay, the next thing I wanted to talk to you about is, I want you to just shine a little bit of light that you have on Tesla, because obviously Elon had his 180 moment very soon after telling the world that they would be accepting Bitcoin for Teslas and that they would be holding that on the balance sheet; he did a 180 and said they won't be and there are concerns about coal, which sent everyone into a tailspin. But, there's a lot of suspicion with this, a lot of reference towards the tax credits, how much their business relies on these carbon tax credits.
I'm certain you would have looked into this, so can you shine a light on it; how their business operates; how important these tax credits are; how much you know? And then also I want to ask you, what is your take on what Mr Musk is up to, because I imagine you have a good one?
Lyn Alden: So, yeah, currently Tesla is pretty reliant on these credits and basically, it is reported in the past year that they achieved profitability for the first time. One of the criteria to be put into the S&P 500 is you have to be profitable for four consecutive quarters; and once you're in the S&P 500, you have a lot of automatic passive capital just goes in your company. So, if you look at their profit margin without the credits, they're still not profitable. Those credits made the difference and made them profitable.
Peter McCormack: How do the credits work though?
Lyn Alden: It's not a market that I follow super closely.
Peter McCormack: Okay.
Lyn Alden: There are different jurisdictions of credits and basically, because they're considered green, they get these credits that help them out; they're essentially government subsidies to try to shift more emphasis towards electric vehicles, renewable energy. And so, they benefit from these credits and that made the difference in terms of being marginally profitable. They're still barely profitable, but it's marginally profitable enough to get into the S&P 500, for example.
If you look at Tesla's history, they've had trouble making money from selling cars and other technology, but they've made money from the credits and they've also made money primarily from selling their shares. So, because there's always tons of hype around Tesla, especially in the past couple of years, when their stock price goes up a ton, Elon then does an equity offering where they create new shares, sell them to the public and they get all this cash.
So before, they had a pretty weak balance sheet. They had a decent amount of debt, they weren't making money, at least not profit, and they were actually junk rated; they were literally junk debt. Whereas, if you look at companies like Apple and Google and all those, they're pristine balance sheets, where Tesla was literally junk debt and I think they're still technically rated junk debt.
But what they did is, because they're so popular with investors and their stock got so expensive on a price-to-sales multiple, on a price-to-earnings ratio, pretty much anyway to measure it, their stock was extremely expensive, they got to the point where they were worth as much as all other car companies in the world combined, even though they're selling a fraction of the cars, have a fraction of the R&D budget. At this point, they're not even the biggest electrical vehicle seller in Europe.
Peter McCormack: Is that true? I did not know that.
Lyn Alden: Volkswagen's been ramping up across their brands.
Peter McCormack: Well, they're just doing a better job of marketing and PR then?
Lyn Alden: Yeah, it's one of those things where they've certainly been very strong in the upper end electric vehicle market, but we are starting to see increased competition from Porsche and some of these others that are entrants into the space. And now, for example, we have Ford coming out with their Lightning Pickup Truck.
But basically, Tesla made a ton of money from two things: selling equity, which is essentially selling a story. So basically, Elon's been a huge value creator for Tesla, because the story of this Tony Stark kind of guy, at least the vision of that, has literally helped them get a stronger balance sheet because they sold so much equity. And then, two, the credits made a big difference. So, I think the speculation is fair that Elon got a tap on the shoulder by someone to reverse course on this, that Bitcoin might not be ESG enough or something, from whatever authorities have influence over that.
But again, it's speculation. It could be that other people in the company, board members, were concerned about it. It's hard to know if that came from internal or external, but it was a pretty sudden flip. And overall, I think Elon's going through this process where he's learning in public. He seems to be starting with the mindset of, "I'm new to Bitcoin. I want to fix it", rather than, "I'm new to Bitcoin. I want to learn about it".
Peter McCormack: I was interviewing Eric Weinstein yesterday and this was on my agenda, this learning in public. It's a conversation I've had with a few people, because it's a tricky thing, especially I've been through the washer with it, learning in public, getting things wrong, having people shout at me and shouting back and then going away and relearning. But, when you're doing that with 56 million followers, there can be quite the impact.
Lyn Alden: It's also a difference between knowing that you're learning in public versus thinking you know more; whereas other people know you're learning in public, but you don't realise you're learning in public. So, there's a difference. If someone is purposely learning in public, building a brand that they're learning in public, because that's got all sorts of benefits, makes you relatable, helps you learn things along with the readers so that you're going through that process together; or someone comes in as though they're an expert, but other experts can see that they're actually learning in public while they have a massive base; that obviously causes issues.
Some of these have real-world consequences, like people that went all in on Dogecoin, for example, especially the ones that came in later. So, maybe some of the early people --
Peter McCormack: I know!
Lyn Alden: Yeah. But some of the people who came in later are now invested in Dogecoin, but maybe without understanding some of the technical differences that make it different than Bitcoin.
Peter McCormack: Let's just call it what it is; it's an absolute shitcoin! Let's not tell it anything other than what Dogecoin is! Okay, sorry. Anyway, it makes it quite a complicated picture for Bitcoin and I've really been split on this Mining Council. My immediate reaction, as somebody who always reacts very quickly without thinking things through sometimes was, "This is terrible; this is an authority on Bitcoin!" But at the same time, I can understand why people want to defend the narrative, to be able to have the data and have the argument, because what happens is the mainstream media perpetuates these narratives.
I imagine you could go to any mainstream publication, New York Times, Wall Street Journal, Bloomberg, Financial Times, The Times, The Telegraph, any of them and if you did a search for Bitcoin, you'd find a negative energy article. So, it would be great for each time one of these comes up to have the data, to actually have the data on energy mix for Bitcoin mining; but also, to have the comparable data to other industries to give a chance to fight back.
So, I think there's something interesting in there; I'm not so sure on the idea of a council, but I think having the data would be useful.
Lyn Alden: I agree. I mean, it's one of those things where there are pros and cons. Because Bitcoin is decentralised open source, there's nothing preventing miners from including, for better or for worse, but certainly you could have a culture of frowning on secret deals, right? So, Bitcoin has this, I think, good culture of not appreciating these secret backhand deals; they prefer the development to be out in public. So, I sort of think it's good that there's pushback against it.
Another thing to keep in mind is that right now, the United States is nowhere near the big size of the hash rate. That might change in the future with some of the hash rate coming out of China, but overall we're currently talking about a pretty small percentage of the hash rate. Overall, I do think it's good that there are entities that want to have a way to push back on some of the narrative, even potentially lobbying arms that are out there now, right; because if there are lobbying arms against you, it helps, unfortunately, to have lobbying arms back to basically convince state legislators why there might want to be an attractive mining jurisdiction, for example, where you can basically get in front of these politicians and explain why it's useful to them.
So, it is one of those touchy subjects where there's pros and cons and it's not an area that I've focussed too heavily on, because with so many of these other things on my plate, the Mining Council's not been top of my list and there are certainly people more qualified than me to weigh their opinion on that whole thing.
Peter McCormack: Were you, or are you, short Tesla?
Lyn Alden: Not currently, no. There are moments where, if it shows certain technical patterns, sometimes I use it as a hedge, because it's a certain type of stock that tends to go down in an environment. So, it's mostly unprofitable growth stock, or marginally profitable growth stock that I consider overvalued. But, I'm not currently short it.
Peter McCormack: Are they at risk?
Lyn Alden: Not in the near term. There was a couple of years ago where it was looking shakier for them but ironically, because their stock price got so high and then they issued equity, they really shored up their balance sheet. So, I wouldn't say they're in risk in the near term. I think the longer-term risk for them is that -- at least for the stock price; the stock price is more at risk than the company, in the sense that the company could continue to do pretty well and make cars, but the stock price could languish for years. We saw that, for example, with say, I like to use the example of Cisco in the 2000s.
So, Cisco makes networking equipment, basically they're a big backbone of the internet. So, during the 1990s, their stock went absolutely parabolic, just crazy price; their valuation was silly. And from there, their revenue kept growing and the next 20 years, they're a bigger company now than they were then by a lot; and yet, their stock price never fully got back to where it was at the dot-com bubble.
You could have a situation like that with Tesla, where it achieves some high watermark somewhere and takes years and years and years for the price to ever get back to that, if it ever gets back, even if the company continues to sell cars and does reasonably well. One of those things, they have to sell ten times as many cars as now in order to justify the valuation that they have in the longer run, so the market's pre-priced a lot of that.
Peter McCormack: Yeah, it seems like a couple of their issues is, there's increasing competition from the other large manufacturers; but also, they struggle to manufacture these cars at a profitable level?
Lyn Alden: Yeah, basically it's priced as though it's a software company, but it's a hardware company. So, hardware has lower margins. During the dot-com bubble, there was Sun Microsystems and they're one of those other bubble stocks. The CEO, after the bubble started to unwind, he had this funny shareholder letter he wrote, "What were you guys thinking?" He's like, "Literally, you've priced it at ten times sales! Literally, if you assume I make no profit, if you assume that we have no employees, if you assume this, it still takes you ten years to get back your money. And of course, we do have all those things, so you're out 100 times earnings". So it was like, "What were you thinking?"
So, Tesla got to the Sun Microsystems level of extreme valuation, where it's not out of the realm of possibility they could grow into the valuation, basically if, say, all of Ark's assumptions, for example, are correct and they dominate electrical vehicles and then their battery technology is so much better than anyone else's that they license it to all the other manufacturers, then they're somehow ahead of driving as well, auto-driving; so, they operate this big fleet of automatic taxis. Basically, if all of Ark's bullish assumptions come true, there is a possible universe where their valuation makes sense and I can look back and say, "Wow, they were right".
But I think the probability weighs against that overall, so I consider Tesla a pretty risky long investment at current levels.
Peter McCormack: Right, well I hope Elon stops spouting shit about Bitcoin, because it isn't particularly useful. I was actually with somebody yesterday who said that he's very bullish on Ethereum because of the ESG narrative and Ethereum moving to proof of stake. Now, I refuse to invest in Ethereum on principles, but we've covered this before, but just very quickly, you have looked at proof of stake and Ethereum. I think, was it Preston? He wanted to get you debating Vitalik on this as well, didn't he?!
Lyn Alden: Yeah, he is trying to make that happen. It's one of those things that's funny, because I did my article and then I had a couple of debates on it with people.
Peter McCormack: Did you get much hate?
Lyn Alden: Oh, yeah, with the initial thread, yeah, definitely. But it varies. So, some people loved it, bitcoiners generally liked it, ethereans generally didn't like it. For example, one of my closest friends is an Ethereum bull; he liked it because he felt that he learned something from it and basically, he wants to be aware of the alternative view. There are some other Ethereum podcasters out there that appreciated it. They did a crowdsource response.
So, yeah, it's one of those things; it was just a mixed response and I think one of the reasons Preston's trying to get Vitalik is because he was part of that crowdsource response. He read the article and he was part of that crowdsource response where they tried to answer some of the things. So, overall, it's one of those things where, I think if you look at the ESG concern, people are worried about, say, state-based attacks on Bitcoin and I think that in many ways, the ESG avenue is their state-based attack.
I think it's one of those things where, if there were to be a concerned state-based attack on Bitcoin, some of the emerging markets can get away with saying, "It threatens our currency, so we have to ban it" sort of thing, like you see some of these countries do. Whereas, if you look at how the United States and Europe might respond, if they decide to respond aggressively, I don't think it's going to be, "Hey, we need to protect our currency by banning it"; it's, "Look how much energy this uses. We need to do this for ESG concerns". So, there's a good chance that wouldn't be their primary motive, but that would be the one that they can use to get maybe a third or half the population on board with going after it.
So basically, I think that the state-based attack is trying to get the narrative on their side and throwing energy FUD at Bitcoin. That's why I do think it's important for people to constantly look into the data and understand the mechanisms to how it works, because I see a lot of misconceptions out there. People assume that the energy is on a per-transaction basis, whereas it's really not how it works. Two, they underestimate how much Lightning can improve it. Three, they don't take into account declining block subsidy, right; so, even though Bitcoin keeps using more energy, it keeps using a smaller percentage of energy as a percentage of its market cap.
There's an article I linked to a while ago; it was written in, say, 2017/18. It was like, "By 2020, Bitcoin will use all the world's energy" and it uses a fraction of 1% of the energy in 2021. And it's hard too, because if you're a journalist, you also have to spend hours and hours and hours understanding how the Bitcoin code works and then have some degree of knowledge of the energy market. And it's one of those things that's kind of a multidiscipline subject and basically, I have a blend of engineering and finance background and it still took me quite a bit of time to really dig into Bitcoin to fully understand it. There was the initial understanding, then there was a deeper layer understanding and then it was like, "Okay, now I have to get into Lightning and understand that".
Peter McCormack: It never ends.
Lyn Alden: Exactly, and especially if Bitcoin's not your day job. I'm following multiple markets and I have to spin them on Bitcoin and so, if you're a journalist that covers multiple things and then your editor says, "Write about Bitcoin", it's going to be really challenging to write a really informed piece. Basically, the amount of hours I have to put into a Bitcoin piece has always been very large. So, I can imagine that it's just really challenging for journalists writing about Bitcoin.
I do think it's important for members of the community to push back and try and get the facts out wherever possible. It's basically this ongoing part of education.
Peter McCormack: I hope the additional time you've put into Bitcoin has been worth it in terms of increased exposure and you've become one of our darlings and heroes of Bitcoin right now, and I think everyone appreciates your time and effort that you put into your work.
Lyn Alden: Yeah, I've enjoyed learning. It's always a challenge to add an extra asset class to your coverage list, but it's certainly been one of the asset classes that I've been most excited about, so I've really enjoyed going into that rabbit hole and learning how it works and then monitoring it, monitoring the health of the ecosystem and hoping that it continues to succeed, because I think it's really good technology; I think it's good for people to have.
Peter McCormack: So, the last thing I want to touch on with you is just general macro outlook and Mr Biden. I was in a Starbucks the other day and I shared a picture that said certain food and drinks are not going to be available due to supply issues, and we saw in the US there were supply issues with oil; I think, as I read, that was down to a shortage of drivers and an attack on a pipeline, whatever the reason. But lots of people are starting to share different data points for either increases in prices where inflation's hitting, or supply chain issues. How much of this are you tracking yourself? And also, in addition, I want to ask you about the $6 trillion Biden plan, but we'll come to that.
Lyn Alden: Yeah, so inflation is one of the key things I'm tracking now, because it's setting a lot of what types of assets are going to do well and what the Fed response is going to be, and that of course impacts multiple aspects of markets. So, what we're seeing now is a combination of low base effects from last year. So, we're comparing current numbers, CPI numbers, to a dip last year.
But then also, on top of that base effect, we have very hot month-over-month numbers, so things are coming in above expectations. And there's two main reasons for that: one is, the thing I've been tracking for a while is the increase in broad money supply growth. So, ever since we saw the big money supply growth in 2020, which was different than anything that happened in 2008/09, so it's not just QE; it's QE that combined with fiscal spending that gets that money out into people's bank accounts.
That is generally pretty correlated with price inflation. When you have the broad money supply go up, that's monetary inflation, and it tends to cause price inflation. But of course, the degree to that depends on all sorts of things related to productivity and other deflationary forces. So, once it started to open up, my base case was that big increase in broad money supply is going to be price inflationary.
The second thing you need is some sort of either productivity limit or scarcity. So, for example, if you look back at the previous two inflationary decades, the 1970s and the 1940s; the 1970s had the oil embargo, so you had oil shortages; and then the 1940s had all sorts of commodity shortages relating to, you're trying to fight the war and we even changed what we made our pennies out of, because we needed to save the metal. So, both those decades had the combination of big money supply growth and some sort of scarcity somewhere.
So, what we're seeing in 2020 and 2021 is that we saw this big increase in broad money supply. Different countries did it in different paces, so the United States did it more than most other countries; but most countries did some sort of big M2 broad money supply increase. And then you're getting fragilities in the global supply chain. So, semiconductors are in short supply, so that's trickling into things like used cars, because it's impacting how much new cars can be made and therefore, people are going into the used car market to increase the prices enough to give it to people to sell.
Then you're seeing food price inflation, you're seeing broad commodity inflation and so, overall, we're seeing pretty hot numbers come in. I think we saw the April numbers reported mid-May and next month, we're going to get the May numbers reported mid-June. I think those are going to be even higher year over year. But then, after you go past that, I think the rate of change could stabilise, to some extent, where it's no longer going up at the rate it has been.
But the key thing I keep pointing out is there's a difference between transitory inflation in absolute terms and transitory inflation in a rate-of-change terms. So, for example, if you look at the 1940s, you had these three big spikes of inflation, so inflation would go from 0% to 80% and then would go back down to 1% and then it would go to 2% and then it would go back up to 12% and then it would go back down, but there was never really a period of deflation after the inflation. So, it's not like prices went up and then came back down; instead, they went up, they got to a new higher plateau and then they destabilised and then they went up again, then they stayed there and stabilised, then they went up again and then they eventually stabilised for a longer period of time.
So, what you have is a permanent stepwise increase in prices. So, I think the media's mixing up what transitory means. Transitory means it's different than prices coming back down; it's prices going up and then kind of stabilising at --
Peter McCormack: That's the new price?
Lyn Alden: Yeah, that's the new price. But of course, you'll have some things like, there are key things that are really bottleneck, like lumber, for example, due to the sawmill constraint. So, timber is available pretty cheap, but there's only so many sawmills. So, converting that timber into lumber has a bottleneck, so you have this parabolic price action. So, I think some things, like lumber, are going to give back some of those gains. They already have to some extent.
So, whether or not this was the peak, I don't really have a strong opinion; but basically, there are certain key things that got too expensive that will come back. But in a broad sense, a lot of these price increases, even when the dust settles, will be at a higher level than where they started. Then, from there, it'll largely depend what happens next with fiscal policy. So, if they don't do another big burst of fiscal, you could get inflation levelling off again; whereas, if they do another big burst of fiscal, that's when you're probably going to see another round of price increases.
Peter McCormack: Okay. So, the last thing is Biden's $6 trillion figure, which is a number I can't even get my head around. What was your reaction to that?
Lyn Alden: My first reaction to all these things is questioning what parts are going to get through Congress. So, for example, the President's proposal usually does not get through Congress in the original form. And as we've seen, for example, Biden's been working on this stimulus package separately, the Infrastructure Bill. The first proposal was like $3 trillion, and the Republicans were like, "How about $0.5 trillion?" Then they were like, "Okay, how about $2.5 trillion?" And then they were like, "Okay, how about $1 trillion?" and defining what is infrastructure. So, that debate is working its way through Congress.
It's one of those things where, in the current environment, because the Senate is so closely divided, Biden can get something through with a budget reconciliation, meaning that only 50 votes are needed, but there are a handful of centrist Democrats that are on the border between Democrat and Republican and that are onboard with the really big numbers. So, in order to get through that, he needs to tone it down.
Then, of course, the midterms come in. So, overall we're seeing this dance between what the Administration wants versus what they can get through the Senate. They can get most things through the House at this point, at least until the midterms; but getting things through the Senate is their current bottleneck.
So, overall what I'm weighing is less so the headlines; they kind of fade the headlines a little bit, but they're directionally important to show where the Administration is headed. And then, we'll see what happens with the midterms, because with the midterms, if you get a red sweep, it probably reduces what you're going to get; whereas, if they strengthen the blue Senate majority, then some of these bigger packages have a change to go through.
So, that's what I'm watching now; it's more about watching actual dealmanship in the Senate versus how that might affect the inflation versus deflation outlook, compared to just these headline numbers.
Peter McCormack: Crazy times, Lyn, crazy times. Well, I think the most important thing we can take from this and we discussed here is that you're coming to Bitcoin 2021.
Lyn Alden: Yeah, it's going to be fun.
Peter McCormack: Yeah, it's going to be great. It's going to be great to get everyone together. It's a wild bunch of people when we're all hanging out. Whether you can make it or not, I'm going to send you an invite to my party; hopefully you can come and hangout with some of us bitcoiners.
Lyn Alden: I appreciate it.
Peter McCormack: Yeah, cool. Well, listen, I always love talking to you. Have an awesome month. I wonder what wild shit we'll be in for next time we speak!
Lyn Alden: Yeah, we'll see.
Peter McCormack: Take care, Lyn.
