This episode features an interview with Wolfgang Koester, Chief Evangelist at Kyriba. Wolfgang has spent more than 30 years in currency markets, with experience working for Fortune 1,000 companies and government entities. He is the former CEO and co-founder of FiREapps, and was named one of the “100 Most Influential People in Finance” by Treasury & Risk Magazine. On this episode, Wolfgang discusses the importance of knowing your exposures, defining risk, and the possibility of a global electronic currency.
This episode features an interview with Wolfgang Koester, Chief Evangelist at Kyriba.
Wolfgang has spent more than 30 years in currency markets, with experience working for Fortune 1,000 companies and government entities. He is the former CEO and co-founder of FiREapps, and was named one of the “100 Most Influential People in Finance” by Treasury & Risk Magazine.
On this episode, Wolfgang discusses the importance of knowing your exposures, defining risk, and the possibility of a global electronic currency.
Quotes
“Companies need to embrace actually digitalizing the financial part of their corporation, or they will fall behind. You need to be digitally ready. And if you're not, you're going to be more expensive and slower paying than your competitors. And therefore you will actually have serious competitive negative impact. Due to not having digitalized your financial systems.”
“Every business is in the business of taking calculated risks. Some pay off, some don't. But they need to be calculated. And calculated by definition means you need to know what the risk is to make a decision of whether you take that risk or not.”
“We say let the data tell you the story. And we obsess on helping companies get at all that data, clean that data, and give them full visibility towards exposures.”
Sponsor
The Invisible Vault is powered by the team at Kyriba, the global leader in cloud treasury and finance solutions, empowering CFOs and their teams to transform how they activate liquidity as a dynamic, real-time vehicle for growth and value creation. To learn more visit www.kyriba.com
Wolfgang Koester: Every business is in the business of taking calculated risks. I believe that. I wholeheartedly believed that every company takes risks. Some pay off, some don't, but they need to be calculated. And calculated by definition means you need to know what the risk is to make a decision of whether you take that risk or don't take that risk.
Narr: Hello and welcome to The Invisible Vault.
This episode features an interview with Wolfgang Koester [[ CUSS-ter ]], Chief Evangelist at Kyriba.
Wolfgang has spent more than 30 years in currency markets, with experience working for Fortune 1,000 companies and government entities. He is the former CEO and co-founder of FiREapps, and was named one of the “100 Most Influential People of Finance,” by Treasury & Risk Magazine.
On this episode, Wolfgang discusses the importance of knowing your exposures, defining risk, and the possibility of a global electronic currency.
But before we get into it, here’s a brief word from our sponsor…
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So please enjoy this interview between Wolfgang Koester, Chief Evangelist at Kyriba, and your host, Bob Stark.
Bob Stark: [00:00:00] Hi, and welcome to this special edition of The Invisible Vault podcast.
Today we are focusing on currencies - both real and digital - and are joined by one of my favorite people, Wolfgang Koester, Kyriba's Chief Evangelist, TV Personality, and all around expert on foreign and digital exchange. Wolfgang, welcome.
Wolfgang Koester: [00:00:28] Thank you. Thanks for having me. I'm excited to be here. You're one of my favorites, so we're all good.
Bob Stark: [00:00:33] Well then great. This'll be a lot of fun for both of us.
Wolfgang Koester: [00:00:37] Yeah I'm looking forward to it.
Bob Stark: [00:00:38] So Wolfgang, let's start, I hate to say at the very beginning, but I think actually that's an appropriate way to ask the question, because the way that you've got into foreign exchange, into digital currencies, become an expert on all these issues, not just for Kyriba, but for our corporate clients, and in fact for media and TV in general has been a great journey. So can you tell us a little bit about how did you get into foreign exchange? How did this become a very passion for you?
Wolfgang Koester: [00:01:08] As you can probably tell, I have a pretty American dialect, but with a name like Wolfgang, I was not born here. So I actually came in the late sixties every summer for at least six weeks to the United States. And at the time I started seeing the impact of dollar Deutsche Mark and one summer the records were cheap and next summer they were really expensive because the Deutsche Mark wasn't buying me nearly what it was buying me the year before. So I'd actually started watching this in the early seventies. And then there was obviously the big move in the mid seventies of getting off the gold standard. And it was obviously a very large political and economic event that started interesting me. I've pretty deep background in mathematics as well. So mathematics and finance continued to interest me. And when I went to college, I really started actually not just looking at it, but actually trading after not doing so well in trading equities. I actually started trading currencies, which my family thought I was crazy, but in 1982, the trends were pretty good. And I was actually doing quite well in the trading. And then I tried to apply that and did apply that at Audi and English dot Germany under the CFO to put a currency risk management program in place that later on was adopted at VW and it kind of moved on from there. And during that time, I actually met a gentlemen who had started a company with a couple of models of how to model medium to long-term trends in dollar Deutsche Mark mark and joined that firm. And we grew that firm and later became CEO and we sold that firm in 1999, the marketing rights, a company called GFTA. At that time, we were really talking to a lot of corporates who wanted to know when to be less hedged versus more hedged on their core exposures. And the reason for that was it was actually at the time, pretty expensive due to interest rate differentials to hedge. Now that belief that it's expensive to hedge is still believed in some areas today, but it isn't really the case anymore. It's nowhere near as expensive as it used to be. That kind of got me going to really help corporations manage currency risk, and really got heavily into that in February of 87. And so that kind of, then the journey moved on to after we sold that starting another company we're actually helped the companies more understand where their exposures were and then get them to a point where they can easily manage that and automate that whole process. And that actually introduced us to the cloud, where in 2000, 2001, a lot of people still were wondering whether they should be in the cloud or shouldn't you have your data on premise today. I think that has significantly changed, but that really started the journey of helping corporations understand their exposures, because that was much more fundamental. So that's kind of the background that then got me to, as you well know Kyriba merged and acquired fire apps, which was that company that I founded in 2000. And so we continue on the journey of watching what is by far the largest financial market in the world and continues to evolve. And I think we're going to probably get a lot more into what is the history there, et cetera. But at the end of the day, I think that some of the data to remember is A really important, getting up the gold standard in the mid seventies, that really followed by the world event of the Maastricht treaty in 1992, where they started talking about, should they have the Euro? And then obviously they executed on the Euro in 1999, but with the original 12 member states. Then that time period, there was a large movement to actually have two parallel currencies, one being the Euro and the other one still remaining the currency of the country. Actually, I was quite in favor of that, but at the end of the day, that is not what ended up happening as we all know, it became one single currency, the Euro, and that really then opened the debate already that time is what is the next move in the currency markets and really much bigger, much larger in the monetary system, the global monetary system, how could it be affected? And in 2000 data, as we all know a thing called Bitcoin came out on DLT technology. And at that time, people started saying, this is the great way to actually get off any sort of currency standard that is supported by governments and the race started. But let me kind of stop with that. That's a decent background for starters.
Bob Stark: [00:05:45] That is a great background - and offers a lot to build on.
Let's start with FiREapps, where you began to cultivate your celebrity. What did FiREapps do so uniquely in the market - because even to this day, there is nothing like it.
Wolfgang Koester: [00:06:09] So when people try to figure out for years what their exposures were, the banks were helping them and what the banks would start with is, and what consultants would start with is, with the end results. In other words, how to better hedge. And we actually said that to better hedge is really the end result. And actually the easiest part of hedging is the actual financial transaction to hedge. But really, and it was a Businessweek article that actually came out where we were quoted in that ended up being called to hedge or not to hedge is not the question. What is the question is what is your exposure in the first place and get visibility of that. So instead of starting and backing from the hedges into the exposure, we said, let the data tell you the story and we, for a lack of better term, obsessed on actually helping companies get at all that data, clean that data and give them full visibility towards exposures and starting with the data and then moving it forward. And the first part in order to prove that really was on booked transactions. So the first thing we did is we actually focus in order to prove that we can do this, quite frankly, we proved that we can pull data out of the ERP systems and within seconds give a corporation, and when I say seconds, 90, 180 seconds, whatever it is, to give a corporation the idea of what their balance sheet exposures, the monetary assets and liabilities in totality are, and then they can dissect it, how they want to, and then they can do certain things to actually change the exposure, reduce the exposure, before they actually go to hedge. For example, they could convert from one currency to another, they can re-denominate loans. They can do all these other actions before they actually go on to possibly, as a last result, hedge those exposures. But I think the big part here continues to be FiREapps continues to ground itself in the data, getting at access to the data that defines whatever exposure the corporation wants to define.
Bob Stark: [00:08:13] Well, it really touches on what is a theme, certainly post pandemic, but I would say leading up to pandemic. We kept hearing about data-driven finance or data-driven treasury to even be specific about who owns the FX hedging relationship. The data is the hard part to find. And I know you talked about a couple of things, so I'd love to get you to go into a bit more detail. Obviously, cashflow hedging for those that are in treasury and finance, they'll recognize, okay, I have obligations. I need to hedge those and away we go, but that's not the biggest problem. At least not the only problem that needs to be solved. As you say, there's information that's buried deep within the ERPs that you need in order to be able to make those decisions, whatever decision that might be, and that decision not to put words in your mouth, but I know you can opine on this a bit. That decision may not necessarily be to hedge. You need to understand what you've got first before you can even make that decision to hedge or not.
Wolfgang Koester: [00:09:11] Yeah, absolutely. So there's lots there, but it reminds me of one of the first customers we ever had was Yahoo. And the CFO of Yahoo had no interest in hedging at all. But what she did is she wanted to know what their exposures were. And once they did, challenge the organization to change the exposure in such a way that there wasn't going to be a lot of exposure left. So in other words, re-denominate loans, as I was talking about earlier, doing all these things. But the first challenge obviously was well, okay. First of all, we're going to look at the monetary assets liabilities, which obviously, as of COVID have become much more focused on as liquidity being what is on my balance sheet, what assets against the liabilities and the denomination of those. And then really start with that. So typical programs start with balance sheet hedging. There's some companies who want to just think about cashflow, but very few. The majority of them think of our balance sheet and then think about cashflow. Some in Europe still think about transactional hedging, which is kind of a combination of both, if you wish. But from a accounting measurement point of view, the way that financial accounting standards and international accounting standards define it, there's kind of three categories. There's your balance sheet, there's your cashflow and there's your economic. For the economic, you actually don't get any hedge accounting cash flow. If you can do certain proves you absolutely can, and balance sheet, you don't need to because you're managing what you have right now. So those are kind of the three areas and really going into, what are they doing. As you well know, is that requires different data sets. So balance sheet is purely ERP. Cashflow is understanding how the cash ends up on the balance sheet or the position to end up, but really then looking forward to your revenues and your expenses, et cetera. So you may have that in forecasting modules, you have that in various different parts and you need to start marrying that, what I call the vertical data, which is the balance sheet with a horizontal, which is time into the future.
Bob Stark: [00:11:18] So if we're thinking what data-driven looks like, then it really is a matter of aggregating all of the different sources of information. ERP being one, but not the only source of truth alongside what treasury might have in their cash forecast or what the business units may have. And you're first trying to aggregate everything you possibly can to understand, do I have an exposure that I need to worry about? And maybe an exposure is understating it completely. Do I have several exposures or what degree of exposure is there? I'm sure you can smooth it out for me there.
Wolfgang Koester: [00:11:56] I think you've said it absolutely correctly. It is about the exposures that you have. What is important? What is material to you? And I think this is a huge decision is the materiality of these exposures, how can they actually impact your financial results? Because somewhere they'll end up in either the revenues or the expenses on your EBITDA line or further down into and or the earnings per share. So what you're trying to do is figure out where all the exposures are, what is material here, and then apply volatilities, et cetera, measurements on there to do that. But you're absolutely correct. What is really interesting about this is how big of a problem this is. I think most people don't appreciate that because people will say, well, I've got a company and I've only got 10% of my revenue abroad, so I don't have a problem. But I'll give you an example. For example, make it even more extreme. I am a grocery chain on the west coast of the United States and there is a big one there. And they have their revenues only in the United States, so they don't have to worry about currencies. Why would they have to worry about currencies? They have zero revenues from abroad. Well, they buy 20% of their bread in Mexico. They buy a lot of citrus out of Latin America, as well as Israel. They buy a lot of candy out of China and they actually in totality have about a 42% exposure to foreign currencies from all these currency interactions between dollars and their expenses though, they have no revenues abroad. So the bad news there actually is the revenues abroad would actually help them offset that risk, but they can't offset that risk that way. But the point being is you can actually have a company that can have more than hundred percent of their revenues exposed to currencies because your company can be 60% revenues purely on the revenue side, but I could be in other countries producing. And that's not unusual. I could be selling 60% of my products in G10s and I could be procuring or building 50% of my product in developing countries, LDCs, whatever else. And just that definition right there would have 110%% of your revenues exposed to currency exchanges. And understanding that and then figuring out how to mitigate it is very important. The other thing that people forget there is, if you're a U.S. Company, it isn't just dollar against all these currencies. It's actually not. It is, I have inner companies. I've got somebody who was in my inventories in Europe and we're selling it into Japan out of Europe. Now if you're a Yen exposure it has nothing to do with the dollar. I can have a person traveling that is employed in London to Frankfurt. Now I've got a Sterling-Euro exposure. So while there are certainly 266 countries, and therefore just about as many currencies, it is not unusual for companies to have over 200 cross-currency exposures. And when I say that, you can be $250, $300 million company these days and be doing business all over the world and you'll have that exposure. Now you may say, well, now I want to concentrate on the top 80%. And we see that all the time. The problem with that statement is the top 80% is typically not the most volatile and therefore not the riskiest. Risk management actually will dictate that you should understand what are the riskiest exposures, and then figure out the top 80% of that notch. What are my top 80 of exposures? Really important.
Bob Stark: [00:15:49] You've alluded to this a couple of times, so I'm going to ask you to expand on what is a good outcome for CFOs to work towards?
Wolfgang Koester: [00:16:24] It's either good or it's bad. It's really literally almost dead bipolar. And the good is you, as a company, when you've done everything possible are currency agnostic. And agnostic. Isn't not believing it is that currencies' movements don't actually impact your business. That's good. Okay. When it gets bad is when the impacts of currencies materially change your forecast or your results. And you see this all the time. And when I talk to CEOs and CFOs of corporations, which often do, as you know, is they do not want to have a surprise. And when you're a publicly traded company, a surprise by definition is 1 cent per share. Because the minute you have 1 cent per share, it becomes material. You have to report on it and you'll get analysts asking about it, and you get investors asking about it. And as you know, is most companies go out and they say, okay, this quarter we expect to come in between $2 and 20 and $2 and 23 cents. For sure. And Murphy's law, you would actually, without currencies come in at $2.21, but with currencies come in at $2.19. When that happens, the, and I've seen this so many times over the years, often the speaker phones go on mute and they start selling. It's that material. And people think that, well, sometimes it's up and sometimes I'm a little bit higher and sometimes a bit lower, while that may be true, maybe. And while it may be true that sometimes you're up 2 cents, sometimes you're down 2 cents, it's mathematically proven that when you are down 2 cents, your share in percentages reduces, goes down further than when you're up 2 cents. Because the negative surprises are always punished more than the positive surprise is given credit for. So even if you believed, which I actually don't, that's a zero sum game. And even if you believed that, you know, you'll have so many times these gains and the equal amounts of losses, the share price, which is what it's all about at the end of the day, the market capitalization, the value of the company is negatively impacted by a material, financial impact. That's number one. Number two is aside for commodity companies, currency is by far the largest financial risk of a corporation. Now you say, well, how's that? Well, let's think about it. What are other financial risks? Yes. You could have insurance claims, of course. You could have fires and you're insured for those. But they're not really as big a financial risk if you have a hundred plants and one of them, something bad happens there, you got 99 plants. So it's really not that all of a sudden one plant all of a sudden can be that big. But then you go, well, the next one is interest rate risk. Well interest rate risk, yeah, it's possible that you chant change 200, 300 basis points over a year more. 200, 300 basis points is a lot and you can absolutely have all of a sudden a increase of cost of capital that would hurt. But the average currency volatility in the G10s is typically 10 to 12%. So when you think about volatility of currencies, it is actually the largest financial risk and it becomes, to many analysts, the indicator of how good they actually are at managing all risks. So a lot of analysts are asking CEOs and extrapolating. If they're not doing well in foreign exchange, what else aren't they managing very well? And you know, we at Kyriba know exactly how to do that, but this isn't about the Kyriba part. This is in general about how companies need to embrace as a painkiller, not as a vitamin, they need the painkiller of actually digitalizing the financial part of their corporation, or they will fall behind. It's that simple.
Bob Stark: [00:20:44] There's a lot I want to ask there. So I'm going to start with the simple ones. To hedge or not to hedge is a company decision. And going back to your initial point, like around Yahoo. They chose not to hedge, but they still wanted that visibility because they didn't want to be that organization that didn't know what they were exposed to to your point, because what else, if you don't have that diligence in terms of exposure management, what else is going on? Is it fair to say that investors recognize that I may or may not buy into your organization, hedging or not? That's the decision as an investor I can make. I can't control if you're not doing your job and doing your diligence around what your organization's exposed to.
Wolfgang Koester: [00:21:31] Yeah, so a couple of things there. One, once Yahoo actually understood their exposures and the CFO challenged the organization to reduce those exposures, naturally the exposures were still large enough and she now trusted the data that she actually said that is still too big of a financial risk to Yahoo. And they started hedging. So they went through this process, interestingly enough, directed by the CFO to actually wanting to understand the exposure before they make a decision to hedge. I had a conversation with the CEO and CFO of a $1.8 billion revenue company in the Midwest a couple of weeks ago. And they thought we wanted to talk about hedging to your point earlier, but we actually said why, I don't know whether you should hedge or not hedge. I don't even know your exposures, do you know your exposures? No, that's really complicated because somewhere we have partnerships and then we're only 51% in there and it's a complicated process and we don't know our exposures, so we don't do anything about it. We said, why don't we help you understand your exposures? And then you make the decision how to do it. And that was a fundamental belief of ours is at FiREapps and it is at Kyriba today is the fundamental belief is every business is in the business of taking calculated risks. I believe that. I wholeheartedly believed that every company takes risks. Some pay off, some don't, but they need to be calculated. And calculated by definition means you need to know what the risk is to make a decision of whether you take that risk or don't take that risk. Once they had total visibility to the risk at Yahoo many years ago, they actually said, we can't take that risk. And we see that happen all the time. When people finally have clarity and they're very comfortable with now they've defined the risk well, then they can take the step of actually saying, I want to take that risk. And if I do, I'm going to communicate very clearly the risk I'm taking or I'm really not getting paid for that risk, so I might as well take it off and that's a business decision.
Bob Stark: [00:23:48] Well, I like that point, but I'm really not getting paid for it because. The market doesn't reward you for surprise. You had to gain on FX, or at least not to the magnitude that you get punished if you lose. I'm assuming, and correct me if I'm wrong, that the reason for that is that it could have been a loss just as easily. And so as a result, you're not going to get rewarded in terms of an increase in share price for having an accidental win.
Wolfgang Koester: [00:24:18] Absolutely right. And there are actually examples, probably the most famous one was a Dell in the late eighties, early nineties, they reported a massive gain. And the analyst looked at this and said, how is it possible that this company had such a large gain on currencies? Share price first went down about 10%. Then the analysts actually did the math and figured out pretty quickly there's no way they're making this on their exposure. They must be trading for profit and slammed them another 20%. So their share price within a week went over 35% down on a hundreds of millions of dollars of gains. These are not unusual examples because to your point is, they said, well, first of all, if you don't know what you're doing, or you can speculate on what you are actually doing there makes investors nervous. And then yeah, they're up. So I may give them a little bit because it looks good and the trend is fine, but when they're down, they really get hurt. It's really interesting how that happens and continues to happen. And what boggles my mind is that with today's technology, with the lack of high costs of hedging, everybody isn't doing it. But the good news is that more and more companies are doing it. And most companies are managing that risk to some level today. I would say that 90% of companies do some sort of balance sheet risk management and 50% of companies do some sort of cashflow hedging. But I can't unfortunately say that all those companies do it to the point that it becomes immaterial. And that's an issue and they don't do it efficiently that way. If you're still doing transaction hedging, that means you're hedging every single transaction. So you may be buying something in euros and selling something in euros. And you're going to do a hedge on dollar-Euro on the transactional of the revenue side and on the sell side. Now you're actually trading a lot more than you need to be trading, and that does cost money, unnecessary money.
Bob Stark: [00:26:19] As you say, Wolfgang, there remains a lot of room for CFOs to improve their understanding so they can make the right decisions to align to their corporate policies.
One of the reports you created several years ago was the currency impact report, which we still produce today at Kyriba. It has drawn a lot of attention to the magnitude of gains and losses that CFOs are missing. Can you talk a little bit about what that currency impact report is? Because quite candidly, when every time you go on TV, they ask you, but what is this? And what's going on? And why are these companies so challenged to understand and manage their exposures?
Wolfgang Koester: [00:26:57] When we started FiREapps, we actually went after surprise - who were the biggest culprits who had the biggest losses. And one day I'm actually sitting in this town outside of Phoenix in Paradise Valley, Arizona. And I'm reading the local paper and they're talking about who got broken into. And I said to my wife, wouldn't it be interesting if you actually had a database of all the people that got broken into and call them and sell them alarm systems. And they'd probably pay a lot more for it. Well, then I sit there. I said, how do I apply that to FiREapps' business? Internally the currency impact report was called, Who was broken into this quarter? Who got negatively impacted? And we started quantifying it. We never really went out and told the world who had just gotten hurt, but we created this massive database on all these companies, including what currencies were most volatile in those times and therefore impacted the corporation's results. And we really had the belief that we wanted to help corporations do better. And we had to make a choice at that point, because quite frankly, that database today would be very interesting to a lot of investors to actually really be able to know, because you will know at the last day of the quarter, the impacts to these corporations, to every one of them, if you looked at database, which is kind of interesting. Now, we wanted to not make money, from that perspective, but really wanted to help these companies. But we would call these companies up and say, listen, we just saw you had this impact. Would you like to talk about how to resolve that impact? And that's how this whole thing started actually was really to create a database. It was picked up quite frankly, by the press who was picked up by Wall Street Journal first, and then The Financial Times. And then later on, obviously went on to CNBC CNN, and it is quarterly reviewed and reported on by most financial publications today, as you well know. But the idea is that people really want to understand is what can they expect quite frankly as currency impacting on the earnings per shares and who are the culprits? Now, we don't list the culprits too much because really we want to keep helping these companies actually resolve it. So funny enough, our goal was, and is, to get that currency report to say, there are no more impacts. Then we will actually have succeeded in eliminating that problem.
So The currency impact report reviews 1200 corporations around the world. 400 of those in Europe and 800 of those in north America.
Bob Stark: [00:29:47] So on this currency impact report then, it almost sounds like our goal is to make this obsolete by the fact that there's no one that's losing. That everyone is managing their exposures correctly. That everyone's actually making the right decisions. That would be a great ideal to show that we've been successful.
Wolfgang Koester: [00:30:08] Correct. I would absolutely agree with that. That's the goal is really help companies mitigate the risk to the point of immateriality because the reason we find those is because they're material and therefore they have to report on it. That's how we find it is the numbers are the numbers. They have to report on the numbers. We know who report on the number. We know what they reported. We know in what industry they were. We know what the biggest currency impacts were. So there's a lot of information there, but ideally every single company should be currency agnostic and act as if they don't have to worry about currency anymore because it is fully, automatically managed.
Bob Stark: [00:30:47] Sounds like a good objective. I lived to see that happen, but in fairness, in the near term, it's also a fantastic benchmark for them so that they can understand, oh, I really should be doing better. And thank you for drawing our attention to this particular opportunity.
Wolfgang Koester: [00:31:04] And I'd like to add one last thing to this. It is common, certainly in North America and now in Europe, that materiality is actually defined by 1 cent earnings per share. So if you have more than 1 cent earnings per share, you have a material impact. So your goal should be to stay under 1 cent because then you actually don't have to necessarily report to it. And the CEO and CFO do not have to fend off questions with respect to currency. So it's a known fact that 1 cent earnings per share or more is the definition of materiality today.
Bob Stark: [00:31:43] Now one thing you mentioned earlier is around corporates and CFOs. Their mandate isn't to be trading FX currencies it's to be protecting from their exposures. But you gave an example of where you've seen that happen and the market reacted poorly. If we switched from Fiat currencies to cryptocurrencies and digital currencies, those mechanisms don't exist for Bitcoin. I mean, yes, there's a bit of a futures market, but it doesn't have the liquidity that it needs for corporates to protect themselves. So maybe that's the first question. Why are corporates starting to get into cryptocurrency?
Wolfgang Koester: [00:32:23] Well, I mean, I think that there's some that like to be on the forefront of it that actually have a interest in the business, such as an AI firm who is very heavily into cryptos. But I think in general, the feeling is not that a lot of corporations are actually looking to make that part of their balance sheet. Yes, we have the famous you know, Tesla examples. And even though they've now stopped. But I think there's a different area that people are looking at right now. So if you look at the limited demand on, let's stay on Bitcoin for a second, at 21 million coins, it is kind of like limiting gold and you should therefore have a demand that continues to increase with the supply staying the same. And if that is a successful measurement, as there is a measurement in all commodities, and if you want to liken this to commodity, then you would actually look at it and say, by now we should be worth somewhere around $127,000 in Bitcoin. So that model actually isn't working, and then you have to ask yourself why isn't that model working? And the reason that model isn't working is because it isn't that commodity that is limited in that aspect and the fundamental applicability, why Bitcoin and many other alt currencies were built is to actually detach Fiat currencies from the monetary system and create its own global monetary system without governments issuing currencies. And really at the end, the dream was everybody uses Bitcoin. Why would you want to use a dollar or Chinese currency or a Sterling, whatever, if you can buy and sell anything in Bitcoin?
Bob Stark: [00:34:13] I think a lot of people believe that the attractiveness of Bitcoin is the anonymity, but in fact, there's other elements to it such as its utility across borders.
Wolfgang Koester: [00:34:27] Yes. That it was actually one of the dreams of it as being, if that becomes the world's currency, it goes across all borders and it is not credited to the government. The issue there is, that means basically liquidity of governments, if that would actually work, would go away. So then you have to go to the fundamentals of how does the monetary system actually work with the Bitcoins of the world. And there are some theories and arguments about that. I've never believed in it from day one. I went public right at the first height of the Bitcoin in December of 2017, with Maria Bartiromo when she asked the question and actually was debating a gentleman who was believing that it was going to 300 thousand. And I said, I think that there's a couple of fundamental things that we're not looking at correctly. One is the belief that countries aren't going to be able to issue their own electronic currency. And what this came down to, and I put it this way is, there is going to be a race between Fiat currencies and Bitcoin. Who's going to win the race of electronic currency? And I believe from day one, maybe as fundamental as what my dad always used to tell me, which said, don't ever fight city hall. Fighting the governments to take their currency away was a non-starter because the credibility of that could be as easily erased as adding three words to the definition of the financial institution, which is a Senate Bill that's in the United States right now. And those three words are adding to the definition of financial institution, "issuing of currency". The minute you add the word, "issuing of currency," to the definition of a financial institution, every single issuer of Bitcoins, et cetera, actually has to fall within the CFTC, et cetera, regulatory bodies, and actually needs to be completely transparent on every single transaction it does, which goes against the belief. Now, that's one issue. The other issue it turns out is that it is actually really easy to regulate and I had to say this, shut down mines as China has done right now, by just looking at where there are hotspots of electricity. Sometimes they're actually mistaken. So you may have heard in the UK there was a bust I think it was a couple months ago. There was a bust where it was a meth lab. And the reason they thought it was a meth lab, that's what they were ready to bust, is because there was all of a sudden this massive amount of heat being produced in this area. Well, turned out to be as you probably know, it ended up being a Bitcoin mine. And that in itself actually was not illegal. But in order to pay for the mine, they needed to actually get electricity from all the neighborhoods. And stole that electricity and that's what they ended up getting busted for. But at the end being, and this is the point is, in China, when they said we are not allowing mining of Bitcoin anymore in China, they didn't stop with that. They actually knew exactly where all these hotspots were and just turned the electricity off. That's probably why we're at $30,000 in Bitcoin today.
Bob Stark: [00:38:01] Yeah, the supply and demand completely thrown out of whack in many of those cases. And you touched on an excellent point around the pragmatic side of cryptocurrencies as well. Is that the scalability of the blockchains to support them has not yet been proven. Not to say there isn't that potential necessarily, but that's another headwind, is especially with Bitcoin, the blockchain that supports it is not meant and it never was built for mainstream activity. I mean, it's only certain amount of transactions per second, any large corporate or bank that wanted to get in on that would blow it up and basically make it a one lane road after a football game. Like it just wouldn't fly.
Wolfgang Koester: [00:38:44] Well, In 10 years, we'll think about blockchain technology the way we think about Netscape today. Some of the audience may even not even remember Netscape anymore, but that was kind of the massive search engine right? Now everybody knows Google, but do they all know really Netscape? Well it's the same thing here. I do believe that technology is being built for dual ledger technology that can actually handle that and support the global monetary financial system by countries issuing their own currencies. And, even the bank of international settlement now supports formerly governments creating and issuing their own electronic currency, one to one with their fiat currency. The Chinese are very far along and well ahead of just about any, certainly a G10 country, even though by definition, they're not a G10 country as we know. But still ahead of all those G10 countries and they have now created the issuance of electronic currency through tests. So they took it public. They gave it to a hundred people. Then they give it to 3000 people. And now they pay all government employees of one large province purely in the electronic yuan and that is the next test before they're going to go all China electronic yuan on their wallets, everybody's going to do it this way and then they'll take it global. It is a threat to the United States dollar. Because if it is cheaper and faster to transact in another currency, that could be a major shift in the monetary system of the world. And when people don't believe that a currency such as the United States dollar could ever lose its gravitas and not be the number one currency, then they're forgetting history. At one point, even Portugal was the ruling currency of the world. The sterling was the main currency that supported the global systems. So the United States is, well, certainly they are at risk. And it is conceivable that they lose in this, but it's also conceivable that they're going to work hard in catching up and learning from what the Chinese have done. And nobody expects the United States, and quite frankly, doesn't want the United States to be first out with the currency. They'd rather have the Chinese doing it quite frankly, and that is well enough established that now the United States can issue it, but they can't be five years late. And so you will see in the next, my opinion, 24 to 36 months, a heavy investment in this. And certainly this has been supported by Yellen and Powell and as well as the current President of the United States in the U.S. but this is also going on in Europe. This is going for the Euro. This is going Switzerland, U.K., Russia tried it already. So it's, this is something that is coming. And what people don't understand is that it is very doable. When the Euro, which was probably the one that most remember, when the Euro happened, I remember I'm sitting at a taxi in Germany and they had Deutsche Marks there. And so, you know, you paid 17 Deutsche Marks, whatever it was, for that cab ride, that taxi ride. All they did is they put on their meter, a Euro sign and just got a 20% raise. They took Euros at the time instead of Deutsche Marks overnight. And they're very happy they took them because they just put the Euro thing there. So countries do adjust a lot. China has gone through numerous currencies. You think about the countries like Venezuela, Argentina, Brazil, all these countries have had numerous currency changes and valuations and devaluations, et cetera, and just issuing a new currency. So it is not inconceivable at all of that you will have currencies that eventually nobody's going to do anything but electronic currencies issued by the governments.
Bob Stark: [00:42:49] I think the key point that you made, especially with China and their tests is that they're looking to find an attached utility to the digital currencies. So it's not just a unit of measure and just a digital version of what was, fiat or what was paper, but they're looking for additional applications that can make it more popular than it was. I mean, with the, yuan renminbi it was for years, the bottom, half of the top 10 in terms of traded currencies. Well, that slowly started to change. If they can make something that becomes cross border a la like the U.S. Dollar, then that suddenly changes the dynamic of global commerce. It's not just a digital yuan. It's totally taking digital commerce to a whole new level.
Wolfgang Koester: [00:43:37] Absolutely. And if you think about it in big terms is why is there a petro dollar? Why can't that be a petro yuan? And when you have changes like that, that's very doable, very easy, cause it's most efficiency and what is the best way, the fastest way and cheapest way to get paid or pay? And that's what they're going to do. So right now, the most trusted and easy one is the dollar. And so everybody trades petro in dollars, basically. Now you've started to see actually trading in petro euros, interestingly enough, and you're going to see an increase amount of petro yuan within a short period of time. What that actually means though, which I think is what the audience here really should focus on is once electronic currencies are trading, it actually requires an absolute digital, financial, controlling and management, because that means instantaneous exchange of currency for value. And if you still expecting that your dollar-euro is going to settle in two days, which is what everybody today, as a corporate thinks, and now it settles within seconds, you need to be digitally ready. And if you're not, you're going to be more expensive and slower paying than your competitors. And therefore you will actually have serious competitive negative impact. Due to not having digitalized your financial systems
Bob Stark: [00:45:08] Yeah, I think that is a big risk. And if you even think it just back to the corporate CFOs that we were talking about earlier, if you don't figure out how to manage digital currencies in your operation, you can't even figure out fiat currencies, and if you having troubles there. If you can't manage digital currencies, then you're going to be even further behind that you will lose your competitive edge if you can't figure this part out.
Wolfgang Koester: [00:45:33] With absolute certainty. Why are we seeing increased amount of mass amounts of RFP to the point that we almost can't handle them? The same thing, right? People are starting to realize this and it's coming. It's only a question of when, the debate is not whether the Chinese going to issue it and whether the U.S. Is going to issue it. The only question is when. It's not whether anymore. And I think the other inevitability, which certainly will be welcomed by most CFOs that are maybe implementing best practices around fiat currency, understand their exposures and hedging those is that the infrastructure will come. You'll get the liquidity to be able to settle. You'll get the derivatives market to be able to protect yourself. You'll get the utility that goes along with the transactability. So the network will actually be there in addition to just the convertibility at a stable coin rate, like one-to-one to U.S. dollar, as an example. All of those mechanisms in the market will come to make this something that's real and achievable for corporates to protect themselves and to profit from, I suppose, depending on what type of business you're in.
Absolutely. Absolute believer. This is A going to happen and B is going to be good for everybody. And my measurement always is this going to be a good thing or a bad thing because bad things don't last. Good things do. This is a very good thing. This makes the world economics much more efficient and think about the checks that went out during COVID to all the people. Instead of sending out checks to the wrong people, et cetera, if you could just send an immediate Venmo from the government, whatever you want to call it, some sort of electronic currency immediately into an account, you actually will increase the velocity of money. And that is what gets countries out of bad economic times. It's all about velocity of money. And therefore this is a really good thing. I think a lot of people weren't getting their head around that it would just automate the fiat currency that exists today and handle it quicker. That's all this does. And why shouldn't the government look at revisit a system that's been around since certainly the 19 century and likely 17th century, whatever it's been. One could make arguments even further back with central bank, but certainly been around for hundreds of years. Why shouldn't that also benefit technology? And it will.
Bob Stark: [00:48:11] That really is the key point in this discussion, isn't it? It is a transformation. It's not automation. And it's even not just digitization, it's literally a digital transformation of currency and money.
I think it's pretty clear from what you're saying, that your feeling is that the digital currencies issued by state governments are the ones that are going to live. Is there a role for these privately issued alt coins like Bitcoin or Ethereum? And I'm not asking for bold predictions, but do you feel there continues to be a role side-by-side?
Wolfgang Koester: [00:48:48] Most people think so. I don't see what it is unless one wants to think of having an alternative investment vehicle that has a low correlation to other investment vehicles. But in the majority of cases, even currencies were not considered by institutional investors in particular pension funds and their advisors as a separate asset class, even though they have very low correlations to interest rates or equities, even though today's currencies, as they stand are not considered a separate asset class by investors. So it's hard for me to see why some Bitcoin would become a separate asset class, but it's possible. So as a speculative vehicle, it's possible, but typically things stick around when people invest in value. What is the value of Bitcoin? If you have fiat currencies, what's the value of that? You may say, well, it's still something that is cross border. And the answer is that's true. there's value in the fact that there's only 21 million issued, so there's limited supply. And I agree with that, but the man's already dropping off. So if the man keeps dropping off further, yeah, it may come around, but you may be back down to $3,000 instead of $30,000. So I don't see how all these currencies are going to stick around but that is neither here nor there for real discussions, because the real discussion as you and I talked about is that I always worry about how does that impact corporations? And what is good for corporations? And if a corporation wants to take the risk and put a certain type of coin into their pension fund portfolio, that's their God-given right. If they want to put it on their balance sheet and bark to market it, that's their right. But is it speculative? I feel the answer to that is yes. Now under SEC regulations and disclosure requirements, a CEO and a CFO sign off on the fact that Dean do not speculate in currencies. It's actually a clause that they sign off with in every financial statements, as we do not speculate in currencies. So I would argue, and now people are trying to say, well, it's not a currency. So therefore I can say that what I would argue is that it is a currency. They're always say it now. They'd like to get around that by saying it's a storage of value, not a currency. So they try to get around that as you well know, but I think investors in general are going to go, is that really worth it? I was looking at a company the other day where their free cash flow was $60 million and they had $1.1 billion in Bitcoin that went from 1.1 billion to 600 million with a free cash flow annual of 50 million. I don't think they should be in the business of investing in Bitcoin, but they disclosed it well, and investors knew it and they got out of that stock or they didn't, but I will tell you when the stock market was going up, that stock was going down.
Bob Stark: [00:52:13] When you have that kind of volatility in your balance sheet and investors aren't necessarily going to reward you as much when it goes up as much as they'll punish you when it goes down to your point currency exposure before. This is a fascinating conversation Wolfgang. There's a lot to this that I feel we could explore in a part two or part three or a part four. For now, maybe I'll ask for one final comment and it's similar to what you get asked when you go on television and Fox business news and Bloomberg and MSNBC and whatnot, is what suggestions do you have for investors? What should they be looking for to understand if the companies that they are interested in are doing a good job versus not a good job?
Wolfgang Koester: [00:53:01] The number one indicator is the foreign exchange gain or loss line on the income statement. If that is a large number and is unexpected, then analyst can and will extrapolate that to say A that's an unnecessary risk and B what other risks are they taking that are unnecessary? So the number one place to look is foreign exchange gain or loss line. Number two thing is quite frankly, try to look at the currency impact report the way we do it and see how you can extrapolate that for your own investments. I think that's important to do, but we do not, as you know, point out individual companies. The other thing is to look at the quarterly and annual financial statements and the quarterly statements. It is item 3A and in the annual statements, it is item 7, which requires certain disclosures about what risk the company are taking in particular with respect to currencies. And as an investor, one should know the risks that the company is willing to take at notch and what excess risk they have. This becomes important and it becomes even more so when you all of a sudden start having negative impacts coming from electronic yuan, because there's an argument to be made that this could increase volatility of the financial markets significantly with a massive shift. And the interesting thing about currencies is when it's happened it's over. The market adjusts quicker than any other market, 24, 6. Six days a week, 24 hours, it's adjusting. And if all of a sudden, an announcement come out, it corrects like this and it's over. And that horse is out of the barn. And it's the same thing here where people are going to start seeing more and have more visibility to how these currencies are being managed and therefore how their finances and their liquidity is being managed.
So those were some indicative points from the foreign exchange side to look at. And then larger is what's the volatility in their liquidity. I was reading on a company today that had $50 million in cash reserves last year and wasn't growing as well. And all of a sudden it's down to 20 million and all they're really talking about is liquidity. Well, they were surprised by that, that cash holdings were that significantly lower. Therefore their share price goes down significantly. Well, that's a surprise, very negative surprise because now the cash holding isn't there. Now they say, well, but we have lines of credit in place for another $75 million. Well, you had those at 50 million too but your company, all of a sudden is not as healthy as it was a year ago. And so you have to look at it as an investor. Finance is all you actually look at. It's all numbers driven. So the people who are investing and defining the value of your company look at the numbers. And if those numbers tell them the wrong story, their capitalization goes down. It's as simple as that.
Bob Stark: [00:56:15] It is as simple as that. And yet we still need you, Wolfgang, to make sure that corporate CFOs do their job well and protect themselves accordingly. Because even as simple as it is it's still hard for many to understand the basics of, I want to protect myself, but I don't have the data and the information. I don't know what I need to do in order to find that information. So as you say it's an easy outcome. If you're committed to finding and digging through the data and understanding your exposures. Well, Wolfgang. I wanted to thank you very much. Incredible insight as always. And I think any of us who listened here learned a lot more about the world of currencies, the world of exposures, what to do, what not to do, i.e. let the markets be cruel because you didn't hit yourself appropriately and didn't understand what you were exposed to and take the right actions. But also insight into what the future of crypto and digital currencies looks like. So Wolfgang, I want to say thank you again. And I think we all look forward to a Part Two when we can get into this even more detail.
Wolfgang Koester: [00:57:23] Thank you, Bob, for having me. And thank you for all the good questions and I look forward to Part Two as well.
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