What's the big deal?Nikola Corp. is an electric-truck company. "Our vision is to be the zero-emissions transportation industry leader," it says. It went public last year by merging with a special purpose acquisition company, and was sort of the next Tesla for a while; shortly after it went public it traded at a market capitalization of about $30 billion, higher than Ford's. Then in September a short-selling firm called Hindenburg Research published a report calling Nikola an "intricate fraud" and alleging that a lot of founder Trevor Milton's claims about its technology were lies. The stock dropped—its market cap is about $7.5 billion now—and Milton stepped down as executive chairman. Nikola commissioned an investigation by its outside lawyers to get to the bottom of things. Now Nikola has released the results of the internal investigation and they are … oh, you know. Did Nikola's founder lie about whether Nikola had produced a zero-emissions truck? Yes, say Nikola's own lawyers in Nikola's own annual report to the U.S. Securities and Exchange Commission. Did he lie about whether the truck worked? Yes. Did he lie when he said that all the major components for the truck were made in-house? Yes. Did he lie when he said that trucks were coming off the assembly line? Of course. Did Nikola produce a video to make it seem like the truck could be driven, when in fact it was only moving because it was rolling down a hill? Yes, that is also a real thing that this company really did. But was the company "an 'intricate' or 'massive fraud'"? No, no, what are you talking about, not a fraud at all: The statements listed above were inaccurate in whole or in part, when made. In other respects, the Hindenburg article's statements about the Company were inaccurate. For example, the Automotive Experts determined that: (1) the Company's workforce is led by technical and engineering leads that have deep industry experience and expertise; (2) the Company's technological contributions and development are consistent with other OEMs at similar stages of development; and (3) the Company's maturity level is consistent with that of an emerging OEM. These findings are inconsistent with the main conclusion of the Hindenburg article that the Company was an "intricate" or "massive fraud".
I think the point here is something like: - Nikola is viewed by its fans as a promising electric-vehicle startup with smart engineers, cool technology, and some plausible future path to one day produce good electric trucks that work and that it can sell at a profit.
- This bullish view of Nikola, say Nikola's lawyers, is broadly correct: The engineers are smart, the technology is promising, the basic premise is not ridiculous, one day it might make money, it is reasonably comparable to other similar electric-vehicle startups, etc. The lawyers did a deep investigation, looked at everything, and decided it basically checked out.
- Nikola's founder spent a lot of time running around pretending that Nikola was already there, that it was already producing electric trucks that worked, from scratch, on an assembly line, ready to be sold to customers.
- That's not a "massive fraud," that's just, like, startups, man.
I want to both make fun of this view a lot and also agree with it? That is, like, startups, man. What you want, when you invest in a startup, is a founder who combines (1) an insanely ambitious vision with (2) a clear-eyed plan to make it come true and (3) the ability to make people believe in the vision now. "We'll tinker with hydrogen for a while and maybe in a decade or so a fuel-cell-powered truck will come out of it": True, yes, but a bad pitch. The pitch is, like, you put your arm around the shoulder of an investor, you gesture sweepingly into the distance, you close your eyes, she closes her eyes, and you say in mellifluous tones: "Can't you see the trucks rolling off the assembly line right now? Aren't they beautiful? So clean and efficient, look at how nicely they drive, look at all those components, all built in-house, aren't they amazing? Here, hold out your hand, you can touch the truck right now. Let's go for a drive." That's not true, but it's a nice metaphor; the goal is to get the investor to see the future, so she'll give you money today, so that you can build the future tomorrow. Sometimes this goes badly wrong. Theranos Inc. is the classic case; it had a visionary founder and smart scientists and promising ideas to one day make broadly useful finger-prick blood tests, and it pretended that it already had those blood tests, and people got incorrect blood-test results, and that's quite bad so now the founder is facing a criminal trial. But mostly it goes fine! Startup investors understand that this is the game they are playing; they want to be sold an enthusiastic vision of the future by someone who believes it so purely and tangibly that he thinks it has already happened. Sometimes it works out great, the founder achieves his vision, the future is as predicted and the investors get rich. Other times—most times—it doesn't work out, the vision fails, the future is different and the investors lose their money. It's fine. That is the game they are in, betting on wild visions of the future sold to them by wild visionaries; only some of them have to come true for the investors to get rich. It's just that traditionally these things happen in private markets: Wild-eyed visionaries raise money from venture-capital investors who are specialists in funding wild-eyed visionaries, and then they try to build their thing, and if it works then they have a real company and take it public and make profits and so forth, and if it doesn't work then they quietly close up shop and try again with some other wild vision. You go public, and sell stock to boring mutual funds and middle-class retail investors, only when you have something viable. In the olden days that meant "a profitable company," and it certainly doesn't mean that anymore; lots of huge consumer-tech-ish unicorns have gone public with large losses and somewhat vague plans to reverse them. But even those companies typically have, you know, a business; they produce their thing at some large scale and sell it for money and have either positive gross margins or at least some story about how they will achieve them.[1] The recent boom of electric-vehicle companies going public by merging with special purpose acquisition companies has eroded that tradition. Now you get founders selling their wild visions to the public, with a pitch that is heavy on projections and light on historical financials; they can go public earlier, still in the vision stage, and there is no sharp boundary between how they sell to venture capitalists and how they sell to mutual funds and retail investors.[2] They are confident in their vision of the future, and act like it is already here. That's not really what public companies are supposed to do. Index funds will save usWe talked the other day about my pretend theory that the stock market consists of one company, The Stock Market Inc., and that its board of directors is made up of a small group of giant diversified institutional investors who have sort of a weird governance relationship with all of the individual companies that, in this model, are just divisions of The Stock Market Inc. Part of the weirdness is that the board of directors of an absolutely gigantic company like The Stock Market Inc. will only have so much capacity to pay attention to the operations of any one division. Occasionally some enormous event—like Covid-19 and the development of vaccines to fight it—will be so material to the success of The Stock Market Inc. as a whole that the board of directors will get personally involved in telling the managers of a division what to do. But mostly they'll leave the division managers—chief executive officers of actual public companies—alone to run their businesses, and will promulgate very general policies about issues of universal concern, governance and climate change and social issues and so forth. Here is maybe a more real version of that model, in a paper titled "Systematic Stewardship" by Jeffrey Gordon of Columbia Law School: This paper frames a normative theory of stewardship engagement by large institutional investors and asset managers in terms of their theory of investment management – "Modern Portfolio Theory" -- which describes investors as attentive to both systematic risk as well as expected returns. Because investors want to maximize risk-adjusted returns, it will serve their interests for asset managers to support and sometimes advance shareholder initiatives that will reduce systematic risk. "Systematic Stewardship" provides an approach to "ESG" matters that serves both investor welfare and social welfare and fits the business model of large diversified funds, especially index funds. The analysis also shows why it is generally unwise for such funds to pursue stewardship that consists of firm-specific performance focused engagement: Gains (if any) will be substantially "idiosyncratic," precisely the kind of risks that diversification minimizes. Instead asset managers should seek to mitigate systematic risk, which most notably would include climate change risk, financial stability risk, and social stability risk. This portfolio approach follows the already-established pattern of assets managers' pursuit of corporate governance measures that may increase returns across the portfolio if even not maximizing for particular firms.
For instance: Systematic stewardship also takes a portfolio approach. The distinctive twist is the focus not on how to increase expected returns across the portfolio, but how to reduce systematic risks, and thus how to enhance risk-adjusted returns for the portfolio. This approach is not simply additive. It does not counsel, in addition to devising governance approaches that will increase expected returns, now also take into account systematic risk factors. Rather, reducing systematic risk may entail a trade-off with expected returns. For example, a diversified investor sensitive to systematic risk may have a different approach to risk-taking by large financial institutions and may favor rather than disfavor government regulation that targets such risk. It may regard its risk-adjusted returns as enhanced rather than reduced by measures that reduce expected returns on a portion of its portfolio.
You could—people do—have a model that says "bank shareholders like banks to take extra risks, because if those risks work out the benefits accrue to shareholders, and if they don't the costs are mostly borne by bondholders and taxpayers and so forth." And this model might be correct for bank shareholders viewed as bank shareholders. But actual bank shareholders are largely diversified investors who own lots of other stocks, and a bank-driven financial crisis will be bad for those stocks too, so the big shareholders will actually internalize a lot more of the risk of crises than they would if they were pure bank shareholders, so they will want different behavior from banks and regulators. Elsewhere in diversified investors and systemic risks, here is a research note from Dimensional Fund Advisors on "What Is the Social Cost of Carbon?" And: "World's Biggest Wealth Fund Draws Dot-Com Parallel With ESG." Texas power billsHere's a story about real-time settlement I guess? The Texas electricity crisis last week has morphed into a credit crisis in the state's wholesale power market, where participants have begun defaulting on a portion of the $50bn in energy purchases made during record cold weather, according to an update from the grid operator. The Electric Reliability Council of Texas (Ercot), which serves as a central clearing house for buyers and sellers in the wholesale electricity market, said on Wednesday that it had tapped emergency funding to cover failed payments. Electricity prices reached the maximum allowable $9,000 a megawatt-hour last week, far above typical levels of about $25, as the winter storm shut down half the state's generating capacity. The bill is now coming due as buyers — such as electricity retailers, municipal utilities and power generators — have to post collateral as a down payment on purchases. Some retailers have failed to deliver it, Kenan Ogelman, Ercot's vice-president of commercial operations, told the agency's board. "Defaults are possible, and some have already happened," he said. If buyers are not able to cover their bills, Ercot will pay the generator and the charges will ultimately be spread out to other market participants, including other generators and traders, as permitted by regulations.
The point is that there is a power market based on credit and collateral, and the power settles in something like real time (for the spot market), but the money settles later: Utilities and wholesalers get electricity delivered to them over the wires, and then later they pay for it. When the price of power jumps to ridiculous levels, some of the buyers end up getting electricity that they can't pay for, and the electricity crisis "morphs into a credit crisis." In a sense this is bad: Credit crises are bad, defaults are bad, you never want your clearinghouse to tap its emergency funds or have to allocate losses among market participants. In another sense it is … probably better than the alternative? You could imagine a non-credit-based system of real-time settlement, where utilities have to wire cash for electricity the moment they use it. (On the blockchain, or whatever.) And then if prices shot up unexpectedly, utilities would have to post lots of cash to continue to get electricity for their customers, and if they didn't have it then they wouldn't get the electricity, so they wouldn't owe any money, so there wouldn't be a credit crisis.[3] Also though they wouldn't get electricity? Perhaps that would be better—perhaps the undercapitalized utilities wouldn't get electricity so there'd be more electricity left for everyone else, or perhaps their inability to pay would keep prices down—but mostly it seems worse? Like if you made every utility and wholesaler come up with enormous unexpected amounts of cash on short notice to prepay for suddenly-super-expensive electricity, possibly too few of them would be able to do it, and there'd be even more blackouts than there actually were, due purely to a breakdown of liquidity. In an electricity crisis, what you kind of want is to generate as much electricity as possible, and distribute it as efficiently and fairly as possible, and then send out bills later, and if people can't pay the bills you sit down and figure out how to allocate the losses. Perhaps you have a Draconian allocation of "anyone who got the electricity has to pay the bill even if it takes the rest of eternity to work it off," or perhaps you have some loss-sharing arrangement where the state or federal government eats some of the cost, or it's allocated proportionally among ratepayers and utility shareholders over the next decade, or whatever. But you have some leisure to decide that, to have different stakeholders argue about it in different venues, if you let the electricity crisis turn into a credit crisis. If you just let it turn into a much worse electricity crisis then you miss your chance to fix it. People are worried about Bitcoin liquiditySure why not: The world's largest Bitcoin fund is selling off faster than the cryptocurrency itself as investors rush to the exits. The $31.6 billion Grayscale Bitcoin Trust (ticker GBTC) plunged 21% this week, outpacing a 18% decline in the world's largest cryptocurrency. That's evaporated GBTC's once-massive premium to the Bitcoin it holds, with the price of GBTC closing 3.8% below the value of its underlying holdings on Thursday -- a record discount, according to data compiled by Bloomberg. It's an unusual situation for GBTC, which has persistently traded at a premium to its net asset value since the fund's launch in 2013. That figure soared to 40% in late 2020, with investors willing to pay a markup for exposure to Bitcoin's dizzying rally. That avalanche of inflows swelled the number of GBTC shares outstanding to a record 692 million. However, GBTC doesn't allow redemptions -- meaning that shares can only be created, but not destroyed. With Bitcoin's climb now stalling, that's created a supply and demand imbalance as participants in the trust seek to find buyers in the secondary market.
My model is that it is still easier and more pleasant for most people to buy Bitcoins in the form of an exchange-traded trust than it is to buy them in the form of Bitcoins. On the way up, this means that GBTC trades at a premium to Bitcoin, because investors are paying up for ease and pleasantness. On the way down, it means that GBTC trades at a discount to Bitcoin, because the people who wanted easy and pleasant exposure to Bitcoin are not the diamond-handed true believers who will hold Bitcoin through a selloff. Also because there is no good arbitrage mechanism; you can't crack GBTC open and extract the Bitcoins, you can only sell it to other not-particularly-diamond-handed buyers. Bitcoin accountingGuan Yang points out that Square Inc. treats the entire gross amount of Bitcoins that it sells to customers of its Cash App as revenue, which means that its revenue from selling Bitcoins ($4.6 billion, on $4.6 billion of Bitcoin transactions, on which it cleared $97 million of net revenue) is higher than its revenue from doing actual cash transactions ($3.3 billion, on $103.7 billion of "seller gross payment volume"). Yang points out that other financial-services companies don't generally book revenue that way; investment banks report "trading revenue" as the value of stocks and bonds they sold minus what they paid for them, not the total gross value. Of course other non-financial-services companies do book revenue that way; Apple's Inc.'s revenue for an iPhone is the price of an iPhone, not the price minus what it costs Apple to build it. (That is its gross margin.) And this is not Square's doing; this is how U.S. generally accepted accounting principles apparently work, for Bitcoin.[4] Still it is weird; it treats dealing in Bitcoin differently from dealing in other financial assets, and makes Square's Bitcoin business look bigger than its (actually much bigger) dollar-based payments business. Anyway I guess the point here is that there is no particular reason to assume that GAAP accounting reflects economic reality. Diamond hands, fat fingersHere is a post on Reddit's r/WallStreetBets forum from someone with the username u/meiggs who claims to have "Tried to quickly buy 50k worth of GME before close but fat fingered and ended up buying 'GMED.'" GME is of course the stock ticker of GameStop Corp., WallStreetBets' favorite stock. GMED is Globus Medical Inc., a $6 billion market cap medical device company focused on spine disorders. Oops. The post is from 4:04 p.m. yesterday, shortly after the market closed. As of 10 a.m. today it had 6,700 comments and 94,900 upvotes. GMED was down 2.2% yesterday on fairly average volume. We talk a lot around here about people buying the wrong stocks. One theory that I have is that, when a stock goes up for days or weeks because it has a ticker that sounds like something else, people aren't really confused. They are playing some sort of weird meta game; they are buying the stock because they think other people will be confused and it will go up, or they are buying the stock because they think other people will buy the stock to play meta games and it will go up, etc. You need some catalyst—some potential confusion, a merger or IPO or Elon Musk tweet about something that sounds like the ticker—but once you have that the thing can just chug along on its own, because it is fun and people like gambling and comedy, not because they think anything real has happened to the stock. Nothing would give me more pleasure than to tell you that GMED was up 50% today. Wouldn't that be great? There's a catalyst, but it is purely silly and social: If you read u/meiggs's post, there is no chance whatsoever that you will get confused about GameStop's ticker and buy the wrong stock, but there is some chance that you will say "lol this guy bought GMED, that's funny, I should do that too to continue the joke." Alas, it didn't happen. As of 11:15 a.m., GMED was up about 1.6%, which is better than the broad market but nothing amazing. Is the SEC investigating Elon Musk for tweeting about Dogecoin? - I doubt it.
- Maybe? Here's a tweet saying they are, citing "sources familiar with the matter."
- "I hope they do! It would be awesome," tweeted Musk.
- I doubt that too.
For what it's worth, I think Dogecoin is clearly not a security, and I think that Musk's joking manipulation of this joke cryptocurrency is clearly not the sort of thing that the SEC does or should care about, but I have been wrong before and you can't really bet against dumb financial things happening in 2021. Will the richest man in the world, who is also the chief executive officer of a $650 billion electric car company, who is also the CEO of a flying-to-Mars rocket company, spend most of his time in 2021 in court arguing with a U.S. securities regulator over his tweets about a cryptocurrency based on a Shiba Inu meme? I mean, it sounds unlikely, but it's a thousand times more likely than that he'll quietly get down to work and avoid messy pointless internet distractions, right? There will be some incredibly dumb Elon Musk story this year, why not this one. "It should list a blockchain address instead."In yesterday's column I included a screenshot of a portion of the cover page of Coinbase Global Inc.'s registration statement for its planned direct listing of stock. I wanted to point out something new to me: In the spot on the registration form for its address, Coinbase wrote "Address Not Applicable," explaining that it is "a remote-first company" and has no headquarters. I made some mild jokes about a crypto company of course existing nowhere. "It should list a blockchain address instead," I wrote. Somehow I skipped over the very next section of the cover page, which is titled "Copies to:" and which usually lists the company's lawyers and their address. And Coinbase's does; it lists some lawyers at their outside law firm (with an address) and some people at Coinbase (without an address). But then it also lists: Satoshi Nakamoto
1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa
Coinbase did list a blockchain address! Not its blockchain address, of course; it's Satoshi Nakamoto's address. Presumably Satoshi Nakamoto does not actually want to receive correspondence from the U.S. Securities and Exchange Commission about Coinbase's direct listing, and the SEC is not actually going to send him that correspondence, and if it did it would not be at his blockchain address. It's just a weird joke, to put in your official filings with the SEC. I like it a lot. Things happenIn a Flash, U.S. Yields Hit 1.6%, Wreaking Havoc in Markets. How $50 Billion of Unwinding Fueled Thursday's Treasury Selloff. Convexity hedging. Risk-Parity Quants Hammered by Stocks and Bonds Moving Together. AT&T Carves Out Pay-TV Business in Deal With TPG. Birkenstock sold to LVMH-backed group in €4bn deal. Nigerian crypto investors defy crackdown to ride bitcoin frenzy. Warren Buffett Backers Can Rest Easy With 90-Year-Old Getting Vaccine. "The US Federal Reserve should consider Ferberising bond investors." 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! [1] These are very broad statements and not universally true. Some biotech companies go public on a pure-vision basis, etc. [2] To be fair most, though not all, of the statements that Nikola conceded to be false were made before it went public. Still obviously the truck-rolling-down-the-hill video was out there when Nikola was going public, etc. [3] Depending on how utilities raised the money. Perhaps they'd all have credit lines with banks and would draw down those lines to pay for real-time settlement, and then they wouldn't be able to pay back the lines. But it probably wouldn't be like a one-week problem; they'd have a bit of time to pay back the lines before it became an issue. [4] Square says: "The sale amounts received from customers are recorded as revenue on a gross basis and the associated bitcoin cost as cost of revenues, as the Company is the principal in the bitcoin sale transaction. The Company has concluded it is the principal because it controls the bitcoin before delivery to the customers, it is primarily responsible for the delivery of the bitcoin to the customers, it is exposed to risks arising from fluctuations of the market price of bitcoin before delivery to customers, and has discretion in setting prices charged to customers." | 
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