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The HX Research Take on Deep Knowledge Investing
Enrique Abeyta
April 26, 2024
Last week, we introduced a new format for our content – a collaboration piece with another great content author.
This week, we are going to continue that format and have produced a collaborative issue with Gary Brode of Deep Knowledge Investing. Gary has been a successful money manager for many years and launched DKI in 2020.
He puts out a thoughtful piece each week highlighting five points of interest. They run a gamut of topics (primarily macroeconomic), and he adds some insightful market-related commentary to each.
For today's issue of HX Daily, we have taken a couple from his piece this week and added our viewpoints. As you will see, sometimes we agree, and sometimes we don't. Either way, it is always an exciting conversation.
You can subscribe to Deep Knowledge Investing below.
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Here we go….
1. The Bitcoin Halving is Here:
There will be a total of 21MM Bitcoins mined from inception through the middle of the next century. However, those coins won't be mined on a consistent schedule. Just 17 years into Bitcoin's existence, about 19.7MM have been mined. That's almost 94% of the total supply. Approximately every four years, the reward for miners gets cut in half. That means that by the time you read this, the daily creation of new Bitcoin will fall from about 900 per day to 450. This is happening at a time when concerns about the debasement of the dollar and other fiat currencies are increasing and when ETFs are allowing a new class of investors to start to buy Bitcoin.
A lot of people think Bitcoin will rally post-halving. What do you think?
Now harder than gold. Chart from Financial Underground
Deep Knowledge Investing’s Takeaway…
One reason the dollar price of gold keeps rising and is now at an all-time high is that the supply of gold only increases by approximately 2% a year. In contrast, Congress and the US Treasury think nothing of overspending by trillions of dollars each year and just adding to the debt as if the US will never need to pay what it owes. By the time you read this, Bitcoin will have become “harder” than gold. That means the creation of new units compared to the total supply available is even lower for Bitcoin than gold. As for the "hardness" of the US dollar, it's a disaster we're all experiencing, as inflation. DKI owns both Bitcoin and gold.
Enrique’s Take
We agree with Gary on pretty much everything here.
Some critics have looked at the price performance of Bitcoin during periods of volatility and claimed the correlation to “risk off” in the markets is a sign that Bitcoin is NOT a good "store of value."
We think that is a short-term view. We also think you should talk to the other 5 billion people living outside the developed Western world and ask THEM if they view Bitcoin as a "store of value."
It is easier to obtain than gold for them, and we think that ultimately, the global demographics of demand for Bitcoin are not only what take it to $100,000 but perhaps even $1,000,000.
2. Buy Now Pay Later for Rent. What Could Go Wrong?
DKI has previously reported on the expanded use of buy now, pay later (BNPL), including when people started using it at fast food restaurants. (A McDonalds happy meal on layaway?) Companies like Flex advertise that using BNPL to pay rent is about “taking control” of your finances. Flex charges people who want the liberation of not having to pay their rent on time a $14.99 monthly fee plus just 1% of the payment amount. So, what could go wrong?
The perfect time to launch new credit products.
Deep Knowledge Investing’s Takeaway…
Terms marketed as “freedom” to “take control” of your rent payments mean paying a financing fee later. People who want to pay late do so because they're falling behind, a trend that's likely to continue. At that point, Flex starts charging up to a 36% APR on outstanding balances. Unsurprisingly, that part in the fine print is more challenging to find than the cartoon videos advertising the "benefits ."These products help people who need occasional delays to avoid bouncing a check or being late with the rent. When it’s something people rely on, it’s easy for this to become a trap.
Enrique’s Take:
"Buy Now Pay Later" or "BNPL" reminds us of what is happening with sports gambling and marijuana at the moment.
There are many areas of our economy right now that used to be illegal but have now become legitimized. Unfortunately, many of these play into some of the frailties of human nature.
BNPL are just loan sharks – just ones backed by venture capitalists!
Net-net, we are happier that they are now out in the open and can be monitored and regulated. That doesn't, however, mean that they are suitable for society.
We think this WILL ultimately end badly, but it is not a near-term concern for us in the economy.
First, you must look at aggregate borrowing on an inflation-adjusted basis relative to consumer incomes and assets. More borrowing on an absolute basis is a reality. Still, consumers are making more money and are wealthier, so the number is a lot less scary on a relative basis.
Second, we think that many of these companies will eventually overextend themselves and go bust. Who will be the loser then?
The shareholders and backers, including venture capital and private equity. That isn't good, but we don't think it will significantly impact the economy.
3. Tech Companies Reducing Office Footprint:
We've been reporting on problems in the commercial real estate sector for the past few editions of The Five Things. More people moving away from big cities and employees' insistence on working from home/anywhere are putting pressure on the commercial office space market. This week, the Wall Street Journal reported on technology companies reducing the amount of office space they use. Due to the nature of their work, tech employees are well-equipped to be effective outside the office. Making the situation worse, tech companies defensively grabbing more office space than they needed contributed to massive growth in the rental markets in hubs like Seattle and San Francisco. That's being reversed. The WSJ reports, "San Francisco's office-vacancy rate hit a record 36.7% in 1Q". That's up from 3.6% in 2019.
Employers are still having trouble getting people back in the office—chart by Wall Street Journal.
Deep Knowledge Investing’s Takeaway…
Every week, we’re relaying more problems in the commercial real estate market, and the fear is that this will become the 2024 version of the housing market in 2008. On the positive side, there's probably less leverage on the commercial side now than in the housing market. On the negative side, housing demand didn't disappear, but demand for office and retail space is vaporizing. We’ve heard rumors that Washington, DC, already has a plan to bail out overleveraged property owners and the banks that lend to them. DKI hopes that doesn't happen. Until people suffer the consequences of making bad decisions, we will keep getting more bad choices and will have intensifying boom and bust cycles.
Enrique’s Take…
The issues in commercial real estate are getting a LOT of attention in the media right now and by “doom and gloom” commentators.
We applaud Gary for expressing a relatively balanced view on the subject, as most folks are calling for Armageddon.
Our views are based on conversations with our relationships, who managed billions of dollars in commercial real estate assets. We published those a couple of weeks ago.
We think that the consensus view on this subject is wrong and ill-informed. Most of the "smart" money talking about it hasn't done the work and understood the math. Nor are they speaking with actual market participants.
The issues around urban office space are genuine. However, that real estate area makes up a minimal amount of total commercial real estate.
Also, unlike the housing market in 2008/9, every single participant in the equation wants to AVOID the issue. The lenders, the owners, and the US government all want to manage this situation.
That was impossible with millions of houses but much easier to do with a few thousand urban office towers.
We think that, ultimately, they all agree and renegotiate the borrowings at lower levels – and with government support – and that there will be no crisis here.
Whether this is a good policy in the long term is an open debate. Still, we do NOT think commercial real estate will be the catalyst for the next recession.
Watch the full episode below!
We hope you enjoyed this issue of HX Daily, and we look forward to collaborating more like this in the future!
Let us know your favorite newsletter writer, and we will connect with them…
Have a great weekend!
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