Highlights from Horizon Kinetics "Compendium Compilation" - 2021

These are from the "Compendium Compilation (Eighth Volume)" of essays written by Horizon Kinetics' Murray Stahl in 2021:

• If the supply of goods and services aren't increasing at the rate of the money supply, you have to ask why? One answer is that there are key commodities for which the production level can't increase very much. Not because it's technically impossible to do, but because the extractive industries are under a constraint. The constraint is they cannot increase, in any measurable way, the emission of carbon dioxide and other greenhouse gases. The goal for almost all of them, which you can now read about in their annual reports, is to decrease emissions by about 3%  year. The only way to accomplish that is to not expand production in any meaningful way. Yet, the world population increases by about 80 million people a year, and they're going to need those products - whether it's silicon, soda ash, oil and natural gas, or lithium - whatever it is that's going to be used, there are more people needing more of it.
• [A]t some point, the bondholders do experience the sensation of debasement And when they do, they'll refuse to buy bonds anymore. Then you're in a major financial crisis. The central banks will have no alternative but to buy those bonds, otherwise they're going to create a massive problem. If the central banks have to support the bond market at the current yield levels, you're going to have incredibly serious inflation, much more serious than we have right now. And that's what, I think, is ultimately what we're coming to.
• [T]he production of ordinary commodities in common use... requires enormous amounts of capital. The return on capital is generally rather low and quite cyclical. Moreover, the periods of low return on capital can persist for many years. It should not be surprising to learn, consequently, that investment capital gravitates towards the high return businesses and away from the low return cyclical businesses. If such trends persist, some types of commodity production will at some point become inadequate to meet demand. The result in a free-market society is allocation of scarce resources via price adjustment, a phenomenon otherwise known as inflation. Inflation raises the return on capital for commodities, but the return still remains low even though it is elevated relative to the prior period, and it still remains cyclical. It is still very inferior, on those counts, relative to intellectual capital. The return on capital for commodity production might, even with elevated pricing, be inadequate to attract sufficient funds to remedy the supply deficiencies. The consequences may be a persistent type of inflation we have not generally witnessed in modern history.
• If you're really interested in the study of inflation, the investment challenge is not to simply protect yourself against the ravages of inflation; it is to benefit from inflation, to improve your position via inflation. To merely keep pace with inflation doesn't change anything. 
• The following is a list of 20 publicly traded royalty companies. A few might be left out, but 20 is more or less the total number that exist in the world. [FNV, WPM, SAND, RGLD, OR, MMX, MTA, LBRMF, ATBYF, TPL, PREKF, VNOM, MSB, MNRL, RPRX, DMLP, FRU.TO, ALS.TO, DRR.AU, SBR].
• What you'll find is that in a real crisis, the Federal Reserve steps in as a buyer and you'll get high rates anyway, because there is no amount of money that they could invest that's really going to defend the market. They might be able to protect the treasury market, more or less, but the bond market is vast. I'd estimate that the U.S. bond market is 15x or so the current size of the Federal Reserve balance sheet. So, if the Federal Reserve were to try to defend the entire bond market, you'd have so much money creation, you'd lose money in bonds anyway, because of the loss of confidence in the currency. If a policy of supporting the bond market were sustainable, then no nation would have ever had a problem with money creation. It might've led to a lot of inflation, but it wouldn't have led to a collapse of the country. However, it has always eventually led to a collapse of the credit market - why would you lend money to anybody (that is, buy their bonds) if you knew your principal was going to be debased? As an interim risk reduction step, lenders might require every shorter maturities. But that just means that when a great many maturities come due in a short window of time, the stage is set for another credit crisis, whereupon the central bank would have to intercede and create more money.
• The Tesla net profit margin is not as high as those of Microsoft, Apple, and Alphabet. The relevant figure is a mere 11.76% Yet, this company has the mighest market capitalization to sales ratio [in the S&P 500].
• The Tesla valuation is sufficiently unique to suggest that the market expects Tesla will dominate the entire automobile industry. In fact, the Tesla market capitalization of $1.21 trillion already dominates the list of publicly traded automobile manufacturing firms. [...] This not only suggests an investor presumption of the eventual capture of a 100% market share, but at a higher level of profitability than the current industry leaders. Tesla's market capitalization and market capitalization-to-sales ratio might be more understandable if the shares of the traditional automobile manufacturers were in decline, thereby forecasting an impeding decline in profitability as well as a serious loss of market share. However, this is not what is happening. In fact, viewed on a year-to-date basis through November 5, 2021, many automobile manufacturers are actually outperforming the S&P 500, while Tesla shares have advanced by 67.48%.
• Thus, 18 out of 36 holdings in the iShares U.S. Energy ETF, representing 31.31% of the portfolio, produces no hydrocarbon. If the portfolio were limited to hydrocarbon producers, it is questionable whether it would be possible to even operate a bona fide hydrocarbon-producing ETF. Thus, the investment world has nearly divested, consolidated, or bankrupted the energy industry out of existence. As a contrarian, it is an opportune time to purchase.
• The prevailing belief is that the world can eliminate much of its hydrocarbon usage. We're going to find out if that proposition is true or false in the next several years. For myself, I believe that proposition is false. I don't necessarily believe that the most wonderful thing in the world is hydrocarbons, and I also believe that if there were a viable alternative to it, it should be undertaken. I just don't think there is a viable alternative as a practical engineering proposition.
• The inconsistency in the consensus views on the automobile companies is self-evident. Tesla cannot possibly enjoy the level of success consistent with its elevated market capitalization unless it captures significant market share from the traditional firms. Alternatively expressed, the traditional firms cannot possibly retain market share while Tesla enjoys a level of success consistent with its market capitalization. One way or another, all such logical inconsistencies are eventually resolved by changes in valuation.
• Do you believe Honda, Toyota, Mercedes, Audi, and BMW cannot design electric vehicles? If it were practical to produce electric cars, these companies would have them in their fleets. They would have viable offerings on the market. However, they do not have viable offerings on the market. They would rather pay the non-zero-emissions fees imposed by 12 or 14 states. This happens in Europe, too. Car companies would rather pay those charges than take the same amount of money and build a proportionate number of electric vehicles. There has to be a reason for this choice - it's not as if they make large scale capital allocation decisions without careful study - and the reason is that with the technologies available, the project is simply not practical on the scale needed. There is a geologic reality that just has to be faced. It has nothing to do with anyone's political orientation or desire for a better world. It is just a practical reality. A global-scale lithium-battery powered vehicle fleet is not a viable solution.
• The challenge for the pharmaceuticals companies is that, in order for a large market capitalization firm to grow at a sufficiently elevated rate, it is necessary to invent new drugs that either cure or treat, but preferably only treat, widespread ailments. In the case of a decisive preventative or a cure, such as a one-time childhood vaccination for diptheria or polio, or a course of antibiotics for an infection, the revenue opportunities are curtailed by the success of the treatment. In order to secure an ongoing stream of revenue of the type that can qualify as a blockbuster drug, what is required is a chronic but non-fatal disease that can be controlled for many years, but not cured.
• If a gold mining company is not desperate to increase production, there is no reason to take the capital of the streaming companies for the next precious metals deal. The miner does not need to do that, so the bargaining position of the streaming companies is not as strong. In that sense, the streaming business is just not as good as it was historically. That does not mean the streaming companies are a bad investment; it just means that the streaming companies must adopt policies similar to those of the gold mining companies. We are already seeing that in Wheaton Precious Metals, which is going to start returning  capital to shareholders. If the company cannot find lucrative streaming deals to make with its cash flow, it will return capital to shareholders in one way or another, either by increasing dividends or share buybacks, or both.
• The consensus view right now is that the governments of the world will, collectively, eventually eliminate tobacco as a retail consumer product. Thus far, they haven't been able to do it. In fact, in some respects, the industry is enjoying a type of renaissance. If there is legitimacy to that observation, if this renaissance persists, then the tobacco companies are not going to continue to trade at the present low multiples. When that happens, assuming it does happen, the upward valuation rerating of the companies will also happen on a  lower number of shares, because most of the tobacco companies are buying back their own stock. If the rerating really does happen, then it will involve a lower number of shares, which would create a quite a substantial rate of return.
  

Previously regarding Horizon Kinetics:

• Horizon Kinetics, Owner-Operators, Indeterminate World, and the Predictability Arb
• Horizon Kinetics on "Corporate Risk Reduction"
• FRMO Corp 2014 Q3 Earnings Call
• Thoughts on Private Equity and High Yield Bond Duration in Latest Horizon Kinetics Quarterly Letter 
• Some Thoughts From 2014 Horizon Kinetics Market Commentaries
  
• Horizon Kinetics On Flawed Diversification Theory
• Latest Horizon Kinetics On Indexing
  
• Horizon Kinetics Fourth Quarter Market Commentary
• Credit Bubble Stocks 2018 Book Review Compendium [review of Compendium Compilation 2015]
• Goehring & Rozencwajg and Horizon Kinetics on Commodities