I came across @Goodalexander on Twitter about a year ago. I still have no idea what he does for a living, but every now and then he drops something—could be a long thread, a short post, even a video—that makes me stop and think.
I don’t always agree with his take, but that’s kind of the point. He challenges my assumptions in a way that’s rare on social media.
Last week, he posted a long tweet that I couldn’t help but annotate (read: butcher) with my own running commentary. Worth checking out—even if just to see how badly I mangled the original.
The reason crypto is still clearly contrarian is the equity risk premium
Basic finance (Modigiliani/ Miller) established that debt and equity are substitutes for financing a business and should have the same cost (WACC)
Equity and debt can both be used to fund a company, but they’re not the same—and they definitely don’t cost the same. Even under Modigliani-Miller (with no taxes), debt is cheaper than equity. That’s why companies like to use it.
But here’s the catch: the more debt you take on, the riskier the company becomes. And when risk goes up, so does the cost of equity.
So while debt might look like a bargain, the total cost of capital stays flat. You can’t magically boost a company’s value just by shuffling around how it’s financed—at least not if you’re ignoring taxes.
The reason many meme stocks became such violent short squeezes is because investors were betting on this. short equity and long debt in Dino companies. Like hertz. AMC. GameStop. Or big HY issuers like Tesla Tesla issued debt at junk yields so the idea was you own the hy debt bc the company could issue overvalued stock to pay it down Equity is jr in the capital structure to debt. This is why bond investors are fine with MSTR.
If we accept that narrative, more than fundamentals, is what moves markets these days, then buying debt from companies like Tesla or MicroStrategy actually starts to make a lot of sense. Especially if you’re a bond investor benchmarked against an index.
You’re getting paid a pretty healthy coupon, and if things go sideways, there’s still an equity cushion in front of you. The stock has to take the first hit before your principal’s at risk.
Meanwhile, owning the equity? That feels borderline delusional. The CEOs themselves seem to be doing everything they can to dilute or devalue their own shares.
And yet… the stocks keep ripping.
Because narrative still wins—at least for now.
Micorstrategy is a great example because the narrative is that it is a leverage play on Bitcoin, whereas reality is the opposite: buying MSTR means buying Bitcoin at a premium, therefore negative leverage. Saylor’s actions devalue the stock while his words pump it…as long as he’s able to hide the trick from his audience.
The convertible buyers are acting rationally in the context of “private gains, public losses”: every year, they collect their bonus by outperforming the benchmark and when the music stops, investors in those funds are left to suck it up. It might be rational even for non-PMs, lads investing their own money, considering how overvalued those stocks are.
It’s not that they see saylor as a trustworthy guy they see him as someone who is willing to soak common stock holders and will be able to do so as long as his equity trades a ton at a high premium
As the meme economy has expanded – so too has the premium of equity to debt. Resulting in many of the current manias we are seeing to do things like issuing shares to buy btc. Things like the circle ipo are a parabola of this trend. It’s really cheap to issue equity. It’s really expensive to issue corporate debt . Even though these things should be substitutes they are not
Bc ultimately the ppl buying equity mostly cannot read whereas debt investors actually have to read prospectuses. So the macro trend here we are really seeing is mass idiocy manifesting in asset prices More on this soon.
This is great point. Despite stocks becoming riskier, they are still bought by the degenerate economy. Think about MSTR again: the stock is reverse-leverage to Bitcoin and yet if you ask investors, they buy because they think it is levereged BTC!
In normal times, short sellers would step in, help correct the mispricing, and speed up the end of the mania. Stock doesn’t go up, narrative falls apart, the hype fades.
But the GameStop saga changed that. A lot of short sellers learned the hard way that being right doesn’t always pay. You might have the fundamentals on your side and still get steamrolled.
At this point, it’s less about whether the market is rational, and more about survival. No one wants to step in front of that kind of momentum. It’s like trying to draw a charge in a pick-up basketball game: yeah, technically you’re right… but all you get is a knee to the ribs and nobody cares.
And you’re going to feel it for days.
Less discussed is the relationship between sovereign and corporate debt. The government can seize private assets to pay down its debt if it needs to. Even without expropriation it can still levy taxes – property taxes wealth taxes etc that are partial expropriation. So corporate debt should always trade at a discount to govt debt The idea that corporates wouldn’t default while the US govt would is logically absurd.
This point needs a bit of a caveat.
The absurdity is, strictly speaking, only relevant for countries that are too big to fail. The US are, as of today, the most systemic relevant country in the world. Thinking that a US default would not take down everything else is absurd.
But that’s today. Tomorrow could look different.
Take the UK. If it defaulted tomorrow, it would absolutely matter—but it wouldn’t be the end of the global economy. I mention the UK because it used to hold the top spot, before passing the torch to the U.S. Or look at Japan. It surged in the ’80s, hit a wall in the ’90s, and the rest of the world kept moving.
That’s why it’s not crazy that Microsoft has a higher credit rating than Japan—even though Japan can print its own currency and raise taxes. Ratings reflect risk, and risk is always about the future, not just fiscal mechanics.
Outside the tax / asset confiscation thing. The govt can legally print money while corporations can’t. So the U.S. credit rating downgrade sort of cements a state of profound absurdity
I have been with many institutions since the first US credit rating downgrade: no one I worked with has ever contended that US Treasuries are risk free assets. It is like buying CDS on US Treasuries: go check if the counterparty of your CDS is still there when it is triggered.
That said, I think credit rating agencies are doing their job. Has the US default probability moved from 0.001% to 0.01%? Can be. Should you change your asset allocation after this? I do not think so.
Everything in capital markets is absurdly backwards right now as a result
Stock is the most expensive it’s been relative to corporate debt. Even though stock will be issued to pay down the debt. Corporate debt is assumed higher quality than government debt. Even though corporations can’t tax or print Illiquid private assets are assumed to be higher quality than liquid ones. Even though you literally cannot sell them What people are missing is that the necessary idiocy for these conditions to arise is exactly the same idiocy that will lead to their collapse.
I emphasised the last sentence because it is a great insight.
Reading levels and test scores are off a cliff and this trend has gotten much much worse post covid. And is worsening faster due to ai. Students now completely rely on ai systems to do their work
I would list other reasons, definitely not how students use AI, as the top10 reasons on why we are in this mess.
So – essentially – what’s going to happen. Is that people won’t be smart enough to avoid socialism and asset confiscation. Even though those things don’t work. They sound good.
Shall I mention Cem Karsan for the 100th time in this blog? Do you remember Elon and his mission to cut costs in order to keep the US deficit under control? Yep, he got kicked out from the administration.
Unfortunately, we live in a World where the choices are between a populist who believes in (only) social freedom – freedom to be whoever you want to be, and marry and die in whatever way you want – and a populist who lies about freedom – strict borders, one religion, one colour, one king.
But in a populist society – corporate debt holders get hosed so the govt can keep operating. Which means the corporate debt holders hose the equity holders. And the illiquid comps that are benchmarked to equities just go to zero outright And unlike the old industrial economy – the AI talent base / base model companies can easily just leave if things get bad enough. So the tax base will collapse really fast
Or it will be Italy: the classic frog in the slowly boiling pot. Or the UK.
Slowly, and then all at once.
The ‘hosing line’ is not as straight as depicted here tho. Unless you say, from democracy to dictatorship. Trump is an unusual populist because he’s milking the same people that voted for him; he’s just fucking harder the one who didn’t.
It is not that capital will lose. It’s the turbo-charged lesson from Scott Galloway: “it’s never been harder to become a millionaire, but it’s never been easier to become a billionaire”. If you pull the right trick, you can make it. Think about this punk.
Equity holders will not get equally hosed.
Nobody wants to use blockchains. They suck and are a terrible UX. They are only better than keeping your money in the system described above. The tidal inflow into crypto will be when the system above starts to collapse. And we are very far from that bc equity is so expensive relative to debt. So first the spread reverses. Then the govt panics and does a CBDC to control capital outflows. Money flows into crypto. Coins tied to trad leverage machines will not do well. Politicians want to get their $ out first which is why it’s legal. Have a great day
My first reaction after reading that tweet? Good that I figured out how to quickly move money into Bitcoin, and not the ETF kind. The “CBDC to control capital outflows” is correct. UK and the British ISA. Italy and the tax discounts on Italian Govies. These are the carrot experiments for capital controls.
But that’s not the right conclusion.
Inflation is the most likely cure to the debt problem. I agree that productive assets, while a good inflation hedge, might be terrible when confiscation starts.
But even crypto would need a functioning society to work. They are already kidnapping crypto bros today, what do you think is going to happen when the State has no more money to pay for the police? How long would it take someone stronger than you to take your private key?
Crypto can be the solution to avoid confiscation. But to work, you need a place to go. If crypto would allow you to escape Venezuela only to land in Turkey…not sure your situation is that better, innit?
Maybe you are better off buying a gun and plenty of bullets instead of bitcoin.
What I am reading now:
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