WEBVTT - Lots More with Matt Levine on MicroStrategy's Infinite Money Machine

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Yeah, we got to

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<v Speaker 1>have more fun around here.

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<v Speaker 2>Oh god, Okay, speaking of fun, this is the antithesis

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<v Speaker 2>is fun. This is the antithesis of funds. No, no, no,

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<v Speaker 2>you haven't heard me.

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<v Speaker 1>Oh okay.

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<v Speaker 2>So I went to write one of.

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<v Speaker 1>Our I did a deadlist.

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<v Speaker 2>I'm both the most popular trader and most successful trader

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<v Speaker 2>at Citadel that is going viral, barges.

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<v Speaker 1>This is an after school special, except.

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<v Speaker 2>I've decided I'm going to base my entire personality going

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<v Speaker 2>forward on campaigning for a strategic pork reserve in the US.

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<v Speaker 1>Black goals.

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<v Speaker 2>These are the important question. Is that robots taking over

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<v Speaker 2>the world.

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<v Speaker 1>No, I think that, like in a couple of years,

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<v Speaker 1>the AI will do a really good job of making

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<v Speaker 1>the odd Launch podcast. One day that person will have

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<v Speaker 1>the mandate of Heaven.

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<v Speaker 2>How do I get more popular and successful?

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<v Speaker 3>We do have.

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<v Speaker 2>You're listening to lots More, where we catch up with

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<v Speaker 2>friends about what's going on right now.

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<v Speaker 1>Okay, even when the Odds is over, there's always lots more.

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<v Speaker 2>And we really do have the perfect guest. So I

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<v Speaker 2>went to write one of our Odd Lots newsletters recently,

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<v Speaker 2>and I was going to write about micro strategy, and

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<v Speaker 2>I had this idea. I was going to call it

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<v Speaker 2>micro's Strategy's infinite money loop. And then I was researching

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<v Speaker 2>on the terminal and I stumbled on a bunch of

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<v Speaker 2>Matt Levine columns where you actually titled it crypto's perpetual

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<v Speaker 2>motion machine. And then I thought, well, I'm not even

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<v Speaker 2>going to try to compete with Matt. I'm just going

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<v Speaker 2>to ask him to come on the show and explaining cases.

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<v Speaker 1>Yeah, cases, but at least he'll come on the podcast.

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<v Speaker 2>So here we are with Matt Levine, who is of

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<v Speaker 2>course the author of the money Stuff column but also

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<v Speaker 2>the co host of the New money Stuff podcast.

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<v Speaker 3>I keep thinking it's two months old. It was the year.

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<v Speaker 1>I really.

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<v Speaker 2>Wow time.

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<v Speaker 1>I always think twenty twenty was two years ago.

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<v Speaker 3>Same time. Time.

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<v Speaker 2>Yeah, time is a flat circle. Matt, what is micro

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<v Speaker 2>Strategy's perpetual motion machine?

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<v Speaker 3>Micro strategy? I keep saying perpetual motion machine. I think

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<v Speaker 3>I'm kidding. I think I'm kidding. I keep hoping that

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<v Speaker 3>I'm kidding. So micro strategy is a pot of bitcoins

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<v Speaker 3>that issues stock, and the stock trades at call it

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<v Speaker 3>two times the value of the pot of bitcoins. And

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<v Speaker 3>so if you have that situation, you sell more stock

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<v Speaker 3>to buy bitcoins because like classically that's an arbitrage, and

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<v Speaker 3>you close the arbitrage, right, you sell stock that brings

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<v Speaker 3>down the price of your stock. You buy bigcoins, that

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<v Speaker 3>brings up the price of bitcoin. Eventually you get to

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<v Speaker 3>the point where you're stock and the value of the

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<v Speaker 3>underlying bitcoins is the same mecro strategy, Like it never

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<v Speaker 3>gets any closer. So that keep selling more stock and

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<v Speaker 3>buying more bitcoins, and that keeps driving the value of

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<v Speaker 3>the company up, and so they keep getting more and

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<v Speaker 3>more valuable.

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<v Speaker 1>They have an as it so to speak, it's not bitcoin,

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<v Speaker 1>and that asset is the ability to get like non

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<v Speaker 1>margin callable leverage.

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<v Speaker 3>Right, So I mean like like if.

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<v Speaker 1>I wanted to borrow bitcoin or borrow money to buy bitcoin,

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<v Speaker 1>I could, but there is a chance that bitcoin goes

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<v Speaker 1>down tomorrow, they ask for my money back, and I'm homeless.

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<v Speaker 3>So this is a thing that they say, and that

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<v Speaker 3>has some truth to it, but this is not a

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<v Speaker 3>leveraged way to buy bitcoin. And the way you know

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<v Speaker 3>that is that the market cap of the company is

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<v Speaker 3>two x the value of its bitcoins. Right, So it's

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<v Speaker 3>like a it's like an anti leveraged way to buy bitcoin, right,

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<v Speaker 3>Like if you put two dollars into micro strategy, you

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<v Speaker 3>get back one dollar of bitcoin, which is the opposite

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<v Speaker 3>of leverage. Now it's true that like and they did.

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<v Speaker 3>And by the way, also like they do have the

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<v Speaker 3>ability to like they're right, like they've sort of touted

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<v Speaker 3>this as their strategy, like we are a better mouse

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<v Speaker 3>trap for buying bitcoin because we can get leverage. They

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<v Speaker 3>do a lot of convertible bonds. They don't. I don't

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<v Speaker 3>think I have a ton of like you know, just

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<v Speaker 3>sort of regular, non like non marginal leverage other than

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<v Speaker 3>the converts. But like, yeah, like that's a that's a

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<v Speaker 3>theoretical case. It's just like it's just not like true

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<v Speaker 3>as a matter of pricing.

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<v Speaker 2>Wait, the convertible bonds are actually what like initially caught

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<v Speaker 2>my eye because I think they issued at like one

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<v Speaker 2>of the recent ones zero percent with a conversion premium

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<v Speaker 2>of fifty five percent. And that's like already when the

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<v Speaker 2>stock is trading at this massive premium to the value

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<v Speaker 2>of its assets. And so you know, usually the higher

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<v Speaker 2>the conversion premium and the lower the coupon. The less

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<v Speaker 2>attractive that would be for investors, but clearly people are

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<v Speaker 2>buying this stuff because they keep doing it.

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<v Speaker 3>Yeah, Like a convert is just like it can convert.

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<v Speaker 3>You just plug into a model, right, Like, well, sorry,

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<v Speaker 3>I taking a step back.

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<v Speaker 2>I actually need you to explain convertible arbitrage.

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<v Speaker 3>Team. So there's there's two things there. There's convertible arbitrage.

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<v Speaker 3>So there's also a lot of like fundamental investors you

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<v Speaker 3>think about like the micro shadowy convertible never mind convertible arbitrage.

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<v Speaker 3>There are people in the wor world who run I

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<v Speaker 3>don't know, fixed income funds who run you know, like

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<v Speaker 3>convertible fundamental funds, who run various sorts of funds who

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<v Speaker 3>wake up in the morning thinking I want to buy

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<v Speaker 3>some bitcoin, and they can't because their mandate doesn't include bitcoin.

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<v Speaker 3>It might not even include micro strategy stock or micro

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<v Speaker 3>strategy stock might be too rich for them. But they

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<v Speaker 3>like they can buy a fixed income product that has

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<v Speaker 3>some bitcoin upside. They're like, yeah, that's great, right. So

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<v Speaker 3>part of the investment thesis for these bonds, and there's

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<v Speaker 3>like a lot of these bonds is something like that.

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<v Speaker 3>It's like this is a way to get bitcoin upside

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<v Speaker 3>with downside protection. But the convert arbitrage strategy is this

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<v Speaker 3>is the way to get micro strategy volatility, and micro

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<v Speaker 3>strategy is so volatile in part because it's crazy, but

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<v Speaker 3>in part because of like technical factors involving their ETPs,

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<v Speaker 3>and so a convert arb is just an options trading strategy,

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<v Speaker 3>like like you're buying call options on micro strategy, and

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<v Speaker 3>call options are more valuable the more volatile the company is,

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<v Speaker 3>more volatile the stock is. And this is a very

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<v Speaker 3>you know has like one hundred percent annual volatility, and

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<v Speaker 3>then you know what you're doing is like get you

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<v Speaker 3>buy a convertible, You sell some stock to hedge, and

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<v Speaker 3>you adjust your hedge over time as the con the

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<v Speaker 3>convertible gets more or less in the money. And the

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<v Speaker 3>way you do that is basically, every time the stock

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<v Speaker 3>goes up, you're selling more stock to get shorter, and

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<v Speaker 3>every time the stock goes down, you buy back stock

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<v Speaker 3>to reduce your hedge. And if the stock is constantly

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<v Speaker 3>bouncing around, you're constantly buying low and selling high and

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<v Speaker 3>making a lot of money. So it's a good volatility trade.

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<v Speaker 3>And those convertible terms you know, it's like zeros up

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<v Speaker 3>fifty five is like that sounds outrageous, but you plug

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<v Speaker 3>it into the model and you put in you know,

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<v Speaker 3>one hundred percent of volatility and that's cheap, and so

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<v Speaker 3>like people want to buy it.

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<v Speaker 2>Joe, I didn't realize this until recently, but you know,

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<v Speaker 2>if you go and look at some of micro Strategies

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<v Speaker 2>earning presentations, so they actually have slides on there that

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<v Speaker 2>are basically like boasting about how volatile the stock is.

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<v Speaker 2>Have you seen these, Matt I think so, yeah, it's

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<v Speaker 2>like MSTR is more volatile than any other s and

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<v Speaker 2>P five hundred stock there's another market.

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<v Speaker 3>Yeah.

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<v Speaker 2>Yeah, they're clearly like marketing the volatility is a selling.

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<v Speaker 3>Point, like they know what they're doing, like like this

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<v Speaker 3>is important. This is like they're they're like sort of

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<v Speaker 3>using every part of like this strategy to raise money,

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<v Speaker 3>which is like they're really like thoughtful about it and

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<v Speaker 3>like selling lots of volatility is very helpful to them.

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<v Speaker 3>And the punde that the ETF is like you know,

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<v Speaker 3>convert investor buys low cells high right, every time the

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<v Speaker 3>stock goes down, you have to buy back some stock

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<v Speaker 3>every time the stock goes up, you have to sell

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<v Speaker 3>some stock. That is, you're profiting from volatility, but you're

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<v Speaker 3>also damping volatility, right because like then the stock goes down,

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<v Speaker 3>you're buying. So if you issue a lot of convertibles,

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<v Speaker 3>you dampen the volatility in your stock. Micro Strategy doesn't

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<v Speaker 3>have this problem because they also have these LeVert ETFs

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<v Speaker 3>which so much increase the volatility of the stock. Because

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<v Speaker 3>a LEVERTYTF every time the stock goes up, they have

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<v Speaker 3>to buy more stock every time the thought goes down

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<v Speaker 3>if the sell stock, and so the Leverty TTF is

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<v Speaker 3>like jacking up the volatility, which is part of why

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<v Speaker 3>the stock is so validle.

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<v Speaker 1>So it does a perpetual motion machine. It's solved, No, okay.

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<v Speaker 3>The what the thing that I don't understand is the

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<v Speaker 3>premium of the stock, like the volatility Like yeah, like

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<v Speaker 3>that that that works, right? The volatility trade is a

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<v Speaker 3>good trade the stock, Like why is the stock worth

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<v Speaker 3>twice the value of the underlying big guys? I don't know.

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<v Speaker 1>Yeah, it's weird. A big crash in bigcoin would be

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<v Speaker 1>really bad, right, and that's very possible because it's crashed

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<v Speaker 1>many times in this history.

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<v Speaker 3>Yeah, you know, like your guess is as good as mine.

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<v Speaker 3>About like what that does to the premium, Like if

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<v Speaker 3>Bitcoin goes down by fifty percent, does this stock go

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<v Speaker 3>down by fifty percent because it go do go down

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<v Speaker 3>by ninety percent? Who knows?

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<v Speaker 2>Could I start my own perpetual money making machine where

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<v Speaker 2>I just have a pot of something and then I

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<v Speaker 2>try to make my stock as volatile as possible, Like

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<v Speaker 2>maybe I just say stuff and constantly do it.

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<v Speaker 3>Like everybody's are trying. No one's like at this scale,

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<v Speaker 3>but like a lot of companies have looked at this

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<v Speaker 3>and said we should do that, and so some of

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<v Speaker 3>them should do it. Some of them do it, like dogecoin,

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<v Speaker 3>you know, like you can have other there's.

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<v Speaker 1>Like random like kind of dt.

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<v Speaker 3>I wrote about the half choking crypto thing that's doing

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<v Speaker 3>it called you know, there's like a crypto called part coin.

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<v Speaker 1>There's a strategy.

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<v Speaker 3>Yeah it was not a company.

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<v Speaker 1>Yeah yeah, replicated on chain?

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<v Speaker 3>So yeah, yeah, well it can like the mechanics can

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<v Speaker 3>can the premium be replicated on chain? I don't know.

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<v Speaker 3>I mean you can sort of sell anything, but like

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<v Speaker 3>I think part of the premium here comes from it

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<v Speaker 3>being a real corporation, right, I mean one thing that's

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<v Speaker 3>like attried to put up micro strategy, Like they're trying

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<v Speaker 3>to get into the S and P five hundred Yeah,

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<v Speaker 3>which is a fascinating Like that turns on a change

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<v Speaker 3>in the accounting rules that allow for them to take

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<v Speaker 3>to account for their bitcoin gains as profits.

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<v Speaker 1>I didn't love it.

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<v Speaker 3>Yeah, So like they may not get into the SMP anyway,

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<v Speaker 3>but like they they have not been profitable enough to

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<v Speaker 3>get into the SMP, but like the bitcoin gains, they

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<v Speaker 3>have had biggining gains most of the time, and like

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<v Speaker 3>that will become accounting profit for them.

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<v Speaker 1>I want to ask you a question that touches in

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<v Speaker 1>one of Tracy's favorite topics, and it's actually a little

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<v Speaker 1>bit adjacent here. What would be the problem of just

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<v Speaker 1>having an index that's just these are the five hundred

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<v Speaker 1>biggest companies. Is there any like what's better about having

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<v Speaker 1>an S and P that sometimes has some discretion versus

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<v Speaker 1>just like you're the five hundred biggest companies.

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<v Speaker 3>In the world, in the US whatever in this immediate case,

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<v Speaker 3>like what is a company? Like is spy a company? Oh? Interesting,

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<v Speaker 3>because like this is this is an etf right, I mean, like,

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<v Speaker 3>arguably this is an eat, right, it's in the trappings

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<v Speaker 3>of a tech company. But like if you said the

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<v Speaker 3>biggest company as well, you know, like is it S

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<v Speaker 3>and P five hundred? Fun a company? But away from

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<v Speaker 3>that now, I mean, like people definitely have very rule

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<v Speaker 3>driven indices. I think part of the appeal of the

0:10:59.000 --> 0:11:02.920
<v Speaker 3>SMP is, you know, it's a product that's sold to

0:11:02.960 --> 0:11:05.640
<v Speaker 3>fund managers, right, and like if if every fund manager

0:11:05.679 --> 0:11:08.600
<v Speaker 3>says I don't want to own, you know, for a while,

0:11:08.720 --> 0:11:10.920
<v Speaker 3>the SMP was for a while a lot of indexes

0:11:10.960 --> 0:11:14.240
<v Speaker 3>were excluding dual class stocks because like fund managers would

0:11:14.280 --> 0:11:15.959
<v Speaker 3>call the index providers and say, we don't want to

0:11:15.960 --> 0:11:18.720
<v Speaker 3>own dual class stocks, were bound to buy the index,

0:11:18.720 --> 0:11:20.040
<v Speaker 3>so take them out of the index. And then like

0:11:20.080 --> 0:11:22.080
<v Speaker 3>they changed their mind because all the dual class stocks

0:11:22.120 --> 0:11:23.760
<v Speaker 3>were doing well and so they had to put them

0:11:23.760 --> 0:11:26.200
<v Speaker 3>back in the index. But it's like it's just a

0:11:26.240 --> 0:11:29.080
<v Speaker 3>market driven thing, right, Like if people want a certain index,

0:11:29.120 --> 0:11:31.319
<v Speaker 3>they get that index. Was something wrong with having the

0:11:31.360 --> 0:11:32.840
<v Speaker 3>top five hundred companies the index.

0:11:32.960 --> 0:11:36.040
<v Speaker 2>Like nowadays everyone has started custom indexing as well, right,

0:11:36.160 --> 0:11:37.440
<v Speaker 2>so like if you don't like the S and P

0:11:37.559 --> 0:11:39.720
<v Speaker 2>five hundred, you can just ask for your own index

0:11:39.760 --> 0:11:41.679
<v Speaker 2>and that's why there's a billion indexes.

0:11:41.720 --> 0:11:41.920
<v Speaker 3>Now.

0:11:42.440 --> 0:11:44.480
<v Speaker 2>The other thing I saw was there was a bitcoin

0:11:45.040 --> 0:11:48.480
<v Speaker 2>minor I think it was called Mara or something, Marara Holdings,

0:11:48.520 --> 0:11:51.240
<v Speaker 2>and they said they weren't going to issue converts basically

0:11:51.360 --> 0:11:53.640
<v Speaker 2>to do the same thing as micro strategy. So it's

0:11:53.679 --> 0:11:55.880
<v Speaker 2>almost like, is this going to be like an asset

0:11:55.960 --> 0:11:57.840
<v Speaker 2>class a thing that stays with us?

0:11:58.360 --> 0:12:01.600
<v Speaker 3>Yeah? You know, the people in the convert market talk

0:12:01.640 --> 0:12:05.160
<v Speaker 3>about being saturated with with like crypto converts. Right, Like

0:12:05.160 --> 0:12:07.559
<v Speaker 3>if you like grew up as a convert investor, you're

0:12:07.720 --> 0:12:12.800
<v Speaker 3>like you're like portfolio and crypto, right part because like

0:12:13.400 --> 0:12:16.000
<v Speaker 3>you think about like the volatility and like the technical

0:12:16.000 --> 0:12:18.680
<v Speaker 3>aspect of making money on the trading, the volatility that

0:12:18.800 --> 0:12:21.160
<v Speaker 3>depends on the credit being good, and like no one

0:12:21.240 --> 0:12:23.760
<v Speaker 3>really knows the credit here, right. If there's a big

0:12:23.760 --> 0:12:26.079
<v Speaker 3>crypto crash, all of these credits like in a very

0:12:26.120 --> 0:12:29.679
<v Speaker 3>correlated way become terrible, and so like your whole you know,

0:12:30.000 --> 0:12:31.199
<v Speaker 3>asset class falls apart.

0:12:32.080 --> 0:12:35.120
<v Speaker 1>Prior to all this, what was the canonical use case

0:12:35.160 --> 0:12:37.160
<v Speaker 1>of who and why issue converts?

0:12:37.640 --> 0:12:37.840
<v Speaker 3>Oh?

0:12:38.480 --> 0:12:42.360
<v Speaker 2>Uh, I seem to remember energy companies.

0:12:42.600 --> 0:12:45.000
<v Speaker 3>Energy did a lot. I mean, like the canonical case

0:12:45.800 --> 0:12:50.120
<v Speaker 3>is like tech biotech like but a lot of energy too.

0:12:50.240 --> 0:12:53.280
<v Speaker 3>You know, it's like it's like companies that are volatile,

0:12:53.520 --> 0:12:56.600
<v Speaker 3>companies that often don't want to get credit ratings. Companies

0:12:56.640 --> 0:13:02.160
<v Speaker 3>that you know, like what you're saying telling is in

0:13:02.200 --> 0:13:05.920
<v Speaker 3>some sense equity upside and in some other sense equity volatility,

0:13:06.200 --> 0:13:09.400
<v Speaker 3>and that's more attractive to converted Like they're companies that

0:13:09.440 --> 0:13:12.520
<v Speaker 3>have attried to equity volatility and not such attractive credit

0:13:12.559 --> 0:13:14.760
<v Speaker 3>to like traditional credit investors, and so they can do

0:13:15.600 --> 0:13:17.240
<v Speaker 3>that trade rather than a sharing bonds.

0:13:30.440 --> 0:13:31.640
<v Speaker 1>You have a deep seat, take.

0:13:33.080 --> 0:13:37.920
<v Speaker 3>Various takes. My main take was today, like your old

0:13:38.120 --> 0:13:41.400
<v Speaker 3>that you know, the way to monetize deep seek was

0:13:41.800 --> 0:13:45.760
<v Speaker 3>short video.

0:13:44.559 --> 0:13:47.920
<v Speaker 1>I was my old blog at the star war dot

0:13:47.920 --> 0:13:49.839
<v Speaker 1>com in like two thousand. This was when, you know

0:13:49.880 --> 0:13:52.719
<v Speaker 1>what I thought about this When Google introduced sheets or

0:13:52.760 --> 0:13:55.400
<v Speaker 1>when they came out with their Access competitor, I was like,

0:13:55.440 --> 0:13:58.400
<v Speaker 1>some companies should start doing this. When they short Microsoft

0:13:58.800 --> 0:14:01.160
<v Speaker 1>for some reason, Sheets never really took off and became

0:14:01.200 --> 0:14:04.080
<v Speaker 1>an Excel competitor on a real level. But back when

0:14:04.080 --> 0:14:07.160
<v Speaker 1>it was so much free web two dot software, I thought,

0:14:07.360 --> 0:14:09.240
<v Speaker 1>give up free software and short your competitor.

0:14:09.280 --> 0:14:13.840
<v Speaker 3>Anyway, Yeah, I mean there's no evidence that Deep Yeah,

0:14:13.840 --> 0:14:15.400
<v Speaker 3>it'd be cool if they did.

0:14:19.560 --> 0:14:22.680
<v Speaker 1>Lots More is produced by Carmen Rodriguez and dash Ol Bennett,

0:14:22.720 --> 0:14:24.880
<v Speaker 1>with help from Moses Onam and kil Brooks.

0:14:25.280 --> 0:14:28.440
<v Speaker 2>Our sound engineer is Blake Maples. Sage Bauman is the

0:14:28.480 --> 0:14:29.880
<v Speaker 2>head of Bloomberg Podcasts.

0:14:30.320 --> 0:14:33.680
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0:14:33.680 --> 0:14:36.600
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<v Speaker 2>And remember that Bloomberg subscribers can listen to all our

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