Tad Smith on Scarcity and Stores of Value

Foreign. I'm really, really excited to have my dear friend Tad Smith. Those who don't know Tad, you. He is probably one of the best CEOs in the market. He was the CEO of Sotheby's, he was the CEO of Madison Square Garden. He was the president of Cablevision. And now he is spending a lot of time on deep tech and crypto and hopefully a future author about all the things that's going on. So, Tad, thanks for taking the time and joining Imran.

It's great to be here. We've been friends a long time. Two little tweaks on your intro. One is I've only been a division president of Cablevision, and second, I'm not a CEO in the market. I'm very happy investing, thank you very much.

Yes, but people like you need to be CEO because there is such a shortage of great CEOs in the marketplace.

Spending my time on boards helping other CEOs do great things, and that's an incredibly exciting role. And also, as you know, I'm a partner in 10T holdings and One Round Table Partners with Dan Tapiero at the Growth Equity Fund. And that's a pretty exciting place to be as well.

Yeah. So you had an incredible career, so maybe start there. Like, how did you, you know, you went to Harvard and get into the business? How did you become who you became?

A lot of it was, I grew up in Denver, went away to school in the east, met some very interesting people at school, and I started trying to do a lot of different things. And one thing I did is when I left school, I went to work at JP Morgan, which is a great firm, spent some time on Wall street, then tried the nonprofit and the government sector and ended up being, by the way, the chief of staff of, improbably, the New York City Taxi and Limousine Commission. Can you imagine that, Imran, a million years ago?

Oh, wow. I did not know that about you.

No, I know, exactly. And in fact, I've got a taxi door on our wall down here in Florida from that period. But I wound up broke, not surprisingly. But it didn't matter whether I was broke or not, because nobody in government made any money. And, and, but so I put an application into business school and went away to Harvard and came out and then started my career, really in Consulting at McKinsey. And I had a I while I was in school, I was at Oliver Wyman Co. And switched to McKinsey and have been in consulting for a few years. But that's when I made a decision that I wanted to be on the client side. And since then, whether it is the record company bmg, whether it is Reed Elsevier, the Anglo Dutch, well then Anglo Dutch, it's now a publishing company. Whether it is music, almost pretty much any sort of entertainment media or tech business for the last 30 years, sports, art, cable television, news, news publications, newspapers, all of those things. I have been involved in cable, telecom, any of these things. And they've been. It's been incredibly wild ride. And it seems like almost a little bit like Forrest Gump. I wind up at the intersection of technology disrupting some business, whether it was the Internet or a variety of different versions of it. And so I've having done that for 30 years, it's really wonderful not to be the CEO, not to be the president, but in fact to be chairman of the board or on the board and helping other CEOs find their way in this increasingly fascinating world.

Yeah, no, as you pointed out, you were at the intersection of the changes, right? So your most recent CEO gig at Sotheby's, right, you came in, the company was under activist attack, you became the CEO, you turned around that business and ultimately sold the business. One of the biggest. Learning from the art business, right. Art is such a. Becoming such an interesting artboard. Becoming became such an interesting asset class. And do you think that continues? What makes the art business so special, how the art business is changing from your perspective?

Well, from my perspective, art is actually essentially. I was asked this question or version of this question recently and I said, you know, I don't think art is. While it is certainly getting increasingly financialized, it's sort of an asset class, but it's not quite there yet. It's not like a bond or a commodity or anything like that. It really has some unique characteristics that make it a little bit quirky, but it is, by the way, an interesting. The conversation about art is very often interesting in the context of is it a store of value? And in that respect, I think it is a store of value. Whether it is the best store of value, whether it's better than some and worse than others. It's got different characteristics, but that's how I think about it. It's one of a variety of different stores of value that are available to people that can afford it today.

But is it efficient market?

No, it's not an efficient market. Every single piece, the vast majority of pieces that are sold in the secondary market are unlike others. They're unique. The markets tend to be thin, the transaction costs are high, and the Price discovery is. Is complicated.

So how is the future of art business or Sotheby's business looks like in your mind?

Having spent five years there, we were really focused on how it moves online and how the fact that it moves online helps it scale its demand curve. And that worked out very well. Today it has a different issue, which is I would say question number one is, do people continue to value and like art? I think the answer is yes. And number two, do we think that the art market will grow? I do believe it will grow for reasons we can talk about. Third, will it change? Absolutely, it's going to change. Fourth, how would Sotheby's be positioned with respect to that change? And by the way, when I say Sotheby's, I'm speaking about Sotheby's and Christie's. Do I think Christie's and Sotheby's or Sotheby's and Christie's will be well positioned for it in some ways? I do think so. But both firms have been subject to potential disruption for almost more than a century. And they're hanging on, by the way. They've been around almost three centuries, just to be clear. Literally three centuries. They're older than the United States. And so you, you say, well, is this time really different? And the answer is it might be. We'll have to see. But do I think that art continues to be a very powerful store of value over the medium to long term? I think it'll be more challenging.

Now let's move into the sports business. You are CEO of Madison Square Garden. It seems like I'm finding a trend here. You are the CEOs deeply involved in businesses that had very scarcity value. Right. Sports, art, and now crypto in many ways.

And then even when I was in the media business, they were choke points of distribution. They had scarcity of distribution. Exactly right.

Yeah. So I'm finding a threat that you like businesses that have scarcity value.

Well, there just aren't anymore, unfortunately. Congratulations. Welcome to the new economy. There are no scarcity maps. Well, actually there is one scarcity value which I'm deeply involved in, which we'll come back to.

Yes. So let's talk about sports business. And you know, it's significantly outperformed my expectations sports as a business. I remember one of my friend was getting involved in these, you know, buying different games a decade ago. And I was different teams and I was like, why are you doing that? He said, watch, this is going to be a great. And we saw pretty significant value creation.

Yeah. When you say significantly outperform, you're talking about the value creation.

Yes, right, right.

As opposed to, by the way, the revenue growth.

Yes, yes, yes.

Right. Okay.

That's a key point. Yeah, key point. Yes, that's a very key point.

Because it hasn't been a particularly fast revenue grower, say versus tech.

No, it's not. And that's why I talked about scarcity value. So it seems like what we're seeing with art and we're seeing with sports team. And that would be my question about Bitcoin also, like is that a scarcity value driving the demand or is that is a fundamental takeaway? But let's talk about sports for a second. So why do you think sports team value has gone up so much? We kind of eluded it. But is that your thinking?

I think it's exactly what you said with a slight twist on it, which you're hinting at. But we'll just say the quiet part out loud. Any asset that is both highly desirable and scarce in a world where the money supply is expanding substantially is going to attract excess dollars. It's very simple. Everything which has elasticity of supply, labor, goods in the store, services provided by people that are not scarce will not attract excess value as dollars are printed. And let me tell you, they've printed a lot of money recently. And the sports teams are very highly desirable, incredible social and economic and historical and capital associated with them. And by and large the attention of them is hugely scarce. The audience to get them is hugely scarce. So it makes it even more desirable. And there are only so many teams. And by the way, there are a lot more billionaires in the world than there are teams. So you print money, that's going to be bees to honey, let me tell you.

So what other asset class, if you've continued to continue to print money like this, seems like big beautiful bill will increase the deficit.

Luxury real estate, extraordinarily high end jewelry, extraordinarily high end, fine art, gold for sure, obviously Bitcoin for sure. Mega cap tech stocks that are unique and basically sui generis in specific areas, all of those things. They will attract bees to honey as the money printer goes.

So do you think at some point this thing catches like how long do you think this continue? Because money printing cannot continue forever.

Well, it's had a pretty good history of thousands of years, right?

That's true.

Thousands of years. By the way, it used to be they didn't really print obviously what it is. They just clip the gold coin and then they switch the gold, you know, water down the gold coin and then the silver and then we, you know, increasingly thin it out. But, but it's the same concept.

Yeah, but the deficit is at a level in the United States. Can us continue to print money for next a decade or two decades?

Well, it's an interesting question. I'll just ask you why couldn't it? By the way, I, I suspect that is Plan A. So let's find out why, why Plan A wouldn't work. I mean, by the way, that's probably Plan A now. I actually, I'm more optimistic than that. I, I think we're going to have a productivity boom that will help. But let's, let's pretend, let's set that argument aside for just a minute. Plan A is a do exactly what Secretary Bessen said. Right. Which is try and lower rates as much as possible and grow their way out of their debt problem.

Yeah. I think the risk is if you keep continue that the long term rate, interest rate going to go up in the market. The financial market will force it. Fed might try to cut rate.

Yeah, but they could take care of that with capital controls and lots of other gimmicks which they're already by the way doing the supplementary leverage ratio. Now how long they can work is an interesting question. I think they're more vulnerable aspects to me in terms of that strategy are what you do with what you and I were just talking about, Imran, which is as you expand the money supply through a variety of different techniques, qe, non qe, all the different ways and shapes and forms, the wealth inequality grows very substantially and it creates a great deal of systemic fragility in my opinion. In societies where people that are working hard every day but only have their good labor and good hard work to sell are struggling to make ends meet, whereas people that have assets that are scarce and desirable have explosions of wealth.

Yep. And then the inequality does create challenges.

And the inequality creates really very serious systemic challenges. So I, I think the more difficult challenge is going to be that than getting someone to buy the T bill.

Fair point. So let's move on to plan B, which I kind of agree with you that we're about to have a massive productivity boom.

Well, I hope so. You are a legendary tech investor if you don't believe it. Well, then I probably want to change my view.

No, I 100% agree with you also that productivity boom will have some challenges as well. So we'll cover that as well. But why do you think it's kind of obvious but what do you think?

AI is obvious, right? I mean the truth is the. As for the first time in. Well, not first time. This is the most pronounced example of where knowledge is being commoditized very, very rapidly. And by the way, labor shortly will be commoditized as robots get better and better. But knowledge being commoditized is an extraordinary concept when you think about how much knowledge has been a moat, huge moat. And the moat is. The moat is no longer available to us. I mean, it's extraordinary.

When is the last time we saw knowledge being commoditized like this?

The Gutenberg Bible would be 1. Movable type would be 1. The early stages of the Internet and search were good examples of it. We have a number of examples of it over time. Obviously, if you go far enough back, writing was one. Right. I mean when you think about it, writing significantly reduced the barriers to knowledge over periods of time. But nothing like this. I mean, at the touch of my keyboard here, you know, I have access to pretty much all of the world's best thinking except some that's behind paywalls instantaneously. I mean think about it. The supply curve for knowledge has shifted out infinitely. I mean, think what it does to all the world. I mean, it's amazing.

No, this is amazing because nobody ever framed it, at least in my conversation, that knowledge being commoditized. So obviously we saw the productivity improvement with intellect and AI, you could argue we can see similar, if not higher productivity improvement. So it improved productivity. But who loses out though?

Well, let's start with people that have traditionally benefited and sometimes very significantly from selling knowledge. And by the way, well, management consulting firms would come to mind.

Wall street firms.

Wall street firms are going to have to evolve also. But they are, I'll argue brokerage. Yes. But I'll argue that the investment banks are slightly bet in a slightly better position.

Perhaps somebody has to underwrite it.

Yes, yeah, there's that. But also, you know, having been a client of investment banks on multiple occasions, the point I would make is financial advisory. The people who are great financial advisors and you have been one. So you know what I'm talking about A good portion of what they charge for and is things that are actually truly human qualities and not knowledge per se. We'll come back to that. We could go down that. Lawyers. Let's talk about lawyers, physicians, physicians, radiologists. I mean you think pretty much the entire white collar code writers, when you start thinking about those kinds of things, it's essentially the entire white collar workforce.

Yeah. And this is a actually in many way technology a lot of times took jobs from the blue collar workers. This is probably first time the white collar workers gonna see the pressure. So the question is, so knowledge get commoditized, what happened to this job? Do you see a systemic unemployment increase among the white collar? And these are also higher honored people. And now what does that mean for the economy though?

Well, this is where people split, right? One group is quite optimistic and they say we've gone through multiple phase transitions of technology before. And yes, some jobs get displaced in one area and then new jobs are created another area. The other point of view is this is pretty unlike those prior kinds of phase transitions because this is a massive wide scale general purpose new technology that is essentially, as I said, commoditizing knowledge. And so it's not obvious how white collar workers who are commoditized in one vein in their skill set immediately retrain for another one. Now if you are in the former camp, then I think you can take comfort that will figure out what they're going to do as things evolve. And I don't mean to diminish that argument. I'm just saying that's, that's honestly because you can't really point to jobs that aren't here yet, but that you know that based on our experience with technology, technological disruption, they, they will come. You just can't see what they are yet. In the second camp, if you're in the second camp, this one, I think the path is going to be we're going to need to rethink the social contract in some way that provides meaning and purpose for everyone and also has some way for everyone to be able to participate as an economic citizen. And that is going to be an interesting position. Now I'm talking a number of years in the future. But if you are in that second camp, then that's going to be, you're going to be thinking about that. I don't see a third camp. I just see one or two. Maybe there's a third one. I just don't see it.

No, no, I agree with you. So you know you used to be in a media business as well, many times.

And by the way, remember I have been and still am an adjunct professor at Stern where I taught strategy finance for entertainment Media technology for almost 20 years.

Yeah, exactly. And you invited me to your class. It's a great class by the way.

Professors, we forgot professors. And elite universities and universities generally, educators, teachers, all of those things. Those are all knowledge people who sell their knowledge.

Let's talk about it, right? You kind of pointed out that one of the backlash. I think in early days we're seeing it that that people are putting paywall against AI Cloudflare CEOs talking about it. I was recently with one of our common friend who runs the media company was talking to me about it that how they will try to block AI from crawling. So how do you think that plays out?

Honestly, I think it's sort of a temporary sideshow.

You think so?

Yeah, because if we think that AI is which is evolving and growing and becoming more and more productive as fast as it is, parabolically by the way, isn't going to be able to figure out how to reverse engineer around someone's pile of data behind a paywall. Well, I mean that's effectively a short on technology. And you and I know how well that trade has done over the. Over the past few decades.

No, I agree with you. But somebody can argue that look what happened to music, right? You know, ultimately at first it was Napster, but then all these music companies like Spotify and all these guys, they had to pay the label. So do you think.

I don't disagree, but let's, let's delve into music because it's an interesting example when you think about where the economic rents were captured and now are captured. They were captured in the medium of the music itself and the producer and distributor and marketer of that medium. That's where the economic rents were. Today they're mostly in concerts. When you think about it from the artist's perspective, if you want to earn money, you got to hit the road. And by the way, think about what that is. Again, back to. We talked about different forms of scarcity. I also, as you know, was privileged enough to run Madison Square Garden. And if you've got a stadium with a Taylor Swift in it, you have scarcity. There are only so many people that can get in. And the reason I say that is because the economic brand of music shifted from one after that. Essentially that distribution system by and large changed in such a way that it no longer could control any sort of scarcity value into a new one, which is concert stadiums.

So really the question is if you are an online news site or if you are an online content site, or if you're a media company and you make money by selling knowledge, right. Or you capture the knowledge of what does that mean for your business, for AI? Do you think that businesses go away?

Yeah, that's pretty significant. Not soon.

Not soon. Nothing happens in one overnight.

Yet not soon. But I'll tell you one thing, I think you should be actively thinking about how to take your current proprietary knowledge of proprietary data and create a new and an evolved business, create a new business model around it. I don't know what the business model is, but yes, I think it's going to be, yes I do.

All right, let's move on to fun topic, crypto. You have been a big believer and big advocate of bitcoin, obviously.

I'm with Dan Tapiero, the Growth Equity Fund. We invest in all sorts of, we invest, by the way, the equities. I personally have direct token investments, but we invest in the equities of companies that are forming the digital economy. So yeah, I am a, a big fan.

So let's start with bitcoin. You know, and my friend Tom Lee thinks bitcoin is going to go to a million dollar plus very soon.

Well, see, Tom Lee gives financial advice. I won't do that. I just have an opinion about my own situation. And by the way, I'm a huge fan of your friend, I should point out.

Yeah, no, he's great. So I think, you know, one of the interesting thing, you know, I recently saw your LinkedIn post that really resonated with me. That is because you basically make the case that the CPI number is irrelevant. You really have to look at overall cost because of the money supply is like low double digits, you know. And you know, as an investor that's very profound to me because if you believe that is your cost of capital because you're losing, you know, market share, the money supply is growing 10 12%, you know, if you're not making 10 12%, you are worse off every year. So actually why don't you explain the audience that your view, what is the right way to think about whether it's inflation or if you have a $2 today, how to retain that $2, what kind of growth you need. You have a very differentiated point of view.

First of all, I should credit the insight to people like Michael Howell of Cross Border Capital who understands liquidity and also of course to the great evangelist of this is Raoul Powell and Julian Battelle who did great series of work. So I will invariably misquote them. But you can call me an acolyte of the view. The view is very simple, which is if you look at the law, and by the way, Michael Saylor has done this, a marvelous example of this. If you look at long term growth of liquidity, it's roughly 6 to 8% by and large and you can add sometimes it's higher, sometimes it's generally not a little lower. By the way, we had a little bit slower. Obviously in certain short periods, such as when the Fed was restraining capital in 21 and 22, generally speaking, 6 to 8%. Now you can also say there's on top of that, that's just monetary, what I would say monetary expansion, which is an effective basement, you could add to that if you want to certain non monetary related supply constraints, pandemic, normal goods and services, structural inflation. Add a point or two to that and pretty soon you're talking 8 to 10% pretty fast. And if you think that the underlying value of the mighty US dollar versus goods and services and crucially assets is eroding, call it 8 to 10% a year, all in. That is very different as an investor, but frankly as a household than believing that it's your cost is actually that your dollar is eroding at two and a half percent a year. Ten is a lot. It's four times bigger than two and a half. And the reason I say that if you're an investor that thinks you're doing well at 6% and your relative wealth is declining at 8 to 10, you got a big problem.

So why do you think most people is missing it?

Well, first of all, I missed it for 50 years. So let's start with that. The first half century of my, actually I would say the first 55 years of my life I missed it. Okay, so let's start with that. So it is easy to miss because it is again when you think about it, and you are steeped in Wall street, you know this so well, my friend. If you don't question the premise that the money is eroding beyond the cpi, which is by the way, what we're all sort of taught to think, then we're well not taught to think. I would say that we think that that's the most relevant measure. But if you fundamentally believe that versus goods and services and assets, that 2% is right, we sort of dismiss it because 2% is not material. If it's 8 or 10, it's a big deal. Now crucially, the other thing I would say is you and I are, we're steeped in the notion that the inflation rate should be measured versus goods and services because that's what's important to people who are building homes and living their lives and providing for their kids. But we never really talk about versus assets and that's really interesting. And of course even how they think about housing Inflation baked into the CPI uses owner's equivalent rent, which is in fact, as you know, a labor construct, not a labor. It's a mathematical construction. The reason I say that is because if you're not talking about assets, and you really fundamentally aren't talking about the inflation in assets, you're only talking about goods and services. You're never really taught to ask the question, well, how strong is the fiat currency to be a store of my wealth? But in practice, all of us behave like it isn't a good store of wealth. We buy our homes, we buy, you know, we buy things, stocks we buy. We try to park it in places to outrun, as it were, the, the underlying quality of debasement. So we behave like it, but we don't ever talk about it and we don't ever question it. So it does. Once you see it though, you can't unsee it. But to get to see it, you need to have somebody really tell you it's almost like taking a red pill.

So your Premise of that 8 to 10% growth is kind of hard to argue, but are we missing anything?

By the way, a lot of people do argue with it. Just for the record, you and I, I don't know what the argument is. No, no. M2 is really 6%. No, no. I mean, I get, I get all sorts of arguments about it. But even if it's 6%, and by the way, it isn't because that excludes all sorts of things like private credit growth and international global liquidity. It's not like the liquidity stops at the borders. We've got reasonably low cap. You get the idea. But people do argue with it.

So do you think we need to adjust this number for population growth? When you think about the wallet share in the US it doesn't matter because the population.

Yeah, except it's basically zero. It's. It's either negative or zero. So it's. I mean, they're not any. I mean, not nowhere with. I mean, there. I would struggle to come up with an OECD nation that's got positive population growth. I guess we could do that as a quiz, actually.

I suppose, but it's not going to make that big of a difference.

It won't do much. Yeah.

So it's fascinating. So if that's the case, do you think the value for bitcoin obviously go up because people are looking to store capital?

Well, Bitcoin will be volatile, but it has two trends. One is secular trend of adoption, which looks like tech. Right. And number two, it is a hedge against debasement. So if you believe that we will stop debasing the currency, this is the plan B, presumably of plan A. Or you believe that the tech quality of Bitcoin, its tech differentiation will face some sort of secular hurdle, then Bitcoin will have trouble. I happen to believe it's got a very strong tailwind.

Got it. So what other crypto you are looking into besides Bitcoin?

Our growth equity fund. And by the way, my opinions reflect only mine and not my partner's, although I hope they would agree with me. Invests in companies that have wide different, lots of different examples of where they are exposed to not more than just bitcoin. And so. Such as? Well, all of them. I mean, you know, we have investments in things like Gemini, we have investments in Deribit which is in the process of being sold to Coinbase. We are investors in Kraken, we're investors in Animoca and Future Verse and Doodles. I mean there's so many different ones. We have multiple positions across the entire spectrum of digital assets. No, I was going to say, although again we are equity investors.

So what do you think about all these new companies now trying to replicate MicroStrategy and creating Ethereum, treasury strategy, Solana, treasury strategy. What's your thought about those kind of strategy?

Well, I've been a longtime investor in MicroStrategy, now called Strategy and an enthusiastic investor. It's been good things for me. I think Michael Saylor has done a lot of groundbreaking work and done a huge amount for the industry. I've also been more recently an investor in a couple of the others. I think they're going to need exactly what you and I would expect, which is they're going to need some sort of moat over the long term. What's the moat? MICHAEL SAYLOR? I think the moat is it's an enormous hoard that has going to create a new and completely differentiated view of what a bitcoin based economy or bitcoin based financial system looks like. And he's doing that incredibly well. And he's currently securitizing it at various levels of, of the liability side of his balance sheet, which is amazing. I think others might be from particular places that are geographically distinct and have unusual arbitrage quirks, which I think is good. But I believe you're going to need something differentiated and unique which is why you see we were talking about Tom Lee earlier. You see people like Tom Lee saying, well you know, eth isn't the so called perfect money that Bitcoin is, but it nonetheless is an extremely low inflation rate and it has high utilization in a variety of different areas and so therefore can be a type of store of value. And so he launched a Treasury company with ETH as its core. If you launch a Treasury company with Solana as its core, you're going to have to deal with the fact Solana's inflation rate I think is in the 5, 5 or 6% rate. So you know, it's hard to see if you've got a store of value that is growing at 5 to 6% net, that's getting to a pretty elastic supply curve. So it's hard to see how it retains value. On the other hand, Solana's tech tailwind is enormous. So that's what you see propelling it forward.

Now that you know you are investing, besides investment, what other areas that you are spending a lot of your time?

Art, tech, AI. Those are really my three great passions now, which tech obviously includes bitcoin and crypto. And that's where I spend my time. That's it.

So to wrap up, you had an incredible career and what are the two or three things that you learned in life? You talked about the money supply thing that you learned at 55, but what are the two or three or even it could be higher. The things that you learned you wish you knew when you were 20.

Oh my God, I wish I understood money at age 10 the way I do now. Number two, I would say I would one of the things that if I had my life to play over again and you know, it's interesting, I remember reading years ago that Bill Gates did this and he was probably right, which is take time when you're in the busy throes of being a CEO or frankly you very busy career, anything like that, to get off the grid and dive deep into some new and emerging area. So important to keep learning. And I don't mean learning like getting better at your job or getting better at your position, whatever the case might be. It's dive deep into some new and powerful area. It's so fun to be, to be learning. It's incredible. The third, and this is something that has been the most rewarding thing and it was so improbably reached thing of my career. My career would be. Would have been very different if I hadn't been teaching most one of the most personally valuable things. The fourth thing I would just say is the most important thing in life begins with good health, good health practices. I've had bad health in my life. That's not fun. I spend now a lot of time on good health practices and the difference is extraordinary.

Health is the single most important thing. If you don't have the health, you don't have anything. This was enormously fun to talk to you, so thank you for making the time and sharing your insight.

The conversation.

Yes, thank you. Thanks everyone. Thank you again for tuning in, and I really hope you enjoyed that conversation as much as I did. Subscribe to our show on Apple or Spotify or wherever you listen to your podcast so that you don't miss an episode. See you next time. All opinions expressed on this podcast are solely those of the host and guest, are for general information purposes only, and do not constitute professional investment advice.