Good essay. All I would add is that stocks of pre-profit companies exist in a class by themselves within your overall thesis. A great many pre-profit companies continually issue more shares to cover their losses every year. This is a routine practice that requires the underwriter to hold the newly issued stock for a very short holding period (a month?) and a pre-profit company can operate at a loss in this mode for a shockingly long time--as long as broader markets rise or at least remain flat. Oftentimes companies in this mode fall into bankruptcy during sharp market drops because the underwriters suddenly refuse to hold the stock during the obligatory period and they simply pull the plug.
This practice fits neatly within the consensual hallucination thesis, and it gives rise to a lot of zombie companies that just survive off of ever increased dilution. Most retail investors are not aware of this practice and for some reason it is much harder for non-professionals to detect than should be the case.
Generally I think this point alone should discourage people from holding too many pre-profit stocks. In the very, very rare cases where I invest in a pre-profit early-stage company I look very closely at their cash and burn rate to determine if they are going to need to raise cash from the stock market before they get to cash profitability.
Thanks for calling attention to your 2018 piece on "intangible capital" and its explanation of how changes in the economy have rendered so much of neoclassical political economy superannuated.
Be sure to read the very last sentence of my comment.
"As I understand it, one year after the IPO, SpaceX will join the S&P 500.)"
While S&P hasn't changed their rules for letting in new stocks, Nasdaq 100 has.
"MULVEY: Previously, the NASDAQ added and deleted companies from its top 100 index once per year. If a new company wanted to join the club, it had to trade for at least a few months.
WOODS: The NASDAQ threw that out. Now, a new company can join the NASDAQ 100 in as little as three weeks. No need to wait for the annual meeting."
It is much worse than that:
"WOODS: The float for SpaceX is 4% of the company. This means that investors can only trade 4% of SpaceX on public markets. But the NASDAQ is saying that percentage doesn't really represent the size of the company for its index.
MULVEY: Instead, when SpaceX is added to the NASDAQ 100, it will weigh the company as if three times the number of shares are available for sale.
HARVEY: So you multiply by 3, and you get 12%. So what this will do is increase the demand by the index investors because they need to match that 12%, rather than 4%."
And for clarification, it’s not just that the stock has to be around a year, there are earnings tests as well. It won’t go into the S&P500 unless it is genuinely profitable.
“Note that Bloomberg’s Matt Levine likes to say, “Everything is securities fraud.” The concept is sufficiently vague that perhaps no executive is innocent.”
According to the author of Three Felonies A Day, prosecutors can convict any one of us because of the unknowable nature of regulatory laws.
If they wish to our rulers may ruin our lives on a whim or merely to make a point—obey and conform or else!
I’m a lawyer and what you say is not so. Prosecutors bring charges and prosecute them until a jury convicts the charged person or persons. Your distinction has little meaning in practical terms.
Nice! I always hate the losers that give 2* reviews on Yelp for the parking situation. As if that is under the owner’s control. Um yeah, it’s in the financial district for crying out loud.
FWIW - I’ve always been partial to the Arturo Fuente 8-5-8 Maduro and the Padrón 1926 Serie.
I don't disagree exactly, but I think the key aspect is the sorts of use value a thing has. So fiat money is only worth something because it has trade value (people will exchange things for it at a known rate) and some collector value and other minor uses. Gold has trade value, but also decorative value and industrial value which are pretty significant. If the trade value of gold drops, say because it becomes illegal to trade it in coin form or something, the other value uses are still pretty significant. The other value uses for fiat currency are quite minor, so if they stop being traded almost all their value evaporates.
Notably, not all the value of fiat money evaporates if it stops being used for trade! My father in law collects coins etc. and has a fair bit of Hong Kong currency from before they were taken over. In good condition some are worth more than their face value (more or less based on conversion rates a few decades out of date).
The other side of that coin (heh) is stuff that is has no trade value but the use value is also entirely a consensual hallucination. Fashion clothing seems to fill that niche, arguably women's clothing as a whole. A fancy bit of clothing might be very expensive and so valuable when it is believed to be in fashion, then drop down to zero value if it turns out not to be fashionable. Goodwill stores (and landfills) are filled with perfectly functional clothing that people paid good money for then decided were negative value and gave away for nothing.
"Notably, not all the value of fiat money evaporates if it stops being used for trade!"
Yes, but it is still a similar hallucination.
"Gold has trade value, but also decorative value and industrial value which are pretty significant."
I suppose it depends on your definition of significant but only around 10% of gold consumption is for industry. Jewelry is closer to 50% but one could argue this is mostly a hallucination too, as people see gold jewelry as a store of value. This is far more true in a country such as India, for example, than it is in the US.
Your reading comprehension and theory of mind continue to surprise. The whole point is that everything is a question of subjective value, and the only thing giving any object apparently more stable value is how many alternate value uses people have for it, but every value is dependent on what humans want and can evaporate as soon the humans change their mind.
I don't know if we fundamentally disagree on the details or not but it is clear to me one or both of us have missed the other's intent. Probably both of us.
I am tired of your personal attacks though this one is only fully clear if one knows your previous ones. Regardless, I don't think they are within the rules set by AK.
"Anchored to nothing, the value of a dollar is a consensual hallucination." I would argue that the value of government debt, including cash and reserves, is the expected discounted value of future government primary surpluses.
I don't think "reckless" is the right word. For example, after WWI, Germany printed as a protest against war reparations and occupation of the Ruhr region. I'm not sure they had an option that wouldn't be seen as less reckless.
Maybe one could argue the demands by other government on Germany were reckless but that seems a little different than how one is likely to read your statement.
Arnold, if you have not read Ludwig Lachmann's 1956 book Capital and Its Structure, I think you would find the book worthwhile despite its age. Lachmann discusses the role of the stock market (the Stock Exchange, as he terms it) in generating and coordinating the use of capital. His discussion is broad enough that it can easily cover human capital and not just physical stuff.
I respect Arnold’s thinking and writing, so it is always with caution that I disagree. But here I go, unsurprisingly it is regarding Bitcoin. To his credit, he compares it to the dollar as a consensual hallucination. I think the dollar comparison is fair. Bitcoin is attempting to be money. The dollar is widely accepted to be money. They are both failing in at least one respect. Since inception, Bitcoin has been a better store of value while the dollar has been a better medium of exchange and unit of account. The future I see as more likely than Arnold’s chain letter hypothesis is that Bitcoin’s superior monetary attributes (scarcity, durability, divisibility, portability, fungibility) compared with the dollar will drive increased adoption in an emergent fashion. A “re-inflating pyramid scheme” is a new concept I’ve never heard of before. Pyramid schemes grow, are identified and collapse never to be seen again. Is anyone investing in Madoff Hedge Funds? Bitcoin as a pyramid scheme is sloppy labeling that attempts to define something you don’t like with something similar, but is just incorrect. Is Berkshire Hathaway a reinflating pyramid scheme because it has had multiple 50% drawdowns in its history? Bitcoin is volatile. Bitcoin may not emerge as a major global monetary good larger than it is today. Bitcoin may fail due to technological advancements in some unforeseen way. It is not a pyramid scheme. It is an emergent money that is sharing the same consensual hallucination as the dollar or gold. Is gold a pyramid scheme? Find a label that works to have a better argument. I am always listening.
There is plenty of gray areas between useful hallucinations, other hallucinations, and pyramid schemes. That said, the dollar, gold, expensive art, NFTs, and Bitcoin are all hallucinations. NFTs and Bitcoin are also pyramid schemes. Sometimes other art is too.
There are good arguments that the others are useful hallucinations. Not true for Bitcoin.
What is your definition of pyramid scheme? Maybe I’m missing something. Most illuminating would be articulating how gold isn’t a pyramid scheme but Bitcoin is. We agree that NFTs seem ridiculous. I also feel the same about Pokémon cards. Collectibles and money are two distinctly different categories. Some collectibles have evolved into money - see glass beads in Africa, etc…. they just don’t last in this function as they lack strength in key monetary attributes.
The essay's whole arc is a fall narrative — from a concrete 19th-century world (gold at $20.67, par value = $100 of real plant) down into hallucination. But there was no Eden to fall from. Gold's monetary value was never a physical property of gold; it was an unusually stable convention.
The point that earnings can be driven by prices rather than the reverse, and that AI-ecosystem firms can manufacture each other's revenue through circular purchases, is Soros's reflexivity, and it's empirically checkable right now — the vendor-financing loops among the AI infrastructure players are a real and current concern. Arnold could use the Starlink issue as an example; it would be topical and clearer, I daresay.
Loved this but I'd say that gold is also a consensual hallucination. We've just been hallucinating for longer and I'd make the claim that the dollar is backed by much harder assets. If you don't want to take it, the US Navy shows up at your doorstep.
I think I see what you mean, but I don't think the Japan example works. That was a question of opening trade at all, less a question of currency. Today, if the value of the dollar relative to other currencies starts to drop due to others not accepting it, it is not clear what war ships would do about that. Currency exchange is too distributed and fluid to force people to take it if they do not want it to buy your goods (or pay your taxes).
The notion that share prices must be "anchored" in something tangible seems to be based on the idea that there is some absolute, immutable "something" that has value. There is no such thing, which is a foundational idea in Austrian economic thinking. The classical economists thought the anchor was labor. They were wrong, as just about everyone now acknowledges. The notion that plant and equipment are somehow the anchor is also wrong, for all the same reasons.
Do masses hallucinate? Individuals might. Value is everywhere and always personal. On what basis could someone make the case that a stock's price is an hallucination?
Stock prices are based on estimates of future earnings. Sometimes those earning have a high probability of being in a narrow range. Sometimes the bell curve is extremely flat. While acknowledging the bell curve of SpaceX is extremely flat, It would still seem that SpaceX will never have enough profits to justify the current price. If so, it is a hallucination. Then again, Amazon once had a flat bell curve, though at the moment the one for SpaceX seems flatter. But maybe not.
Seems so to me. Retained earning are a close second. If the company invests the earnings to grow, that might be third. Investing in growth stocks based on expectations of larger future earnings is reasonable too but doesn't seem tangible.
"Note that Bloomberg’s Matt Levine likes to say, ’Everything is securities fraud.’ The concept is sufficiently vague that perhaps no executive is innocent."
I will go ahead and call baloney sandwich on this one. Please show your work.
When a fiduciary undertakes actions that lack any economic substance and are not transparently disclosed as such to investors, then that is fraud - pure and simple.
“‘Contradicted by internal forecasts’ is still not enough.”
Actually it is, which is why she is in prison.
Let’s say I sell you a used car and my marketing slide deck says it’s in pristine condition, but my internal forecast knows that the engine leaks oil and that it won’t pass a compression test. Does that sound Gucci to you or will you cry fraud?
Morally, you are correct. Whether it is legally fraud or not entirely depends on the product type and rules for that product. IDK about in Holmes case but as Andy says, she also stated false claims of fact.
In his column, Matt often writes about a never ending series of ridiculous lawsuits filed under “securities fraud” so the concept is making fun of this and not endorsing it. People sue for ridiculous stuff and call it securities fraud all the time.
There are two types of errors. One is to overlook real fraud. I am not in favor of making that error. The opposite error is to find fraud everywhere, regardless. Levine and I are saying that this error is very easy to make within the statute.
As I asked, please show your work as to where securities laws have been enforced against otherwise innocent individuals.
Also, a few days ago, you spoke of the role of police in enforcing the intentionally vague concept known as “disorderly conduct.” It appears that you are completely Gucci with the enforcement of vague laws in certain contexts, but not in others:
“Anyway, his theory is that police do not provide most of their value by apprehending criminals. They instead provide value by upholding order. This is a radical theory.
In an orderly society, people obey social norms. In terms of game theory, you have an equilibrium in which most people in most situations cooperate. Defection is rare.”
In both the Stewart and Mickelson cases, the law had been clearly established for literally decades. As the latter, a tippee of material non public information who trades on such information is guilty of a crime. Mickelson bought $2.4 million in Dean Foods stock across three accounts. He had less than $250,000 in those accounts previously and had never traded Dean Foods before. The stock surged 40% after the spinoff and Mickelson immediately sold his shares for a profit of $931,738
Y’all libertarians crack me up with your apologetics.
Perjury only attaches to statements made during an investigation. If she had not been investigated for securities fraud she wouldn't have been convicted of perjury. Even the prosecutors knew they couldn't prove a securities fraud case against her despite her freely talking with them which is why they didn't charge her with it.
The feds had more than enough information to initiate an investigation into the stock trades of Martha Stewart. This was never in dispute by any of the parties.
Rather, she nuked herself when after she realized she was under federal scrutiny, she altered telephone logs from her broker and lied directly to SEC and FBI investigators.
If you want to defend her poor choices then be my guest. But, to use this as some prime example that the securities laws can entrap almost anyone is malarkey.
Good essay. All I would add is that stocks of pre-profit companies exist in a class by themselves within your overall thesis. A great many pre-profit companies continually issue more shares to cover their losses every year. This is a routine practice that requires the underwriter to hold the newly issued stock for a very short holding period (a month?) and a pre-profit company can operate at a loss in this mode for a shockingly long time--as long as broader markets rise or at least remain flat. Oftentimes companies in this mode fall into bankruptcy during sharp market drops because the underwriters suddenly refuse to hold the stock during the obligatory period and they simply pull the plug.
This practice fits neatly within the consensual hallucination thesis, and it gives rise to a lot of zombie companies that just survive off of ever increased dilution. Most retail investors are not aware of this practice and for some reason it is much harder for non-professionals to detect than should be the case.
Generally I think this point alone should discourage people from holding too many pre-profit stocks. In the very, very rare cases where I invest in a pre-profit early-stage company I look very closely at their cash and burn rate to determine if they are going to need to raise cash from the stock market before they get to cash profitability.
Thanks for calling attention to your 2018 piece on "intangible capital" and its explanation of how changes in the economy have rendered so much of neoclassical political economy superannuated.
https://www.econlib.org/library/Columns/y2018/Klingintangible.html
Be sure to read the very last sentence of my comment.
"As I understand it, one year after the IPO, SpaceX will join the S&P 500.)"
While S&P hasn't changed their rules for letting in new stocks, Nasdaq 100 has.
"MULVEY: Previously, the NASDAQ added and deleted companies from its top 100 index once per year. If a new company wanted to join the club, it had to trade for at least a few months.
WOODS: The NASDAQ threw that out. Now, a new company can join the NASDAQ 100 in as little as three weeks. No need to wait for the annual meeting."
It is much worse than that:
"WOODS: The float for SpaceX is 4% of the company. This means that investors can only trade 4% of SpaceX on public markets. But the NASDAQ is saying that percentage doesn't really represent the size of the company for its index.
MULVEY: Instead, when SpaceX is added to the NASDAQ 100, it will weigh the company as if three times the number of shares are available for sale.
HARVEY: So you multiply by 3, and you get 12%. So what this will do is increase the demand by the index investors because they need to match that 12%, rather than 4%."
https://www.npr.org/transcripts/nx-s1-5853326
And for clarification, it’s not just that the stock has to be around a year, there are earnings tests as well. It won’t go into the S&P500 unless it is genuinely profitable.
“Note that Bloomberg’s Matt Levine likes to say, “Everything is securities fraud.” The concept is sufficiently vague that perhaps no executive is innocent.”
According to the author of Three Felonies A Day, prosecutors can convict any one of us because of the unknowable nature of regulatory laws.
If they wish to our rulers may ruin our lives on a whim or merely to make a point—obey and conform or else!
Prosecutors cannot convict. They can only file charges.
And I don't know the rules for grand juries but where one is required, prosecutors are somewhat limited on what they can even prosecute.
I’m a lawyer and what you say is not so. Prosecutors bring charges and prosecute them until a jury convicts the charged person or persons. Your distinction has little meaning in practical terms.
“prosecutors can convict any one of us“
“Your distinction has little meaning in practical terms.”
I’d love to see the Yelp reviews of your legal services.
https://yelp.to/o_hyS9WVUq
Sorry I’m a better entrepreneur than I was a lawyer.
Nice! I always hate the losers that give 2* reviews on Yelp for the parking situation. As if that is under the owner’s control. Um yeah, it’s in the financial district for crying out loud.
FWIW - I’ve always been partial to the Arturo Fuente 8-5-8 Maduro and the Padrón 1926 Serie.
Why is the value of fiat money any MORE of an illusion than the idea that gold or some other substance is "valuable?"
try copper :)
I don't disagree exactly, but I think the key aspect is the sorts of use value a thing has. So fiat money is only worth something because it has trade value (people will exchange things for it at a known rate) and some collector value and other minor uses. Gold has trade value, but also decorative value and industrial value which are pretty significant. If the trade value of gold drops, say because it becomes illegal to trade it in coin form or something, the other value uses are still pretty significant. The other value uses for fiat currency are quite minor, so if they stop being traded almost all their value evaporates.
Notably, not all the value of fiat money evaporates if it stops being used for trade! My father in law collects coins etc. and has a fair bit of Hong Kong currency from before they were taken over. In good condition some are worth more than their face value (more or less based on conversion rates a few decades out of date).
The other side of that coin (heh) is stuff that is has no trade value but the use value is also entirely a consensual hallucination. Fashion clothing seems to fill that niche, arguably women's clothing as a whole. A fancy bit of clothing might be very expensive and so valuable when it is believed to be in fashion, then drop down to zero value if it turns out not to be fashionable. Goodwill stores (and landfills) are filled with perfectly functional clothing that people paid good money for then decided were negative value and gave away for nothing.
"Notably, not all the value of fiat money evaporates if it stops being used for trade!"
Yes, but it is still a similar hallucination.
"Gold has trade value, but also decorative value and industrial value which are pretty significant."
I suppose it depends on your definition of significant but only around 10% of gold consumption is for industry. Jewelry is closer to 50% but one could argue this is mostly a hallucination too, as people see gold jewelry as a store of value. This is far more true in a country such as India, for example, than it is in the US.
Your reading comprehension and theory of mind continue to surprise. The whole point is that everything is a question of subjective value, and the only thing giving any object apparently more stable value is how many alternate value uses people have for it, but every value is dependent on what humans want and can evaporate as soon the humans change their mind.
I entirely agree with this more general comment.
I stand by my previous comment.
I don't know if we fundamentally disagree on the details or not but it is clear to me one or both of us have missed the other's intent. Probably both of us.
I am tired of your personal attacks though this one is only fully clear if one knows your previous ones. Regardless, I don't think they are within the rules set by AK.
Value is subjective, but I do think the nature of gold or some other commodity has a greater psychological value than fiat money.
For you, sure. Perhaps for the majority of those of us age 55 and up.
But for many younger people Bitcoin has a greater psychological value than either.
We can say they are wrong to think/feel that way, but that doesn’t make us objectively correct.
Usually I detest relativism, but this case is not moral relativism.
For the record, I’m agnostic on Bitcoin. And Ethereum as well. Those who “invest” in any of the other cryptocurrencies are imo quite foolish indeed.
That’s my point: you don’t need to be “objectively” correct; value is subjective.
Why else would millions of people pay hundreds of dollars to watch Taylor Swift perform?
PS—My brother collects basketball sneakers. To him this is “gold”! And in a real sense he’s not wrong.
I guess :) But not worth the constraint on not being able to optimize the rate of inflation.
Depends. Some people like to "invest" in gold. Others see high transaction costs and carrying costs as compared to cash or stocks.
"Anchored to nothing, the value of a dollar is a consensual hallucination." I would argue that the value of government debt, including cash and reserves, is the expected discounted value of future government primary surpluses.
The US has operated at a deficit since 2001. This works until it doesn't.
Agree, as the historical record demonstrates. All hyperinflations are preceded by reckless fiscal policy.
I don't think "reckless" is the right word. For example, after WWI, Germany printed as a protest against war reparations and occupation of the Ruhr region. I'm not sure they had an option that wouldn't be seen as less reckless.
Maybe one could argue the demands by other government on Germany were reckless but that seems a little different than how one is likely to read your statement.
Arnold, if you have not read Ludwig Lachmann's 1956 book Capital and Its Structure, I think you would find the book worthwhile despite its age. Lachmann discusses the role of the stock market (the Stock Exchange, as he terms it) in generating and coordinating the use of capital. His discussion is broad enough that it can easily cover human capital and not just physical stuff.
I respect Arnold’s thinking and writing, so it is always with caution that I disagree. But here I go, unsurprisingly it is regarding Bitcoin. To his credit, he compares it to the dollar as a consensual hallucination. I think the dollar comparison is fair. Bitcoin is attempting to be money. The dollar is widely accepted to be money. They are both failing in at least one respect. Since inception, Bitcoin has been a better store of value while the dollar has been a better medium of exchange and unit of account. The future I see as more likely than Arnold’s chain letter hypothesis is that Bitcoin’s superior monetary attributes (scarcity, durability, divisibility, portability, fungibility) compared with the dollar will drive increased adoption in an emergent fashion. A “re-inflating pyramid scheme” is a new concept I’ve never heard of before. Pyramid schemes grow, are identified and collapse never to be seen again. Is anyone investing in Madoff Hedge Funds? Bitcoin as a pyramid scheme is sloppy labeling that attempts to define something you don’t like with something similar, but is just incorrect. Is Berkshire Hathaway a reinflating pyramid scheme because it has had multiple 50% drawdowns in its history? Bitcoin is volatile. Bitcoin may not emerge as a major global monetary good larger than it is today. Bitcoin may fail due to technological advancements in some unforeseen way. It is not a pyramid scheme. It is an emergent money that is sharing the same consensual hallucination as the dollar or gold. Is gold a pyramid scheme? Find a label that works to have a better argument. I am always listening.
There is plenty of gray areas between useful hallucinations, other hallucinations, and pyramid schemes. That said, the dollar, gold, expensive art, NFTs, and Bitcoin are all hallucinations. NFTs and Bitcoin are also pyramid schemes. Sometimes other art is too.
There are good arguments that the others are useful hallucinations. Not true for Bitcoin.
What is your definition of pyramid scheme? Maybe I’m missing something. Most illuminating would be articulating how gold isn’t a pyramid scheme but Bitcoin is. We agree that NFTs seem ridiculous. I also feel the same about Pokémon cards. Collectibles and money are two distinctly different categories. Some collectibles have evolved into money - see glass beads in Africa, etc…. they just don’t last in this function as they lack strength in key monetary attributes.
Of course there are good arguments for Bitcoin. Whether you agree with them or not.
Which is different from the idea that at the current dollar valuation it is a good risk/reward.
It is NFTs that have the least good argument, frankly.
The essay's whole arc is a fall narrative — from a concrete 19th-century world (gold at $20.67, par value = $100 of real plant) down into hallucination. But there was no Eden to fall from. Gold's monetary value was never a physical property of gold; it was an unusually stable convention.
The point that earnings can be driven by prices rather than the reverse, and that AI-ecosystem firms can manufacture each other's revenue through circular purchases, is Soros's reflexivity, and it's empirically checkable right now — the vendor-financing loops among the AI infrastructure players are a real and current concern. Arnold could use the Starlink issue as an example; it would be topical and clearer, I daresay.
Loved this but I'd say that gold is also a consensual hallucination. We've just been hallucinating for longer and I'd make the claim that the dollar is backed by much harder assets. If you don't want to take it, the US Navy shows up at your doorstep.
Does the Navy do that? I don't think we have actually seen that occurring, but I could be wrong.
It's been a while but they did it in Japan in the 1800s. Right now they don't have to. No one would risk it.
I think I see what you mean, but I don't think the Japan example works. That was a question of opening trade at all, less a question of currency. Today, if the value of the dollar relative to other currencies starts to drop due to others not accepting it, it is not clear what war ships would do about that. Currency exchange is too distributed and fluid to force people to take it if they do not want it to buy your goods (or pay your taxes).
The notion that share prices must be "anchored" in something tangible seems to be based on the idea that there is some absolute, immutable "something" that has value. There is no such thing, which is a foundational idea in Austrian economic thinking. The classical economists thought the anchor was labor. They were wrong, as just about everyone now acknowledges. The notion that plant and equipment are somehow the anchor is also wrong, for all the same reasons.
Do masses hallucinate? Individuals might. Value is everywhere and always personal. On what basis could someone make the case that a stock's price is an hallucination?
Stock prices are based on estimates of future earnings. Sometimes those earning have a high probability of being in a narrow range. Sometimes the bell curve is extremely flat. While acknowledging the bell curve of SpaceX is extremely flat, It would still seem that SpaceX will never have enough profits to justify the current price. If so, it is a hallucination. Then again, Amazon once had a flat bell curve, though at the moment the one for SpaceX seems flatter. But maybe not.
So, would investing in dividend paying stocks be the best way to anchor funds these days in something tangible?
Seems so to me. Retained earning are a close second. If the company invests the earnings to grow, that might be third. Investing in growth stocks based on expectations of larger future earnings is reasonable too but doesn't seem tangible.
“Share prices are no longer anchored in physical plant and equipment. Today, they are supposed to be anchored to corporate earnings.“
Minor correction: they are supposed to be anchored in free cash flows, not corporate earnings. They are not the same concept by a long shot.
Also, it is doubtful that share prices were ever anchored in PP&E. Rather, they were anchored in the cash flows that those assets could generate.
"Note that Bloomberg’s Matt Levine likes to say, ’Everything is securities fraud.’ The concept is sufficiently vague that perhaps no executive is innocent."
I will go ahead and call baloney sandwich on this one. Please show your work.
When a fiduciary undertakes actions that lack any economic substance and are not transparently disclosed as such to investors, then that is fraud - pure and simple.
Speaking of which, this take has not aged well.
https://arnoldkling.substack.com/p/the-elizabeth-holmes-jury-110
I’m partly with you on the Holmes take, but only partly.
If all she had done were the things Arnold noted in his post, then I am indeed fully with Arnold.
But in reality she did much more than that.
She knowingly represented specific material facts that were false, including facts about the technology.
Fraud requires a knowingly false factual representation, not just bad vibes, exaggeration, selective emphasis, or aggressive salesmanship.
I am with you that in the Holmes cases the former existed, and it was correct that she was convicted.
I am with Arnold that the latter absent demonstrating the former should not be criminal fraud.
I am agnostic on whether or not particularly egregious exaggeration should be civil fraud.
Her investor slide deck included financial projections that were directly and materially contradicted by internal forecasts + actual results.
“Contradicted by internal forecasts” is still not enough. It’s her company, she gets final say on that.
Agreed 100% that if she made false claims about actual results, that is fraud.
And again - I agree she almost certainly did commit fraud by making false claims of fact.
I’m only saying that sleazy projections and misleading aggressive salesmanship is not fraud absent those false claims of fact.
“‘Contradicted by internal forecasts’ is still not enough.”
Actually it is, which is why she is in prison.
Let’s say I sell you a used car and my marketing slide deck says it’s in pristine condition, but my internal forecast knows that the engine leaks oil and that it won’t pass a compression test. Does that sound Gucci to you or will you cry fraud?
No she deservedly is in prison because of false statement of facts.
Forecasts are not facts.
Your example is a false statement of fact. Even though you improperly state it as an “internal forecast.”
The false fact claim is “pristine condition”.
Morally, you are correct. Whether it is legally fraud or not entirely depends on the product type and rules for that product. IDK about in Holmes case but as Andy says, she also stated false claims of fact.
In his column, Matt often writes about a never ending series of ridiculous lawsuits filed under “securities fraud” so the concept is making fun of this and not endorsing it. People sue for ridiculous stuff and call it securities fraud all the time.
Arnold made his statement in the context of criminal law and not civil lawsuits.
There are two types of errors. One is to overlook real fraud. I am not in favor of making that error. The opposite error is to find fraud everywhere, regardless. Levine and I are saying that this error is very easy to make within the statute.
As I asked, please show your work as to where securities laws have been enforced against otherwise innocent individuals.
Also, a few days ago, you spoke of the role of police in enforcing the intentionally vague concept known as “disorderly conduct.” It appears that you are completely Gucci with the enforcement of vague laws in certain contexts, but not in others:
“Anyway, his theory is that police do not provide most of their value by apprehending criminals. They instead provide value by upholding order. This is a radical theory.
In an orderly society, people obey social norms. In terms of game theory, you have an equilibrium in which most people in most situations cooperate. Defection is rare.”
https://arnoldkling.substack.com/p/charles-fain-lehman-on-the-fight
“As I asked, please show your work as to where securities laws have been enforced against otherwise innocent individuals.”
Martha Stewart, for one.
Not defending her personality, haughtiness or anything else.
Phil Mikelson re: Dean Foods trading.
In both the Stewart and Mickelson cases, the law had been clearly established for literally decades. As the latter, a tippee of material non public information who trades on such information is guilty of a crime. Mickelson bought $2.4 million in Dean Foods stock across three accounts. He had less than $250,000 in those accounts previously and had never traded Dean Foods before. The stock surged 40% after the spinoff and Mickelson immediately sold his shares for a profit of $931,738
Y’all libertarians crack me up with your apologetics.
“As the latter, a tippee of material non public information who trades on such information is guilty of a crime.”
BTW, this statement is clearly false. Go look it up.
Though thankfully, you are not guilty of a crime for making this false statement… 😏
Dirks v. SEC
Hint: there’s a reason that Mickelson “voluntarily” relinquished his ill gotten profits + interest.
Dude, in each case the celebrity in question was NOT charged with - let alone convicted of - the crime of insider trading.
THAT is the point!
Martha Stewart has entered the chat
She was never convicted of insider trading or securities fraud.
Instead, she forgot to exercise her 5th amendment right to remain silent and was convicted for making false statements.
The fact that Arnold liked your comment says all I need to know about his credibility on this topic.
Martha Stewart has left the chat. 😂
Perjury only attaches to statements made during an investigation. If she had not been investigated for securities fraud she wouldn't have been convicted of perjury. Even the prosecutors knew they couldn't prove a securities fraud case against her despite her freely talking with them which is why they didn't charge her with it.
The feds had more than enough information to initiate an investigation into the stock trades of Martha Stewart. This was never in dispute by any of the parties.
Rather, she nuked herself when after she realized she was under federal scrutiny, she altered telephone logs from her broker and lied directly to SEC and FBI investigators.
If you want to defend her poor choices then be my guest. But, to use this as some prime example that the securities laws can entrap almost anyone is malarkey.
It's really hard to call a bubble. I've had bubble on the mind since 2020 vaguely and 2024 specifically, and the only bubble that's popped is bonds.
That's for sure. The dot-com bubble went on for way longer than I thought possible at the time.