WBD398 Audio Transcription

ESG & Institutional Bitcoin Investment with Kevin O’Leary

Interview date: Thursday 16th September

Note: the following is a transcription of my interview with Kevin O’Leary. 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 businessman and TV Personality Kevin O’Leary. We discuss institutional bitcoin allocation, ESG compliance, and the changing economic landscape.

“If you are able to get the institutions just a 1% allocation that’s a trillion dollars worth of buying, so now you’re talking about a million dollar bitcoin...smell the fucking roses, the opportunity is there, you got to get on the bandwagon to solve this problem.”

— Kevin O'Leary

Interview Transcription

Peter McCormack: We're actually winging it a bit this morning, because American Airlines lost my luggage.

Kevin O'Leary: Oh, that sucks.

Peter McCormack: Yeah.

Kevin O'Leary: It's probably in Phnom Penh, Cambodia, right now.

Peter McCormack: It's in Cincinnati.

Kevin O'Leary: Oh, that's good.

Peter McCormack: So, I was rushing this morning.  I had to go up to Bloomingdales and get new clothes.

Kevin O'Leary: So, they'll get it to you tomorrow, I guess, right?

Peter McCormack: Later today.

Kevin O'Leary: That's good.

Peter McCormack: I wanted to be smart for you.

Kevin O'Leary: I never check luggage.

Peter McCormack: Ever?

Kevin O'Leary: Ever, because you're never going to see it again.

Peter McCormack: The problem is, I'm now here for two months, so I've got a lot of luggage.

Kevin O'Leary: Yeah, I bet.  Yeah, that's a problem.

Peter McCormack: So, nice to meet you, man.  It's great to get you on the number one Bitcoin show.

Kevin O'Leary: Absolutely.

Peter McCormack: Pomp will be a bit jealous!

Kevin O'Leary: Yeah, I'll tell him right away!

Peter McCormack: I've got a bunch of things I want to talk to you about.

Kevin O'Leary: Let's go.

Peter McCormack: I'm not sure if you're a Bitcoin guy, or just a guy hunting for yield, making money.  I know you've invested a bit in mining.  I know you're on the verge of interest, but I don't know if you really care, like the crazy bitcoiners?

Kevin O'Leary: I would say that I'm viewing it now -- think about me as an investor.  I have a mandate to deploy capital and generally, I work in the world of 11 sectors in the S&P 500.  And, I'm trying to beat the index both here and in Europe and in Asia by investing in companies either in their debt or their equity. 

So, for a long time, crypto was interesting, but it wasn't where institutions were going.  I serve the institutional market and the foreign pension plans and sovereign funds; I talk to them every day.  So, what I'm interested in doing is understanding where they're going, because I'm a service entity for them; I index.  So they say, "I want to index psychedelics".  MindMed is one of my companies.  Now, there are three others and they've raised billions of dollars and we've going into the exploration of psychedelics as medicine, not as recreational drugs, FDA proved, etc. 

So, what's interesting now about crypto, I don't consider crypto Bitcoin or Ethereum.  Yes, they were the pioneering assets, but I'm considering crypto as the 12th sector of the S&P.  It hasn't been declared that yet, but I think that's where we're going.  So, when you talk about running a mandate, like I do, for institutional clients or institutional mindset, they say to themselves, "Okay, in a normal world where I understand each of the 11 sectors of the S&P, the largest I would allocate would be 20%, let's say, to technology".  That's generally the max in a mandate.  And maybe you do 3% in energy, because your ESG concerns are there and all the rest of it, but you're dabbling in all 11.

I'm now dabbling in crypto as if it was the 12th.  So, that means I don't need a mandate to do that.  I'm doing that because I'm able to get my compliance department to agree on certain coins, tokens, assets; but they have no interest in just buying Bitcoin.  I get Bitcoin.  That's one asset.  It's just like when you say, "I'm going to have 20% in tech".  There are 1,000 companies to choose from to build that position.

So for me now, to actually get into crypto, I need multiple positions, because I'm mandated to have diversification.  So, yeah, I own Bitcoin; yes, I have some Ethereum; I have some Litecoin; I have some USDC; but there's much coming.  And I'm at 3% right now weighting in a mandate.  That's not a lot.  I'm on my way to 7% by year end.  That's a lot.  And that's starting to be where I consider myself a participant in this market. 

But I'm having to do it different than maybe you or Pomp or a lot of the guys that were pioneers.  I don't have the option to be a cowboy, I can't do that; I have three problems on that front: number one, I have to get my internal compliance officer to agree; number two, I have to get my external auditor to sign the audited statements that then turn into reports to the regulators and every jurisdiction that I've participated.  I cannot afford to be offside for one second.  So, that's taken a lot of time.  That isn't easy and that is where we sit.

I'd say to you that's good and bad news.  It's good news that I've been able to do it.  It took me almost half a year, but the upside is that there's trillion of dollars of the people I service that want to do the same thing, if we could just get the regulator onside to tell us what the rules are.  It's like football; you can't play football if you don't know the rules.  We need the rules, then you're going to get a massive allocation into crypto.

Peter McCormack: What is 7% in real numbers?

Kevin O'Leary: I don't say, because it goes across multiple mandates.  And, we have rules about disclosing dollars, because it's not always our money.

Peter McCormack: Okay.  And are these people just kind of aware that there's this crypto thing and they know they should do it and they just trust you with their money, because in my world, my show is What Bitcoin Did.  95% to 98% of our content is Bitcoin and we occasionally discuss other projects.  So, I might discuss Ethereum if I wanted to talk about stablecoins or do the comparisons; but in my world, Bitcoin is very different from crypto.  I actually consider them two different things.  All they share is the fact that they both use a blockchain and cryptography.  But what they are trying to achieve, for me are very, very different things.  So, if they're just this wider desire for people to invest in crypto and they don't really care what it is, then it's for you to decide the investments?

Kevin O'Leary: No, when it comes to crypto, because of the compliance and the regulations and where we're at, I don't put other people's money into crypto mandates.  I'm very fortunate to have my own operating companies, multiple operating companies, that I control; in the case where this crypto is, 100% control.  But I have to be compliant anyway, because when you have a compliance department, it's because you've been able to grow -- I have multiple investments in financial services companies, many of which are reporting and regulated.  So, I can't be offside.  It's because I'm a shareholder in these companies.

Peter McCormack: What do you mean by offside?

Kevin O'Leary: Let me give you an example.  Back in 2017, when I took my first position in crypto, the regulatory environment was nothing less than toxic.  At that time, regulators around the world were sending out complaints to all kinds of people that were trying to tokenise all kinds of assets, including one here in New York, a hotel.  It was a poop show.

Peter McCormack: You can say "a shit show"!

Kevin O'Leary: Yeah, it was.  And you just can't get involved in that when you're reporting and being compliant in many other jurisdictions.  And so, at that point, my own compliance department said, "You've got to stop talking about this stuff.  You've got to stay away from this stuff.  This is just an environment that is brutal".

Over time, and particularly the last 24 months, you've seen Switzerland, Germany, France, England, Canada, a jurisdiction that cooperates with regulators in the US in total harmony, launch ETFs with their primary asset being Ethereum and Bitcoin.  So, the tonality of that regulatory environment has changed dramatically.  You're starting to see the regulator talking about, "Let's discuss these asset classes.  Let's get into a dialogue about it".  As a result, I've been able to be more flexible about my own position and come out and disclose, just a few months ago, that I've taken a 3% position in our operating company of specifically Bitcoin and a few others. 

But I agree with you on the thesis you have on Bitcoin, because when I talk to -- let me give you an example, which is I think very intuitive what you said there.  Let's say I'm talking to a sovereign fund, all right, and say they have $500 billion, and they want to deploy into crypto for the first time, they're going to put a small weighting, 1%.  The reason they haven't done it yet is not because they're having a debate about whether they want to; they want to.  But they have a compliance department that includes an ESG committee, which determines which assets get to the investment committee first, because every single asset is viewed with that particular sovereign fund by the merits of sustainability.

So, just at Bitcoin 2021, there was a huge debate going on.  Elon Musk was involved.  I've made some statements about it, because I'd learned from the pensions that they were not going to get involved in it, because it was not ESG compliant.  The Chinese were burning coal to make electricity to mine and get awarded coins.  That was a nightmare.  And so, the reason Bitcoin is still not yet an institutional product is we have not got around this issue of sustainability.  It's getting addressed and I'll give you an example.  This is a shoutout to a company I am a shareholder in, Hut 8, Jamie Leverton.

Peter McCormack: Yeah, she's great.

Kevin O'Leary: She is great.  I met her through a real estate transaction and we started having a discussion, like you and I are right now, but she said, "Look, I'm ESG compliant".  But what I like about her company is that I can buy her equity, which I did at that time; I think I'm up 69% in the mandate that that's in, because she claimed, and she was right, that she is in direct vol.  In other words, the correlation between the price of Bitcoin and her stock price is one-to-one.

So, she is keeping every ordered coin on her balance sheet, she doesn't sell it, she loans it out to get fiat and pay her expenses, and as a result, she is a proxy for Bitcoin in a compliant way that many of us can invest in.  So, the model for her, and I talk to her about this all the time, is don't go buying assets that are not ESG compliant.  If you continue to mine on an ESG compliant basis and you're a woman and you have women management, because a lot of these sovereign funds demand compliance around diversification, I'm talking where there's billions of dollars, not buying $1,000 worth of Bitcoin, where they want to allocate huge dollars, her model is going to be the model of the future for miners, which is why I've made my biggest bet with her. 

Every time she looks at a new mining operation, it's got to be 100% ESG.  That means it's going to push her to solar, it's going to push her to wind, it's going to push her to any compliant way, maybe burn-off of gas and use it productively, as she does in Northern Alberta.  But Bitcoin, to me as that asset class, is not a currency, it is an asset.  Because the plans I'm talking about, the sovereign funds, they want to buy the coin and never sell it, never trade it.  So, if they felt they could buy her stock, for example, and know that she would guarantee them that she would only mine new awards sustainably and she never would sell the assets, they may consider that as their proxy for Bitcoin, which is I think a big opportunity for them and other miners as well.

I talk to all the miners all the time; they're always soliciting funds and I get it.  But I can't ever be -- because when I disclosed that I had 3% weighting in Bitcoin and Ethereum, the first calls I got were from all the guys I know in the pension plans saying, "Do you know that those are sustainable or not?  Do we own them, or just you, because we can't own them?" and that's when I learned about the problem.  It remains today, and the reason I say it's not a problem, it's an opportunity; if we solve this in the Bitcoin asset community, whatever you want to call it, you're going to see $1 trillion of fiat currencies going to Bitcoin as an asset, just like real estate.  And I think you want to talk about $100,000, $200,000, $250,000 coin price; it has to solve this problem.  It won't get there until them.

Peter McCormack: We haven't done ESG yet, have we, on the show?  Marty Bent did an interesting show with Michael Saylor discussing it.  And one of the funny things I find about ESG is that 95% of the conversation seems to be about the E, not the S and the G!  You must know Dan Morehead at Pantera?

Kevin O'Leary: Sure.

Peter McCormack: Did you read the Pantera thesis, where they covered why actually --

Kevin O'Leary: I have read it.

Peter McCormack: -- more on the E than the Social and Governance?  Bitcoin's actually a great tool for Social and Governance.

Kevin O'Leary: It is, but here's the delta between the thesis of that, call it a whitepaper if you wish, and then what the reality is.  When you meet an ESG Committee that's sitting on top of the investment committee of any institution, and they even have ethics committees now, because they don't want to invest in places where human rights are abused, there are all kinds of these filters coming in.  You can have a discussion about how many fairies dance on the head of a pin with an ESG Committee, but it doesn't matter if they don't agree.

What they want to know is, are hydrocarbons being burnt in the creation of the energy used to get a coin rewarded?  Yes or no; binary; yes or no.  You can't give them the theory about how it's good that there's more efficiency being built into the models for miners and their stacks and efficiencies and all that stuff; they don't give a shit.  What they want to know, are you burning any hydrocarbons?  If your answer is, "Well, kind of, sort of", they just can't invest.

Peter McCormack: But we're a long way off at zero?

Kevin O'Leary: Well, I think what we're going to need to get, because my thesis of owning coin now is I do believe over time we're going to solve this problem with the idea that miners, the next generation of miners, are going to the ESG Committees first and say, "I'm going to put up a gig of mining capacity.  I'm going to put it up in West Texas.  I'm going to use solar and wind when it becomes available.  I'll build it out 250 at a time.  I want you to give me $150 million and I'll give you equity in my operation".  That's coming. 

Then the investment committee says, "What is this, an infrastructure deal?" and that's what it is.  If you can show that you can get 11% to 17% annualised return, which you could if you believed in Bitcoin, you would write that cheque for $500 million, $600 million.  That's the snack bracket of these funds, but they can't do it unless it's compliant with ESG.

Peter McCormack: Where's the ESG pressure coming from?  Is it just themselves as a business?

Kevin O'Leary: I think you can blame Larry Fink's letter this year, and I think he's a genius, because he sets the mandate for the global consideration, at the board level, of ESG.

Peter McCormack: You should probably explain who Larry Fink is.

Kevin O'Leary: Well, the largest asset manager on Earth is BlackRock, and he writes a letter each year and he sends it to every CEO of a company he's invested in.  It basically sets the rules by which they should govern their companies regarding sustainability and climate change, and all kinds of other issues that Larry believes in.  Now, you can ignore it at your peril, because if he puts a position on in your company, he's going to be one of the largest shareholders, period.

So, he's on a mission and I think it's a noble one.  He himself has to struggle with the definition of what ESG is, but he has changed the tonality of the S&P 500 in just 36 months.  I'll give you an example of how you can test this thesis.  You look at the price-to-earnings ratios of the entire energy sector, they have been going down, even though earnings have been going up, since he started this thing. 

He started saying, "We don't want to mine oil out of the ground.  We don't want to transport these hydrocarbons; we want to get rid of them and find a sustainable method for energy".  That whole sector got crushed, and it continues to underperform.  Why?  Because the incremental buyer of the institution, that is also reading that letter says, "Chevron?  No thanks.  Basically, we don't want it".  I've been under the same pressure to remove those names from some of the indices that I'm involved in, and I love energy.  I think it should have a place, and these companies are spending billions to come cleaner and they're incentivised to do it.  It doesn't matter that their price-to-earnings ratios are getting crushed. 

So, going right back to the beginning of your question, that's what happened, and it's global.  So, he will basically set a tone that disfavours non-sustainable companies and favours those that are sustainable, and they're rewarded with higher price-to-earnings ratios.  Same thing for Bitcoin.  It will have a higher P/E when you can say, "That coin was mined sustainably", and I think that's why we're talking about these massive new opportunities.

Peter McCormack: I mean, there'll be two types of people that will listen to this.  There'll be somebody I think like a Michael Saylor, who will agree with you, and I think he considers Bitcoin as more of an investment; a sensible investment, a place to store his money at the moment and a moonshot to become one of the richest people in the world.  There's that kind of person.

But there's also the kind of person like Marty Bent, who debated him and said, "I don't care about these people.  Bitcoin can take its time, we don't need an acceleration in growth".  They come more from a moral standpoint about having good, sound money and censorship resistant money for people in all difficult locations around the world.  So, he feels like any kind of compliance with ESG is bending the knee to someone else's narrative, and there are two very distinct crowds, and I'm sure you are aware that there are sub-communities in Bitcoin.  Some are quite radical and they're just, "I don't give a fuck about these people", excuse my language.

Kevin O'Leary: Believe me, I hear from those constituencies too.  My point is, I live in the real world, so if you're an owner of Bitcoin and you want to see a $100,000 price on that coin in the near future, you have to address this issue.  And I'm sorry, because for all the excitement in a conference like this and the discussion we're having of Bitcoin, I bet you no more than 4% of institutions globally even touch it.  They don't give a shit; they're not going to.

So, my opportunity, the way I look at it is to say, well, if I can be part of the solution and I'm going to invest in miners that are part of the solution, I'm going to be rewarded, because I'm solving for trillions of dollars that want to play that won't.  They don't care what the radical -- I love the community, I get it and I hear this debate every day.  But then, I go back into my office and I look at my board and I look at trillions of dollars of institutional money flowing around in assets that have been approved for decades, and none of it's Bitcoin; none of it.

Fink said the same thing just three months ago; he said, "I don't give a shit about Bitcoin".  He didn't say that, he just said, "Nobody asks us about it, because no one's going to buy it.  The thing's not ESG compliant".  Bingo, that's the opportunity; he just set the rules.

Peter McCormack: Yeah, that's the danger of Bitcoin.  I mean, when you say radical, others would say principled.

Kevin O'Leary: I love principled; radical principled.  One man's freedom-fighter is another man's terrorist.  It's the same thing.

Peter McCormack: Yeah, but the principles of what's happened with Bitcoin, how it's been built, has been built around quite solid principles and some of these people would say, "Well, who is this Larry guy?  Do we need him?  Who cares?"  If the institutions don't want it, fine, Michael Saylor can have it, Elon Musk can have it.  They'll come eventually.

Kevin O'Leary: Why did Musk to a 180 turn on taking coin for the purchase of his vehicles?  I'll tell you why; this is my speculation, okay.

Peter McCormack: I'll tell you mine if it's different.

Kevin O'Leary: Okay.  So, he makes his decision, he goes out there, the majority of his investors in Tesla are institutions now.  That is an institutional company and he's been rewarded a very high P/E because they believe in his vision for the future.  Along comes this idea to pay for your Tesla in Bitcoin.  All of those institutions have ESG Committees; 99% of them are on the sustainability model.  They know that there's a debate going on regarding coin and the mining of it in China; non-compliant ethics issues, ESG issues, burning coal to make Bitcoin.  They just called him up and said, "No fucking way.  We invested in Tesla, not this debate about ESG".  That's my thesis.

Peter McCormack: Yeah, I think you're probably right.  And I suspected there was also probably some internal dialogue, a little bit like when Spotify took Rogan; there were these internal debates about some of the shows and guests he had and 20 shows were censored.  I have a feeling he fought a bit of an internal battle over that one as well.

But the problem with that, Kevin, is that I would rather Elon Musk just sold his coins.  And I'm sitting in the field of people who would say, "Look, I would love a $100,000 Bitcoin, but at what cost?  Am I here for $100,000 Bitcoin because it makes me wealthy; or, am I here because there is a currency now that --" I've just been down to El Salvador again for my 5th time and I've seen the difference it's making to people's lives there.  Am I here for that, therefore do we risk Bitcoin, do we risk centralising it, do we risk destroying what it is by bending the knees for the investors?  That's what I don't know and I do wrestle with that.

Kevin O'Leary: Yeah, I think it's a great debate, but I don't think Bitcoin's ever going to be centralised.  It's going to be regulated, but never centralised.  I think to the fact that, as we started this dialogue earlier, I, like you, believe in it as an asset.  I own it, I'm never trading it, I'm never going to sell any coin.  To me, it's the building I used to own in Boston that I sold for cash.  It's something that I think over time will beat the indices and hedge me against inflation.  It's similar to gold, which I also own, but maybe in a better performing way, and I need to get all the roadblocks out of its way.  I don't want to have this ESG debate about it anymore.

I'm part of that debate, I'm one of the voices that have been saying this now for two years.  We've got to address this issue.  And again, it came up again at the panel I was on today.  It's the same story.  In that audience, every time I come to these conferences and I do a panel, I look into the audience and I see the same institutions that I serve indexing with baseball hats on and sunglasses.  They don't want to be seen here, but they're really interested in this asset class.

In that room, I bet you 20% of the people today, I don't know, there were 3,000 in there, are involved in financial services.  You can tell who they are, because they're wearing a hat and they've got sunglasses on, because they're not ready to declare they're players yet, but they want to figure out what are the rules and when will the regulator approve it, because it will be allocated.

I think, when you're talking about a $500 billion sovereign fund and they allocate 1%, you're talking real money.  And you, as an owner of a coin, are going to vastly be worth a lot more than before their participation.  So, we can have this debate about the community and the moral obligations and centralisation/decentralisation, but if you are able to get the institutions to just a 1% allocation, that's $1 trillion worth of buy-in; so, now you're talking about a $1 million Bitcoin.  That's why I'm in the game.

So, I'm happy to have this dialogue saying, "Everybody, wake up and understand.  Smell the fucking roses.  It's there; the opportunity's there; you've got to get on the bandwagon for it to solve this problem for it".

Peter McCormack: How much issue is there with the regulators right now, because again I can reflect on El Salvador and we just see today that President Bukele announced that if anyone invests in the country, they won't have to pay any capital gains tax on their Bitcoin investments, and they just move really quickly as a country; they just make decisions and they move.

We've just seen Ukraine announce that it's legal to own Bitcoin, and it perhaps might become the next one.  And we're seeing these smaller nation dominoes falling, yet here we are in the US where the majority of Bitcoin companies are, I expect the majority of Bitcoin wealth is, yet it seems like the regulators are doing everything to hold it back?

Kevin O'Leary: Yeah, that's a great observation.  Let me give you the answer from the pragmatic view of the big guys, okay, the guys I get to talk to all the time.  Here's the way they look at it.  Let's say you're running, I don't know, $100 billion, and your job is to work with your compliance department, work with your auditing teams and then of course, report to the regulator in the jurisdiction you're in, the same thing all around the world.  For 100 years, those mandates have had the compliance infrastructure, so I'm going to give you an example.

Here in New York, some guy running a $1 billion mandate right now, at 4.01, or a second after 4.00, the systems will mark-to-market every position he has, or her, and it will go straight to the compliance department and they will see every single position, and they have the AI to automate it.  Let's say the mandate is, "You can't have more than 20% of anyone sat with the S&P and you can't have more than 5% any one position", that's a classic mandate.

If they go offside even for a second during the trading day, the lights light up in the compliance department, because it's a mark-to-market by the second, because they have margin on there sometimes.  So, whether they buy a bond or whether they buy a stock or a future, or whatever it is, those systems are infrastructure inside.  And at 4.01, the compliance department checks the box, says, "Everything's cool".

Then what happens is the auditor, the external auditor, can at any time go and check that they're compliant, because at the end of the quarter, they're going to be asked to sign off on the statements as an independent auditor.  And those signed-off statements then go through the reporting systems to the regulator. 

Now, that infrastructure exists everywhere, in Switzerland, in Germany, in France; that does not exist anywhere for crypto.  There is no infrastructure inside of that institution to deal with, "Okay, I'm going to buy $10 million of USDC and I'm going to write contracts for 30, 60 and 90 days on a loan.  I'm going to pull in 5.5% interest and pay it back in USD and then go back to fiat".  You can do that with Circle, if you wished.  There is no infrastructure to do that.

Peter McCormack: Who operates that structure within the traditional market?

Kevin O'Leary: So what happens is, if you're an XYZ fund company and you are managing money for institutions, like university or state, they won't give you a dime until their compliance people go see your system, and that you're 100% compliant and you're able to report to them.  What's missing in the crypto universe right now is the investment in compliance infrastructure.  I'll give you my example.

In my own operating company where I have to be compliant, I say, "Look, we just sold that commercial real estate, we've got a lot of cash, our cash desk says we can only make 21 basis points.  I'm going to buy a few million dollars"; let's just start with that, let's just start with a small amount in the mandate and I'll show you how it works with USDC, the one I like.  I like the USDC, I don't do Tether, I don't do Dai, I use USDC, because I love the compliance that's been built over there at Circle.

My compliance officer, "No, no, we are not doing that".  I said, "Why not?"  "Because, how are we going to report that?  We have no way to mark-to-market that.  How do we know?  It's hybrid, it's risky, the answer's no, the answer's no".  I said, "No, we've got to solve this.  We're not beating inflation on the cash we just brought into the operation.  We just sold real estate and now, in our mandate, we're losing money every month, because we're getting 21 basis points and inflation's 2%".  My own compliance officer, I pay that person, I pay them, but they're arm's length from me, they said, "No, not doing it".  I said, "I'm going to call the auditor".  I call my own auditor, they said, "No, not a chance.  Are you out of your mind?  We're never going to sign those statements".

It took me six months to just do the first million; I mean, just to get that as an experiment to just show them it can be done, because there's no infrastructure.  So, it's very easy for you and I to just open up a wallet and buy stuff, but if you want to play with the big boys, you've got to solve this problem.  So, that's the noise I'm making.  I said it on the panel today, Jeremy was there, Sam was there, from FTX, and I got to disclose; I'm a spokesperson for FTX and an investor with him now.  The reason I did that is I want to use his infrastructure for compliance.  He's got the biggest global infrastructure ever and he can be compliant with my own auditors and my regulators in the various countries I operate in.

So, I look at this as a huge opportunity, but everybody thinks it's ready to go.  It's not ready to go.  There's much work to be done to make it so that some guy running $100 billion says, "Okay, put $10 billion into Dai, or put it into USDC, just for overnight", and not have a red light blow up in the compliance department saying, "What the hell is that; what is that thing?  You're non-compliant", "honk honk", you know, like the phones, and the army runs down to his office and shoots him!  Think about that; that's what happened today.  So, that's what we're trying to solve for, and a lot of people don't understand that opportunity.  To me, it's an opportunity.

When I see these companies emerging, I think we're at $29 billion of USDC now, so there are people playing in it, but $29 billion sounds like a lot of money; it's nothing.  It's nothing in the global context.

Peter McCormack: I mean, I think it's quite a lot; I could do a lot with that.

Kevin O'Leary: I know, but trust me, it's not.  It makes people think all the institutions are involved.  No, they're not.

Peter McCormack: Let me ask you something, because you talked about, in that last moment, you talked about beating inflation and what inflation number do people like you use, because we see quoted government inflation, which is around 4%, or 5%; we see house prices shooting up; I speak to my friends who work in traditional trades, plumbing, carpentry, they're saying their prices are up 10%, 15%.  The house I wanted to buy I nearly bought last year; I think it's up 20%.  What numbers do you guys use for inflation?

Kevin O'Leary: It's a great question, because you've nailed it there, you've talked about sectoral inflation.  So, there are input costs going up in many sectors, real estate and for a while lumber was going through the roof and certain commodities were spiking.  But right now, the way I look at it, we have a very large cash position in my operating company, because we reduced our commercial real estate over the last two years from 31% down to 8%, so I have to redeploy that.  You don't do that overnight, so we're going to take crypto up to 7% from 3%.  So, we're going to be working on probably 17 to 20 positions in different coins, different tokens, different chains; we're doing that research now.

Peter McCormack: Why did you reduce your real estate position so much?

Kevin O'Leary: I'm a real estate guy from way back and I've lived through three cycles in real estate, and you look at cap rates.  When you see AAA Boston or New York trading in under 3.5% cap rate, or under 4% even, you know that you're at the top.  You don't know how long you're at the top, but you're at the top, because cap rates are crazy, crazy low in those markets.  The risk you have is if interest rates go up, so do cap rates, so you can lose 20% real fast.  So, that was one situation.

I also saw what was happening in my -- I've got investments in about 34 private companies.  I've got commercial kitchens, I've got wireless charging, I've got insecticides, I've got beach chairs, I've got you name it.  I do PRX gym equipment.  I mean, these are companies that are really successful.  And I watched what happened during the pandemic and I asked them in Q3 last year, "What's your estimate for use of corporate real estate for back office and for retail?" because in situations where I have a control position, I want to know what their cap ex is for next year.

Back then, we made the assumption, and you may find this really interesting because I was stunned, that 15% of our staff would not come back to the office after pandemic, and specifically in the departments of compliance, accounting and logistics, like transportation stuff, because those jobs are always in cubicles in the basement.  I understood, people don't want to travel two hours a day; they want to stay and raise their kids in the suburbs or take care of elderly parents, whatever it is.  So, we went with the idea that we would reduce our exposure square footage, and primarily our headquarters are New York, Florida, Texas and California.  So, we started negotiating a reduction of 15% with the rates; primarily the rates, some private owners, but people we rent the space from and the retail stores.

Here we are in September, now two quarters have gone by.  55% of the staff will not come back, not 15%, and if we make them, they'll just get another job.  They don't want to come back.  That's more than half.  That's in these private companies.  I think there's around 10,000 people, including the supply chain of these companies.  There is a fundamental change in the way people don't want to go into a cubicle.  In addition to that, some of my customers, like Bed Bath & Beyond, closed 200 stores.  They're never reopening them, they're doing it all, curating it online direct to consumers and suburban areas.  I sell them product.

Commercial real estate is fucked, that's what I think.  And I don't care if you're a movie theatre -- I'm not saying real estate, I said commercial real estate.  There are law offices in Boston that have shut down one-third of their space; they've got their partners working from home, they don't want to go back in.  So, instead of a 4% cap, maybe it's going to be a 6% cap; you're going to lose 20%.  That's why I sold.

Peter McCormack: Do you think it's going to remodelled to residential areas eventually?

Kevin O'Leary: No, I think it's going to be climate-controlled storage.  So, what's going to happen is a lot of these buildings, Bed Bath & Beyond for example, what I would think is going to happen, there's going to be a new asset class emerge on a conversion.  In other words, let's say you've got to spend $1 million to convert an old Bed Bath & Beyond store into multiple pick-and-pack climate controlled and then rent it to Amazon, rent it to Shopify, rent it to Facebook, whatever.  And so, you have these jurisdictions, including CloudKitchens, where people that live in these dense areas where these stores used to be, have the benefit of having the product delivered to them within an hour, two hours; so, it'll get repurposed.

But that's not good for you if you're the owner now, because you're going to have to sell that at a 7% or 8% cap, or 9% cap, maybe 11% cap, and you bought it at a 3% cap.  You're going to lose a shit load of money, and I don't want to be part of that dance.  Look, I may be wrong, but I don't think so.

Peter McCormack: Back to the inflation point, sorry, because I interrupted you because that was fascinating, but would just love to know what you use as your measure of inflation.

Kevin O'Leary: So, right now, we're taking a combination of what you talked about, looking at our input costs and at the same time, looking what the government data is.  I think inflation right now is running at just under 3%, so combined across all sectors.  So, when you're talking about making 21 basis points on cash, you're losing a lot of money each year, which is why there's so much interest in just stablecoins; because right now, contracts for stablecoins are running at anywhere, depending on duration, from 3.8% up to, I just wrote some contracts for 5.5% yesterday. 

I have to drag my compliance people screaming into this, because nobody understands what USDC is.  I mean, you can go online and read about it, but they just say, "Wait a second; how do we know this isn't going to go to zero?"  I say, "How do you know that the US dollar isn't going to get slaughtered with inflation concerns?  How do you know any fiat currency isn't going to have a problem?  You simply don't know".  But because we have no infrastructure to report those trades and those contracts and no way for the external auditor to do it, it's very, very hard.

I have to hire three people just to do those contracts full time to be able to say, "Okay, here's the contract.  Send it to the compliance department, show them when the duration is, show it to the auditor, set the infrastructure up so the reporting works within our internal organisation", and I'm just one guy.  Can you imagine how hard that is for massive institutions?  They're not going to do it.

Peter McCormack: Where's the yield on those stablecoins coming from?

Kevin O'Leary: It's basically, if you understand the loan of the asset, I mean it's margin; it's basically a margin loan, that's what it is.  That's the way you've got to look at it.  It's no different than you asking your prime broker to loan you money so that you can borrow 50% of your long purchase on a stock.

Peter McCormack: Who's the borrower though?

Kevin O'Leary: Well, it's out there in the ether.  There's a market for people who want to borrow stablecoin, that want to borrow Bitcoin, that want to borrow your tokens, and they pay for them, and they're using it to stake positions and maybe they're using margin.  In other words, if you think Bitcoin's going to have a big move up and you can use margin on it, maybe you simply borrow the coins and put 5X leverage on it.  There's all kinds of trading like that going on.  It's not illegal; it's risky.  And the more volatility, you watch these contracts; when Bitcoin has a big up or down day, your yield can go up 25 basis points.

Peter McCormack: There's lots of people who've been sounding the alarms about the global economy for a couple of years.  I regularly speak to, you'll know, Caitlin Long, I regularly speak to her; and another guy called Travis Kling, I don't know if you know him?

Kevin O'Leary: Yeah.

Peter McCormack: Yeah, I've regularly spoken to those two over the last few years and they've brought it up a lot, and people seem very jittery now, but you're plugged into investors and institutions.  Is that the same experience amongst people; are people jittery about the global economy?

Kevin O'Leary: No.

Peter McCormack: They're not?

Kevin O'Leary: No, they're not.  Actually, the economy here domestically is better than anything I've ever seen in my investment career.  Let me give you the reason I think it's occurring.  During the pandemic, first of all we had all that stimulus and we have more maybe coming, we don't know.  But let's take a business like Lovepop Greeting Cards, another one of my companies; they make greeting cards, okay.  They're probably the fastest growing greeting card company in America.  They're 3D greeting cards, they're laser-carved in Vietnam.  You can go to Hudson Yards right across the road here and you'll find a Lovepop Greeting Cards shop there.

During the pandemic, all the shops were closed, and nobody buys greeting cards online.  You buy it as an emotional purchase, "Oh, it's my granny's birthday, I'm going to buy her a card.  It's my son's birthday.  It's Easter.  It's a holiday", and they're point-of-purchase emotional purchases in drug stores, train stations and stores like Hudson Yards.  That all goes to zero.  The company did what all the successful companies do; they did the digital pivot and they basically went online.  Maybe they use Shopify, maybe they use something else, but they went out to the existing customers and said, "We're still in business, do you want to buy direct from us?" not thinking that many would.  Well, we were all very wrong.  That company got up to 80% of its business back direct.

Now, why you care about that is when you sell through retail, you make 50 cents on the dollar.  When you sell direct to the customer, your margins can be past 90%.  So, you can lose half your business and make more cashflow.  So today, in my portfolio of companies, for the ones that survived, they are way ahead of forecast on cashflow; not on sales, but on free cashflow, because they've converted their business direct to consumer. 

The S&P did the direct thing.  Nike, in a matter of five months, did what they thought would take six years.  They're 50% director to consumer globally.  That means Footlocker means a lot less to them, retail is a lot less to them, and their margins go way up.  It's reflected in the S&P.  So, you're getting enhanced margins, enhanced cashflow, enhanced productivity.  And, this is the super bonus that nobody thought about, I mean I couldn't even believe this would happen and it happened to me, we make 15% pre-tax in our portfolio when it's humming, and we get the weekly tear sheet on sales and free cashflow.  15% is the American Dream; that's what you want.

What happened, we think we're going to make 17.5% this year.  That's incredible; that's absolutely incredible, because we've cut our travel expenses, we've cut our retail space, we have cut all of that cost in having employees in an office that now they work out of home.  It's amazing.

Peter McCormack: That's obviously a continual changing evolution of the economy, more businesses going online and it's great for Nike, but maybe that's going to squeeze out some smaller retailers.  So, who is this not good for, because obviously this is great for the big companies who've got the money and the budgets to build out this impressive ecommerce infrastructure; but there must be some people getting squeezed?

Kevin O'Leary: Who's getting squeezed are operators that don't understand direct-to-consumer models, that don't know how to use social media, that don't know how to photograph their product, can't produce 15-second videos, even Nike.  I mean, these days I teach, primarily graduating courts of engineers, places like MIT, Harvard, Temple, other colleges and universities, because a third of an engineering class will start a business and I like to see the deals early.  It's a good relationship I have.

I always tell people, or I used to before this pandemic, "If you're going to go and put yourself $80,000, $90,000, $100,000 in debt going through an education in a college, pick a career that you can actually get paid".

Peter McCormack: I was reading about a guy this week.  He did it and he's earning $40,000 a year.

Kevin O'Leary: Okay, so I used to say, "Look, there are three disciplines that you should focus on: number one is engineering, number two is engineering, number three is engineering; and if you have any spare time, do some engineering at night".  I would say, "I love history, I love the arts, I think all that stuff is great, but you will starve to death if you do that".

I don't say that anymore and I'll tell you why.  My number one growing cost in my businesses today, videographers, editors, animators, storywriters.  I used to pay them nothing.  They would beg for work.  They would be lucky to make $15,000 a year and live in their parents' basements.  That's not what's happening today.  They are the most in-demand people, both corporately in the S&P 500 and in small business, because they're storytellers and they know how to tell the story of a product or a service direct to consumer.  The economy's changed. 

Now, those people graduating out of Tisch two blocks from here are some of the highly paid people in New York, because they're artists.  Who the fuck knew that would happen?

Peter McCormack: I'll tell my son.  He wants to come here and study at Parsons.

Kevin O'Leary: Well, I'm wrong, I'm telling you, I was wrong.  And now, excuse my French, but I'm 100% wrong on that and today, I respect a great videographer, a great editor, a great storyteller, a good animator.  I beg on my knees to hire them, because they're in such demand.  So, the economy has changed and the losers are the ones that don't endorse that methodology of building a business direct to consumer, which is a global franchise now, not just domestic.

That's why the economy is booming, that's why the stock market hits new highs every week almost, because it senses a new America, a digital 2.0 America.

Peter McCormack: There are a lot of people who would disagree with that point.

Kevin O'Leary: Yeah, well they're not living the life I'm living in terms of working with real entrepreneurs.

Peter McCormack: No, but they would say the S&P has continued to grow because the government has printed so much money.

Kevin O'Leary: Yes, there's the underlying liquidity and there's truth to that as well.  But you look at earnings, every single print this year in every sector, 60%, 70%, 80%, depending on the sector, beat their numbers after they've been upgraded, in some cases twice.  So, you think about that.  You beat your earnings and the analysts say, "We've got to upgrade the earnings", and then you beat it again.  That's because you're enhancing your margins from direct to consumer, you're enhancing your margin through cutting travel and entertainment costs, whatever you're doing.

Peter McCormack: There must be something like the airlines…?

Kevin O'Leary: Oh, listen, the airlines are completely screwed.

Peter McCormack: Yeah, that's what I thought.

Kevin O'Leary: Look, I'm saying there are losers.

Peter McCormack: Yeah, but that's what I was looking at; who are the losers?

Kevin O'Leary: You've picked a good -- I'll tell you the losers.  Energy companies are losers, because nobody wants to own their stock anymore.  Airlines are completely screwed, because they made the assumption that business travel would come back to what it was and it would come back quickly.  It is never coming back to what it was; it will take decades to get it back to what it was.

If I own a company and you want to take a flight somewhere, you've got to write online a five-page essay about why I'm going to make a 17% return on your trip, because you don't need to go.  You can Zoom it, you can do Skype, you can do something else.  You do not need to go there; and if you do need to go there, I've got to get a return.  It's going to cost me $5,000.  How am I going to make $20,000 from your $5,000 trip; that's what I want to know?  And, if you don't have an answer, you're not going.  And, the reason I'm able to do that now is I know with certainty you can do your job, because you just did it for the last two years without flying somewhere.  So, that's why it's really challenging for the business side.

Now, the airlines say, "Great, we're going to do terrific work with consumers for holiday vacations", that's true.  That's a shitty business.  You fill up a tube with people at $79 and fly them to Disneyland, you make no money.  And then you fly them back on the same ticket; that is a horribly shitty business.  Take United; they had an $8 billion deficit on their balance sheet debt.  I think they're over $20 billion now, and that was just 18 months ago.  The balance sheet's upside down.  I'm short that stock, I'm short all the airlines.  They're not going to zero, but those stock prices are going down.

The heartbreak of the delta virus and the concern of new derivatives of these diseases, every year, are going to keep a lot of people out of -- think about airlines.  Some of them are saying you've got to be vaxxed, you've got to prove it.  We're at this conference; you've got to show your card to get in here.  Secondly, some airlines say, "We don't care", maybe wear a mask, maybe you don't.  So, you're going to bifurcate that market into, "Here's a tube that you pay more to get into, because everybody's vaxxed, and here's a death tube; you pay less, because maybe half the people have the new variant of the virus", you don't know. 

I'm not getting in the death tube at any price.  If I'm going to fly, I'll go into the safe tube, but they're just cattle cars with people in them.  I mean, I'm not trying to diss the airlines, but they're just buses; you've got to think of it that way.

Peter McCormack: Well, listen, we've come right to the end of our time far too quickly.  I could have probably chatted to you for another few hours.

Kevin O'Leary: I've really enjoyed it.

Peter McCormack: We'll have to do it another time.  Just a close-out question, because we're here at a conference and a lot of my listeners are a range of people with different careers, different jobs.  A lot of them write to me and a lot of them are just trying to create a good retirement for themselves and build up a pension.

Kevin O'Leary: What's wrong with that?

Peter McCormack: No, it's a great thing, but I'd say a closing question for someone like you is, if somebody is an early investor, what's the best bit of advice you've ever been given, or you give to people who are just getting into the world of investing?

Kevin O'Leary: Diversification.  But I will tell you, I've got a team of people look at deals and for the last 18 months, we look at deals on Mondays at 10.00am, everything that's coming through the transom, we see a lot of stuff.  The ones that we've invested in, 60% are crypto or a derivative of DeFi, because the growth potential in all of these opportunities -- I mean I should do a shoutout to WonderFi, it just went public in the Canadian NEO Exchange two weeks ago; I've got another one I invested in with a guy named Jordan Fried.  He's got Immutable Holdings, the ticker symbol we hold.  He owns the URL, NFT.com. 

I met the guy when I'm launching an NFT in the watch space; I want to own that sector.  I'm an insane watch collector.  I know all the royal collectors, I know all the manufacturers.

Peter McCormack: What are you wearing there?

Kevin O'Leary: FP Journe, one of 17 in the world.

Peter McCormack: I feel like a peasant in my Breitling!

Kevin O'Leary: So the point is, if I had an NFT for this watch, authenticated by FP Journe himself and the company, when it goes in the secondary market after my death, it will be accredited, because a lot of these watches get knocked off.  So, when you start trading in the secondary market an important piece like a Patek, an Audemars Piguet, a Rolex maybe, you're going to find a real demand for authentication and the chain is the way to do it.  I don't think anybody's in a better position than I am to make that happen.

But for that investment, it led me to Jordan Fried, because he owns NFT.com.  I said, "Listen, I need that URL, because I want to go NFT.com/watch".

Peter McCormack: He's going to charge a lot of money for that URL.

Kevin O'Leary: Well, that URL is part of his portfolio, and that company also is scheduled to be listed.  I'm now a shareholder in that.  So, there are lots of derivatives we can talk about in the future, but that's an example of a deal.  Instead of investing in some other opportunity, that capital went to Jordan, because I really liked the growth potential.  It's risky, I get it, but he's a smart guy and I love his team and he's now in my portfolio.

Everybody that's talking about NFTs, I say, "Meet Jordan, because look what he's got.  Look here, he's got the URL", and everybody goes, "Oh, I need that URL".  Of course you need that URL, and he's reserved all of the big brands, so there's nobody squatting on NFT.com/Nike.  He's got it and he's not stupid.  So I think, to me, that's the kind of thing I'm talking about.  There's so much opportunity in this crypto and in decentralised finance that your capital goes there first, that's what's going on here.

So, my portfolio now is almost half of it in these kinds of start-ups.  Now, I'm building, because I'm involved with FTX, I'm using that platform for my compliance, and Circle.  So, I'm putting assets on there and bringing the whole compliance department screaming in.  And those are the guys who are going to be winners, because they have the capital to be able to build out the infrastructure that we talked about earlier.

Peter McCormack: Right, they're telling us to wrap up.

Kevin O'Leary: Okay.

Peter McCormack: We're going to have to do this again some time, because there's a lot more to talk about.

Kevin O'Leary: Yeah, it was great, really enjoyed it.

Peter McCormack: Appreciate your time, man.

Kevin O'Leary: Yeah, you got it.  Thanks, ciao.

Peter McCormack: Ciao.