Game, Stop itI guess yesterday's big financial news is that Keith Gill departed from his prepared remarks to tell a congressional hearing "I am not a cat." Here: When lawmakers turned their attention to Gill, or "Roaring Kitty," it was to congratulate him. "You outsmarted the system," Representative Blaine Luetkemeyer, a Missouri Republican, told him. Gill didn't speak often, but when he did his remarks appeared to move GameStop shares, with the stock rising Thursday on his opening comments and at least on one of his answers. It still ended down 11%. The buzz across social media was whether Gill was going to wear his signature bandana during the hearing (he didn't). Instead, it was hanging on a cat poster in the background. Gill provided what was perhaps the most memorable quip of the day, when he began his testimony by clarifying: "I am not a cat."
What do you make of the fact that GameStop Corp. stock went up when Gill talked? Not that much—its high for the day was $48.87, and its low was $40.65, a tiny range compared to the wild swings that GameStop has produced in recent weeks—but, still, it's something. Hearing Keith Gill talk is enough to push up the price of a stock, if that stock is GameStop. Now, it is true that when he talked he said some nice things about the stock—in addition to deft meme work, he spent much of his congressional testimony laying out the fundamental bull case for GameStop—but I have trouble believing that that is what mattered. Surely the explanation for yesterday's price action is not that people heard the bull case for GameStop for the first time when Gill read his prepared remarks, bought the stock, and then sold it when the spell of his voice wore off. Surely the explanation is that people on Reddit and YouTube thought it was funny when Gill was talking about GameStop, and that it would be even funnier if they bought the stock, so they did. When he stopped talking it stopped being funny so they stopped buying. Meanwhile, at the hearing, members of Congress were looking for some deep fundamental or structural explanation for why GameStop went up so much and then down so much, for some deep problem in the plumbing of financial markets that was exposed by GameStop's irrational price action. "A lot of people thought it would be funny to buy stock at once, and it was," is not the sort of explanation that sounds good in a congressional hearing. It is kind of what the market was saying, though, even yesterday. There are nine GameStop moviesMy basic view of financial drama is that finance consists of people slouched in chairs staring at computers, so the drama is … it is there, it is very much there, there is a ton of drama, I yield to no one in my appreciation for the drama of credit derivatives or whatever, but it is not necessarily the sort of drama that conventionally comes across in, say, a Hollywood movie. A person slouches in a chair, staring at a spreadsheet; he moves some numbers around, nods in satisfaction, and types a chat message. We cut to the person at the other end of that chat message, who slouches in her chair, reads the chat message, nods, and puts an order into the order-entry system. We cut to the computer at the other end of the order-entry system, which silently and invisibly executes the order. Fortunes have been staked, daring intellectual leaps have been made, capital has been mobilized, price signals have gone out that will change the course of world events, but also nothing has happened, nothing that really shows up on screen anyway. Well, that is the drama of high finance. The drama of retail finance dispenses with the spreadsheets and the chat messages and replaces them with Reddit and the Robinhood app, but the basic elements of silent slouching persist. Not always silent. "In the [WallStreetBets] Discord's voice channel, where hundreds participated in the 'gme-rocket,' yelling, humming, and intermittent announcements coalesced into something like a Gregorian chant." I guess … sure, maybe that is the most conventionally dramatic thing to happen in financial markets in the last decade? Several people yelled at once? Anyway now there are nine movies about it: As of the writing of this story, the GameStop project count stands at nine. At MGM, a film called The Antisocial Network is being adapted from a forthcoming book by Mezrich (the best-selling author whose Accidental Billionaires was turned into David Fincher's The Social Network). There's an HBO movie being produced by blockbuster horror ace Jason Blum and Andrew Ross Sorkin, co-creator of Showtime's Billions. RatPac's feature will be based on the Rogozinski memoir Wallstreetbets: How Boomers Made the World's Biggest Casino for Millennials. One of two as-yet untitled documentaries will be directed by Jonah Tulis (behind the CBS All Access doc Console Wars); the other is being produced by XTR (the company responsible for such titles as You Cannot Kill David Arquette) and partially financed via a Kickstarter campaign. The Wall Street Journal, meanwhile, has a title for its doc: This Is Not Financial Advice, which is already in production and covers a broader swath of digital-investment communities. Netflix is bankrolling a feature scripted by Oscar-winning screenwriter Mark Boal (The Hurt Locker, Zero Dark Thirty), reportedly set to star Noah Centineo of To All the Boys I've Loved Before fame, and a docuseries produced by Dan Cogan (Icarus) and Liz Garbus (What Happened, Miss Simone?). And there's a limited series titled To the Moon that's being fast-tracked by the nascent production company Pinky Promise.
Which one of them will best capture the experience of sitting alone at home in a pandemic typing jokes on your computer? Selling stock in baseball playersI am never ever going to resist stories about people selling equity shares in themselves. "I have always thought of this as the great late-night dorm-room question of financial capitalism," I wrote last year, "and in fact I wrote a very late-night-dorm-room sort of paper about it in law school." The idea that, instead of borrowing money and paying it back with interest, you could instead get a bunch of money in exchange for signing away a share of your future income: People love that idea, and other people love hating that idea, and, sure, every discussion of it is a little dumb, but no one can stop themselves. So, here: Fernando TatÃs Jr. was 18 years old, just a low-level prospect from the Dominican Republic trying to work his way up in the San Diego Padres farm system, when he made a financial deal that would impact his entire baseball career. And it wasn't with the Padres. TatÃs signed a contract with Big League Advance, an unusual investment fund that pays minor-league players money up front in exchange for a share of their future MLB earnings. TatÃs, now 22 and widely viewed as one of the sport's best young stars, today knows what those earnings will be. He agreed to a record-setting 14-year contract with the Padres on Wednesday night worth an eye-popping $340 million, the third-highest total in MLB history. His new contract also creates a significant obligation for TatÃs: to pay a sizable chunk of his new bounty—perhaps close to $30 million—to Big League Advance.
Basically Big League Advance gives minor-league baseball players cash advances in exchange for a share of their future earnings. Big League Advance uses a proprietary algorithm to project the performance and earning potential of players, in order to establish a set amount it would be willing to pay a player in exchange for each percentage point of future MLB earnings that player is willing to give up. For instance, if Big League Advance offers a minor-leaguer $100,000 up front for 1% of his earnings, that player can then decide to accept $500,000 in exchange for 5% or $1 million for 10%. A player valued as highly as TatÃs could receive a couple million dollars from Big League Advance. In his first two seasons with the Padres, TatÃs earned less than $800,000 in salary. The Big League Advance payouts aren't loans. If the player never reaches the majors, he doesn't have to reimburse the money, and Big League Advance loses its stake. When a player turns into a MLB star like TatÃs, Big League Advance receives a huge payout. In effect, TatÃs is now funding a bunch of minor-leaguers who will never make it. It's similar to a venture capital fund that backs lots of startups that fail, in return for a gigantic payday from getting in early on a company like Facebook or Uber.
Often when people reinvent the idea of selling equity in yourself, it is for students in college or in learn-to-code schools. The idea is that those people have a need for cash now (to pay tuition), but later they will generate cash, and they might prefer to limit their downside risk, in exchange for giving up some upside, by agreeing to repay a percentage of their income rather than a fixed amount. But the distribution of incomes will be normal-ish; some people will make a lot of money and repay a lot, others will make a little money and repay a little, most will make a medium amount of money and repay roughly what they borrowed. Baseball is a different distribution: A large majority of minor leaguers will make, in round numbers, nothing; they will get poverty wages in the minor leagues for a while and then leave to do something else. A few of them will become major-league stars with contracts worth hundreds of millions of dollars, subsidizing everyone else. Essentially every deal that Big League Advance signs will seem, in hindsight, unfair: Most of them will look unfair to Big League Advance (which will advance money to the minor leaguers and get back nothing), but a few will look wildly unfair to players like TatÃs (who will pay back many times what he got). Arguably that looks less like "selling stock in people" and more like "insurance." (Insurance always looks unfair to people whose houses don't burn down.) Big League Advance is a risk-pooling mechanism; it lets minor leaguers in effect pool their future earnings, so that the ones who make it make a bit less while the ones who don't make it make a bit more. Big League Advance advances them their share of the pool, and takes a cut for its services, but economically the real transfer is from people like TatÃs who more than earn out to the many players who don't. You could imagine other risk-pooling mechanisms. For instance here is a Planet Money story about another company that does something like Big League Advance, but in a more direct income-pooling way. (The minor leaguers get a cut of each others' future income, rather than an advance.) Also though you could imagine baseball itself pooling a bit more risk by just paying minor leaguers more (and major leaguers less), making it less of a winner-take-all tournament and a bit more of, you know, a normal career, where entry-level workers are paid something vaguely commensurate with the overall profitability of the business. "Entry-level compensation is likely to be a topic when the union and league negotiate a replacement for the current collective bargaining agreement, which expires in December." Clearly there is some demand. Prediction marketsI guess the second-greatest late-night-dorm-room question of financial capitalism, behind only "what if people could sell stock in themselves," is "what if we had tradeable financial markets for every possible factual question?" So instead of betting on the efficacy of Covid vaccines by, like, buying cruise-ship and airline stocks, you could just buy some shares of "Will a Covid Vaccine Be At Least 90% Effective," and then if it is you get a dollar per share and if it isn't you get nothing. Obviously there are prediction markets, but in the U.S. they are sort of disfavored, which means that it's hard to get great liquidity on a wide range of questions. But here's this: An online-trading startup that aims to let people wager on questions about future events ranging from economics to the weather to public health has raised $30 million from an array of prominent investors including venture firm Sequoia Capital and discount-brokerage pioneer Charles R. "Chuck" Schwab. Kalshi Inc. expects to launch in March. It plans to let users bet on "yes" or "no" answers to questions about future events. For instance, had the platform existed last year, it might have asked users whether a Covid-19 vaccine would be approved by the end of 2020. The San Francisco-based startup hopes to benefit from surging interest in trading by individual investors. Individuals have jumped into stocks and options during the past year, using apps like those offered by Robinhood Markets Inc. Kalshi also hopes its marketplace will be used by people and businesses looking to hedge against risks that they face from future events. Kalshi's fundraising round comes after it won approval from the Commodity Futures Trading Commission in November to run a derivatives exchange.
That is sort of an incongruous series of sentences. Kalshi is hoping to capitalize on the evident fact that retail investors just love wild speculative gambles, and it just got CFTC approval? If Kalshi was around this week presumably it would have made markets in, like, "Will Keith Gill Wear a Headband to the GameStop Hearing," and hundreds of millions of dollars would have changed hands on that contract, and there'd be sob stories about people who bet yes and lost their houses, and there'd be insinuations about insider trading by people with confidential knowledge of Gill's sartorial choices, and there'd be a whole other congressional hearing to grill Kalshi's executives about the integrity of prediction markets. Anyway here's a good line: Alfred Lin, a partner at Sequoia and a Kalshi board member, said Kalshi's embrace of regulation was one of the reasons his firm invested in the startup. "They're taking regulation fairly seriously," he said. "Companies that move fast and break things are not going to work in this regulated environment."
I feel like "fairly seriously" is about as seriously as a retail prediction-market startup is going to take regulation, but I suspect regulators will want them to take it even more seriously. Bitcoin … arbitrage … ?I have written a few times about one sort of bull case for Bitcoin, which is that it might become a standard way for institutional investors and corporate treasurers to invest some of their cash, a normalized and domesticated store-of-value instrument like Treasury bonds or whatever. If this happens—if Bitcoin is widely adopted by big institutions—then its value will go up a lot. If you're an institution considering adopting Bitcoin, this has a certain virtuous-cycle element: If you buy Bitcoin, that will demonstrate mainstream adoption of Bitcoin, which will push up the price of Bitcoin, which will make your investment profitable, which means you should do it, which means that Bitcoin should be widely adopted by mainstream institutions. Maybe. This effect has to wear off over time, though. The first big company to adopt Bitcoin will push up the price of Bitcoin a lot; the 100th will have no real effect. There are first-mover advantages. There are other, stranger first-mover advantages. For instance it still seems to be the case that, if you wrap a Bitcoin in certain sorts of conventionally acceptable wrapping, then it is worth more than a plain old Bitcoin. If there is something inconvenient about holding an actual Bitcoin—you might lose your private key, the exchange that holds it for you might be a fraud, etc.—and if you had it in some more normal wrapper you'd feel better and pay up for the privilege. An exchange-traded trust that invested in Bitcoins might trade at a premium to its net asset value, for instance. Or if a regular old operating company announces that it's going to buy Bitcoins, its stock price will go up, because people who love Bitcoin will think "ooh this is a company that gets it, they love Bitcoin like I do, let me buy their stock," without necessarily doing a careful calculation about whether they're paying a premium over the value of the company's Bitcoin holdings. Eventually that has to dissipate too—if every company puts a portion of its treasury into Bitcoin, nobody will be excited to buy the Bitcoiniest stocks—but for now it seems huge: MicroStrategy Inc. is adding to its wildly successful bet on Bitcoin, but anyone scooping up the software maker's stock as a proxy for crypto would be paying a hefty premium. The company plans to sell $600 million in convertible bonds and use the money to boost its Bitcoin stash, it said in a filing Tuesday. That follows $1.15 billion of crypto purchases that began last summer, and prompted MicroStrategy to announce a second pillar of its corporate strategy -- "to acquire and hold Bitcoin." So far, the company's bet on the token has paid off. Bitcoin has rallied 316% since the end of August, tripling its investment to more than $3 billion. Its share price has also soared, adding over $8 billion to its market value. The success has led to a math problem for any investor hoping to get a piece of Bitcoin through MicroStrategy. Given that a large part of the company's enterprise value owes to its crypto holdings, rough calculations show that investors are paying a 53% premium over the market price of Bitcoin. Here's how it breaks down: At the current price of about $49,000, MicroStrategy can buy about 12,250 coins for its $600 million. Add that to the nearly 71,000 coins it said it owned as of Feb. 8 and it has more than 83,250. With about 7.6 million shares outstanding, each share would be entitled to 0.011 Bitcoin. MicroStrategy trades for $955 a share, up from $135 on Aug. 11, when it announced its first foray into crypto. Crudely attributing the $820 difference to its new Bitcoin business would mean an investor who bought today would pay about $75,019 per Bitcoin.
Yes right if you buy $1 billion of Bitcoins and they turn out to be worth $3 billion and that adds $8 billion to your market cap, then people who buy your stock for Bitcoin exposure are overpaying. Eight is more than three. Presumably they are overpaying out of a vague general enthusiasm for the Bitcoin complex, without worrying too much about how many Bitcoins they are getting for their money. The passage quoted above is from earlier in the week; by today that $600 million convertible had become $1.05 billion, with a zero coupon and a 50% conversion premium. One almost-true way of thinking about this is that MicroStrategy sold stock for 50% above its current price—which in turn is up more than 500% in the last 12 months—just by saying it would use the money to buy Bitcoin. Another, more true, way of thinking about this is that a convertible bond is a bond with an equity call option attached, and the value of a call option depends largely on the volatility of the underlying stock. If you turn your company from "business intelligence software company" into "weird proxy for Bitcoin" then your volatility will go up. (MicroStrategy's one-year realized volatility was 27% this time last year; it's almost 82% now.) So you can get really good terms on your convertible bonds, which you can use to buy more Bitcoins, which will make your stock both higher and more volatile, which will let you sell more convertible bonds, etc. I dunno. There is just a lot of free money out there for companies that want to buy Bitcoin. If you are a corporate chief executive officer and stumble drunk into your boardroom and shout "Bitcoin!" your stock will go up and people will fling money at you. Surely it is tempting. In a sense it is a credit to the seriousness of most public-company CEOs that they don't do that. People used to worry all the time about stock buybacks: There was a sense that public companies had stopped focusing on actually doing stuff, on building factories and serving customers and improving their products, and had pivoted to generic financial engineering in the name of "shareholder value." But now there is free money, free stock-price increases, free shareholder value to be had by neglecting your actual business and doing generic Bitcoin stuff instead. It hasn't caught on all that much yet, though; most companies are sticking with their businesses. Large-cap small-capsHa: Fourteen members of the Russell Microcap index have risen so much that they ended Thursday larger than the smallest S&P stock. One, real-estate broker eXp World Holdings, has a market capitalization of nearly $10 billion, more than double the smallest S&P stock. When the index reset was announced last year, the largest stock in the index had a market capitalization of $840 million. Within the Russell 2000 index of small companies, the bottom half of which overlaps with the Microcap measure, an astounding 302 stocks are bigger than at least one S&P 500 member. The largest is Plug Power, up 973% last year and another 48% this year to make the fuel-cell developer big enough to be in the top half of the S&P, worth about the same as State Street Corp. or Kroger Co. The size of some of these supposedly teeny-weeny stocks is making a mockery of the microcap indexes and their ETFs. Stunning performance so far this year means few are likely to be upset. The Dow Jones U.S. Micro-Cap Total Stock Market index, structured differently to the Russell version, is up 18.5% this month alone. … Unfortunately for investors, the leading gainers are clearly part of the broader excess in speculative story stocks. Indeed, many of the stocks leading the charge have been here before, soaring and crashing in prior bouts of speculative excess.
A good exchange-traded fund might be like the "Large-Cap Micro-Cap Index," made up of all the companies in the micro-cap index with bigger market capitalizations than companies in the S&P 500, reconstituted monthly or whatever. You could buy that ETF as, roughly, a bet that those companies will actually be promoted to the S&P 500 and go up even further due to increased index demand. Or you could short that ETF as, roughly, a bet that the large-cap micro-cap index is an automatically generated list of all the bubbliest companies. Things happenTexas was "seconds and minutes" away from catastrophic monthslong blackouts, officials say. "This week is like hitting the jackpot with some of these incredible prices." Water Pipes Burst Across Texas, Setting Off a Hunt for Plumbers. Uber Loses U.K. Supreme Court Ruling on Drivers' Rights. Barclays Trading Arm Provides Lifeline Through Pandemic. SEC report highlights dealer threat to buy-side allocations in primary markets. UniCredit banker moonlighted for Markus Braun's family office. Elon Musk Is Again the World's Richest Person After SpaceX Round. "They say Mr. Schwarzman is failing to live up to his own values." Wisconsin wildlife officials ate $20,000 of illegal caviar, prosecutors say. Now the 'sturgeon general' faces charges. "Petition for scientists to start drawing icebergs in their stable orientations." If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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