The Pomp Letter

To investors,

Gambling is an American tradition. More specifically, the lottery has been a core component to funding the rise of America and many of our most respected institutions.

The Virginia Company of London created the first lottery in America in 1616 to raise money for ventures chartered by King Charles, including the establishment of the first permanent settlement in Jamestown, Virginia.

Over time, all 13 of the original colonies established their own lotteries with the goal of raising money for their operations. Given where the money was going, it became a civic responsibility to play the lottery.

The lotteries didn’t stop there. These games have been used to fund churches, libraries, and various prestigious universities including Harvard, Yale, Columbia, Dartmouth, and Princeton.

Lotteries have evolved over the years and now jackpots are reaching more than $1 billion. That seems insane, but why is it happening?

The rules have changed and now millions more people can participate in a single lottery drawing. The more people who are playing, as long as no one wins the pot of money, gives fuel to a larger and larger amount up for grabs.

There are two types of lotteries in the United States — state lotteries and multi-jurisdictional lotteries. State lotteries can only be played within the state borders and the winning ticket must be redeemed there as well. Multi-jurisdictional lotteries are available across multiple states.

The state lotteries are usually smaller in size because fewer people are eligible to play them. The multi-jurisdictional lotteries are where the $1+ billion winning pots have been accumulated.

There are two main lottery brands — Powerball and Mega Millions.

According to the Powerball website, they have raised more than $29 billion for public programs and services. Here is how it works:

“Powerball tickets are $2 per play. Tickets are sold in 45 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. More than half of all proceeds from the sale of a Powerball ticket remain in the jurisdiction where the ticket was sold. Drawings are broadcast live every Monday, Wednesday and Saturday at 10:59 pm ET.

Players select five numbers between 1 and 69 and one Powerball number between 1 and 26.

The Powerball jackpot grows until its won. Players win a prize by matching one of the 9 ways to win. The jackpot is won by matching all five white balls in any order and the red Powerball.”

The 10 largest jackpot winnings range from $2 billion to $632 million.

* $2.040 Billion

* $1.586 Billion

* $1.080 Billion

* $768.4 Million

* $758.7 Million

* $754.6 Million

* $731.1 Million

* $699.8 Million

* $687.8 Million

* $632.6 Million

Mega Millions is slightly less popular, but they have been the recipient of a number of large jackpots as well.

These jackpots are measured in hundreds of millions or billions of dollars, so where exactly does all this money go? The answer, as with most things in life, is it depends. Each lottery system is a little different and each state treats the lottery revenue in a different way.

Generally, here is a breakdown of where the funds go:

* 50% goes to the lottery winner

* 10% goes to administrative costs

* 5% is commissions to retailers who sell lottery tickets

* 35% is divided among states based on pro-rata ticket sales

The amount of money given to the states is where things get interesting. Each state can receive tens of millions of dollars on the larger jackpots, so they have to decide what to do with that money.

California, as an example, is exclusively focused on funding educational efforts, while Arizona supports the following programs:

* Education

* General Government

* Health and Welfare

* Inspection and Regulation

* Natural Resources

* Protection and Safety

* Commerce Authority Arizona Competes Fund

* Court Appointed Special Advocate Fund (Unclaimed prizes)

* Dept of Gaming

* Healthy Arizona

* Heritage Fund

* Homeless Shelters

* General Fund (by Category)

* Mass Transit

* University Bond Fund

* Automation Projects Fund

* Internet Crimes Against Children Victims' Rights

* Internet Crimes Against Children Victims

* Tribal College Dual Enrollment Program

Most people look at the lottery as a dumb game that is a tax on the unintelligent. There is a hint of truth to that thought process. Gambling addiction is real and every state sinks significant resources into addiction hotlines or other combative measures.

Lotteries have also been apart of American culture since the founding of our country. They have helped to fund early settlements, well-respected institutions, and various public services in modern times.

With billion dollar jackpots happening more frequently due to multi-jurisdiction games, the lottery has become a big business. In fact, it is so big that the business and investing world will have a hard time ignoring it in the future.

Hope you all have a great day. I’ll talk to you tomorrow.

-Pomp

Darius Dale is the founder & CEO of 42Macro.

In this conversation, we talk about the S&P 500, bitcoin, consumer spending, manufacturing, capacity utilization, and what will the Fed do with interest rates later this year?

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To investors,

Growth has been demonized over the last decade as something that we should fear. The technology industry is chastised for “growth at all cost.” The energy industry is protested for growth in consumption and production. Numerous billionaires warn of the risks associated with overpopulation. The message is clear — growth is bad.

But I have long disagreed with this idea.

For years, I have been trying to articulate that the opposite is true. Growth is not only good, but it is essential to human flourishing.

I wrote a letter to each of you earlier this year titled, “Grow or Die,” where I argued this must be the motto for the United States of America over the next 80 years. Economic growth is the only rational answer to our financial and technological problems:

“This leads to the multi-trillion dollar question — how do we potentially double the GDP growth of America?

There is really only one viable path in my opinion. We have to double and triple down on technology and innovation. We have to create new products and services. We have to be the leader across artificial intelligence, bitcoin, space, genome sequencing, psychedelics, and much more. If the idea is fringe and potentially disruptive today, the United States must pour immense resources into the sector.

Many things won’t work. That is perfectly fine. The venture capital model is proven for driving innovation. If the US government, and private investors, can unilaterally pursue a similar strategy of funding innovation, we may have a shot of turning this problem around. If not, the United States will continue to erode away as every great nation has done in the past.

Grow or die. That is the motto for America over the next 80 years. History tells us what happens if we fail at the mission. Hopefully we are smart enough to avoid that fate.”

In public talks at conferences I have discussed the importance of the technology industry to accelerate growth. We have to grow out of our problems or we risk being swallowed by them.

A quick Twitter search turns up tweet-after-tweet on this idea as well.

As if that wasn’t enough, I even started a company that is focused on training and employing people to put certain industries in a better position to accelerate economic growth.

This is the single most important idea of our generation in my opinion — we must grow.

There has only been one problem though…I have struggled to articulate the idea in a simple manner. Grow or die is a cute phrase, but it doesn’t fully encompass the different aspects of the issue. None of the existing movements or schools of thought fit perfectly with this problem and proposed solution.

Thankfully, this has recently changed.

A group of pseudonymous Twitter accounts have also identified the same problem and been championing growth as the solution. They appear to be much better at branding and marketing too.

Their chosen name for this movement? “e/acc” which is short for Effective Accelerationism.

In a Substack post explaining the idea, the founders of the e/acc movement write an explanation of the problem:

“It’s hard to avoid the messages: mankind is bad. There are too many of us. Our problems are too many and they are too hard to solve. 

Many people are saying the solution to these problems is to take a step backwards, that the solution is degrowth. But degrowth is a kind of surrender. Degrowth is central planning hopped up on scarcity mindset. Degrowth is a wolf in sheep’s clothing.”

Not exactly an optimistic message from the doomers amongst us. The founders go on to explain why e/acc is the counter-argument. An argument for optimism:

“At the core of e/acc is a set of conclusions about the world drawn from the physics behind life itself, and the path forward it lays out is as clear as it is compelling. All there is left to do is pitch in and help. All there is left to do is build.

In more practical terms, e/acc is about how and why we will all flourish in the world we are building right now. In a world of where we are fed a constant stream of reasons to be hopeless, e/acc is a reason to be hopeful in this very moment. That, more than anything else, is why e/acc is the nexus of so much energy, and why I hope you will be excited about it, too.”

The founders explain what e/acc is from their prospective:

“The essence of e/acc (effective accelerationism) is a belief, based in thermodynamics, that existence has certain characteristics that are most amenable to life that continuously expands. We’ll get into that soon. 

First, practically speaking, the solution to the problems facing humanity is to grow out of them. Humanity solves problems through technological advancement and growth. Contrary examples from history—where humanity has solved a problem by skulking backward—are scarce to non-existent. This is not a surprise, and is in fact a consequence of our physical reality. 

There is nothing stopping us from creating abundance for every human alive other than the will to do it. We have the most powerful information technology known to man on our side: the market. And the same technological growth that is helping out in other places is increasing the power of the market as well.”

And lastly, the founders of the e/acc movement identify concrete goals that humanity should work towards in order to grow out of our problems, create a more prosperous world, and improve the lives of billions of people:

“Strategically speaking we need to work toward several overarching civilizational goals that are all interdependent. 

* Increase the amount of energy we can harness as a species (climb the Kardashev gradient.) In the short term this almost certainly means nuclear fission.

* Increase human flourishing via pro-population growth policies and pro-economic growth policies (emergent altruism, placing economic power and agency in the hands of the meek).

* Create Artificial General Intelligence (allows supplementation of labor with capital) the single greatest force multiplier in human history. 

* Develop interplanetary and interstellar transport so that humanity can spread beyond the Earth.”

Given my previous focus on the importance of growth, and the immense disagreement with the degrowth argument, I find myself nodding in violent agreement or saying “exactly!” as I read more about the effective accelerationism movement.

The things that I have been writing, talking, and tweeting about now have a banner to fall under. There is a movement of people who agree and are working to bring this idea to fruition. As @basedbeffjezos said on Twitter recently, investors allocating dollars in venture capital have been e/acc all along:

“VCs were e/acc all along without knowing it. They are the intelligence of the capital-allocation organism, allocating $$$ towards tech/organizational units that have an expected ability to attract further capital and grow.

A monetary version of thermo dissipative adaptation.

Capital allocators are local control nodes for the greedy bottom-up self-adaptive system that is our techno-capital machine.

Capitalism is a form of intelligence.”

The problem of slow growth has been identified by critical thinkers for years. They have been screaming from the roof top on the importance of growth, innovation, and technology. Now that the idea has turned into a movement, and there is a memorable name associated with it, my expectation is that this idea will explode in popularity globally.

That may be the most important thing to inspire a generation of young people to invest their time and energy into building solutions for the hardest problems our society faces.

I’ll leave you with the wise words of the e/acc founders:

“Whether you’re building a family, a startup, a spaceship, a robot, or better energy policy, just build.

Do something hard. Do it for everyone who comes next. That’s it. Existence will take care of the rest.  Just build.”

Hope you all have a great start to your week. I’ll talk to you tomorrow.

-Pomp

Jaime Leverton is the CEO of Hut8 Mining, one of North America’s largest innovation-focused digital asset mining pioneers and high-performance computing infrastructure providers.

In this conversation, we cover their diversified approach to mining, capital allocation, geographic approach, regulation, & more.

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To investors,

There are a few graphics and visuals that I came across over the weekend that tell a scary story for the US economy. First, we know that the Federal Reserve has been hiking interest rates aggressively. Most people have heard the Fed’s increase from 0% to 5%+ is the fastest in history, but it seems even crazier when you see the comparison visually.

The United States has never seen anything like this before — the Fed has raised rates faster and further than any time in history. We had three of the four largest bank failures in history as a result. Now everyone is waiting for the supposed incoming recession.

The Fed has not received the memo though. There is guidance from multiple members of the Fed that we should expect further rate hikes through the end of the year. The claim is that inflation needs to be snuffed out, the consumer is still strong, and the labor market is tight enough to handle the increased quantitative tightening.

Some of those data points are correct — it is not the full story though.

As @Gameoftrades_ on Twitter pointed out, “households' net worth is now contracting at the deepest levels since the 2008 Financial Crisis.”

This is coinciding with retail money market funds rising at an alarming pace. Why is this important? This same development was seen before recessions related to the Dot Com bust, the Global Financial Crisis, and Covid-19.

These data points do not guarantee a recession is on the horizon, but they are definitely giving us a reason to pay close attention. In these past recessions, GDP growth has been negative, unemployment has risen, and stock prices have fallen.

The same analyst goes on to point out that “markets tend to decline considerably when the unemployment rate rises rapidly.”

As you can see in this graphic, we had a drawdown in stock prices last year, yet the unemployment rate has remained stubbornly low. In recent months, we have seen a small creep up from 3.4% to 3.6% — that is not remotely close to past situations where the unemployment rate went up hundreds of basis points during market declines.

Maybe we should be worried that unemployment is going to accelerate though? WisdomTree’s Jeff Weniger made the point on Friday that “the Fed's Senior Loan Officer Survey is a leading indicator of what happens next. Credit tightens, labor markets weaken.”

Again, if these data points followed the historical trend then we are in for a lot of pain in the coming months.

No one knows what is going to happen in the future. The Fed doesn’t know. Investors don’t know. And talking heads in the media don’t know either. This is why you can see bulls and bears wagering capital in the market to express their view of the future.

With QQQ up 38% to start the year, and the SPY up 15% over the same timeframe, it is fairly clear that there are more buyers than sellers in the equities market through the first half of 2023. Add in the fact that bitcoin is up more than 80% from January to the first week of July and there is a compelling story that investors are plowing capital back into risk assets.

I chalk this up to the classic reminder — don’t listen to what people are saying, just watch what they do. You can find people across finance and tech that are convinced the bad times are just around the corner. Investors in equities and bitcoin are making a very different bet. And the Fed? They are playing chicken with a recession.

Narratives are cute, but they don’t pay the bills. The skin-in-the-game is where you want to keep your eye. Everything else is just noise. Markets are confusing and complex enough. If I had to boil down the only thing you needed to know in investing over the last 15 years, and still the single most important thing to know today, it would be “don’t fight the Fed.”

Hope you all have a great day. I’ll talk to each of you tomorrow.

-Pomp

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Javier Ramírez Lugo is the founder of Cuota.

He has had an incredible experience doing sales at Zenefits, Rippling, and WeWork. He is one of the most experienced and insightful people I have ever talked to about sales, and I always learn something every time we speak. This conversation breaks down how you as a founder or a salesperson can get better, how you can drive revenue, processes, hiring, firing, how to manage, and other hacks & tricks.

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To investors,

I hosted a conference on bitcoin mining yesterday. Speakers included CEOs and leaders of the most successful mining companies in the industry. (view recording here)

The conversations were packed with insights and I learned a lot. Below you will find my notes on each conversation, along with takeaways on bitcoin mining, regulation, power grids, hash rate, and where the industry is going over the coming 2-3 years.

Bitcoin mining is a core component of the bitcoin industry — I hope this event and these notes are helpful as you learn more about the infrastructure behind the digital currency.

Speaker #1 - Daniel Roberts, Co-Founder & Co-CEO of Iris Energy (website)

* Iris Energy has used 100% renewable energy to mine bitcoin since day one, and they’ve only entered markets where the introduction of their load solves energy market problems. 

* The Fourth Industrial Revolution, which we’re already in, creates an exponential demand for energy-intensive computing power. The largest chokepoint is building enough infrastructure in a socially-acceptable manner to deliver services into the digital and exponential world that has begun to take off. 

* When I asked Daniel to explain how much they consider regulation as part of their site selection process, Daniel responded with their philosophy, “We just try to step back, and eventually, the truth wins. If you fundamentally are delivering good services, you're rehiring workers in local communities, and you're genuinely delivering benefits into an energy market, then just deal with the noise, block it out, address the fundamentals, educate people, and do the right thing.” 

Speaker #2 - Jaime Leverton, CEO of Hut8 (website)

* Hut8 follows a more diversified strategy than many of the bitcoin miners that only focus on mining bitcoin. Why? Hut8 was one of the first bitcoin miners to go public in 2018, and they had a very difficult time during that bear market. When they brought Jaime in as CEO in 2020, they did so because they wanted someone with a background in traditional compute that could diversify the business in order to be better positioned for a bear market. They did this by purchasing a high-performance computing business and building out fiat-based revenue streams aimed at dampening the bitcoin mining-related volatility outside of the company’s control. 

* There are massive differences in the approach required for a bitcoin mining operation and a traditional data center. Traditional data centers require a stable base load running 24/7 with things like dual power feeds, high security, and multiple generators to ensure no downtime. Bitcoin mines, on the other hand, have a flexible workload with no customer data being protected, so they are much more straightforward. A traditional bitcoin mine costs $300,000 to $800,000 per megawatt, while a traditional data center could be anywhere between $8 million and $13 million per megawatt. 

* This most recent bear market has been particularly challenging for bitcoin miners. The energy crisis, combined with a low bitcoin price, and a constantly rising global hash rate created a sort of perfect storm for bitcoin miners. Because Hut8 shored up its balance sheet during the bull market, they’ve been able to take advantage of good opportunities during the bear market. 

* Jaime thinks that as an industry one of the areas that needs the most focus is education and breaking down a lot of the misunderstanding that surrounds bitcoin mining. This will drive more conversations that lead to thoughtful regulation and allow bitcoin miners to partner with grids and communities in a way that benefits all parties. 

* After spending 20+ years in the traditional technology world, Jaime has been most surprised by how supportive and collaborative the entire community is. Unlike many of the large public companies she previously worked at, she feels that all of the companies in the bitcoin mining space know each other and are broadly trying to do what’s in the best interest of the industry. 

Speaker #3 - Harry Sudock, Chief Strategy Officer of GRIID (website)

* The GRIID team believes that money and energy are foundational infrastructure layers to a functioning society and a functioning economy, which is why they decide to focus their company on “infrastructure” rather than only “bitcoin.” 

* Bitcoin mining is still not very big in the context of our current power systems. A bitcoin mining operation will consume somewhere between 25 to 500 megawatts, while the large-scale providers of electricity in the US are generating in the 30,000 to 50,000-megawatt range. Harry currently sees bitcoin revenue streams as being a linchpin that may allow a project to get greenlit, but he thinks we’re still quite a ways out from bitcoin having a large influence on how major grids are structured. 

* Harry believes that bitcoin miner revenue today is a small fraction of what it’ll eventually become in the future. Why? Because he thinks people don’t have a clear appreciation yet for how quickly the compounding clock starts on the high-value, low-cost, high-flexibility electricity contracts we see in the bitcoin mining industry and the transformative role these types of business models can play in larger systems. 

* A power plant combined with a bitcoin mine creates abundance across three vectors:

* 1) Utilization goes way up - The monetized hours goes above 97% 

* 2) The cost to operate goes significantly down - The unit economics of each megawatt hour improves drastically because you’re able to run the plant much cleaner since there is no longer a need for maintenance and spinning up and down based on demand. 

* 3) Terminal value increases - Every additional useful life year you tack on to the back end of an asset's useful life has free cash flow associated with it and a multiple that gets applied to it. 

Speaker #4 - Jason Les, CEO of RIOT (website)

* Jason believes hash rate will only continue to grow over the coming years. Hash rate from China has come back online or been relocated. He does not believe China has zero hash rate today. The economic incentive is too strong.

* Public miners have access to US capital markets which has been a large driver in the increase in hash rate. There are investment bankers who cater specifically to bitcoin miners and RIOT has found it easy to get equity capital since they have a highly liquid stock.

* The general growth of bitcoin has driven more awareness, which leads to entrepreneurs around the world looking for cheap energy to convert into bitcoin. 

* The United States could capture more than 50% of hash rate in the future. Jason does not believe this would be a problem because if the US ever became hostile, similar to what China did, the hash rate would pick up and move elsewhere.

* RIOT’s main goal is to mine as much bitcoin as possible, at the lowest cost possible. They believe it is essential to have efficient machines and low cost power to successfully achieve this goal. They are not focused on any other high performance computational tasks. Bitcoin only. They have approximately 3-4% of global hash rate and are likely the largest miner in the world.

* RIOT has pursued a vertically integrated strategy – they want to own as much of their supply chain as possible, including an electrical manufacturing company.

* RIOT believes consuming power is not a bad thing. They see more energy consumption as a clear signal of human flourishing. A lot of energy is wasted throughout the world and bitcoin mining, which helps to stabilize electricity grids, is a net positive. You can think of bitcoin mining as an energy battery — it consumes power when there is surplus and delivers power back to the grid when there is an energy deficit. 

* Recent regulatory situation does not directly affect the RIOT business, but indirectly it has made bank relationships tougher. There are also negative impacts on the public policy front due to the recent regulatory crackdown.

Speaker #5 - Matt Lohstroh, co-founder of Giga Energy (website)

* Giga monetizes wasted energy in the oil field by capturing stranded gas to power energy-intensive computing. Giga also sells high-quality bitcoin mining infrastructure such as containers, generators, ASICs, and electrical equipment.

* Bitcoin miners who build on-grid have a long lead time and big capital expense. Giga tries to shorten the time frame and reduce the capital required by building within 50 feet of the oil well, using smaller infrastructure, and being off-grid.

* Capturing gas flare is reducing CO2 emissions. It is incredibly bad for humans to live next to these gas flares, so Giga is improving the lives of these individuals and creating a better environment through their work.

* Most power producers that Giga works with try to hold the bitcoin after it has been mined, but the economics of mining force them to sell when price is drawing down.

* Matt believes most people miss how important the economics of equipment can be in mining. He says that you make your money “on the buy.” It is essential to be disciplined when deciding when to allocate capital to this hardware. Giga works hard to “future-proof” their hardware as much as possible, but this is a moving target.

* Giga sells their hardware and mining equipment to everyone from one-off buyers to large public companies. The diversity of customers speaks to the various applications for bitcoin mining and the various economic benefits that can be delivered to power producers.

* Matt predicts there will be a lot of consolidation in the bitcoin mining space over the coming years. The economics of the industry, combined with the macro environment, lends itself to efficiency and executives understand they could be stronger together. He does not see the cyclical nature of bitcoin mining changing any time soon.

Speaker #6 - Fred Thiel, CEO of Marathon Digital Holdings (website)

* Marathon Digital Holdings is one of the largest, most energy efficient, and most technologically advanced Bitcoin mining companies, as well as one of the largest holders of Bitcoin among publicly traded companies in North America.

* Marathon believes strongly in a vertically integrated technology stack. Just as Apple owns everything from the silicon in their iPhone to the distribution channels, Marathon owns everything from their mining pool to their custom firmware and operating system.

* Fred believes it is essential that US manufacturers exist for bitcoin mining hardware. Bitmain makes great products, but they have nearly 70% market share. Marathon is actively trying to help the industry diversify on the manufacturing front.

* Marathon is actively looking for geographic diversification. They have large sites in Texas, just as many others do, but the company also has sites in North Dakota and the UAE. The UAE site was built via a partnership with a sovereign wealth fund that helps them ensure stability in infrastructure, power prices, and other inputs. After the UAE site, Marathon is now receiving inbound interest from other Middle Eastern countries.

* Fred sees nuclear power as a viable option for power generation on bitcoin mining sites. It is hard to see this happening in North America due to the public narrative and regulation, but using small nuclear reactors are a great option elsewhere. These small nuclear reactors solve a key problem in energy infrastructure — we lack good coverage of transmission lines.

* Marathon is looking at landfill sites where they can take methane gas waste and turn it into bitcoin. This is similar to Giga’s approach to gas flare capture, but it comes from a different source in the landfill site.

* There are projects being built from scratch specific to bitcoin mining. This type of “behind-the-meter” approach allows for customization that increases efficiency and low cost production of bitcoin. Think of a renewable site that is built from the ground-up specific for bitcoin mining.

* One of Marathon’s big advantages is they have been investing in automation technology so they can reduce the number of humans that need to be on-site. The less people on site, the lower the cost of producing bitcoin. Marathon is one of the largest bitcoin miners in the world but they have less than 50 employees at the business. Reducing SG&A is a key component of their strategy.

As I mentioned at the start of this letter, I learned so much about bitcoin mining yesterday. The speakers did a fantastic job describing their businesses, their differentiated approaches, and their outlooks on the industry for the coming years.

Bitcoin mining will continue to become a bigger topic in public market investing, along with a continued essential part of bitcoin’s rise to global adoption. The digital currency is built on the strongest computer network in the world and miners are a key piece of that.

I want to thank the sponsors of the conference — Marathon Digital Holdings and Iris Energy. You can read more about each of them below. Hopefully you found today’s notes helpful. I will talk to everyone tomorrow.

-Pomp

Thank you to our sponsors for the bitcoin mining conference…

🚨 Iris Energy 🚨Iris Energy is the largest Nasdaq-listed Bitcoin miner who has used 100% renewable energy since inception. Iris Energy targets markets with low-cost, excess renewable energy, builds and operates its own proprietary data centers, and is led by a seasoned management team with a track record of success across infrastructure, renewables, and digital assets. If you want to learn more, click here.

🚨 Marathon Digital Holdings 🚨Marathon Digital Holdings is one of the largest, most energy-efficient, and most technologically advanced Bitcoin mining companies. Marathon is also one of the largest holders of Bitcoin among publicly traded companies in North America. They differentiate by investing in the most advanced technologies and leveraging innovative technologies to convert energy into economic value while helping keep Bitcoin’s ledger up to date and secure, one block at a time. If you’re interested in collaborating, funding, mentorship, or strategic partnerships, click here to contact the Marathon team.

Watch the full recording of the bitcoin mining conference

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To investors,

The $20.7 trillion commercial real estate market is in big trouble. A few weeks ago Treasury Secretary Janet Yellen publicly stated “I do think that there will be issues with respect to commercial real estate.” Famed entrepreneur Elon Musk tweeted “Commercial real estate is melting down fast. Home values next.”

Yellen and Musk don’t agree on much when it comes to economics, so it is important to pay attention when they are both sounding the alarm on the same issue.

The first thing to understand is that demand for large commercial real estate buildings, such as office towers in big cities, has been rapidly declining as work from home trends turn into the market standard. According to a recent National Bureau of Economic Research Working Paper, attendance in the 10 largest business districts in the US is still below 50% of its pre-COVID level, as white-collar employees spend an estimated 28% of their workdays at home.

The percentage of full days working from home was ~5% before the pandemic, so the recent trend has caused a more than 5x increase in the baseline.

The national average vacancy rate is 19%, including Los Angeles at 26%, NYC at 23%, and even Miami—which has been a winner of the pandemic migration trend—at 16% vacancies.

These are staggering numbers. As demand has dropped, equity and debt investors have been trying to identify the current value of these properties. We have seen a building in San Francisco, which was previously valued at ~$300 million, put on the market for an 80% discount.

This was followed by reports last week that two office buildings in Midtown Manhattan sold for almost 50% less than asking price.

As you can see in this data from the IMF, commercial real estate prices rarely go down, so it can quickly become catastrophic if the market does not correct and stabilize.

The good news is that the blended delinquency rate on all commercial real estate debt is still relatively low compared to the historical trend.

It is true that the overall US CMBS delinquency rate jumped to 3.62% up 53 basis points for the month of May, but the all-time high on this basis was 10.34% registered in July 2012. The COVID-19 high was 10.32% in June 2020.

The problem in the debt market is not what has happened already. It is the tsunami of debt refinancing that will need to happen over the second half of 2023. Megan Henney writes:

“About $1.5 trillion in commercial mortgage debt is due by the end of 2025, but steeper borrowing costs, coupled with tighter credit conditions and a decline in property values brought on by remote work, have increased the risk of default. 

Fitch Ratings already estimated that 35% — or $5.8 billion — of pooled securities commercial mortgages coming due between April and December 2023 will not be able to be refinanced.”

This is problematic because interest rates have more than doubled in the last two years.

To make matters more complicated, 67% of commercial real estate loans are issued by small and mid-sized banks. These are the same banks that have felt the brunt of the recent banking crisis which was induced by the Fed’s 500 basis point hike in interest rates at the fastest pace in history.

Although most banks did not fall victim to the market in the way that SVB, Signature, and Silvergate did, there is still immense pressure on these institutions in the current environment. Add in the idea of the Fed conducting further rate hikes later this year and the doomsday scenario becomes clearer.

As John Maynard Keynes observed, when you owe your banker $1,000, you are at his mercy, but when you owe him $1 million, “the position is reversed.”

But there is a second-order effect that we need to call out. There is a very real chance that municipal government finances will take a hit as well. As Dror Poleg explains for The Atlantic:

“Municipal governments have even more to worry about. Property taxes underpin city budgets. In New York City, such taxes generate approximately 40 percent of revenue. Commercial property—mostly offices—contributes about 40 percent of these taxes, or 16 percent of the city’s total tax revenue.

NYU professor named Arpit Gupta and others estimate a 6.5 percent “fiscal hole” in the city’s budget due to declining office and retail valuations. Such a hole “would need to be plugged by raising tax rates or cutting government spending.”

The potential solutions to this problem are few and far between. One idea is that private equity investors will step in to gobble up commercial real estate assets. This is probably true, but it will only happen at significantly depressed prices. There is significant economic pain between where we are today and where prices would have to trade in order to get transaction volume growing again.

Another idea is that these commercial buildings could be converted into residential buildings. Theoretically this makes sense, yet there are a number of complexities that developers will have to navigate to make it a reality. Zoning and permitting is the obvious one. There are other more technical issues like plumbing infrastructure in the building having a low probability of being adapted to the residential use case, so there would be significant construction needed to retrofit these assets.

There are also a number of people who believe the commercial real estate crisis could be averted. Marco Santarelli uses three examples of risk mitigators in the market:

* Diversification of Commercial Real Estate: While the office sector is facing significant challenges, other segments of commercial real estate, such as industrial, retail, and hotels, are performing relatively well. The diversity of assets in the commercial real estate market provides a buffer against potential risks, as the struggles in one segment can be offset by the strength of others.

* Manageable Refinancing: Despite the refinancing cliff, a considerable portion of commercial real estate debt appears capable of being refinanced without major issues. Banks have maintained strict lending standards, and most debt in the market generates sufficient income to meet these standards. This indicates a certain level of stability and preparedness in the industry.

* Strong Credit Performance: Banks have reported excellent credit performance in commercial real estate lending, with low delinquency rates and minimal losses. This suggests that lenders have been cautious in their underwriting practices and have managed risk effectively. The overall health of the commercial real estate market's credit performance indicates a level of resilience in the face of potential challenges.

It is unclear how bad the commercial real estate market will get. There is significant risk here, not only for investors but also local governments, so I anticipate this topic will gain coverage through the end of the year. The Federal Reserve and the Treasury are supposedly watching it closely. Various banks will have to navigate the obstacles ahead or risk going under.

And none of this analysis has even touched on the knock-on effect of the commercial real estate stress to residential real estate. If we enter a recession in H2 2023, it may be the most telegraphed recession of all time. That doesn’t mean that the economic pain and destruction will be avoided though.

Hope you all have a great start to your week. I’ll talk to you all tomorrow.

-Pomp

Get Better Crypto Data: Do you want faster, easier crypto data? Sign up for Velo Data, a new product that we have been working on to solve this problem: velowaitlist.com 🚨

Eric Balchunas & James Seyffart are two ETF experts at Bloomberg.

In this conversation, we break down BlackRock's announcement that they are filing for a publicly traded bitcoin trust, that essentially will give investors all of the benefits and exposure to a spot bitcoin ETF. Eric & James explain what the difference between this fund vs Grayscale's fund, potential market implications, how the regulatory environment could change, and predictions on if it will get approved & how much capital will flow into this fund if approved.

Listen on iTunes: Click here

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Bloomberg’s ETF experts break down BlackRock’s Bitcoin Filing

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

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To investors,

The Federal Reserve has been hiking interest rates aggressively for the last year and a half. Although multiple banks have failed and asset prices are down materially, the Fed has remained steadfast in their pursuit of tighter financial conditions.

A key reason the Fed has not wavered is the labor market. We currently have an unemployment rate of 3.7%, which is low compared to the historical averages. The unemployment rate in the United States averaged 5.72% from 1948 until 2023, reaching a high of 14.70% in April 2020 and a record low of 2.50% in May 1953.

South Dakota has the lowest unemployment rate at 1.9% and Nevada has the highest unemployment rate at 5.4%.

According to the Bureau of Labor Statistics, there are 10.1 million open jobs in America and 6.1 million unemployed people, which means there is ~ 1.66 open jobs for each person looking for work. Although unemployment is low, there are still enough open jobs to employ every person who wants a job in America.

Another important data point to evaluate the health of the labor market is the average hourly earnings for all employees on private nonfarm payrolls. The average is $33.44 today, which is significantly higher than the $7.25 federal minimum wage. Given that this is an average, the outliers in the data obviously skew the metric higher.

Industry Trends

If we dig deeper into the labor market, we can evaluate which industries are adding or losing jobs. One of the most surprising data points is that no industry saw a net loss in jobs in the past 12 months. The industry that saw the lowest growth is “Utilities,” which saw a net gain of 3,400 jobs (0.6%). The industry employs a total of 555,900 people.

In the past 12 months, the “Private education and health services” industry gained the most new net jobs. The industry now employs a total of 25,254,000 people, a gain of 1,073,000 (4.4%) in the past 12 months. 

Another point to call out here is the resurgence of leisure and hospitality. This sector got decimated during the pandemic, but it has recovered nicely. There was an addition of just below 900,000 jobs in the last 12 months and more than 16.5 million people work in the sector currently.

Remote Work

According to Forbes’ recent study, 12.7% of full-time employees work from home in 2023 and 28.2% of employees have adapted to a hybrid work model. The same report shows that approximately 16% of companies are fully remote, which means they are operating without any physical office.

Tech Layoffs

If we drill into the tech layoffs, we can get a good sense for how certain industries are navigating the economic pain.

Each layoff tracker has different data. They each agree directionally though. According to Layoffs.fyi, 785 tech companies have laid off 206,136 employees so far in 2023, which has already surpassed 2022’s 164,709 layoffs.

There were more than 100,000 individual tech employees that were laid off in January of this year, according to TrueUp. We have seen three other months in 2023 with at least 50,000 people laid off. The current month of June appears to be on track for the lowest number of tech employees laid off in almost 9 months.

It appears that the peak number of tech layoffs occurred in January, with 349 being reported that month, followed by a steady decline since. The month of June is not over so it is hard to predict if the trend will hold, but the significant decrease in recent months is encouraging.

We are not out of the woods yet. The slowdown in layoffs across the tech sector will be important to watch. If we enter a deeper recession, it would not be surprising to see more layoffs occur. The tech industry has been a big beneficiary of the loose monetary policy era of the last decade — what the Fed gives, the Fed can take away.

Overall, the labor market remains strong compared to historical trends. This strength is flashing a green light to the Fed to continue to keep financial conditions tight. It does not necessarily mean that the Fed will hike interest rates further, but we can’t discount that option either. We will find out more about the Fed’s plans later today — if they hike rates once more, then we have to believe that a recession is almost guaranteed.

After talking to hundreds of people looking for a new job in the last few months, one of our companies has been diligently working to place these individuals in new opportunities. Thankfully, we have helped thousands of people find a job in the last two years, so the experience is paying off at the moment.

We are hosting a free webinar on Monday June 19th at 6pm EST to teach people how to best position themselves to get a new job. We will focus on the bitcoin industry, but the lessons can be applied to any industry you are interested in. You can RSVP here.

Hope you all have a great day. I’ll talk to everyone tomorrow.

-Pomp

The US Economy Just Got Stronger

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

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To investors,

Today is a guest post from Will Clemente, co-founder of Reflexivity Research, on the current state of crypto market structure. You can subscribe to Reflexivity’s research by clicking here.

After a major first quarter we have seen a continued decline in trading volume across the board for major digital assets across all major centralized exchanges. Throughout the month of May, aggregated trading volumes declined from $23bn to $9bn to their lowest levels since 2020. This represents continued apathy and decline in speculative interest in crypto markets.

Looking at the makeup of overall trading volume by exchange, Binance’s market share has fallen to 56% despite a slight rebound over the last week. This is a 15% percent decline from its peak at the start of 2023. The biggest beneficiaries of this dynamic fall under the “other” category, which includes exchanges such as Huobi, Kraken, and Kucoin.

Offshore exchanges remain the dominant venues across the entire crypto landscape, making up a whopping 86% of all trading volume; this dynamic is likely to only accelerate with regulatory uncertainty in the United States. Even Coinbase, which historically has been recognized as the publicly traded highly regulatory compliant alternative option to other venues in crypto, announced the launch of its own offshore derivatives venue called Coinbase international exchange.

Harsh regulatory efforts and posturing from government officials in the US with the intention of establishing control over the industry are only going to have the opposite effect and drive talent/capital/innovation off-shore and on-chain; ultimately giving the government less control than what it would have if it encouraged activity to take place in the US; allowing it to at least retain some degree of oversight. For the foreseeable future it’s unclear why the dominance of trading volume in offshore venues won’t continue.

While USD denominated market depth has remained relatively stable, liquidity for both Bitcoin and Ethereum measured by coin denominated 2% market depth (coin denominated depth of bids and asks within 2% of current trading price) has remains roughly flat on the month; again, illustrating a period of apathy for the crypto market. This downtrend in liquidity that we’ve been tracking for the last few months was reflected in an announcement from Jane Street and Jump, in a statement from the two market makers, that they would be scaling back their crypto operations in the US.

Jane Street went a step further stating that the firm would be scaling back its crypto operations globally due to regulatory uncertainty that has made it difficult for the firm to operate in a compliant fashion. This decline in liquidity makes it more difficult more entities operating in digital asset markets to execute larger trades without incurring slippage (price impact). In other words, declining liquidity in the market translates to higher volatility. 

In terms of trading pairs, TUSD has taken up an increasing amount of activity on centralized exchange, now 36% percent of all Bitcoin trading volume while Binance and Paxos’ BUSD pair has declined from 32% to 5% amidst regulatory uncertainty and the removal of zero-fee trading.

Stablecoins remain the dominant pair of choice for centralized exchange market participants, with stablecoins making up 82% percent of overall trading volumes, relative to fiat, for Bitcoin specifically and 76% percent of centralized exchange crypto trading volumes overall.

Of these stablecoins, Tether remains king with a whopping 76% of overall stablecoin market share on centralized exchanges.

That is it for today’s analysis. Hope everyone has a great day.

This was a guest post from Will Clemente, co-founder of Reflexivity Research, on the current state of crypto market structure. You can subscribe to Reflexivity’s research by clicking here.

-Pomp

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe

To investors,

Artificial intelligence is now being talked about by the media as much as bitcoin was discussed during the all-time high run of 2021. This is noteworthy because the media’s coverage will only accelerate adoption, while also helping to solicit more investment dollars to the industry.

As Bay Area Times explained, coverage of new product releases like ChatGPT have not slowed down months after the initial take-off.

These hype cycles around new technologies, whether AI or bitcoin, always get a bad name from critics. But the hype cycles are essential in seeing the technology flourish. You need excitement to get people to leave their old jobs and come build products or companies in the new industry. You need excitement for investors to part with their hard-earned money and invest in the new industry. And you need excitement to break through the noise and capture the attention of potential new users.

Think of the hype cycle as an industry-funded marketing campaign. The more people who get excited about a new technology, the more entrepreneurs, capital, and users will show up to help make dreams become reality.

Now it should go without saying, but unsubstantiated hype can be a negative thing. There has to be substance underlying the excitement. Historically, these hype cycles have been related to some major breakthrough. Smart people are getting excited about something new — the timing may be off, but the breakthroughs usually end up creating something valuable.

The internet bubble birthed the internet. The mobile bubble birthed the iPhone. The crypto bubble birthed bitcoin. And my guess is that the artificial intelligence bubble is going to birth a lot of compelling products as well.

Remember, humans are bad at predicting the future. People get ahead of themselves in these hype cycles. As Bill Gates famously said, “most people overestimate what they can do in one year and underestimate what they can do in ten years.” If you look back through history, the hype ended up being real — it just happened on a much longer timeframe than initially thought.

This brings me to the current hype cycle of AI. There is plenty of craziness that can already be identified. For example, Nvidia has the highest forward P/E of semiconductor stocks in the U.S.

As this Twitter user pointed out, now would be a good time to remember the famous Scott McNealy (former CEO of Sun Microsystems) statement to Bloomberg just after the dot-com collapse:

“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate.

Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”

So what has happened in the past to stocks trading at more than 10x sales? It hasn’t gone very well. According to GMO, stocks trading in this range have suffered against the S&P 500 index.

The hype cycle is a necessary part of building out new technologies and industries. The capital shows up, but you need to be very cautious of how you choose to participate. Things will become overvalued incredibly quickly — don’t be the person buying at the top of a market.

I have no clue if the AI bubble is going to peak this week, next week, next month, or next year. Timing markets is a fools game. But I do think it is important to identify bubbles as they form. People will make a lot of money through the full hype cycle, and thankfully real products and services will be built, but you have to be careful that you don’t follow the herd into a losing proposition.

Contrary to popular belief, we need more hype cycles. That would be a sign that innovation and new technologies are coming to market. It also means that billions of dollars will trade hands, which will print massive winners and losers. Frankly, this is a story as old as time. Learn from history and try to avoid some of the mistakes that others already made.

Hope you all have a great day. I’ll talk to everyone tomorrow.

-Pomp

🚨 I am hosting a private, invite-only conference for 500+ founders later this year 🚨

It is completely free to founders. I want to invite a few people outside my immediate circle. If you're a founder, apply here & our team will be in touch if accepted:

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe

To investors,

Today, we are publicly announcing the Bay Area Times — a new product that uses data and visuals to analyze what is happening across business, finance, and technology on a daily basis.

The product has been in beta testing with 20,000+ readers for the last few weeks and the feedback has been phenomenal. Now we are ready for prime time, so you can subscribe here completely free.

Why are we building Bay Area Times? Simple — it is the news product that we wish we received every morning.

Narratives dominate the headlines on other platforms. Writers spend paragraphs regurgitating the same points over and over again. These legacy products take too long to read, they bury the data deep in paragraphs that are too long, and it is hard to recall most of the information that you read.

But what if you just want cold, hard facts? What if you want to see the data visualized in a single chart? What if you don’t have 10 minutes to read each morning?

This is exactly what Bay Area Times was built for.

Each morning an email goes out with approximately five big stories of the day. You get a visual (ex: chart, graph, or infographic) to clearly communicate what is happening, along with a few bullet points that summarize the rest of the data or facts.

No hidden agenda. No twisted facts. No biased narrative.

If you sign up for Bay Area Times, you will get visuals, data, and facts about the top stories of the day that can be read in less than 5 minutes. Everything is completely free.

Subscribe here: https://www.bayareatimes.com/

I am very excited about this launch, so please send your feedback after you have received a few editions of the newsletter. Tell us what you like or don’t like, including where we can improve. Your feedback is invaluable when building something like this.

Lastly, if you are interested in advertising to 20,000+ people from some of the top companies in the world, apply as an advertiser here: Click here

Launching new things is always fun. This one feels like it could be very valuable to people. Hope you enjoy it. Have a great start to your week. I’ll talk to everyone tomorrow.

-Pomp

🚨 I am hosting a private, invite-only conference for 500+ founders later this year 🚨

It is completely free to founders. I want to invite a few people outside my immediate circle. If you're a founder, apply here & our team will be in touch if accepted:

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe

To investors,

The concept of an insurance policy is straightforward. A contract is created between a policyholder and an insurer. The contract states that the insurer is legally required to pay for losses outlined by the insurance policy when they occur. 

In exchange for having their losses covered, the policyholder must agree to pay a premium to the insurer over time. Policyholders pay for the right to insurance and only use it when necessary.

These insurance policies can cover many different types of assets or risks. There is fire insurance, flood insurance, home insurance, medical insurance, and many more. The largest insurance companies will offer policies for any and all of these use cases.

But maybe the largest insurance company in the world does not actually look like an insurance company at all. 

This was the idea proposed to me by two investors yesterday at breakfast. Their point was that bitcoin could be the largest insurance company in the world.

Let me explain.

Some people are buying bitcoin as insurance against currency debasement. Others are buying bitcoin as sovereign default insurance. Some are buying because they want insurance against undisciplined monetary and fiscal policy. Some are buying for insurance against seizure. And others are buying bitcoin for insurance against economic censorship. 

Just as there are different insurance policies that serve different purposes, Bitcoin is different things to different people. And just as most policyholders don’t want to ever have to use their insurance, most bitcoiners realize that bitcoin’s success will likely come on the heels of major issues in the legacy financial world.

But how exactly is bitcoin insurance? First, a bitcoin holder pays a one-time premium (cost to purchase their bitcoin), rather than an on-going premium. If the bitcoin holder bought early, the premium is cheap. If they wait to buy much later, the premium will likely be much more expensive.

Second, if bitcoin is going to be the asset that investors seek safety in during times of economic uncertainty or chaos, then there is an inverse relationship to catastrophe in the legacy financial system. Bad things happen in the legacy system, bitcoin gains in value. We saw this when high inflation hit the United States. We saw this in countries where seizure of assets became prevalent. And most recently, we saw this when banks in the United States were failing and bitcoin gained in value.

When confidence in the legacy system is rocked, people want an alternative that is outside the system. There are very few options these days, especially given how digital and hyper-connected everything has become. Bitcoin serves as a “payout” when bad things happen in the old system. The decentralized, global nature of the asset increases the resilience and accessibility for billions of people.

Another point worth mentioning — rather than have to trust that an insurance company will honor an insurance policy in times of crisis, bitcoin provides a programmatic digital product. You don’t have to submit your claim. The insurance company can’t make a unilateral decision whether to uphold the policy or not. Bitcoin is not owned or controlled by any one person or organization. You don’t have to trust anyone. The asset and network can be audited by anyone, at any time, from anywhere in the world.

Don’t trust, verify.

This idea of bitcoin as a large insurance company is noteworthy because it opens up the possibility that open-source software could introduce a new type of insurance against events that were previously uninsured. No insurance company is going to write you a legitimate policy against high inflation. They won’t write you a policy against government seizure of your assets. The insurance companies historically have not covered hyperinflation or economic collapse.

These tail risks are too obscure and too hard to measure. They don’t fit into the insurance company model. But bitcoin was built in such a way, and has been adopted by people around the world for specific purposes, that now make it clear that bitcoin is serving as an insurance against catastrophe.

I hope we never have to see bitcoin succeed because of outright failure in the legacy system. That would bring a level of pain that most people could not endure. We are talking double-digit unemployment for many years, people going hungry, no heat or power for families with young kids, violence becomes prevalent, etc. Just study any nation who has gone through a similar event and you will understand immediately why we should avoid those events as much as possible.

However, on the off chance that any of these economic risks occur, I think it is prudent to have some insurance. Bitcoin provides that insurance in a unique way. Given that you also don’t have to pay a persistent premium, but rather only a one-time premium to acquire the asset, the risk-reward seems heavily skewed in favor of the bitcoin holder.

If this insurance thesis is correct, you also don’t have to hold a large amount of bitcoin for it to work. A mere 1-3% allocation in a portfolio should be highly effective at countering the negative side effects of these economic risks.

Bitcoin has become a $500+ billion insurance product that is used by hundreds of millions of people around the world. There was no CEO, marketing team, board of directors, or insurance sales departments. It is a great product that serves a real pain point, which benefits from word-of-mouth. We have learned over the last few decades that those are the hallmarks of technology products that eventually dominate markets for decades.

Let’s hope the insurance expires worthless, but I wouldn’t be willing to bet my financial future on it.

Hope you all have a great weekend. I’ll talk to everyone on Monday.

-Pomp

🚨 I am hosting a private, invite-only conference for 500+ founders later this year 🚨

It is completely free to founders. I want to invite a few people outside my immediate circle. If you're a founder, apply here & our team will be in touch if accepted:

You are receiving The Pomp Letter because you either signed up or you attended one of the events that I spoke at. Feel free to unsubscribe if you aren’t finding this valuable. Nothing in this email is intended to serve as financial advice. Do your own research.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit pomp.substack.com/subscribe