Charts of the Month - December '21
MicroStrategy Converting Fiat to Bitcoin, ZIRP and Intrinsic Valuations, Fed Balance Sheet, Labors Share of Output, Private Capital Flows, and Size of Fiscal Relief Packages
By now everyone knows about MicroStrategy and their approach to fiat sitting on their balance sheet. If not, give this tweet thread a read. It's going to be very interesting to see what other companies follow their lead and how capital structure trends evolve over time, as they shift the traditional Debt:Equity paradigm to include BTC somewhere in the Modligiani-Miller calculus. We'll leave how to account for this shift up to the likes of Damodaran, but from an operational perspective, it's quite fascinating, so we've tried to illustrate what looks to be a siphoning of capital out of the traditional markets to both fund operations and to store value elsewhere.
Little tweaks to large numbers over long periods of time tend to have outsized consequences. Such is the plight of building a 10-year DCF. Even if you model Free Cash Flow, CAPEX, Working Capital, and Taxes perfectly over your time horizon (you won't), you can still come up with a wide range of outcomes based on your cost of capital (or terminal growth rates). An illustration of the effects of ZIRP and where Amazon may be trading if J. Powell wasn't so benevolent.
Yes, we know, nominal numbers matter and a $7 trillion+ balance sheet is big. Quite big. But hear us out. The rate of change is equally, if not more so, important than level (said differently, momentum is more important than velocity). And looking at the Fed balance sheet, yes, we started from higher levels, but the rate of change during the pandemic is still dwarfed by that of the GFC. In terms of willingness to print, it feels like we still have a long way to go.
Labor Share, defined by the BLS is, "the fraction of economic output that accrues to workers as compensation in exchange for their labor." In a recent Real Vision interview, Kiril Sokoloff sits down with Michael Wilson, CIO and Chief U.S. Equity Strategist at Morgan Stanley, and one of their topics of discussion was how capital has taken the majority of the spoils of top-line growth, and workers have suffered because of it. "I think we've had this incredible run of capital taking the majority of the spoils. We wrote about it almost three or four years ago now, how labor cost percentage of revenues was at a 50-year low after the Great Financial Crisis. And then it troughed around '13 or '14, around the same time the minimum wage discussion started. But we're still well below where we were even 15, 20 years ago. Forget about 30 years ago when you had labor unions really entrenched." Given the ever-increasing populist sentiment coupled with Janet Yellen's position as a 'banker for the people', we would expect the focus on metrics like this to intensify going forward.Deficit But the problem is much larger than the level of Interest Expense. The updated forecast on Tax Receipts minus Mandatory and Discretionary spending (the two big-budget line items before interest is paid) tells us that there's a $12.5 trillion dollar gap that needs to be funded...before we account for what we need to pay in interest.
We all know public market fund flows are basically FAAMG, TSLA, SPACs, and, apparently any IPO of 2020. But in order to understand what the industries of the future look like, and by extension, what the workforce, spending, and investment trends of the future may look like, it's always a good idea to look at what the private capital markets are doing (i.e. where are VC and Growth equity funds flowing). Also, as a side note, when is Tesla going to get included in the FAAMG nomenclature? It's about damn time this happens. May we propose FAT-MAG?
As our last Charts publication of one of, if not the most unbelievable years of modern times comes to an end, we've realized it's impossible to wrap it all up in a single chart. But the below comparison between the G20 fiscal relief packages put into context vs. the Great Financial Crisis is one that tells at least a large part of the story.