Chris DeMuth's State of the Markets November 2022 (podcast #139)

Chris DeMuth joins the podcast to discuss the state of the markets in November 2022 and what’s catching his eye in event driven land, including what’s happened to TWTR since the deal closed and his thoughts on the FTX blow up.

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Transcript begins below

Andrew Walker: All right. Hello and welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could follow, rate, subscribe, and review it wherever you're watching or listening to it. With me today, I'm happy to have my friend and the founder of Rangeley Capital, Chris DeMuth. Chris, how's it going?

Chris DeMuth: It's going well, Andrew. Happy Thanksgiving, and nice to see you.

Andrew: Good to see you too. Good to see you too. I haven't recorded one of these in two weeks and I pop on and my first thought is, for these, you get, uh-oh, I'm starting to get a little bit more homeless though my beard doesn't compare to your well-kept enormous beard over there.

Chris: Yeah, I always like to check in on your pod to see how it's going.

Andrew: That's what everybody wants, the state of our facial hair. But anyway, let me start this podcast the way we do every podcast. First, a disclaimer to remind everyone, nothing on this podcast is investing advice. That's always true but particularly true today since we're going to be going through, probably a lot of different stock situations and everything. So, just remember, please do your own work. Not financial advice. Consult your financial advisor.

The second way I start every podcast is with a pitch for you, my guest. We don't need that here. We do these every month so people can go listen to our prior ten or twelve episodes for full pitches. Anyway, we were emailing back and forth a few weeks ago, this morning, everything trying to figure out what to do, and I think both of us were kind of thinking, I thought this a few weeks ago. You thought this day, "Man, what are we going to talk about? Not much has happened." And then I thought I was like, oh, since our last podcast Twitter closed, FTX blew up, there's been some movement. We've got a Democratic Senate and a Republican House now. Actually, a lot has happened. It's crazy how much changes inside a month. Anyway, I'll pause there. Lots to discuss. I'll turn it over to you. What's on your mind today?

Chris: Perhaps we could start with Twitter, in part because when we're thinking about topics for off and on Twitter, getting feedback from listeners and friends and looking for ideas. So maybe start with that. I would say that perhaps the key to my heart is paying me the money that I'm owed, and I feel like I have this complete kind of reopening of my heart to Elon Musk after $54.20, and I think that he comes across very different to me as an agent than as a principal. As an agent, I like a lot of convergence on the things you said on the law, counting on this and that, in a way that is sort of convergent. I admire and enjoy the variance when you're a principal, he's wild heterodox, and fun. I like all of those things. People say it's the Wild West. I think the Wild West was cool and we live in a wild world and him letting that shine through a little bit, is fantastic. I look at this and, boy, if he can slash 75% of head counts and be left with this kind of motley crew of people who need the Visas, so you're dealing with these Indian and Chinese Americans who are looking around, and I look at these guys and think, I bet they can run this whole thing fine and that's going to be a big reveal if it's all fine and you're going to look at all these other organizations and say, "What are these other people doing?" They paid six figures to make Insta videos about their cappuccino in the morning and yoga in the afternoon. I'm rooting for him hard. I hope it works out well. There's chaos. He is doing what, I don't know if it was specifically Mark Zuckerberg, but kind of the era and the shtick of moving fast and breaking things. He's certainly doing that and saying and doing some things that are probably terrible, but he can kind of see what happens, fix the bad, and replicate the good, and I think it's great.

I have not been that impressed by the kind of people storming away from Twitter and they say they're going to an alternative. There's such a network effect here. The alternatives look kind of dumb to me, you got to get excited about it and you go and you write something, no reaction a few hours later and so I don't think those are going to take off. It's like people who threatened to move to Canada when their favorite politician doesn't get enough votes. I would say Canada would be densely populated all the ways the Arctic Circle if all of those folks have followed through and seems kind of the same vibe as I'm getting on Twitter. So I think a lot of it is going to work but it seems mad. I mean, you're just looking at this bedlam going forward, that any kind of PR person or a lawyer or anybody would tell you don't say and he says. So it's kind of amazing to watch.

Andrew: Yeah, I've been all over the place on it. I guess the one thing they jumped on this crazy was, there was this night where Elon had just fired like another round of people and there was this night where everybody was saying oh if Twitter isn't here in the morning like here's how to contact me and I don't know, I could be wrong, but it struck me as pretty crazy. I didn't know where that was coming from. It's not like Elon fired everyone and the service is just going to collapse under its own weight. Like I do think you'll start seeing. I've noticed it, maybe it's me personally or I'm looking for it. You start seeing little bugs popping up or spaces haven't been working or I've gotten weird things on notifications, but generally, you just start getting bugs. It's not like the site was just going to fail whale, and no one would ever be able to log on for the rest of human history or something. It did seem a little strange to me. I don't know.

In terms of what Elon is doing, it has been wild just to see how chaotic it has been. I mean, I'm with you it seems like it's kind of cool to see all these experiments running out in real time. I guess would be the favorable thing of it. Though it has been, I don't know, the Twitter blue stuff where he allowed everyone, for people who were watching, he allowed anyone to apply for the Twitter blue checkmark and people would do... My personal favorite was somebody made an Eli Lilly account and said all insulin will be free in the U.S. going forwards, an then Eli Lilly, the company, has to go out and explain why insulin, which costs a penny to make is priced at hundreds of dollars. They have this PR crisis. It was hilarious to me, but at the same time you could see, oh, Elon you try, I think you got, tens of thousands of dollars in subscription revenue from Twitter blue, and because of that, every brand advertiser is pulling out their brand advertising. It was really cool to see in real time, but you can also see why maybe larger companies have to be a little more careful with their words. Anyway, I'm all over the place, but it's been fascinating.

Chris: Yeah, and let me just back up on one thought. I defer to people's behavior when it's there and property maybe 99%, my carve-outs on liberty are just the normal tropes of basically exclude violence and fraud, right? You have to tell the truth, can't hurt anybody, you can't hurt people, and you can't touch their stuff, but other than when it's on other people's property and violence, you can do whatever the heck you want. But I would like to pull back for a second and say, what are his duties to the bondholders? I mean, he certainly has to. I mean, a bond as a creature of contract, it doesn't have the same value maximizing properties. If you have a common stock holder, you just have to pay. But can you do something that is so out of character with the likelihood that you could pay. He could always pay from other assets, right? He can pay as long as he wants to but I'd be a little nervous if I was Morgan Stanley right now

Andrew: I love the point you're making because I don't think anyone's really made this. He paid 44 billion dollars for Twitter, right? And 13 billion stat. 36 of equity. Let's say Twitter is worth twenty billion dollars, right? Well, he is way under water, right? Because the bonds are still made whole 13 billion, but now his Equity has gone from about 30 billion in that scenario to it's worth about 6 or 7 billion in that scenario right? So what he's doing, we call it agent of chaos and it's been really interesting, but one way to look at it is that as you've described maximize variance, make this the riskiest option bet, the hugest maximization of value that the hugest upside downside of value possibly can. Because from this point, I need to hit at this point a quadruple just to get back to break even, right? So I need to make this as risky and crazy as possible. Just throw stuff at the wall, if it doesn't work. Hey, maybe I turned Twitter's value from 20 billion to 1 billion. That would be someone else's problem, right? They'll be the debt holder problem at that point.

If it does work, even if it's unlikely, cool, I've made myself whole. So it is really interesting and through that lens and, you know what, these are high yield bonds, they do have covenants on what you can do financially, but operationally, I don't think there are really any covenants, as long as you're within the financial covenants. He can do what he wants and again, we saw this with the Twitter contract. The Twitter contract was made by a person playing by normal rules who was normally constrained by their reputation and shame and all this other stuff. Elon just did not care about that when he saw he was about to lose money.

With Twitter, I think bondholders might learn, "Oh, 13 billion dollar bond, maybe you thought this guy was going to be constrained by normal rules." He does not care, he will increase variability to the absolute maximum, to give himself a shot at making himself full and he doesn't care if he turns your bonds from 90% may call on the downside to a 10% or something.

Chris: And it'll be interesting to see where they trade when they start to trade, it'll be interesting to see if he does a kind of Paul Singer and come in and buy them off. It'll be interesting to see if he drives the bonds from 60 cents to 10 and then buys them at 10. I mean I think a lot of this is not generally contemplated by somebody senior in the capital structure where there's just so much leeway in how you operationally handle the equity as the equity holder. I mean, it's really a one-off situation. One of the reasons why I'm glad it worked well at least so far at least for us is, it's not something that you can use normal kind of Kelly criteria, "Hey, what are we going to do the next 100 times?" There might not be a second time for this kind of situation. It's really amazing.

Andrew: There might not be a second time because I do think people are going to look at what Elon pulled during Twitter and especially if you don't have a corporate buyer or if you have got a private buyer mean, how many 40-billion dollar private deals have we ever seen? But if you've got a private buyer, or even if you've got a corporate buyer people are going to start building in reputation blocks, right? Where if you try to get out because you've just got cold feet or the markets turned against you. I think there are, I don't know how exactly. There are lots of different things out there. I'm not sure which one of them will go, but people are gonna start building in, "Hey, if you get cold feet, here are some penalties if you try to pull a bad material adverse ejector or something like that." I think we'll start seeing that.

Chris: I think the solution is especially for anybody at the scale above where court expenses are really a big motivation. I think it's just going to be a penalty break up like let's do this deal at 60, if you challenge it and fail on the challenge. I think that that's the solution.

Hey, I don't know if this works as a transition but the person I've heard go farthest in terms of an explanation of being value maximizing in a way that has no risk, aversion is SBF. He has actually explained how it's selfish to pull in your sales, that what you should even if any mathematical upside down side and probabilities, you should add the most value and even if that means there's this significant blow up risk, it will be mitigated by other people with similar philosophies acting around the world, and he can explain all this in detail earlier and lay that all out before us. So, I don't know what you think about him and that but that's another one that's happened since last we spoke on the podcast.

Andrew: Lets talk, I mean, FTX, I don't know if we use allegedly or not, I'll just say, allegedly, a lot of corporate shenanigans going on there, obviously filed for bankruptcy, we're seeing a huge domino effects in the crypto space. I mean, I've just been obsessed with the FTX story. It's one of those things that sounds straight to say. But if you had pitched this as a book or for like the show succession, you would have gotten turned down because it would have been too outlandish. Nobody would have believed it could happen like this, something could collapse this quickly, but it has just been absolutely wild. We're seeing domino's put kind of fall and play out throughout the crypto space. I'll just turn it over to you. We can talk about FTX, we can talk about crypto, we can talk about all that type of stuff.

Chris: I think it's amazing how stable his life has been since these revelations that he's not getting dragged away in shackles.

Andrew: I'm with you there. I cannot believe. I guess process needs play up. I don't know how he hasn't been jailed for fraud charges or anything. I don't know how something hasn't been brought against him.

Chris: I've thrown pillows at the dining room table with my kids and gotten worse reaction from my wife, than he's gotten from the authorities so far. I don't get so just wander down the street like I'm in trouble at that point. He's like committed a multi-billion dollar fraud and he's speaking at a New York Times conference and is free on his own. Like, he's a free man.

Andrew: I try not to get to conspiratorial, but things like him donating lots of money and I think FTX donated money on both sides of the aisle. I think there were people under him. He was a huge Democrat but I do think there were people under him who were big Republican donors. I don't want to turn it into it like a political thing, but him donating lots of money to politics and being outstanding, it reminds me of the feds trading stocks and interest futures a couple months ago when that came out and like, there are no penalties for that. Congressman trading on Covid disclosures and doing one thing in their personal accounts of do it. Like, I try not to be too conspiratorial, but it blows my mind that there's no repercussions for this and it undermines our faith in the system a little bit.

Chris: The other analogy I would throw up there and this has been widely referred to but in the kind of weird lack of follow-up is Jeff Epstein that if you have a fraud at a big enough scale that cuts close enough to home, that there's this kind of paralysis in terms of our regulatory and our political structure, kind of sorting things out and maybe the world will kind of come down on him like a ton of bricks but it sure hasn't yet. So two reactions I have. One is that it is much worse for the crypto world if he gets away from the alleged behavior so far. That basically says well because it was pretend money, you can go mingle accounts and do these things. It would be just explicitly, obviously, of course, completely 100% illegal if it was US dollars. If the fact that it was crypto somehow makes this not criminal that I think that that is a debacle for crypto.

If he's personally liable that says, oh no, there were these high standards, enforceable standards, that he violated and so that it would strengthen whatever residual value. So I think that him being free right now actually could exacerbate what is almost a daily further reverberations on other institutions as one after another goes bankrupt. And then and then just the other reaction I have is, if somebody comes to me and says they're in business to make money, I believe them. If they say they're in business to save mankind, it makes me think, they're in business, to have orgies in a 40 million dollar penthouse in the Bahamas. And his his kind of virtue focus is one, there are people on this planet, I know some people on this planet that are that charitable. But their own role in the charity isn't always like what their fixated on. I think it's a kind of a weird thing and the history of like, I don't know the precise words used on this but sort of modeling kind of emotive machinist.

I know a Worldcom CEO is very much like that that does seem to be a bit of a base of switch for fraudsters that they have some kind of big higher purpose, that they make a big whoop out of. And so his role specifically with the tech altruism aspects and people I admire. But it seems to be really jarring if you look at what the money was spent on, where it was spent, and how it is spent, and how it was stolen. And then, weirdly just going back to the earlier point on on how society's reacted, the fact that big press organs are still kind of making this exception for him and that it wasn't his money, it was other people's money, and being, you know, kind of virtuous and and charitable with other people's money is not a virtue. That's not a good thing. And big serious press organs are kind of missing a beat on this that it was stolen money, it was other people's money.

Andrew: I've been it's another thing I've just been really confused by, it's pretty clear like if this had been a normal collapse and they had been over leveraged or they're what apparently maybe happened to block by where they had a a lot collateral stuck at an exchange and they went bankrupt like that would be one thing and then you could write oh this guy fall from grace, charities were counting on him but it is so strange. It appears allegedly he was just stealing the customer's funds. This was a pretty big hate to use the f-word but this was allegedly a pretty big fraud and it's strangely like, oh, it's so sad, he was going to donate a lot of money to charities. Like, yeah, he was going to donate by just stealing from people. That seems to be the bigger part of the story.

Chris: Our friend, Thomas Brazil, who's done just magnificent work in the past on crypto bankruptcy, claims and a lot of these has done incredibly well, both on the crypto side and on the fraud side, right? So you have made off claims incredibly. I know about in a by-post bought kind of 30 cents in the dollar, largely made whole because of the amount that they were able to come back with from the banks that had introduced to and made off. So those claims were really good, the amount, [inaudible] claims really good. This one's going to be a lot trickier though. I mean, I think there is kind of gray markets and just a couple pennies on the dollar this point for FTX this, you know sorting it out. Where the money is? How much money there is? It's going to be a brainer.

Andrew: Let me switch to a different topic. Once you're with FTX, I do remember last year there was a podcast and it's not the one everybody points to over the summer. But last year there was a podcast, people were asking SPF about Tether and he said, "Oh, Tether, we've withdrawn billions of dollars from them. They're fine, don't worry about this." And then he walked through a bear case where he was like well let's say Tether is worth 90 cents on the dollar instead of 100 cents on the dollar. I remember things there as that's not the bear case. The bear case is Tether's a fraud and it's worth zero and I couldn't believe this guy who was running an exchange and everything, like wouldn't be even willing to comprehend the bear case of the fraud is a zero, tight? I'll allegedly, and I think Tether's actually a lot. But I'll let you to it.

So I've been thinking about that when within three weeks, he goes from The Golden Boy of crypto to everything collapse. And part of what gave him like when I was listening to that Tether and I was his first like, he'd been backed by these big VC firms. He was the Golden Boy of Tether like they had given him this, I don't want to say whitewash, but they give him this reputation and then he collapses and you find out, no HR, no systems at the thing. He's living with all. I think everybody knew he was living with the execs but they're they're engaging in whatever their engagement. But it's so surprising, you come so quickly, their balance sheets are terrible, everything. And I was just kind of running around the VCs, like, does this change your opinion of VCs at all? Like, all this could have been solved by very basic due diligence. And I understand you're not going to get private equity, were buying a whole company. We're going to talk to every employee due diligence but I'm surprised that people were writing billion dollar checks into this thing. And they wouldn't have the due diligence of, "Oh, you have basic controls put in place and all this" or "Hey, I think you would have seen the balance sheet was pretty crazy, pretty quickly, if you had looked at it where it allegedly was all on FTT tokens and everything."

I'm very surprised by this. I'm wondering, is this one off? Is this just how crazy crypto was? Does this make you think a little bit differently of VCs?


Chris: Just as a funny insult. I might say, no, it doesn't make me think about VCs, but I would say, boy was a bull market behavior. So it was kind of a circular on both sides. Hey, everything we've done has worked for a few years so we can play very fast and rely on our gut or intuition. The last five of these, we keep marking up so I can keep marking up this one. So kind of this two-sided hubris. And then, on the other side I mean, and the best thing that was written about this was live on Sequoias site, just putting it all out there, including him playing video games apparently badly. But him playing video games while he was doing this pitch. That was just a spectacular pitch in terms of its success, but kind of flippant and casual, and no real work being done. I mean, I think that maybe the other one that comes to mind in this category was [inaudible] If you say this is the youngest self-made billionaire in some category, then you do the kind of resulting fallacy of saying, given that that's the conclusion, it's my job to back into why this person is great and brilliant and wonderful. And if you look for and at the kind of emotive and friendship level, it's kind of sweet that you can always find something.

If you say, hey, I'm concluding this person's great and wonderful, young self-made billionaire, the conclusion is they're great. It's my job to understand that. And oh, by the way, if I can't get there then that's because I'm stupid. So let's see how smart I am by figuring out why the emperor's clothes are visible because they're already been made an emperor based on that billionaire status. And having over a billion dollars at least on paper becomes part of your title in a way that if you have 700 million dollars, you're still pretty rich guy, you've probably done something, right? But it's not your identity in the same way. If you have a billion dollars, it's kind of billionaire Elizabeth Holmes, billionaire, Sam Baker and free. And so, once they reach that status, it was kind of this flywheel on the VC side. And they were doing no work.

I mean, you would do more serious diligence on like a dry cleaner thinking about buying a second unit for half a million dollars or do more serious work. I mean there was just nothing.

Andrew: It's a great comparison. But the thing with Theranos was if I remember correctly, she was faking blood test results, right? So she was taking blood, sending out and come back and just faking blood test results. And that's a hard science. And I understand, look, we've got to look at the people who got defrauded by that with a switch, but it does make sense if I gave somebody my blood and five minutes later, they came back and had these all these results. It makes sense like that's a type of fraud that's very hard to check. This was financial services like it seems pretty crazy that you couldn't catch like the balance sheet fraud and all this sort of stuff, it just speak to an extra bottom level of no due diligence. And Peter Teal once said, maybe there's not enough fraud in the government once, right? When I think when Donald Trump was taking over. And I get what he was saying, and maybe these aren't investing in enough zeros, but that's the zeros where you're doing Angel round stuff, right?

I expect, if you write a hundred, two hundred thousand dollar checks to startups, if three or four of them aren't frauds or just like instant zeros, you're probably not taking enough risks in your super Angel rounds, right? But these were billion dollar checks and you got defrauded it by a balance sheet that was made up of like, literally magical beans. And it seems so crazy that somebody could get taken in by this. Like, it's an order of magnitude worse on the due diligence that it's just kind of hard to convey to me, you know.

Chris: Not just shoots checks and similar point, but checks at these big evaluations that imply a certain kind of institutional aspect at that point where I think it would be an argument for checklists and there should always be checklists and kind of multiple source skepticism. And there should always be that even if you like and respect the person. I think that a lot of skeptical work is done on the short side. If you look at somebody looking to take apart something, they do a lot more of the kind of sleuthing and I think those sleuthing behaviors should be done on the long side and in due diligence even if you respect the person.

It's not just that you discover fraud, you might just discover some aberration. Maybe discover they're the victim of fraud. Maybe discover this person is just benignly delusional about some opportunity that you just don't really see there. But the only way you really get to the truth is multiple sourcing, is skepticism, and is thinking for yourself and just trying to get away from the kind of huge bias from seeing positive results that came before because they're seen as kind of hot and then peaking at other peoples conclusions. I mean, I think that it's fine to take into account but like something I think we do well, looking at a security that VC could do maybe a bit more looking at a private business, which is have a separate channel, where you ultimately will compare all your thoughts, but you kind of do more independently. Like almost try to not pay attention to who else is investing and around and just like going farther, doing your own work and then you can peek. But I feel like VC is like almost all peaking like it's almost all just like, "Hey, if somebody else is doing it, then I'll do it. If they're not, I'm not going to." And so maybe, yeah, skepticism, due diligence, multiple sourcing, and deeper longer cleanroom research before you compare notes.

Andrew: I agree with all that. The one other thing that jumps out to me is I did not know about that Alameda FTX relationship before all this blew up like I'm I wasn't following it that closely. I've obviously wasn't writing billion dollar checks into this or anything. But I mean just the fact that VCs knew about this and kind of ignored it. Look, we've invested in things with related party deals before. Sometimes, you know, there are explanations or it's benign. But most of the times I'd say there's a reason when you see a related party deal on a proxy or a 10K. It's a big red flag like a big, big red flag.

If it's a bank and they say hey one of the bank directors got his home mortgage from us, that's not a big deal. But you'll see I know a couple companies like they're restaurant companies and the CEOs brother-in-law is doing the construction for all the restaurant companies and be like, "Oh, it's not a big deal." I'd say, "No, that's a huge deal and this, hey, the CEO, who's running an exchange is also the CEO of a commingled hedge fund crypto trading platform." Like, whoa, I can't believe that was a red flag and it's both a reminder, and it's shocking to me that this wasn't picked up on or wasn't played until the exchange was literally up in flames.

Chris: Yeah, I mean a disaster. The more flexibility somebody has as a business person or is now a kid or anything else, the less flexibility they should have or the less control they should have of observing accounting administrating and managing it. I wouldn't want to have both. If I get the substitutive control a over decision like he had over FTX, he should have had zero control over actually moving money around between these different entities, and he should have wanted it. Because look, I can do real harm here. I want somebody else in charge of looking at how money moves around and they just had this incredibly fast and loose and casual like even if there wasn't any fraud, it was just wildly inappropriate. And I don't think you would want to have that much discretion, because there's just going to be this constant question over kind of dual loyalties or fiduciary. There's no way to do that kind of mixed mandate and maximize everything. So you're constantly going to be in this tension and so there's no way that could have been done well.

Something else I throw out about Alameda and the interesting early part that I had only overheard about in terms of arbitrage, because you think, if you're going to do forget about merger, are we can talk about merger later if we wanted to, but forgetting just looking at actual riskless arbitrages right now in capital markets are generally way to the right of the decimal point and tiny fractions of a second. So you're dealing with hey, there's different currency markets and so forth. And so, you know, capturing hundreds of thousands of a penny in for an instant. The idea that you had these 40% spreads into different markets you could capture, it probably seemed like this Bonanza. But the theory and I felt guilty of this sometimes. The idea seems like it's 90% of the battle, but it's really 10% of the battle and just operationally, executing is 90% of the battle. If you came up with idea, you think, and if you're smart and you like math, you want to say like, hey it's done, I came up with this like, where's my money? But the real answer is one of these two things is our frog. You can't really move it. There's a regulatory problem, just do it.

I have a little bit of mixed feelings about him, but one thing that Jim Rogers always did when he's dealing with the emerging markets and I think of crypto is a lot like an emerging market, is he would just go and he would do it with like $500 or $1000 and he just set up the relationships and he just start executing things at some small-scale looking for a big opportunity. But just so you can say like, okay, what actually happens if you show up in Kenya and you buy a coffee stock in their market, and the answer is like frequently, not what you expected to happen. But let's figure this out and let's learn lessons and pay $500 of tuition, not billions of dollars in tuition. So, I think this had a lot of aspects to me of the emerging markets where they were just constantly whipsawed on operational regulatory problems.

Andrew: No, I can't remember when, it was sometime last year when all the block by and everybody were offering big deposit yields and I was trying to figure out how they were doing it and in hindsight, it seems all block by 5 but I don't believe, I don't know why. But in hindsight, it seems like there might have been some other things going on, but at the time, it looked like a lot of it was Bitcoin Futures are what was happening. And I would look at that Bitcoin Futures are and I tried to figure out and the risk I kept coming up to back to was there was collateral risk and there was real blow up risk, right? Because you have to like do it at one exchange and another exchange and if one of the exchange is shut down or something, like you there were there were risks to it. But yeah, I do. I'm totally describing it poorly because it was a while ago, but it was fashioned.

I do want to ask one other thing. You've been a longtime crypto bull. I mean I remember back to the range account podcasting days when Bitcoin was it's five figures now and it was in the four figures then and you are a Bitcoin bull. I've always been a little bit more of a crypto skeptic. I would say I did I did a lot of work on Etherium and I kind of liked it but it's always been hard for me to see like every used case seems to come back to you. Hey we're going to do traditional finance but we're going to do it more poorly, more expensively, more slowly, and with a lot more operational risk. So I did sort of say like we've seen five different blow-ups inside of a month here. When you as a crypto, I don't know if you're still a vrypto bull or not like has this changed your take are your thoughts on crypto at all?

Chris: I wouldn't say that I am a government skeptic and fiat skeptic and so optimistic about the idea of decentralization and private sector alternatives on almost every topic, including currency. I would say that it's going to be a steeper hierarchy and what survives. So good for Bitcoin and Etherium compared to everything else. And so it's going to be fewer institutions and it's going to be wild, it's going to be wild. But I still think that in a world where you don't have backed currency, I still think that it has a role as a store of value. I think that it's a lot harder to make the case for transactions. I don't think it's going to be big part of our lives, but the gold analogy I still think holds up. Gold is not a big part of our lives. So to say that it is a 21st century gold, I can go days or weeks without ever thinking about gold, even if it's nice to have something that stores value in an inflationary world and a world where I am mistrustful of both politicians and Central Bankers. Having something else is something that still is attractive to me.

The part that's least attractive and that attracts bad actors is just to pick up on two things. One is the the the yield on some of these accounts that people should be very wary of very high guaranteed returns. I think if you kind of, there's some threshold above which the percentages that are fraudulent this like hundred percent and if you look at the, I think was the Alameda pitch deck? I don't know if you saw their debt instrument where they were like 15% guaranteed. Unless the unless the treasuries are yielding 15% then it's almost impossible to say that. And even if they were really sure, that level of confidence they're trying to imbue in you is literally a confidence scheme. They need you to believe it for their thing to work.

Andrew: Just on the Bitcoin as I definitely heard the Bitcoin as digital gold argument a ton. I think it's probably one of the best arguments but I guess my two push backs on this would be is like storing Bitcoin is actually like a lot more expensive than storing gold just because of the hash rates and everything like it takes a lot of computational power. So I think that you would need that to calm down a lot over time and I'm not sure what the solution to that problem is is would be number one. And then number two, I think this would apply to gold as well but it's like hey we're this year is going to be the highest year and what 40 years for US inflation and Bitcoins way down. Guess what? Gold is down too. But you look at those and say, hey, these are supposed to be stores of value that protect against inflation and we're having the highest inflation on record and both of those doubts like, are they really protecting against inflation?

Chris: Yeah. No, it's a great question. It's a hard case and the things that just because I'm an American and I think about our government and I kind of my my biases or starting premises are certainly wishing that we had more robust symmetry in our monetary and fiscal policy whenever there are crises. And I indulge the things they say and do during crises, I just wish we pull back. proportional. If we're doing something for a reason, I wish we would stop doing it when those reasons no longer applied in a way that we're more responsible and more long-term oriented. Such that I have a lot of concern about the US government and how we behave in ways that affect our currency.

The problem with the problem is everything else seems to be so consistently worse that America can actually kind of shine pretty brightly compared to other currency pairs, other government policies and the private alternatives, right? And even the suspicious uses a Bitcoin, even from a kind of a moral perspective, it's not particularly anonymous or discrete, right? Like, even if you had less than a lot of three reasons to want privacy, it's not that private. So I think that when I start from the premise of distrust of our politicians and Central Bankers, there's certainly should be something better. Bitcoin is the most plausible one and the theory. And I think, I don't know if something better that the private sector has come up with for store value. It would be something useful.

It would maybe barrels of oil and timberland is better, and maybe you just denominate your life in, Mr. Walker's worth X number of barrels. And you can always use it. I mean, that's maybe not crazy. But that's the only thing I can think of as an alternative.

Andrew: I was gonna say that would have been a good store of value over the past year. But guess what? Oil at this point is now flat over the past year, despite all of the inflations. And lumber is way down over the past year.

I think we've done crypto and I think we've done Twitter. I do want to quickly just in the last couple minutes you've got. I put out a tweet just saying. There were a couple other topics I know we want to talk about. I don't know if we have time. But I put out a tweet that said, hey excited to have Chris on. There were lots of questions on there. I can walk you through or if any jumped out, we could quickly address those.

Chris: I saw things people asked about. It's kind of a coincident. I can almost done all of the merger ARP stuff right now, say later, lower, I'm skeptical and think there are tons of regulatory problems. And that holds true for somebody asked about Tower semiconductor getting bought by Intel, I think a creative solution which is rarely employed by buyers is simply to carve out national assets and close deals X, China in this case, or X some unfriendly jurisdiction. I think it's a cool solution, I would try it.

My experience of floating that by boards and management and lawyers is almost a consistent bust. Unless you just have a tiny business, they're going to deal with China all the time. They don't want to stick up their middle finger at China even in the case of closing this deal. It's a cash deal. They're paying $53 in cash for the whole business including China. They don't have a reason to and doubt they'll do something particularly novel. So I think that that's a real regulatory delay and outcome risk.

Andrew: On that one, if I remember correctly, that was a deal that was announced in February of this year, right? And I think Tower stock was in the mid-30s when they announced it and it's a 53 cash deal. It does come back to incentives too, right? If the market had gone up or things have gotten better, Intel might be incentivized to say hey will close without China. But at this point, I have not done the fundamental work but my gut would say based on where Sammy's have traded it in where the Tower being in the low 20s, maybe lower, without this deal. So if you're Intel and you're like hey we can pay 53 for this asset that stand alone would be worth 20 or we can walk on China, China is kind of giving us a free out. If I was Intel, I really be looking to take that thing. I wouldn't want the creative solutions that aren't required of me, right?

I mean we did say longtime listeners will remember we mentioned Apollo Tenneco over the summer and that deal did close but I was pretty skeptical it was closed because they required Russia and Ukraine approval. And I was like, "Hey, the markets turned against Apollo, this is a super levered business. It might be worth 25% of what they're paying on an equity basis." Like, if your Apollo why not, just take this regulatory gift you were given and walk and they ended up closing. I'm not sure why. Maybe they were just still overall bullish. But if I'm Intel, I'm not doing something super creative to pay double what this business is worth, you know. Even if it is strategic, why not rewrite the contract, go lower, then do something cheaper but get a pound of flesh for doing it for sure.

Chris: I agree 100% as far as Intel's reaction with Tower and the price in regards to their relationship with China. And also thirdly, in terms of just kind of thinking about a bear market, one of the things that we've seen time and time again, is any saw or cliche about what should be where you think is priced in the market, it's still going to trade horribly the day that that news comes out. So it's going to be what your math says approximately, minus not what your math's is approximately, plus, "Oh, they should kind of know it's in trouble." I mean, we've seen horrendous breaks when deals have broken and just relentlessly bad trading on free deals, non-contractual deals. This one in a sense you could say is non-contractual in terms of were looking at a situation which will be outside of the contract in terms of the requirements, the buyers, and every single time it's like people sharpen their pencils afterwards but like shoot first and ask questions later in terms of the price and what happens. And so I just think that it just makes me very, very wary of situations like this.

Andrew: If you want to see an example of this, Rogers was getting bought by, the ticker there is ROG, they were getting bought by Dupont. And the contract was scheduled to terminate earlier this month if they didn't get China approval, they didn't get China approval because China is not approving anything.
And Dupont just said, "Oh, we agreed to buy you guys end of 2021. It was a hot market, we paid a big premium. Now it's not. The end of 2021, we're just going to pay the break fee and walk as we're allowed to do." And Roger stock again. The ticker there is ROG goes from about 235-230 the day before Rogers walks to 100 the next day.

So I had heard some people are like, "Hey, I think Dupont can walk on this. I think there's a lot of downside." To my chagrin, I didn't do any work or do anything there but obviously, the market was just kind of asleep at the wheel there. They thought Dupont, big company, maybe they'll do something creative, maybe there's some reputation. No. Dupont just said, "Hey, by writing a hundred million dollar check, we can save ourselves about 7 billion of value." I don't know the exact number. And they did what their economics aligned with. And I think Intel, I believe that contract expires in February. I don't know if there's an extension if they haven't got [inaudible] but in the next three months, I think Intel we'll be looking to do something similar. I don't know if Tower has got a price in or not. But it seems like between.

Chris: Tight merger and spreads[?] are just great structures for shorts. I'm kicking myself on this one. And it was kind of a No Man's Land. It wasn't wide enough to own or tight enough to short early on and the deal and I kind of lost the plot on it. You can only pay attention to so many things and it kind of coincided with this whole year. We had things that we were hyper focused on that I think we're good choices of what to focus on. And so this one broke and I was like, oh my gosh, that was a beauty of an opportunity. But another ones, I think later, lower people asked about ATVI, I think later lower Tecna, I think later lower a lot of these I think there's big regulatory risk and the regulators are going to be aggressive, and I don't feel the need to. And maybe I'm being a little cautious here, because of the pattern of thinking about Twitter and all the things I liked about Twitter and thinking about how well say like Hindenburg did. I'm treating that like, hey, let's just wait. Let's just the real. Do the work. Understand the situation, be patient, let the bad news come out. We can act on it like that day or act on the later. So I think a lot of these have a later lower opportunity.

Andrew: With Twitter, I think there were a lot of things surprising, but one of the things that surprised me most with Twitter was Elon's put rough timing. Early May, a deal on hold. Early June, he said, "Hey, I'm putting you on notice. I can terminate this in 30 days if you don't cure this thing." Thirty days passed and he broke the deal. And one securing of the things that surprised me is Twitter stock drop the day the deal broke. The day he officially broke the deal. I was like this guy's been communicating for two months and on Twitter all the time he's tweeting he wanted to break the deal but like the news hit and the stock dropped anyway. I was surprised by that.

I do think like that is probably relevant to an Activision Blizzard situation, where it does seem like at least the US is going to bring suit to stop this. All the TVs are there. I believe there was a Reuters report out about a week ago that said that they're preparing, they're gearing up for that. Like it does seem like it should be priced into the market. I can't believe anyone be surprised if the suit hits but it does seem like when the suit does hit, it probably drops. Now, some people would say hey if it's 95% the suit hits, there is the 5% chance that Microsoft makes enough concessions and they walk. So you are getting that upset, optionality. But I do think that's where the point.

Just last thing on Activision then I'll wrap this up. The one thing I think both of you and I have struggled with Activision is both you and I think that there's a really good chance the US brings a case and both you and I think there's a really good chance of Microsoft ultimately wins a case that the US brings. UK CMA has been I think we've done work there. I think we're both very, very concerned about Microsoft's ability if the UK CMA blocks Microsoft's ability to get a reverse. Have you done anything else there or do you have any updated thoughts on UK CMA? And we're going real nerdy for the merger Arbitrage streets here when we're talking UK CMA.

Chris: Tight with the DOJ. I think we should bring an antitrust suit against the CMA and DOJ for collusion. They're like-minded in a lot of things, they're coordinated. The the prospect for a quid pro quo is very real, trading off the side that has more of the agenda to pocket versus the side that has the easier procedural route. And the DOJ trouble they've run into in court so much recently I think would further push them towards being cute about a procedure here. So I think that they are very aware of each other. I think some of the verbiage out of the DOJ, out of CMA, and less important to me but out of the EU as well looks a lot like team things up for each other. So you don't actually need direct coordination if you know what the other side is looking for. So I think that puts the deal really imperil.

I think that if CMA was out of the picture and you're going in front of a US judge, the Microsoft position on that seems to me just bending over backwards. Reasonable when it's related to Call of Duty and the things that the guy who's the head of kind of gaming for Microsoft's really good and really persuasive and impressive to me. So as he explains why he's doing this deal, it sounds like nothing lies like the truth. I kind of believe they're mobile focus. He's not trying to screw over PlayStation on Call of Duty. I mean if you look at their behavior historically, I don't know. Maybe he's just super persuasive and he's lying, but sounds real to me and the economics lines up. So I think that the deal is incredibly benign. It's just in the center of the crosshairs of the point that this government wants to make. And so, you never want to be the example to the point that the government has already decided they want to make. You don't want to kind of stumble into the room and make yourself kind of stumble to them with this deal. So I think it's a very hard situation.

Andrew: If CMA does break, do you still think if CMA says, "Hey we've reviewed, we've gone through the phase 2, we're not allowing this deal." Do you still think there are very few kind of arrows in Microsoft's quivers to get around that CMA ruling?

Chris: It would be something else. I think would be very, very hard . But if CMAs bringing the case carrying water for the DOJ, it would be something unrelated to the deal. It'd be something else they want from Microsoft. So I know it's possible but it's I single ditch unlikely.

Andrew: I'm no regulatory expert but that's the one thing that jumped out to me, like, "Hey, I understand what a DOJ case looks like. I understand the arguments. We've seen these before. We can handicapped them right now. We can handicapped them once we've read all the filings and we can keep updating with CMA." I don't know if they want to block this, which it seems like they do. I don't know how you get around that. What you do? I mean, I don't know if Microsoft had, hey, CMA will build the next three Activision Studios there. And we'll put a new sales. Like does that help? I just don't know what happens there. But we had lots of time, as you said, probably later lower but we'll have lots of time to discuss it. Anyway, Chris, I think we're just under an hour. I think we'll wrap it up there surely and we've got one more of these in 2022 before it's onwards and 2023.

Chris: Excellent. Thanks, Andrew. I've enjoyed our conversation.

Andrew: Thanks. Thanks everyone on Twitter who submitted the questions and we'll do this again next month. Talk to you soon, Chris.

Chris: Right. Bye.

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