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Re: BTC/Oil/USD/MSTR-Tying It All Together & The “Ummwut” Umwelt.
This thread ties together 3 “macro” topics (1. BTC/Crypto, 2. Oil, 3. USD) that I’ve been writing about to a “micro” topic (4. MSTR) I’ve also written extensively about (4th MSTR installment).
Last year I got captivated by octopuses (these things happen) and read several books on cephalopod consciousness, and an interesting word caught my eye: “Umwelt.”
“Umwelt”: “the world as it is experienced by a particular organism.” For instance, it is hard for us vertebrates to envisage the umwelt of an octopus that has invertebrate, distributed intelligence.
From my perch, it’s even more difficult for me to understand the Umwelt of Michael Saylor, the Lord of Cyber Hornets.
First, let me disclose once and for all that I have ZERO position/conflict of interest in either MSTR or BTC. (I am no pump-n-dumper - I don’t make EVs while pumping dogecoin, nor do I cry on CNBC about “hell coming” while I am covering shorts.)
TOPIC 1: BTC/CRYPTO. I am on record for being a cryptocurrency (but not blockchain) skeptic.
That said, I have also said repeatedly that I believe in the promise of blockchain and have advised on/invested in blockchain tech that I think have real-world use cases.
In particular, I am very intrigued by well-defined use cases designed to disintermediate specific "old school" verticals. I view these investments very differently from rampant token speculation.
Given the unprecedented monetary stimulus and expansion of the federal balance sheet the last few years, I get the BTC Maxi “Cash Is Trash” Umwelt. But Saylor takes this to a whole new level.
(Saving this as an image for posterity in case circumstances force a different pinned tweet).
Religious zeal that would make the Gretaverse proud + Lack of intellectual rigor underpinning valuation + Blatant disregard for shareholder/creditor interests = The “Ummwut” Umwelt of the Lord of Cyber Hornets.
You might claim that all this laser-eyed hyperbole is just tongue-in-cheek, except that behind the rhetoric, his ACTIONS speak louder than words: Saylor has massively levered up MSTR’s balance sheet and effectively “put it all on red.”
Behind all the technobabble on decentralization and trust-less network effects (last time I heard so many references to Metcalfe’s Law was 2000-2001), the BTC Maxi Unwelt boils down to: “Fiat is doomed, and BTC is the ticket to a Decentralized Utopia.”
There are just so many problems with this thesis, and I touch upon many of them in my BTC/Crypto Meta-Thread here:
Rather than focus on intellectual rigor on how to fundamentally value financial assets, BTC Maxis typically respond with: 1) “Boomer” insults, and/or 2) “new paradigm talk” discounting basic laws of finance in favor of dubious (and intellectually lazy) “stock-to-flow” frameworks.
How about calling a spade a spade? Satoshi’s white paper came out in 2008. You know what else was invented in 2008? ENDLESS QE as the panacea for every financial crisis. THE LIQUIDITY LOTTERY WAS BORN AT EXACTLY THE SAME TIME THAT BTC WAS BORN.
I opined the other day about how winners of the Liquidity Lottery conflate endless artificial inflation due to QE with actual investment acumen:
You can make the exact conflation argument for justifying the “use case”/valuation of BTC which arguably has value only because its worshippers believe it has value, just like Kim Kardashian is famous only because her worshippers believe she is famous.
UNPRECEDENTED MONETARY STIMULUS CONFLATES SPURIOUS VALUE WITH REAL VALUE. BE CAREFUL OF “NEW PARADIGM” TALK THAT REQUIRES SUSPENSION OF FUNDAMENTAL LAWS OF FINANCE – THIS IS TYPICAL DURING ASSET BUBBLES.
I coined a term for these spurious stores of value — “INFLATION CAPACITORS.” Big Question: what would cause these Inflation Capacitors to discharge?
Here is another mental model that explains why BTC/Crypto, completely devoid of extrinsically sourced cash flows, is the longest duration “Inflation Capacitor” of them all.
TOPIC 2: OIL. I have been beating the drum now for some time why the Liquidity Lottery may be over and how oil could be the “butterfly” that causes a “tsunami” in risk assets, i.e. the “discharge” catalyst for these “Inflation Capacitors”:
In accordance with Maslow’s Hierarchy of Needs, STRUCTURAL INFLATION OF “STUFF WE NEED” DRAINS LIQUIDITY FROM “INFLATION CAPACITORS” aka “STUFF WE DON’T NEED.”
The mechanism for this discharge? The same Fed that brought us QE and the Liquidity Lottery is going to be forced to take it away; given the STRUCTURAL underpinnings behind oil (by far the most important commodity), MARKET CORRECTIONS IN THIS DECADE MAY NOT BE SOLVABLE BY QE.
Here is my Oil Meta-Thread if you want to read about why this is shaping up to be a STRUCTURAL commodity cycle and NOT “TRANSITORY”:
TOPIC 3: USD. This regime shift away from QE is not convenient for the BTC Maxi/Cyber Hornet Umwelt because for that utopian thesis to play out, the USD definitionally needs to fail, Weimar-style.
I give reasons here why the USD is UNLIKELY to go the route of the Reichsmark for the foreseeable future.
In fact, I posit that oil’s structural march may cause the OPPOSITE to happen: renewed USD STRENGTH may wind up wrecking all EM currencies, and arguably BTC/Crypto is the most “emerging market currency” there is:
Tying these 3 macro themes together, you see why I am very worried about the current setup:
TOPIC 4: MSTR. Finally, we descend from the world of “macro” and talk about the “micro” of MSTR and why I am fascinated by this case study. @Harvard_Press if you’re listening, I volunteer to write the HBS Case Study someday.
In my first MSTR thread, I present MSTR’s capital structure in a Merton “Real Options” framework:
I followed it up with a second thread to clarify questions on POV (issuer vs. investor) and why the issue is semantic and moot:
The third thread talked about how Saylor’s 3 debt issuances + his self-inflicted rhetorical straitjacket has destabilized his capital structure — despite having maneuvering room until maturity:
Every time this thread circulates, I get angry BTC Maxis accusing me of conjecturing about outcomes years in the future and how there is no immediate “forcing function.” I never said there was an immediate forcing function.
That said, his own rhetorical trap of committing all future excess cash flows to buy ever-increasing amounts of BTC all but guarantees an eventual problem if BTC doesn’t perform as he expects.
And if he changes his mind and liquidates BTC to satisfy debt maturities? Well, that’s a whole other problem for a hyper-volatile asset that is subject to "liquidity gaps."
Here is an update on MSTR’s BTC holdings: From the YE 8K: “As of December 29, 2021, the Company held approximately 124,391 bitcoins that were acquired at an aggregate purchase price of $3.75 billion and an average purchase price of approximately $30,159 per bitcoin.”
Here is the current cap structure:
6.125% due 6/15/28$500 mm
0.75% due 12/15/25$650 mm (K=$397.99) 0% due 2/15/27 $1050 mm (K=$1432.46) Cash$57 mm (9/30/21)
Equity Mkt Cap$3511 mm (1/30/22)
TEV $5654 mm (1/30/22)
("K" is conversion price)
My point has always been that the hyper-volatility of BTC, coupled with Saylor’s “bet the ranch” modus operandi, coupled with the increasing likelihood of the END OF THE LIQUIDITY LOTTERY all portend tricky times ahead for the Lord of Cyber Hornets.
Saylor has a track record of BYOBBS (Believe Your Own BS Syndrome), sprinkled with a penchant for "aggressive accounting." See this long-term chart of MSTR:
And this brings me up to a topic near and dear to my heart: CAPITAL REALLOCATION RISK. Having witnessed egregious examples of capital MIS- reallocation in the oil patch, I can tell you MSTR takes the cake.
In the oil patch, the challenge facing public companies is that they are continually faced with redeploying cash flows from producing wells back into the ground into definitionally WORSE ACREAGE — it is a hamster wheel that can continue only indefinitely only with RISING PRICES.
In MSTR’s case, the core business seems to generate stable cash flows, BUT rather than reinvesting those cash flows in the business or distributing them to shareholders, SAYLOR HAS COMMITTED A CAPITAL REALLOCATION DECISION THAT SHOULD NOT BE HIS TO MAKE.
By committing all cash to buying BTC, he is telling shareholders: “My business is no longer growing and worthy of investment, and you, dear shareholder, are too stupid to make your own decisions on how to allocate your money, so I am going to bet the farm on BTC.”
As mentioned, Saylor does NOT have a good track record of corporate governance as it is: