You’ve probably not heard, but we are having a bit of a problem with inflation on our hands, particularly with energy sources like natural gas. Mark Rossano from C6 Capital Holdings is an expert on all things inflation and energy related. In this episode, we talk with him about how inflation is affecting energy prices and what it means for Bitcoin miners.

Timestamps

Audio Version

Transcript

Foxley: Hello, and welcome back to the Compass Podcast. Today we're joined by Mark Rossano, CEO of C6 Capital Holdings. Mark is an expert on all things capital markets, and we talk with him about how energy prices are changing because of inflation. This podcast is presented ad-free by Compass Mining the largest marketplace for Bitcoin mining, check out compassmining.io today if you want to buy, sell, or host an ASICs. Now onto the show. Mark, thanks so much for joining us on the Compass Podcast. I'm really excited for today's discussion, even though it's not anyone's favorite topic to talk about prices rising, but is really important. And we need to see where things are going with expectations are for prices, especially for operationally expenditure, like operationally expensive Bitcoin miners who are just pulling so much energy,

Rossano: It's a pleasure to be on. Thanks for having me. And it was funny, when I was doing some of the due diligence before we came on, miso prices, which are just the Midwest prices, which was where we think you know, some of the opportunities live for, for Bitcoin mining, they're just going through the roof again, and it's a matter of, you know, how are they priced? Where are they going? And I think that there's definitely a lot to talk about when we start looking at electricity prices. And you know, where can they go from here?

Foxley: Definitely, there's a lot of ways to take this conversation. But we'll start off with your background, both in energy markets, finance markets, and then my understanding is you're also moving quickly into the Bitcoin mining space, helping some firms find energy sources all across the United States.

Rossano: Sure, so I'll try to keep it brief. I tend to rant so I apologize in advance. I have kind of a weird background on how it went. So I started at Morgan Stanley investment management, my background was FX rates, commodities. So I did everything from forwards futures, options, equities. We did some structured products when I was there. So it was great. Loved it, you know, we did everything that I really wanted to do, especially on the commodity front in terms of owning physical owning paper, you know, structuring different things around that went to go get my MBA. While I was there, I ended up living in the Middle East for a time working in Masdar City. There, we were kind of coming up with a balance between short cycle gas turbines, which got me into a lot of natural gas and LNG, obviously, also natural gas, but just just shipped a little bit differently. And then at the same time, the short side well, gas turbines mixed with those solar panels, solar in general wind and geothermal to kind of kind of marry what is the best mix and one that doesn't have any interruption. So did that. Then I left and I ran a portfolio, what what we called or what I named well to wheel. So that was following the hydrocarbon from the wellhead to the end user. I got very annoyed that everybody was very siloed. And I was like, well, it's all the same product. So why don't we just kind of flatten the whole thing and understand the process? So I did a lot of downstream chemicals, Pet cam in general refining, you know, where things are going in terms of plastics and beyond, as well as obviously ENPs, Oilfield services and the like, did that made a call that OPEC was going to go into a price war, then that was just from context that I had went down the value chain and did a lot in on the fixed income side doing high yield distressed debt, taking companies into and out of bankruptcy, you know, restructuring loans, all those fun things, started my own hedge fund. Something very similar than my now middle daughter, she's fine. Now, but she we found out that she was going to be massive heart surgery that 36 week sonogram, she ended up going to the hospital, you know, didn't surgeries didn't go well. They told us that she wasn't going to survive the weekend. And she did and she's now four. So yeah, you know, she's, she's the little monster out of the three of them. Then, during that point, I had to turn to shut down the the hedge fund Well, I ended up working at Bloomberg. And then there was doing commodity strategy, kind of marrying my geopolitical background with with some of the things that I've did. And then obviously looking at commodities as an aggregate, because we did a lot in the past on on x and firts. And then when I was looking to come out of Bloomberg, I looked at the market, I was like, you know, I don't really like the way the public markets looking. I think there's a lot of opportunity on the private side. So in 2019, the thesis was that we were coming into an electricity shortage when you're looking at baseload capacity, and you look at the grid. So the view was that we were going to have a shortage of available or at least consistent and affordable electricity. So he wanted to find solutions for that. We were coming into a global food shortage that was only going to get worse. And you know, here we are. And the focus was to try to invest in not only fertilizers, but also ways to increase yield. And then other energy infrastructure plays one of them being renewable diesel without using food, y'all for those that that saw the e-15 Comment even though we're in a global food crisis. So those are the three pieces right now that were that were working on. I have a big background in LNG, you know, FERC all those pieces. And now on the Bitcoin side, we're working with some bitcoin miners, because on the baseload capacity, which is where we're looking to purchase, we're buying hydroelectric dams, you know, there's 65% of the hydroelectric dams in the US are actually owned by mom and pops. So are small industries. So there's an opportunity to come in to pick up some of these things for a favorable price in some interesting areas that see a lot of price increases. And we're looking at ways to bring on some bitcoin capacity, because not only do you have the water to help cool the plant, but you also have the power that is very consistent and is is readily available.

Foxley: Yeah, I first became exposed to the idea of using like these small hydro dams across the United States. Last summer at Bitcoin mining Disrupt in Miami, and pretty cool idea, just like imagining having a small less than one megawatt site in your backyard that has like a creek running around, he just turned into your mind. And there you go, you have you have some free energy combined some bitcoin with it. I'm curious from your background, what sort of strategies were you utilizing to understand the global macro macro picture? Because there's a lot of people out there who, just to be blunt are LARPs. And they're just they like macro stuff. And then they know, point at chart and make a decision on prices. But there's obviously so many different ways that you can strategize these things, and then deploy capital behind it. And your firm has been successful. You said, you've worked with Bloomberg on this. So what are some of the things that you guys were looking at for your firm to be able to make these decisions and make you guys successful?

Rossano: Sure. So what are some of the big things I've always been more of a top down person. So the way I look is where's the geopolitical structure? You know, we're coming into a generational cycle that is going to see more war, are we going to see, you know, are we are we at the tail end of something. So one of the things that I was concerned about coming into 2020, was that we were coming into a very concerning decade, you know, one of the things that I had written about was that it was going to be a weird amalgamation of the 30s and 70s, between hyper and I don't want to call it hyperinflation. But let's just say, a double digit inflationary pressures mixed with stagflation, and then eventually a deflationary cycle. And within that there was going to be a lot of unknowns, especially when you start layering and food and all these other pieces. So one of the things is we look at the top down, you know, where, where do we think there's opportunity? Where do we think there's the greatest risk, and then we look to deploy capital accordingly. So one of the things that we've looked at is really food. Obviously, if you take Maslow's hierarchy, you know, you need that safety piece. And then you need food, you need food and water. And if you don't have either one of those three things, you know, that f, let's just say everything else becomes secondary, if not, you know, the last on the list. So those are ways that we wanted to look at it and then start to structure that in terms of what are some of the friendly countries, what are countries that are seeing a resurgence, like  Vietnam is one that we've been very positive on India is one that we were we were excited about. Now we're starting to kind of go the other way, just in terms of some of the pressures on the inflation front food front. And then when you start looking out, you know, the US Canada are ones that we think is going to see a lot of growth and then there is some kind of sneaky opportunity within eastern Europe. Obviously Russia Ukraine is front and center but there's also a lot of opportunity when you start looking at solutions and deploying them within the Eastern Bloc.

Foxley: The macro scene obviously there's a lot of people who are just going to armchair it so it's interesting to find somebody who actually knows what they're talking about. And that is what makes this conversation really helpful is uh, you know, inflation and energy prices pretty well. So let's dig right into that we're looking at Bitcoin mining, they are, the core miners are long energy and they have to be they have to hold so much of it. Your op X just is everything when you're calculating what you're going to mined during a given period. And if you're going to be profitable going to the multiple years that ASICs have their lifespan. Currently, we're seeing inflation eke into every single part of society, whether it be gas prices, or food prices, or used cars, new cars, and it's also hitting just wholesale energy prices as well that affect Bitcoin miners. So I'd like to kind of get a perspective from you on where you're seeing inflation hit the most right now. And if energy prices, for the most part are seeing that, like a larger disparity than other places, inflation and hitting, we talked right before the show natural gas basically has gone parabolic in terms of price for natural gas, but there's obviously a lot of other energy sources out there that perhaps are not facing those price headwinds.

Rossano: Sure. So one of the things that, you know, my background is in my degree was in, you know, foreign exchange. And when you start looking at effects and rates, you know, they're very much together, sometimes they can kind of fall apart. But that provides some opportunity when they start to deviate from their normal spectrum. So when you start looking at the US dollar, you know, what is the dollar doing? Is it getting stronger? Is it getting weaker? You know, what are rates doing? Are they going up? Are they going down? You know, one of the problems that we have right now is we've been in a bond bull market since the since the early 80s. So you're seeing this pretty much a steady decline since Volcker got in front of rates, and then you started to see this come down. Now, after seeing his rates go to two, you know, obviously, as we've seen, go negative, what comes next. And that's when you're starting to see the shake up, and you're starting to see the dollar, you know, become some of that strength. And the reason why that's so important is because the dollar stands for everything, when you start looking at the reserve currency of the world, how things are trading, where things are going from here. So when you start looking at rates that we're getting to, we're now in a net rate rising cycle, and for most people who are watching this, or, you know, or that maybe have started to read about a rate rising cycle, most have never seen it. And now we're coming into one of the most aggressive after really one of the biggest experiments, when you look at COVID, when everybody was easing, and you had fiscal policy, getting easier monetary policy getting easier. But also all of these issues also gave rise to cryptocurrency, because you start looking at Fiat and you're like, alright, well, what is Fiat actually backed by like, what are we? What are we really looking at going forward. But when you start looking at at energy prices, the dollar is still going to be king, the euro, the dollar is still going to really set the standard because a lot of the producing nations have their currencies pegged to the dollar. And they will always want to transact or at least for for the most part, transact in dollars. So when you start looking at where oil prices are, where those flows are, there's that there's that back and forth between where supply and where's demand. And right now, there's so much geopolitical uncertainty, you're seeing a lot of this volatility, but realistically, let's just say we're between 95 and 115. And that's where we're going to be as well, Putin is going to try to go give Ukraine a hug, then Ukraine is going to say no, and you're gonna see these, you know, like, right now we're down $5.50, just because, you know, why not? And that's, that's the uncertainty that's going to keep in there that's going to stay in there. And that that also has that effect on natural gas, like, where's natural gas going? What are some of the pressure points. And as you were talking about things that we were discussing earlier, you know, natural gas has a lot of upward momentum in terms of where is LNG, where's local consumption, so natural gas consumption within the US has been increasing, it's going to continue to increase, you know, it's something some little sneaky thing that the current administration has done, it's no longer a bridge fuel, if you notice, they've actually deleted that term now, which just a fuel, you know, one of the things that we've always thought was that natural gas was going to be a fuel of the future is going to be one of the key pieces of the basket. But when you start looking at at Germany, and you start looking at Europe, in general, they're so reliant on Russian gas, and we've seen it continue to come through, it's still 90 or so MCM a day. So there's still some continuous move, which, if you think about that, you know, through the math, it's like So Germany, and Europe pays Russia. And then Russia pays Ukraine for the transmitting of gas. And so Europe is financing Russia's war, and then Russia is financing Ukraine's war against Russia. It's like, got it. That's the world we live in today. So when you look at that, that pressure, when you look at that, it's not just on the demand side of natural gas, but how do we respond on the supply side? And then like, when you're asking about inflation, where are we seeing inflation, steel prices, labor prices, you know, proppant, when you start looking at Sand, or the lack of sand, or availability, all of these things have this knock on effect, and everybody has to get their margin, you know, where am I going to make my money going forward. And that's when you start looking at diesel still over $5 that goes into it. So all of these things culminate with, I have higher demand, and I can't really have a supply response. So here's where we have this kind of this, this exponential move in pricing at this point.

Foxley: It was pretty fascinating to see the confluence of both massive money printing over the last two, three years, really, since quantitative easing out of the financial crisis, and the huge spikes in demand post COVID Getting at the same time, and to me, that seems like a really nice scapegoat for a lot of the politicians who are dealing with inflation right now and they can just blame this on the demand side when it really has a lot of aspects involved with it. Much of that has to do with the money print Think returning to the energy market itself, though I'm curious about how much the international demand for energy, whether it be like natural gas or other goods, like oil itself plays into the domestic United States market, because we've seen natural gas prices in the United States go up. But is that really caused by the war in Ukraine, and when when we have almost two separate markets, or do these markets play with each other enough, that they're going to induce prices to go up on both sides.

Rossano: So because we've been building out LNG capacity, you know, going back to when schneer was initially going to import LNG for those that are old enough to remember that, then all of a sudden the shale revolution began. And that was when we actually flipped, and we were going to export. So since that period, you we've come to a point where almost 12 million tonnes per annum can now get exported. So when you look at what has been done within the US, you've had a big conversion, or, you know, for the most part from heating oil diesel, into natural gas consumption, you've seen that pivot and on the industrial side as well trying to consume as much natural gas as possible. Methane cleaner burning, you're not using diesel and heating oil. So internally, we've seen that increase, and that's going to continue. But then at the same time, you're starting to see that really become a much bigger factor, obviously was in Europe. And then when you look at the emerging markets, especially Asia, because the easiest, lowest hanging fruit is converting coal to natural gas. So when you start looking at those connected that connectivity, and I was just pulling up some of the data that we have, like when you look at just taking march for an example, on March, we exported 7.4 million tons. I mean, so you're talking about a serious number that is going off the coast. And when you start looking at that, that pivot Europe is the consuming factor, because Europe has made an agreement with Gera, which is the the entity out of Japan that tries to buy LNG as an aggregate trying to get the best price. They've had been reselling some of their capacity back into Europe, because Europe is trying to use the shoulder season, which and for those that don't know, shoulder season is the low period, then obviously, so the low periods for natural gas consumption is as you would think fall and spring, you're not really using air conditioning, you're not really using heating. But because Europe's appetite has been so aggressive that we've essentially taken away the shoulder season. Now one of the other things that is little known is Russia also exports LNG into Europe, from Yamal, from other areas. So when you start looking at that pivot, you have that natural gas consumption. So the US is seeing the increase, even though we're at a record amount of supply, that international market really starts to take a certain pivot, especially when you compare Henry Hub to TTF. To to jKm, when you start looking at the different natural gas prices, you know, we're still the cheapest, even at $7, which, if you think about that, that is fascinating that we're still the cheapest, but then when you take the knock on effect, there's also the liquids component and there's propane and LPG consumption, which is liquefied petroleum gas, which is a mixture of propane and butane has also been increasing. So propane is actually much easier to transport versus LNG because I don't have to, you know, cryogenically freeze propane to move it from point A to point B, I can put it on the road a bit easier. The conversion from from diesel to propane is easier. So when you start looking at the liquids front, you know, we're exporting LPG and ethane. On the other side, when you think about the NGL basket or natural gas liquids of ethane, propane, butane, we're exporting that at a at a at a just a rising rate. You know, Saudi Arabia is taking advantage of that, you know, they've raised LPG prices to 2014 highs, which even at $1.40, in the US, I mean, we're still the cheapest. So when you start looking at all of these products, that were typically kind of beholden to the US. Now all of a sudden, you have, as you pointed out, you know, where those markets start to actually converge. And there is that demand, which is obviously keeping prices elevated in the US, while also being competitive into the global market.

Foxley: So I'm curious for Bitcoin mining, moving back to purchase power agreements, and how these play into the entire consideration. So when a bitcoin miner just for context for the audience, who may not know, when a bitcoin miner goes to a facility, they oftentimes have to sign a purchase power agreement for a certain amount of energy to be used over a certain period of time, and they more or less locked into a right, whether it be like five cents a kilowatt hour or something like that. And they also have to use like a certain threshold. So if this facility has five megawatts and they sign on for three megawatts, they're expected to use that three megawatts and they're, they're liable for that and they have to figure out what to do with it. Hopefully plug in all those machines and get them hashing those PPAs legal contract So you're signed into that price. But oftentimes there's flexibility in these things I know of a Bitcoin mine in Colorado, they had a force majeure clause come out recently, and basically all of them got kicked out. Because the person wanted their energy back in it was just how it is it's part of the PPA, like, those things exist in the legal world. I'm wondering now that we're seeing inflation creep into energy markets are Bitcoin miners expected to see their PPAs go up across the board? Or do you expect it to be more of a localized thing where this community is being hit by higher energy prices, or this person is taking advantage of the excuse of inflation to increase a PPA, or is this more tied up in illegal contracts, and you can't really touch it, and it just is what it is.

Rossano: So there's a lot of ways that you can kind of protect yourself from the person such as myself selling electricity, and then the miner on the other side who's buying it, is you want to be very clear when you have the purchase plan agreement, because typically, you know, especially as you were talking about the life expectancy of the minor, you know, some depending on the refurbishing cycle, you know, figure three to five years is what you're going to look at, and then you go into, you know, then you can obviously start to expand out. But typically you have three years, and the one of the things that we've been seeing is three years with the additional two years as being the option. So when you're looking at the three years side, you want to be very clear, and if especially we don't want to force force majeure situation, is look, I will I and this is what we've been doing is like, I'll lock in at 44 cents, so I'm going to lock in at four cents, but I will provide a certain percentage of my revenue, that will also come to you whether that's, you know, 5%, whether that's 10%. You know, typically we try to stay between five and 10%. So that everybody's benefiting from the where prices are at the moment, you know, then at the other side, you can say, well, I'll also pay rent, and then be the facility, one of the things that we're opening is like, you'll share the cost of labor, there's no point in you having your team me having my team, let's share the Let's share the price. And we'll have people that are trained in both. But you want to have an escalator and you want to be very clear on what that escalator is, it's like, look, I don't want to get turned off. So if prices go to x, you can increase my rate by a penny, or half a penny, you know, if if rates go to why then I'm gonna say Alright, well, at that point, that's going to be the cap, and you have to be able to be very clear on where my cap is. And typically, when you're seeing this, you're also getting the benefit of getting some of that revenue from Bitcoin mining. So you still want them, as you said, to be hashing to be to be generating this income. Now, given prices have come under pressure, but they've been fairly fixed in a very tight band. So when you start factoring in, you're paying me rent, you're sharing the cost of my of my labor, I'm getting, you know, 5% of revenue, plus, you're paying me four and a half cents, all of a sudden, all of that together becomes a very viable option. And you want to be very clear on that, because you don't want to have that turn off. Now, some of the ones that we've looked at, and that we've created, depending on the volatility of the market, and what the what the bitcoin miner wanted, they said, Look, if rates go to, you know, have this parabolic move, let's just use Germany for an example, you can turn me off, because I don't want to be producing in that I can't afford it. And at that point, you can then sell 100% to the grid. And then as things come back down, you know, there'll be a certain amount of optionality. There's also one that has a calculation in it, where if you know, if let's just say German price has happened in the US, we see 300 euro per megawatt hour, but Bitcoin goes from, let's say, 35,000 to 150,000. Well, even though electricity prices went up, I'm still making more money by sharing and revenue with you. So that you can be very clear on what that number is where you're going to pivot from the grid to the minor and back. So I think that's, you want to and this is I know legals a call center. And it's frustrating at times, but that's where you want to spend the most money and understanding and having a been very clear what those rates are going to be. And then on the two year, on the two year extension, you pre negotiate, you know, what it will that be, you will have a 5% increase in in kilowatt hours, you know, in in price, but will will decrease rent by, you know, 10% Because at this point, you know, you paid the money to have the step down to have the, the cement slab. So, again, these are things that you want to create more plug and play. And it's just a very consistent revenue for the the producer of electricity.

Foxley: So the takeaway is get a good lawyer and pay them well, contract. Exactly.

Rossano: I mean, that's really where you want to make sure that there's no ambiguity and because that is where you you're gonna get that's where you can say it's like, oh no, well, if since it's not set, it's not there, I can clearly declare force majeure. And you're, you know, you're out of luck. And there's some, there's some guys that say, you know, because we're dealing with hydropower. And given we're dealing with areas that could see some level of the clients, some people have said, Look, I also want to be tapped into the grid, just because I want to make sure I'm producing 365 days a year 24/7. And, again, some sometimes that isn't an option. Some are okay, with downtime, it all comes down to what the miner wants.

Foxley  25:33
Okay, moving away from the particularities of this conversation, maybe spreading out a little bit, putting on some tinfoil hats for a second as well. There's a nice tweet that I really know a nice tweet from Digi economist, who is a Bitcoin skeptic put it lightly. And he and I are going back and forth the other day about energy costs and what the impact of inflation in Bitcoin mining will be on energy costs and what governments will do to tamper energy costs going forward. Essentially, like we'll Bitcoin miners become a scapegoat for increased cost of energy across the board. And we're going back and forth on it a little bit. His models are always like 10 to 100x, larger than they should be. And I think it's because he likes to do that he works for a central bank. But it is an interesting question that I've gotten from a few people going forward if energy prices continue to inflate because of monetary inflation, and because of just demand for energy sources, are Bitcoin miners going to be in a tough spot, I'd like to get your take on this. Also, maybe we could sprinkle in a little info on what you expect energy prices to do going into the next year.

Rossano: Sure. So to kind of go after the Bitcoin mining side, I think that's when you have to appreciate hash rate, you know, because when prices go up, typically hash rates fall, so then the miners that are able to stay in business are going to capture that because you're gonna have less mining, which then means that prices should go higher, because you're going to be generating less coins, which then means that those so you're all you're almost kind of guaranteed to see some of that appreciation, when you're looking at just the sheer mechanics of supply coming down. I mean, just look at what happened when you had China's shutting everyone off, all of a sudden there was this massive pivot of where can I go, and you had Bitcoin prices respond to that, as you had the supply coming off in terms of new coins. So when you start looking at the different economics of it, we do see prices going higher. I mean, some of the things that we're looking to do, on the private equity side, is buying up some of these dams. You know, when you start looking at the three dams that we purchased in New England, you know, we were expecting to see prices of about nine cents, you know, that was what we were modeling. That was in 2020, we wanted to take a recession year right now, they've been throwing off anywhere between 22 to 26 cents on a net level. Now, from a Bitcoin mining perspective, I would never recommend somebody to be in large parts of New England. There's some spots within Vermont, New Hampshire that have some optionality. But it's really the Midwest. And the question to where a price is going, and how is inflation going to do that? You have to look at what is the price setter, you know, so in New England, because they have essentially a cement wall that is keeping any new pipelines from being built from Pennsylvania, into into that region, you know, by Pennsylvania, I'm talking about the Marcellus. So they have to import natural gas. So when you start looking at the LNG market, and to be clear, they have to import it from abroad, because the Jones Act prohibits anybody from from exporting from Houston, up into Boston, because there is no Jones Act flag vessel, the Jones Act vessel just has to be made in the USA built in the US manned by us sailors in order to be Jones Act.

Rossano: Approved, if you will. So that means that the block of Boston is beholden to pulling down from Europe. So when you look at New England, their price setter is natural gas. And then when you turn to the Midwest, which I think has some of the most opportunity for Bitcoin mining is coal. Coal is really kind of that Bellwether. Now the issue is you're seeing more and more coal facilities get slated for retirement, which is becoming an underlying problem, because you're but at the same time, you're taking down baseload, but coal prices have been have essentially gone up. Because when you look at where things are saying where things are going, for the last 25 years, you've told these coal companies in these employees that they're never going to have a job again. So go out and trying to start a new mine is near impossible, because who's going to want to go work in a coal mine. So now you have that cook to your point on demand supply? The supply response isn't there, but demand continues to go up especially for on the thermal front. So now you have this this weird conundrum in terms of where things are going and that's when you look to the Midwest. So there's some some interesting opportunities where you take that coal facility, you can put some carbon capture on it, you can actually create a lot of side products, because we're looking at that, that coal facility as an opportunity, you know, there's an opportunity to make green, there's an opportunity to actually throw off other, you know, different industrial gases. And also having, you know, wind and solar next to it and having some of that opportunity. And in creating, essentially, this power generating because we need baseload capacity. And baseload capacity is something that is running 24/7, which basically is nuke coal. And as long as the natural gas facility is built, right in natural gas, so those are your three pieces, because if the sun's not shining, if the winds not blowing, and you don't have enough battery capacity, which is very difficult, you have to have a short cycle gas turbine. And as we saw in Texas and Erekat, there are times when short cycle gas turbines can't turn on. And that's when you start to get these big, this big backdrop. But from the mining side, you know, we see some of that opportunity in the stranded gas that you're seeing in Texas that you're seeing in parts of Oklahoma, where it makes sense, because I can't get it to market. So it's just gonna sit there. So let's bring in some of this Bitcoin mining, the other problems are have and I think some of the Bitcoin miners are finding out the hard way, it's a bit warm in Texas, it gets a little hot, and the cooling costs start to add up. Which is why if you go further north, you have a certain amount of opportunity. And then when you're looking at the dams, you know, you can pull water off of it. So again, there's, there's a lot of these opportunities, but I think this this pivot is going to really move where Bitcoin miners are, but also take some of this hash rate off, which I should, I think should also support pricing at this point.

Foxley: Yeah, hash rate going down might help some people's predictions a little bit this year, because there's definitely a lot of hash rates supposed to go online, at least from manufacturer orders. So we only have about 10 minutes left, I want to talk about where we're going next, expectations for next year, like stagflation, whatnot. But before that, I want to get a quick word in about demand and the basically the demand for energy like, can all these energy producers in the United States, get online quick enough to meet the demand that people are expecting? Oh, obviously, we have that headline the other day from the Biden administration, that was putting out more oil reserves. And that did basically nothing for the market. And most people in the oil and gas markets were like, Okay, you're releasing these reserves, the this is only a temporary measure, it's not going to help anything out. Gas prices, from my understanding didn't really respond to it. So our energy providers available or able to meet demand right now, are we looking to three years away to be able to meet the current demand we need?

Rossano: Now, the issue right here is it's very difficult because when you look at so one of the shows that we have on the Primary Vision network on YouTube, is the frack spread cam, because you need you know, everyone likes to talk about rigs, and don't get me wrong, rigs are important, you have to poke holes. But the frack spread actually turns it into production, that's when you're going in your fracking, you're opening up the well, and you're tying it in. The problem is the amount of horsepower available has diminished. And I'm sure I'm not, I'm not lying to anyone, or surprising anyone by saying that our supply chain is in trouble. So when you think about the steel, when you think about the transmissions, the fluid ends, the trucks, all of those things are struggling right now. And because of 2020, if you had, you know, let's just say you had 100 horsepower, 1000 horsepower in the yard, you needed a new fluid, and you went to go to the yard to take it, you started to see a lot of this, you know, essentially piecing picking apart the the available horsepower or what used to be available. So now you have the problem of where's my availability company? And if I want it, can I get it? And the answer is no. And then you start looking at pipe, and I get pipe and the pipe guys are like, Look, if you get in the queue, you know, I'm not going to thread it because because pipes have to be threaded going into the into the oil patch. Once the pipe comes in, I'll then read it for you. So it's three months waiting for pipe, then it's another six weeks to wait for it to get threaded. Next thing you know, it's four and a half months later, and I'm finally getting my pipe showing up. So you have these these built in bottlenecks. Then when you look at some of the capacity where, you know, people have talked about Biden saying, Oh, well look at what he did on on the on permits, it's like okay, well, if you permit me and allow me to drill it, but then you hinder my ability to build the new tie backs or little pipelines to the pipe. It's still useless. I'm not going to truck this. So I'm just going to let it sit Foley and just let it sit in general. So when you look at the backlog, it's really in order to to see that demand response. It's really that 18 to two years out, because it's 18 months to two years out because you're not going To see that response. Now, the other problem is obviously, the supply side, you know, typical economics supply is short, prices go up, demand comes down. And when you look at what is happening internationally, you have emerging markets that are still providing subsidies for petrol. And for food at my opinion, they're gonna have to choose and they'll choose food over fuel. And you're starting to see that come back and forth. And as you see that balance, that's where you see that pressure come down, because people have to make decisions. You know, one of the things that you would ask that I failed to address was inflation, you're Where's inflation going. And that's only going to keep things worse, because when you look at pricing, and this is again, going outside of just oil, when you look at commodities in general, that zinc, aluminum, copper, all of these things are have are below 1997 storage levels. So you're looking at an inherent shortfall. And yes, Russia is a gigantic producer, Russia has to dump oil into the market, they have no choice they have to sell at any price possible, because they can't risk shutting in because they don't know if they can bring it back on. But it's not just oil they produce. It's you know, the alumina that they import to export aluminum, it's the zinc, it's the it's the iron ore that they send into Germany, there's so many different knock on effects. And that's creating that that supply shortage. So you still need to see that demand come down. But even as demand comes down, you're just starting to get into balance, and you're not able to build that amount of supply, keeping things very tight. And that leads us into disinflationary pressure giving way to stagflation, because even as demand is coming down, you should expect to see bills coming in things, and you're just not going to get that and that's where you get this stickiness prior to, I think, a much bigger deflationary cycle.

Foxley: Yeah, CPI numbers were really interesting. Last week, 8.5%, highest in 40 years. And there were some interesting notes in that as well. The one that stuck out to me the most was the used car market, it's down like 3% in prices, but year over year is still up, like 35%, or something quite high. That is just demand destruction, as I understand it, people are not willing to pay prices for a used car that high, and so they won't pay for it. And so the owner of the car is now discounting the price, prior to what it was beforehand. And so that's, in a sense, lowering inflation. Some might disagree, but at least the prices are decreasing a little bit. But what you're saying here with Stagflation is that prices would stay elevated, most likely emotions into the long term, but like not as much, how should I rephrase this, like prices will, will stay elevated for the most part, and they might discount a little bit like we saw on the used car market, right. But for the most part, they're going to stay fairly elevated compared to 2020, or 2015, or 2020 10.

Rossano: And that's because as you see demand for used cars coming down, you should see more used cars showing up. But because of the shortage of microchips that give you 1500 chips or in a car, you know, where are you getting the microchip. So everyone, some little things like Tin. Tin goes into the soldering where you're getting tin, Myanmar, Myanmar has been in a civil war for how almost over a year now, I mean, you can go back to saying that they've been in some sort of civil wars since 2014. Then you look at NEON, Russia is one of the largest exporters of neon Neon is important for microchip production. So then you start looking at steel, Germany's one of the largest producers of cars, they have a steel shortage. So even though prices come down, it's just you're not seeing the supply coming through to really replenish that and that's where you're starting to see the pressure. And then you take that into rates, you know, we have mortgage rates now over 5%. And if the cost of owning it goes up, like if you bought a car and 2020 as as I was lucky enough to before a woman decided to tempt fate and cross traffic without looking. When you look at when you look at that in 2020 I had a lease that was based off of like point two 5%. And, and yes, the prices were higher, but I was paying 25 basis points. Now, I was lucky because I locked in a rate at 2.49%. And if you were to go do that, right now it's over 3% You know, the the financial, you know, just for I am a German snob I love German cars. So the BMW that I was getting, I mean, BMW financial was over four and a quarter. So that also kind of brings the prices down because if the cost to me goes up, well then prices have to balance and that's always going to also decrease because it's like alright, I can you know, when BMW was charging me a quarter percent and I was paying 599 a month. Now I'm paying over 1100 Well, what's Honda charging? What is what is Ford charging and that's when you start to see that creep, and that's when you start looking at inflation on replacement costs. Because if you own full He really starts to go parabolic when I go down in, in, in quality so when you look at big box stores, BJs, Costco, Sam's Club, those memberships are exploding because it's like, Look, I can't afford Whole Foods, you know, I can maybe afford the local food store, but I'm going to have to buy in bulk. And once you buy in bulk, where are you going next outside of I have to cut. You know, it's like I only buy name brand because I'm a name brand snob. It's like, well, the name brand is kind of expensive. I'm gonna go generic. And then once the generic prices go up, it's like, Well, where else? Where else do I go now. And as you go down that scale, that's when you start to see that inflation come up. And once you can no longer finance your current living standards, even at generic prices. That's when you start to see that demand destruction that's when you start to see things really tighten up of I can't go out to eat this week. You know, I can't drive to Disney Six Flags. What have you I have to stay home because I just can't afford it.

Foxley: Yeah, I feel like I'm living out my macro one on one classes from college and real life together like supplement goods and demand destruction and whatnot. Mark, I will really want to thank you for coming on the compass podcast and talking about energy prices and inflation. This has been a really helpful episode. I think a lot of our listeners and Bitcoin miners out there are going to find this useful.

Rossano: Well, I appreciate it if you want me to have come back on and rant about where things are happy to do so.

Hosted by Will Foxley