The Liquidity Event Podcast: Episode 47
Episode 47: Boats + Capitalism = Inflation
AJs out munching on tea & crumpets so the Liquidity Event is blessed with guest house Mark Stancato, CFP, EA. The IPO market finally gets its first unicorn listing of 2022 with Ivanhoe Electric who makes a big bet on domestic production of copper to support the future of the electric vehicle market. Speaking of issues in the climate tech space, MicroStrategy makes an ill-timed bet on Bitcoin that may cause the largest corporate holder of Bitcoin to face an ignominious margin call. The gang finally unmasks the cause of all that inflation in the market and you would never believe it’s gasp INTERNATIONAL CORPORATE CARGO FREIGHTERS.
Read the Full Transcript:
Speaker 1:
This podcast is for informational purposes only and should not be considered tax or investment advice. Welcome to The Liquidity Event, a show about all things personal finance with a laser focus on equity compensation. Hosted by AJ and Shane of Brooklyn FI, each episode will take you through the week's news on Fin Tech, IPOs, SPACs, founder wins and fails, crypto, and whatever else these nerds think is interesting. Learn more and subscribe today at brooklynfi.com.
Shane:
Hello, and welcome to The Liquidity Event. We are your hosts, Shane Mason and...
Mark:
Mark Stancato. I am guest host today as AJ is out traveling the world. No, actually, Shane, this is AJ. I got my new podcast voice, my deep, melodious voice. I'm taking a page out Elizabeth Holmes from Theranos.
Shane:
Is this your English accent, AJ?
Mark:
Absolutely.
Shane:
No. Oh boy. Oh no. Let's not start with that. I've got enough of that out of AJ in the morning meetings with her too-todoos and all that. I've had enough English accents. Why is it so much fun to do an English accent?
Mark:
I don't really find it fun to do an English accent personally. For me, I think it's something you have to work at as an actor. You know, I just can't break into it. I have to know what I'm saying and craft it because you can easily slip, and as soon as you slip from any accent in a play, you're out.
Shane:
All right, so there we are, Mr. Mark Stancato, senior financial planner, also hater of the English accent and an actor in his free time. This is episode 47 being recorded on June 22nd, 2022, which will be airing on June 24th, 2022. This week we'll be discussing one of our biggest IPOs of the year, given that the year is a drought in IPO land, and then we're going to talk about Bitcoin, of course, a little Elon Musk, of course. We're going to talk about inflation, gas prices, the hidden fees going into your bananas, a little bit of ESG and the Squid Game. All right, so Mark, what are you reading these days?
Mark:
I am reading a few different things. Actually I started with The Roaring Nineties by Joseph Stiglitz. He was a Nobel Prize winning economist, worked in the Clinton years, and as one of the chief economists on Clinton's team. It's an interesting book. It's kind of a throwback to the nineties where I was basically just graduating high school, going into college, and really talks about some of the great things they were doing. If you remember that far back, that was the last time we actually ran surpluses as a country.
Mark:
Every year we either run a deficit, we can run a surplus, we can break even, but we typically run deficits. Hence the aggregate of all deficits is the national debt. But a couple years during the Clinton years, we ran surpluses and he was talking about their whole mantra was deficit reduction, deficit reduction, but he was also then talking about the missteps that they took along the way that eventually led to the big blowup, if you will, of 2000, 2001. It's a very fascinating book.
Shane:
Yeah. Shout out to Michael Jordan and the Chicago Bulls for the credit to the surplus back then. I'm reading a stupid sailing book. Are you having a drink with us today, Mr. Stancato?
Mark:
Oh, of course. I am drinking my typical. I'm drinking a little Starbucks Earl Grey black tea with a splash of soy steamed, my friend.
Shane:
Okay. Wow. Wow, I opened a can of worms there.
Mark:
Let me add to it, because I order this drink all the time. I probably spend a thousand dollars a year on this drink. It's $2 99 every time I get it.
Shane:
Did you hear that Dave Ramsey? Suck it.
Mark:
Right? I'm supporting Starbucks. I should invest in the company. Yes, but so it's a Tall and Venti, which means that I only want one tea bag because two tea bags is way too much tea, but I want the bigger cup, so I want the water and the extra soy. They typically, even though they know me, they always, I would say like half the time they still screw it up. They give me a small one or they don't put the soy milk in there. I don't know why it's so complicated.
Shane:
I'd call that a Venti problemo. You are drinking coffee, which is indicative of where you are in the country. Where does the world find you today, Mr. Stancato?
Mark:
I'm actually drinking tea.
Shane:
Oh, sorry. I wasn't listening. As soon as you said Starbucks, I tuned out.
Mark:
I actually don't drink coffee, but yes, here in Los Angeles, I think a lot of people do drink coffee, but I'm a tea drinker. I'm actually in Burbank, California, right here in LA.
Shane:
Right on. We got one of our west coast financial planners representing. Appreciate that. A little representation. I'm in Brooklyn today. I'm back up in Green Point, made it back home, so to speak. What are you doing for fun these days, Mr. Stancato? Let the listeners get to know you a bit. Where do you take your leisurely hours?
Mark:
Well, you see this room behind me? I spend a lot of time here because I work out here, but I also make music out of here. I'm also a musician. As much as you love, and everybody knows that you love gaming, I write songs, and for me it's like a big game because I will write a song. I will start on a guitar or the piano, and then I have pro tools. I'll lay down a drum beat. You do a lot on the computer these days, and then I'll just keep layering it up. I'll play a little bass, a little guitar, throw some percussion in, come up with my top line, and I start building track essentially. I spend time doing that. As you mentioned, I'm also an actor. I belong to a theater company here in LA. Shout out to the group rep at the Lonny Chapman Theatre in North Hollywood.
Shane:
Sure. I'm sure he'll be listening to this Liquidity Event podcast about IPOs.
Mark:
Of course. Been around for 50 years. Yeah, and just got back from Atlanta. I was there this past weekend visiting a friend of mine and just taking it in a little bit. It's cool.
Shane:
I love that city. Love that city. Cool. Well, yes, for those that are not watching on video, there's a huge studio besides Mark. He's got one of our favorite Zoom backgrounds at the company. There's guitars, drum kits, a ton of stuff I don't know how to describe, but yes, a lovely home studio that he has there. Always fun for the Zoom calls. Okay, well that takes us through, and since you called me out for gaming, what I'm doing for fun is starting my second run in Eldin Ring. Oh, all right.
Mark:
Wow. Exciting. Wow.
Shane:
Hey, hey, hey. Did I give you shit for the studio? . Okay, cool. Let's get into the meats today. We do have our first IPO of any materiality this year. We have Ivanhoe industrials. That is going to be IPOing in the next few weeks. Mark, why don't you give us a little bit of background on Ivanhoe? Ivanhoe Electric, excuse me, with the ticker symbol IE, that is heading out the door. It's interesting that they have Electric in their title, considering that they're in the mineral projects company. I believe they work in the battery space, which is going to be more and more important as we move towards a more electric, renewable. Batteries are very important to renewable resources because we've got to store all that passive income, we'll call it. Why don't you give us some deets on Ivanhoe?
Mark:
Some deets on Ivanhoe. Yes. Ivanhoe Electric, currently private, about to go public. Smaller company, 89 employees. They are based out of Vancouver. Let's see, I'm looking at a post valuation of a little over one billion, so they are a small cap. They've raised about 605 million to date. They've been around since 2010, so we're talking 12 years. If you go to their website, ivanhoeelectric.com, I found this a little funny is that it says website coming soon, just literally a landing page, so maybe it's going to come soon. It's the same time they IPO and they'll have all their shit together.
Mark:
They filed to go public on the New York Stock Exchange on May 24th, 2022, and they're going to be exploring and mining for specifically looks like copper, and with the premise that the United States, we're not mining enough of our own minerals that go into everything, like you suggested to go into computers and cars and batteries. It becomes a bit of a national security issue when we have to rely on all these other countries. I think we're feeling those effects now just in terms of all of our goods that you buy at Walmart, Target, Costco, are coming from China.
Mark:
Americans like cheap goods, but then we went into a bit of a trade war. Trump slapped a bunch of tariffs on them, which are taxes. By the way, China did not pay for them. The importer did, who now passed it on to you, dear consumer, who we are now experiencing this dramatic inflation at 8% plus, but yes, we need to start mining our own minerals. Let's see, what else? Another cool stat I looked up here is that Chile actually provides 62% of all imported refined copper into the United States, which is kind of, we talk about a concentrated position, right?
Mark:
As planners in working with our clients, in terms of an investment, that's not well diversified, so we have a concentrated position as a company, relying on Chile for most of our copper, where this is a very important mineral that we should be harvesting here in the States. But I also found it kind of funny, when we're talking about this, is that this company's based in Canada, yeah, but the premise was that the United States is not mining enough of its own minerals, and I say well, if the shit hits the fan and there's a war or something, well, hopefully Canada will be on our side, but at the same time, it's still not here in the United States. It's still not here, so I don't know. Maybe I'm missing something, man. What's your take on that?
Shane:
Well, I don't see a war with Canada in the near future, for sure. My mind was wandering towards, we have an article coming up later in the pod about the hidden costs, the costs that are increasing the price of everything that we're dealing with. It has a lot to do with shipping container companies that are gouging consumers, spoiler alert, and how 92% of the world's commerce comes via cargo ships, and all that shipping coming from Chile, 62% of our copper, which apparently is really important to the industrialization of the EV market.
Shane:
This Ivanhoe company has obviously noted that 62% is coming from Chile and wants to bring it back onshore in the case of a war, and it just makes me think about the size of our Navy and why we do have a giant defense budget for managing the seas and the 92% of cargo, you know, container ships that are floating off the Pacific and docking in the port of Los Angeles, et cetera. I don't really have a hot take. It just makes me think about why we spend, is it 700 billion a year on defense?
Mark:
Yeah, something like that. More than the next, what five nations combined or something ridiculous?
Shane:
I think it's 25 nations.
Mark:
Oh really? I'm off by that much. Wow.
Shane:
No, I mean, of course it's incredible. Yeah. 750 billion. It's just a staggering, like when the number is stupid, no matter what number you say is going to be silly. I'm probably wrong anyway.
Mark:
The point is that we don't need a budget that large for defense, 750 billion. It's insane. It really is. It's not efficient from that standpoint. I mean, all their money could be allocated. I would argue to say that the United States is the last true superpower on the planet. What's preventing us, right, from potentially invading any other country, besides nuclear war? But we are definitely, we have the largest economy by GDP. Next up is China. I think our GDP was 23 trillion. China is around 16, so we still have quite a lead compared to the second largest economy, China, but they're coming up fast.
Mark:
Going back to your point, Shane, about the cargo, this is really kind of a perfect storm, what's been happening with inflation, which is demand's out of whack when inflation goes crazy, but the supply chain's also screwed up because of COVID. The workers got sick. All these shipping companies, they are not US-based companies, so our government can't even really lean into these companies to say hey, stop gouging importers, and then they're taking advantage of the situation. They're really price colluding, but this has been 50 years in the making with the whole concept of just in time inventory. We've been working out this since the Reagan years when it was all about free markets, right? The whole idea of free markets, free markets, free markets.
Mark:
Milton Friedman all day long, don't let any government get involved. Then the other side of the coin is where you say, as economists, well, yes, we need free markets but also the government does have a place. We kind of put ourselves into this hole as a nation and now we're experiencing huge demand and a supply chain that's crippled that we can't catch up to demand. There's actually not enough shipping containers and are not enough boats to bring everything over. Then workers are still getting stupid COVID, so it's going to get worse before it gets better.
Shane:
Yeah. Well, we're going to be talking about shipping containers a bit later on in the pod again. Just happy that we have our first unicorn of the year with Ivanhoe coming out the door, a billion dollars valuation. It used to be very impressive, but with tech companies that have IPOed throughout 2021, we had plenty of deca-unicorns last year, but I'm happy that we have some activity in the IPO market. Let's move on to some articles that we have here this year, or today. We have MicroStrategy is Facing a Bitcoin Reckoning in the General Market, and updates coming out of Quartz.com. We have this company, MicroStrategy, which I thought was a gaming company.
Mark:
Sounds cool. Sounds like a gaming company. You know?
Shane:
Yeah. Apparently their strategy was not a macro-strategy because they did not see macro trends in the market, including the inflation and what's going on in the Ukraine, and this company I never heard of before. It's a Virginia based intelligence company, holds 130,000 bitcoins, and I'll save you the math there. It is now currently worth 2.9 billion, which is worth roughly half the six billion that it was worth about two months ago before in the crypto market.
Shane:
I've been spiking the ball on crypto holders a lot recently, which I feel kind of bad about. I mean, of course the value of bitcoin can jump back up, but this company has the largest holding of bitcoins of any company. It's two and a half times more than even Tesla's, which is the next largest bitcoin owner. This company is the US Defense Department of bitcoin holdings. How do you feel about their balance sheet getting cut in half?
Mark:
You know, I think they had it coming. What is bitcoin at the end of the day, or any cryptocurrency? There's like 19,000 different coins I believe on 5000 different markets. Bitcoin, though, I was actually looking into this, in terms of market cap they have 43% of the market cap, so basically half of all the market cap. Two weeks ago it was 1.3 trillion. Now it's down to 880 billion.
Mark:
Cryptocurrency, it's like a currency, but what are you investing in at the end of the day? I mean, I know with stocks you're going to invest in a company for specific reasons. You can do your research on it and say I like this company. This is what they're producing, a good, a service. I believe in it. You go off the Warren Buffett strategy. What is a stock? You're investing in something that you really believe in. You go with the buy and hold strategy.
Mark:
What's to invest in crypto besides just people buying and selling it? It doesn't produce anything, so I'm not a big fan because I think crypto is really not even an investment. I think it's just pure speculation, and I think a lot of the analysts out there are saying the same thing in terms of crypto. I don't really know a lot about it from a top level view, so I'm not playing the game, getting into crypto. Again, I don't believe in something that I just don't feel is, it's not doing anything. It's not producing anything. I mean, yeah, it's going to be a virtual currency that people can use at some point in the future or are using now, but I think it's just too speculative for my blood.
Shane:
Got you, yeah. I mean, not only is it speculative, but this company took out large loans to purchase more crypto in I believe February of 2022, and their CFO, I'm sorry their president said that bitcoin would have to hit 21,000 before they get margin call. For our listeners that don't know what a margin call is, if you take out a loan to purchase an asset, if the value of the asset decreases significantly, then their loan provider can say hey, we need you to put up some additional collateral or provide cash, and if you don't have that cash available they force you to sell the stock that you have borrowed against, in this case bitcoin.
Shane:
You will be forced into a selling at a loss position. That's why leverage is off and what kills companies like Lehman Brothers and all the other companies from 2008. I just feel like it would be a really terrible way to go out as a CEO of a company as making a giant bitcoin bet that gets you margin called and forces your company into bankruptcy after being around since the '80s. Seems like an unnecessary bet.
Mark:
Yeah, completely agree about leverage. That's what takes out most companies, small businesses included, is that they over-leverage. To literally borrow it to put money into crypto, I didn't know that about them borrowing all that money to put into crypto. That's crazy to me. I think they kind of had it coming. That's a bad move. Bad move, my friend.
Shane:
Yeah. Yeah. Egg on the face. Moving on from MicroStrategy, moving into macro-strategy we do see an interest rate bump. We're about a week behind on this, 75 bips. This happened last Wednesday while we were recording last week's episode, so we just wanted to comment on the Federal Reserve increasing their bips and how that's impacting all types of different credit and interest rates, but most importantly where we're seeing mortgage rates go these days, which is what people are really most worried about, it being the largest purchase of their career, of their lives typically, is their home.
Shane:
We have this nice chart from the Federal Reserve of St. Louis' economic data, and just looking at a huge spike in the average 30-year mortgage rate. We're looking at 5.78% as of June 16th. We're a little bit of a lag in the data here, so it looks like just in December you could get a 3% loan. I'm looking at just six months later, doubling of that number. Just rapidly, rapidly increasing the cost of buying a home. Doubling the interest rate payments should really throw a wet blanket on the housing market. How do we feel about that, Mark? Do you think that's going to impact the housing market, the insane market we've had the last two years?
Mark:
Yeah. I mean, that's the thing. That's the word, insane. It's definitely been insane, and that wasn't tenable nor sustainable. That was a bubble waiting to pop at some point. Yeah, so this is what happens when demand gets out of hand, no pun intended. There's too much demand. People are not making wise decisions by going into this market, and I hear these stories. They're bidding 50, 60,000 over asking. They're cutting the time of the inspection, or don't even inspect the home. This is going to come back to haunt people. When things get rough like this, when the markets are down and everyone's trying to bid for a house, this is the time to take a step back, take a breath.
Mark:
We're actually writing a blog, a collective blog, the planners here, and I was talking about this concept, is that this is not the time to go buy a house for the most part, unless you're forced to. It was at least a month ago, but my how times have changed just in one month. Back to your point, yes. This is what's going to have to happen. The Fed, they have tools at their disposal. They have to raise short-term rates that banks borrow, the Federal Funds rate, it's going to drive up the cost of borrowing, which it needs to so we can tamper inflation. Got to keep driving up, and this is what Paul Volcker did in the early '80s when inflation was running at 18%, and you can lock in that mortgage at 18 or your car loan was at 13%.
Mark:
People will think twice about going out, because one, they can't afford it, and they're like we're going to have to wait, and that's the whole idea. We need to cool demand so people aren't buying, which we actually probably will hit a bit of a recession, but like I said before, it's going to get a little worse before it gets better, and this is how the market's going to self-correct itself over time, or not even self-correct. The government has to inject itself into the situation to bring inflation down, to bring these crazy prices down. If you want to help out, think twice about that purchase, about going out and buying that car or buying a house because the longer that we keep demand higher which is out of whack from supply, inflation's just going to keep on running and the Fed is probably going to get together at least three, four more times and raise rates.
Mark:
I was surprised though, Shane, I got to say, that they raised 75 bips. I was thinking 50. I'm no Fed expert or an economist by profession, but I read a lot of books on it. Our field does dip into it, and I think they were a little late to the party in terms of not catching it fast enough. They should have never said it was transitory. I saw this coming two years ago now, because going back to importing containers, when importing a container would cost, from China, $3500 that importers were paying, and that same container right in the heart of the pandemic when supply chains were hitting and it was becoming quite difficult to get things, it went up to $30,000 for that same container. Importers all over the country were going to say well, I can't afford that so I'm going to have to strategically only bring in a certain amount. Then I'm going to have to pass that on to the consumer. This has been in the works for a couple of years in terms of things going up.
Shane:
Yeah. I mean, that's the story of today's economy and what we're seeing here in inflation and additional costs to consumers. We have two other articles here. It's probably a good idea to just touch on one of these, like gas prices are going through the roof, of course, for our car driving listeners. Just today, I didn't warn you about this one. It just slipped this morning because it was just posted just before the podcast. One of Biden's attempts to cut down on the inflation costs to drivers or motorists, to use the technical term, is to release the gas tax that we pay at the pump, which is 18 cents per gallon for regular gasoline and 24 cents per gallon for diesel.
Shane:
Biden is requesting that Congress move to repeal or give a temporary suspension of those taxes just for the next three months to help out with the prices of gas. The national average topped $5 per gallon for the first time ever earlier in June, so a little bit of relief. It's not really the Biden administration's fault that there is all this inflation and all of these supply chain woes, and it's really going to hurt them hard coming up in the November mid-terms. This is just one attempt to try to ease the pain and probably get some more votes or lose less control than they're looking at losing given the state of the economy.
Mark:
Yeah, well, if this was an election year, whenever the economy is down, if this was an election year, Biden unfortunately, he wouldn't get elected based on what's happening right now. Things are just so out of control. They blame the administration, but honestly it's funny, because administrations get credit when the economy does well. It's like a laggard effect, and it's not the administration that is doing something magical and mystical. You look back in time, there's ebbs and flows. I mean, if they wanted to do a little more, let me pose this back at you, how about lifting a 25% tariff on 300 billion of goods that's still coming from China? How about that?
Shane:
Is that still in effect? Is that still a real thing?
Mark:
Yeah, 300 billion, so we import 550 billion in this country, but 300 billion of goods still are paying 25% tax, so you bring in a container for 20 grand, now it's 25,000. It's a huge, huge increase. I mean, if they want to do something about it, Biden did stump on getting rid of tariffs, but then they realized that in trade world 2.0, they need some leverage against China with this trade war still. That would help make the difference besides the gas tax. I think that would be more of a help to people than the gas tax.
Shane:
Yeah. Yeah, I mean, I guess I should have mentioned, I didn't realize we were going to talking about import/export so much, but Mark does have a background. He knows what he's talking about and he has a background in importing goods from overseas. With that said, I did promise we would discuss this cargo ship article about five times already, so I guess we ought to get this one in before we cut today. The Hidden Fees Making Your Bananas and Everything Else Cost More, from ProPublica, which means some underpaid, overworked, excellent journalist put a lot of effort into this article about ocean freight shipping costs and how it impacts inflation.
Shane:
I just thought this was really mesmerizing, as a lot of these ProPublica articles are, about the cost of everything going up due to some price gouging from the shipping companies who, if you think about it, are really in a perfect opportunity to just rip us all off. They don't have to move anything unless we pay for it, and we're all willing to pay for shipping right now because demand is so high. There's this company, One Banana, in the article, that's just trying to get bananas out of the Port of Los Angeles to shippers, or to ultimate consumers and supermarkets, and this German shipping company, Hapag, is getting called out for charging $400 a day for unreturned empty containers at the Port of Los Angeles.
Shane:
The trucks are trying to bring back the empty containers but there's literally nowhere to put them, and Hapag is charging them $400 a day anyway, so the shipping companies are like I can't get into a contract with you guys, or the trucking companies are like I can't do this contract unless you guys pay me twice as much as you typically pay me to deliver these bananas because I owe this shipping company so much. The shipping company has 60% profits, 60% operating margins for a job that is move this thing from here to there, which is typically a single digit margin company and you move on volume. I don't know how you take your anger out on a German cargo ship company. What are your thoughts?
Mark:
Speaking of bananas, that is bananas. Boom.
Shane:
There it is. There it is.
Mark:
I dropped it, this transition. You got to get the transitions. I think that this has been going on for awhile, and yeah, I can speak to this. This has been happening and it's unfortunate, because as we were talking about, a lot of these shipping companies, these are international companies. There's not much leverage we can put on them. They know they have us on the ropes, and they're going to take advantage of this moment. In fact, I read an article and these shipping companies have started building container ships so large that they really had a hard time even getting into ports with the idea of building more efficiency.
Mark:
Right before the pandemic these shipping companies were experiencing losses because they went out and borrowed a bunch of money, again leverage, to build these enormous super containers and they weren't filling them up, so they were losing money because they weren't able to put 70,000 containers, imagine that, on one boat. But they all started building bigger and bigger and bigger and better and bigger, and they got into trouble with it, so now they're making up for lost ground, is my contention. Again, there's not much we can do. It's been 50 years in the making. We rely on stuff coming out of China. Americans like cheap goods.
Shane:
Yeah. It's really hard to plan for a pandemic, and it takes decades to build these ships and you got to make up the cost, so maybe that 60% margin is justified. I don't know. Are you a capitalist or not? All right, well, that's all the time we have.
Mark:
Not that much.
Shane:
Yeah, that's all the time we have this week for The Liquidity Event. Thank you, guest host, Mr. Mark Stancato, one of our best financial planners here at Brooklyn FI. You can email us at liquidityevent@brooklynfi.com. Leave us a voicemail and we'll play it on the air. Show notes can be found at brooklynfi.com/episode47. BKFIstans can leave us a review if they want to be weird about it. Thanks again.
Mark:
Thumbs up.
Shane:
Nice.
Speaker 1:
Thanks for listening to The Liquidity Event, hosted by AJ and Shane of Brooklyn FI. Head on over to brooklynfi.com where you can subscribe to the podcast or YouTube channel, or if you want to learn about their full service financial planning, tax, and investment firm, specializing in tech professionals and creatives on the path to financial independence. We'll see you next time on The Liquidity Event.