Modular Cat Trees: A Mailbag Episode

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Speaker 8 Hello and welcome to the Money Stuff Podcast, your weekly podcast where we talk talk about stuff related to money. I'm Matt Levine and I write the Money Stuff column for Bloomberg Opinion.

Speaker 9 And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

Speaker 8 Katie, we have traveled into the future. Yes.
Five minutes ago, we were recording a Money Stuff episode for, I'm going to say,

Speaker 8 September 13th. You're right.
As possible. Friday the 13th.
Friday the 13th. And now.

Speaker 8 Still before Friday the 13th, we're recording an episode for, I'm going to guess, Friday the 20th.

Speaker 9 You're so right. Yeah.
Yeah, it's seven days to 13. You get 20.

Speaker 8 All right. So here we are.

Speaker 9 We asked for questions.

Speaker 9 Yeah. We asked you for questions, and boy, did you deliver.
Our inbox flooded.

Speaker 8 Well, we haven't delivered yet. Well, no.
We haven't delivered. But you did.
Singing mailbag.

Speaker 9 Mailbag. It's our first real mailbag episode.

Speaker 8 First all-mailbag episode.

Speaker 9 Yeah. So

Speaker 9 let's dive right in. A writer who asked to stay anonymous asks, why are private markets the new public markets? And is it bad that private markets are the new public markets?

Speaker 9 It's a topic we explore frequently. And I guess we should talk about whether or not it's like a good development.

Speaker 8 I feel like my potted answer on this is like, why are the new public markets? Because there's so much money in private markets, right?

Speaker 8 It used to be that like, if you wanted to raise a lot of money, you went to the public markets because like

Speaker 8 the best way to reach people was to like advertise broadly. But now like there are a lot of rich people.
Financial markets are very globalized.

Speaker 8 So you can call the rich people in Saudi Arabia instead of having to like get the rich people in America.

Speaker 8 And technology is such that it's like pretty easy to canvass all the people with a lot of money.

Speaker 8 And so it is much less necessary to go out to public markets to raise a lot of money because like it is relatively straightforward to access giant pools of money in the private markets.

Speaker 8 And other than the money, like private markets are a lot easier, right? It's like you don't have the same disclosure rules. You don't have the same governance rules.

Speaker 8 You don't have the same getting sued by shareholders. It's a lot easier to stay private in many ways.
And if you can access as much money as

Speaker 8 OpenAI or SpaceX can access in the private markets, then they sort of become the default place. And then our questioner also asks, is it bad that private markets are the new public markets?

Speaker 8 I mean, the standard story is that the point of public markets is in part to like allocate capital to the best uses or whatever but it's also in part like there are a lot of people who have like retirement savings and you'd like them to have adequate retirement savings so true and like you know the stock market is a way to invest in like the growth of the economy right you can buy

Speaker 8 stakes in big companies and as the economy grows, the value of your stakes grows and you end up more than keeping pace with inflation and have a lot of money to retire on.

Speaker 8 And if all of the cool, fast-growing, innovative, small companies that will become large are in the private markets, and the public markets are just for kind of older, more stable companies that are no longer growing dynamically, then that's worse for retirement state risks than there is for ordinary people because only essentially rich people and like institutions can access the fast-growing companies.

Speaker 8 And people say this. You know, Jay Clayton, when he ran the SEC, was fond of saying things like this.

Speaker 8 People sometimes then make the further leap of like, therefore we should let retail investors have more access to private investments.

Speaker 9 Like perhaps through an ETF from Apollo.

Speaker 8 Sure. A nice callback to eight days ago.

Speaker 9 To roughly 25 minutes ago.

Speaker 8 Time is a flat circle. It's a concept.

Speaker 9 It's a concept.

Speaker 8 But the problem is that like

Speaker 8 if you give retail investors access to private, like there's no such thing as private markets, right?

Speaker 8 Like a public market, it's like you can buy all the stocks on the public market because they just trade publicly. The private market, there's no market, right?

Speaker 8 It's It's just like you can invest in SpaceX if Elon Musk likes you. You can invest in OpenAI if OpenAI calls you.
If they don't call you, you can invest in a different private company.

Speaker 8 But like if you're just like a random person, the private company opportunities that you get are not as good as the ones that, you know, Warren Buffett gets or whatever.

Speaker 8 And so the problem of like ordinary retail investors not having access to like the best private market investments is not solved by giving them access to the worst private market investments. Right.

Speaker 8 It's made worse.

Speaker 9 Well, a follow-up question that someone DM'd me about is, can companies just stay private forever? I mean, the answer in a lot of cases is yes.

Speaker 9 But I mean, do you think about OpenAI, what it has a $150 billion valuation? SpaceX, I forget what they're at. But if you're in that position, is there any pressure to go public?

Speaker 8 I mean, companies stay private forever, right? I mean, Coke Industries has been private for decades or whatever.

Speaker 8 Everyone in this room is gesturing at the room to suggest another private company that exists.

Speaker 8 You know, like the big names are like OpenAI, SpaceX, and Stripe. Yeah.

Speaker 8 Like these big like Silicon Valley venture-funded tech companies, there is an expectation among your venture capital investors and among your employees that they'll be able to cash out their stock, right?

Speaker 8 Like they bought stock or they got paid in stock and they want to cash out. And the ordinary way to cash out is you do an IPO and then they can sell their stock.

Speaker 8 Those companies have found a way to avoid that, which is they do tender offers, they raise money from new investors and they use it to buy back the old investors. It's not as good.

Speaker 8 It's not as nice for the investors. It's more complicated.
It's more work and like more managerial attention possibly than just letting stock trade on the open market.

Speaker 8 But you avoid managerial attention to other things like disclosure. I don't know.
I mean, my bet is like these companies probably could stay private forever.

Speaker 8 I think they have some pressure to make it easier to sell.

Speaker 8 But, you know, like if you're an open AI employee and you want to sell your $10 million of stock and the company says, we're not going to go public, but we'll do a tender and like, it'll be a little bit administratively annoying, but you'll probably get your $10 million.

Speaker 8 That's fine because

Speaker 8 you got so much money from like working at this hot startup, right? If in 10 years they're not growing fast, you know, it's like more administratively annoying to not go public.

Speaker 8 But you get a lot of runway if you are a hot startup and there's there's so much money in the private markets to let you cash out early investors.

Speaker 9 Well, we've gotten through one question. Great.
So let's move swiftly along here. Jeff writes, Howdy, you've spent a lot of time talking about regulatory fines.

Speaker 9 For example, the SEC collected almost $400 million in 2023 as a result of off-channel business communications. My question is, where does that money go?

Speaker 9 The off-channel communications example isn't necessarily harming anyone anyone in particular. So I don't imagine it gets paid out as restitution to victims.

Speaker 8 Trevor Burrus, Jr.: Right. Off-channel communication means like people texting about work on their cell phones, which is like the SEC's big enforcement priority.

Speaker 8 I write a lot about the SEC being like a machine for generating fines, right?

Speaker 8 And like the cell phone stuff is such a good way to generate fines because every single bank has employees who have texted about work. And so you can find all of the banks, you know, nine-figure sums.

Speaker 8 The answer to the question. So the SEC is funded by fees that it charges for registration of securities.

Speaker 8 So the FCC has a budget and it goes to Congress for its budget, but then the government doesn't pay for it. Like the securities industry pays for it, like companies registering securities pay for it.

Speaker 8 So the FCC is like free to the government, sort of.

Speaker 8 And it last year had like a budget of like $2 billion, like employees and stuff, and it collected about $5 billion in fines, which is like pretty good return on capital.

Speaker 8 Most of that, I think, is like what is referred to as disgorgement, disgorgement, which means like you made money illicitly and you have to give it back.

Speaker 8 Some of that is going to be disgorged to victims, right? Like a lot of that is like you stole money and you have to give the money back that you stole.

Speaker 8 But there is like a lot of money left over for the SEC. A lot of that goes, I think they paid out like $900 million to victims and they paid out $600 million to whistleblowers.
Nice.

Speaker 8 They pay a commission.

Speaker 9 Not a bad business.

Speaker 8 All these fines, right? Like, you know, $600 million divided by $5 billion is, you know, they pay like 12% fees to the whistleblowers who bring them the fines.

Speaker 8 And then the rest just goes to the treasury, just goes back to the U.S. government.
So it's a revenue source for the U.S. government.
I don't know that the SEC thinks of itself that way.

Speaker 8 I think they must think of themselves as well. They have a higher sense of that.
Yeah, they're like protecting investors and upholding the rule of law and whatever.

Speaker 8 But I like to think of them as doing a certain amount of

Speaker 8 revenue maximization. And they're good at it.

Speaker 9 Good for them.

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Speaker 9 We have a question for me. So, you know, I'm going to read this question for you.

Speaker 8 Paul asks, Katie, what is the value of writing a big story, as Katie did last week? Last week, which is actually two weeks ago. Katie wrote a big story about single stock.
Single stocks.

Speaker 8 Leverage ETFs. She got so many questions about.
And

Speaker 8 a big story, at least one that is widely circulated and cited in financial media. It was cited by such luminaries as the Money Stuff Newsletter.
True. And Cliff Hasnes.

Speaker 9 Really, just the two institutions that I care about the most.

Speaker 8 Anyway, what was the

Speaker 8 how did you feel about that? Well, first off,

Speaker 9 I am glad that we got so many questions about leveraged ETFs because we end up talking about ETFs a lot on this podcast, and I feel like that is a lot of my influence.

Speaker 9 So I'm glad that people are somewhat interested. Right.

Speaker 8 It would be a shame if everyone's like,

Speaker 8 my one note is less ETFs.

Speaker 9 Please stop talking. I think it's pretty human.
It's fun to see the hit count on an article that is widely circulated.

Speaker 9 It's also nice when people talk about the thing that you wrote about because usually when I pitch an article on a topic that I find cool and then people read it a lot and talk about it a lot and tweet about it and also think it's cool, that is gratifying.

Speaker 9 And also just when you write an article that has an impact, it tends to open up communication to people that you would like to talk about who you would think are interesting.

Speaker 9 So you get more inbound from interesting people.

Speaker 8 So I always find it like super gratifying when I write about a thing where I'm like, this is ridiculous and arcane and of interest only to me.

Speaker 8 And then like that gets me the best feedback and people are like, oh, I love this, right?

Speaker 8 It's really satisfying. Yeah, like there are people like me out there, you know?

Speaker 9 Yeah, it is really nice. And also,

Speaker 9 I mean, I can see my hits. So like it's instant gratification for something that,

Speaker 9 you know, if you write

Speaker 9 that story, I mean, it didn't take me too long, but I probably worked on it for like a week and a half, and then just got the instant gratification noise feels good. Yeah.
Yeah.

Speaker 8 I don't look at my clicks, but

Speaker 9 you don't? I mean, you read spikes on the terminal every single day that you publish. Read spiking is when you get a certain amount of clicks in a certain amount of time.
And Matt always reads spikes.

Speaker 9 So we have a rough.

Speaker 8 Something you've told me, but I don't otherwise know.

Speaker 9 I have read spike alerts. So

Speaker 9 Justin writes, both Icon and Ackman have been living rent-free in my mind lately, thanks to Matt's columns.

Speaker 9 And it made me think about how it would be funny if Ackman took an activist position on IEP, given the history of public feuds between the two and the recent precipitous fall of that stock's price.

Speaker 9 Could this actually play out? That would be amazing. I go back and I watch that CNBC clip.

Speaker 8 It's like the most famous piece of fanciful television ever.

Speaker 9 Probably watch it once a month. It's just so good.
Just to remind myself, like, what?

Speaker 8 Who is on? Is it

Speaker 8 Ackman was on an Icon Called In or vice versa?

Speaker 9 I think Ackman was on an Icon Called In,

Speaker 9 and they just let it run.

Speaker 17 I never said that I want to be friends with you, Bill. I wouldn't be friends.

Speaker 17 Carl, I have no interest. Do you think I want to invest with you? Okay, let's

Speaker 17 invest with you. Let's be with the best man on Earth.
Let's move on.

Speaker 8 This is like 10 years. This is like more than 10 years ago.
I know.

Speaker 9 But I watch it to remind myself what peak financial television looks like.

Speaker 8 Greatest fight on financial television ever. It's so good.
I don't think they've like, yeah, anyway.

Speaker 9 They have like kissed and made.

Speaker 8 Yeah, sort of.

Speaker 9 They've appeared on stage together.

Speaker 8 They're friends now. But let's, for the purposes of this, they don't have a podcast together.

Speaker 8 Wouldn't that be so good?

Speaker 8 Can we just give up our seats to them?

Speaker 9 The Ackman Icon show. Yeah, we'll just leave them alone in this box of a room.

Speaker 8 That'd be so good. Yeah.

Speaker 8 But failing that, IEP is Icon Enterprises, which is Carl Icon's publicly traded company, which has had a precipitous fall because a short seller accused it of being a Ponzi scheme and it lost a lot of its value.

Speaker 8 The answer is no. Ackman can't really do much activism in IEP just because Carl Icon owns 85% of it.
And so that's not much activism he can do. Now,

Speaker 8 he had margined a lot of that stock and had his banks seize and sold his stock, then there might be something there.

Speaker 8 But that would be a bigger problem for him than just Bill Ackman being in the stock. But

Speaker 8 the real answer to this question is: no, Ackman can't do that, but the reverse is possible. True.

Speaker 8 And in fact, Elliot built an activist stake in Bill Ackman's European public vehicle in 2017, which he has talked about.

Speaker 9 He revealed it on a podcast.

Speaker 8 His podcast with Carl Aikot.

Speaker 8 Not this podcast.

Speaker 9 I think it was Lex Friedman. Yeah.

Speaker 8 And And so like, it's a little unclear exactly what happened because it's just like his version of the story.

Speaker 8 I'm like, they didn't actually do any activism because I think basically they were building a stake and like

Speaker 8 Akwen was able to head them off. But I don't know.
I was looking idly through the filing for Pershing Square USA and it sort of looked like there weren't that many anti-activist protections.

Speaker 8 So if he does end up taking that thing public,

Speaker 8 God will have Carl Akhan wants to borrow against this IEP stock to try something. It'd be fun.

Speaker 9 I mean, my fantasy lineup is PSH,

Speaker 9 IPOs, trades at a discount. Boaz Weinstein does activism.

Speaker 8 Right. But I think Boaz Weinstein and Bill Ackman are like, they're friends.

Speaker 9 They're friends. I know.
Well, that's the thing. Like, is Boaz morally obligated?

Speaker 8 To do closed unfund activism wherever the opportunity for his office is. Maybe, maybe he is.

Speaker 9 That's what I'm saying.

Speaker 8 I'm going to have a podcast with them. Yes.

Speaker 9 Yes.

Speaker 8 Jeff.

Speaker 9 I wonder if I said the same Jeff. Jeff asks, so whether I'm in the long or short micro strategy leverage ETFs, I'm guaranteed to lose money over the long term.

Speaker 9 Is it possible to borrow these shares to short them? And isn't this a guaranteed money maker?

Speaker 8 No, you're not guaranteed to lose money.

Speaker 9 You tell them.

Speaker 8 Jeff, what are you doing?

Speaker 8 It happens to be the case that this microstrategy ETF that Katie wrote about Low these two weeks ago, it's like a triple-levered ETF that micro strategy was up a lot over the year and the ETF was down a lot because the way the math works is that if you leverage a volatile stock enough, then even though the stock goes up, your triple levered stock can go down.

Speaker 8 But that just, you know, was kind of bad luck. And in fact, lots of other triple-levered ETFs, including the NVIDIA one, like go up when the stock goes up.

Speaker 8 Like normally it goes up when the stock goes up. It has to be, things have to go pretty wrong for it to go down when the stock goes up.
But then we also got a question from Ben.

Speaker 8 If a leveraged single-stock fund produces worse long-term returns than the volatile underlying stock, then would you get better returns than the underlying stock if the fund gave you less than 100 of the stock's daily returns e.g.

Speaker 8 a fund that gives you 50 percent of the daily return of micro strategy i think the answer is yes that's really interesting i think if you like you can you can create that yourself right you create that by like taking a hundred dollars and putting fifty dollars of it into micro strategy stock and just keeping the other fifty dollars in cash

Speaker 8 And then you have half as much volatility as MicroStrategy. And then the key is you keep it 50-50.
You rebalance each day.

Speaker 8 So if micro strategy goes down, so you have like $45 of micro strategy, then you rebalance, you put $2.50 into micro strategy. So now you have $4,750 of cash, $47.50 of microstrategy.

Speaker 8 MicroStrategy goes up on the other end, you sell micro strategy and keep some cash. So each day you always start 50-50.

Speaker 8 And what that strategy is, is just... buying low and selling high, right? So you're sort of assuming that micro strategy will be like more volatile than directional.

Speaker 8 Like it'll bounce around a lot without going anywhere.

Speaker 8 And if that's true, then each time it goes down, you'll buy. Each time it goes up, you'll sell and you'll make money over the long term.

Speaker 8 That happens to work sometimes, but it's just a guess on what the stock will look like. If the stock is very volatile and doesn't go anywhere, that'll make money.

Speaker 8 But if the stock goes up a lot, you'll be sad that you did that instead of just buying the stock.

Speaker 9 Well, might as well launch it.

Speaker 8 You don't need an ETF. You just need to.

Speaker 8 I mean, fine. We love each year.
Come on, Matt.

Speaker 9 Jeez, Louise.

Speaker 8 This week?

Speaker 9 You mean this week?

Speaker 8 You mean last week?

Speaker 9 What are your favorite types of stock malfeasance? Is that how I say that?

Speaker 8 Malfeasance, yeah.

Speaker 9 Malfeasance to cover. Short seller witch hunts.
Wait, no.

Speaker 8 Short sell.

Speaker 8 That was one sentence.

Speaker 9 Short seller witch hunts, gnarly bankruptcies,

Speaker 9 insurance fraud, question mark. Which one?

Speaker 8 Well, I always love clever ones, right? I I love the Spotify arbitrage. No, that's about it.

Speaker 9 You mean the one that we covered last week?

Speaker 8 Last week, yeah. The Spotify one from last week.

Speaker 9 Last week, 30 minutes ago.

Speaker 8 I love clever ones. I love things that like

Speaker 8 use leverage. So like there are some really good insurance frauds where like the thing to notice about insurance is like

Speaker 8 And this is true of a bank too. It's maybe more intuitive with a bank.
A bank is like a pot of a billion dollars with like $100 million of equity, right?

Speaker 8 Like a bank, you can buy control of a bank by buying its stock, and the stock is just a tiny fraction of the value of money in the bank, right? The bank is mostly leverage.

Speaker 8 And so if you buy a bank's stock, you control all that money in the bank, and then you can like give it to yourself.

Speaker 8 And of course, of course, in banking and regulation, I mean banking and insurance, there's regulation to stop you from doing that extremely obvious trade.

Speaker 8 But people find ways, mostly in insurance, sometimes in banking too. But like in insurance, you buy this like little insurance company.

Speaker 8 It has this big pot of premiums that it's written and like money that it controls. And then you give that money to yourself.
Yeah. And it's great.
It's very clever.

Speaker 8 The other thing I really like to write about is, I've been writing about it a lot recently, is fake takeover offers.

Speaker 8 Because you think it's like the stereotype of fake takeover offers, which is that it's like you buy a stock, you put out a fake press release saying that you're buying the company, the stock goes up, you sell the stock, you make money.

Speaker 8 And in fact, there are a lot of cases like that. In almost every case, they don't make money because they are bad at it and they like don't sell in time.
And so they lose money. It doesn't matter.

Speaker 8 That's like regular fun. But there are a lot of cases of like fake fake or quasi-fake takeovers where they're not trying to do that, where they just want to go on television.

Speaker 8 They just want to be a big shot. You know, they want to like have a little merger negotiation.

Speaker 9 To which I say, just start an AI company. You'll get on TV.

Speaker 8 I know, but I'm so sympathetic to that because as like an M ⁇ A guy, like it's like, I understand it's fun to negotiate a merger.

Speaker 8 And like, if you don't have the money to buy a big company, just pretend you have the money to buy a big company. Who are we talking about? Lots of people.

Speaker 9 I know, but recently in the past three months, who did that?

Speaker 8 There was the guy who tried to buy Virgin Orbit. Yep.
And he went on television a lot. Yeah.

Speaker 9 And he was bad on TV.

Speaker 8 Many of them are.

Speaker 9 It was stressful. Well, they don't have media training because they're not legit.

Speaker 8 They don't. Anyway.
Right. They're so excited to be there.
Yeah.

Speaker 9 I get it. I get it.
It is amazing. Before, you know, closely paying attention to money stuff, I wouldn't have thought that there would be plural, that many plural.

Speaker 8 Yeah, I have to say, it's a thing I've noticed more recently.

Speaker 8 The other thing about it is like it's a continuum with real takeover efforts because very few people offer to buy a company saying, I've got a pot of cash right here sufficient to buy the company.

Speaker 8 They're like, if you engage with me and we negotiate a deal, I will get financing.

Speaker 8 Like someone will lend me the money to buy the company or I'll be able to sell, you know, I'll be able to raise this money. But like, I don't have it now.
I have to talk to you about the merger first.

Speaker 8 Yeah. And like, that can be very legitimate.
I mean, like, that's how Elon Musk bought Twitter, right? I mean, it's like a real thing. It's how most big dollar M ⁇ A gets done done.

Speaker 8 It's like you start it without having all the money lined up. But like, there's a continuum down to the guy with like literally $1 in his bank account calling up Virgin Orvit.

Speaker 8 I could probably get the money. He couldn't, right? But it's like, you know, it's all in a continuum.

Speaker 9 God bless.

Speaker 10 I like things my way. My coffee, my schedule, and my treatment.

Speaker 10 So I talked to my doctor about self-injecting with the Vivgard Hydrulo Prefilled Syringe, which contains F-gar Tigamide Alpha and Hyaluronidase QVFC. It's injected under your skin subcutaneously.

Speaker 10 It means I can inject in my space on my time. It's my treatment, my way.
Visit VivGuardMyWay.com. That's V-Y-V-G-A-R-T MyWay.com.
And talk to your doctor about Vivgard Hytrullo.

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Speaker 3 So, let me get this straight. Your company has data here, there, and everywhere.
But your AI can't use the data because it's here, there, and everywhere?

Speaker 3 Seems like something's missing. Every business has unique data.
IBM helps your AI access your data wherever it lives to change how you do business.

Speaker 3 Let's create Smarter Business, IBM.

Speaker 3 Ed, what's up?

Speaker 9 Now it's a question for me.

Speaker 8 Okay.

Speaker 9 Your questions are very intense. This is a good question for me, though.
I have a real answer.

Speaker 8 Thomas also asks,

Speaker 8 Katie, what's your pitch for the next great cat-based business? Financial fundamentals need not apply.

Speaker 9 So I have a real answer for this, and I'm going to steal it from my husband, but we've been talking about this for a while.

Speaker 8 Katie goes home and discusses cat-based business.

Speaker 8 Yes.

Speaker 9 Let me tell you. So you know cat trees, Matt?

Speaker 8 Yeah, I know cat trees.

Speaker 9 Have you ever had a cat?

Speaker 8 No. Oh, well, okay.
But I've had a dog who was really interested in cats.

Speaker 9 Okay, so that doesn't count. No.
But cat trees, if you have a cat, you have to get a cat tree.

Speaker 9 You know, they're usually beige. They usually have some scratchy posts and little platforms that the cat can hop up on because cats like to go high.

Speaker 9 We end up buying a cat tree every couple of years because they get gnarly or just like your cat is bored of them.

Speaker 8 Kitty, when I say that I know about cat trees, when I lived in Brooklyn,

Speaker 8 every so often a cat owner would buy a new cat tree and throw out the old cat tree on the street, and my obsessed dog would sniff it and sit by it and lurk, hoping there was a cat inside.

Speaker 8 Yeah, I get that. So I'm aware of the discarding of cat tree.

Speaker 9 They're probably really stinky of cats.

Speaker 8 No, yes.

Speaker 9 Yeah, because the cat spends so much time on their cat tree. But you have to switch them out every few years because they get grody and your cat gets bored.
Modular cat trees. Okay, I like that.

Speaker 9 So that you can mix and match. And it's also good.
I saw a TikTok recently.

Speaker 9 I should stop revealing how much time I spend on TikTok, but I get a lot of cat behavioral videos, like a lot of Jackson Galaxy.

Speaker 8 I'm nodding knowledgeably.

Speaker 9 A lot of Jackson Galaxy and stuff.

Speaker 9 And someone made the point that you should make every day a little bit different for your cat because your cat stays in your apartment and you want them to be fun and stimulated.

Speaker 9 And I think it would be nice if you had modular cat trees that you could switch up easily so that your cat encounters something new more often than every couple of years. This is a really good idea.

Speaker 9 Thank you.

Speaker 8 I'll fund your modulation.

Speaker 9 So many great ideas that we just never execute. A lot of great ideas.

Speaker 8 I'm a little worried that you've disclosed it on the podcast. Fortunately, this podcast will air eight days after.
That's true. So you have eight days to really act on.

Speaker 8 Yeah, okay. Release funding.
I'll get to work.

Speaker 9 LW asks:

Speaker 9 How can you both be a broker and a dealer? As in SEC registered brokers slash dealers, isn't being both at the same time a problem, a straightforward conflict?

Speaker 9 I.e., some trades you broker and some trades you take a principal position.

Speaker 8 I love this question. It's still on my wavelength.
How can you be both a broker and a dealer?

Speaker 9 Are you LW?

Speaker 8 Did you write in? No, I just like, it's just a good, you know, like it's a, it's like a phrase, like an SEC broker dealer. Everyone says broker dealer, but like right, there's a different

Speaker 8 is someone who like matches up a a transaction so like you want to buy someone else wants to sell i sit in the middle i take a commission i sell from them to you right a dealer is someone who like trades directly with the customer so you want to buy i'm like i'll sell it to you right

Speaker 8 and many businesses in the world are dealer businesses right like if you want to buy a car you go to a car dealer and they'll sell you a car that they own And many businesses are broker businesses, right?

Speaker 8 You want to buy a house, you go to a real estate agent and they find you a house and take a commission, but they don't own the house.

Speaker 8 In a lot of financial markets, there is a broker-dealer model where

Speaker 8 you want to buy a security and you go to your bank, that's the generic term, and they will either be your broker or they'll be your dealer.

Speaker 8 They'll either like find it for you or they'll deal directly off their balance sheet with you. And is that a conflict?

Speaker 8 I mean, like, yeah, of course, it's a conflict, but it's also, it's like, it's just good service, right?

Speaker 8 Like, it's like the reason that exists is because there is someone you can call and you say, I want to buy this bond. And if they have the bond, bond, they'll sell it to you.

Speaker 8 And if they don't have the bond, they'll find it for you. Right.

Speaker 8 And they have some amount of, you know, regulatory and also just like sort of custom expectation that they will do the best thing they can for you. Right.

Speaker 8 You see this in like retail stock trading where like your retail broker who is only a broker and will just route it to like a big market maker.

Speaker 8 Your retail broker will route your order to a big market maker and the big market maker will either fill it out of inventory at a better price than you could get on the stock exchange or they will send it to the stock exchange and they'll do whatever they think is best.

Speaker 8 And they have like an obligation, the best execution, and have, you know, they're getting measured by the broker to like make sure they're giving you the best price.

Speaker 8 So, you know, in general, it's a good service, right? And I often think of like, like I've written a lot about private credit.

Speaker 8 And like one thing in private credit is like, if you're a company looking for financing or like a private equity sponsor looking to do an LBO and you go to a bank and you say, I want to borrow money for this LBO, like the bank will be like, okay, we can probably find you that money.

Speaker 8 We got to go find investors and get you that money if you go to a private credit fund they'll just be like yeah we have money like here take the money right and that's in some ways a better service and i've written about how like banks because they're getting into private credit because they can like broker private credit trades banks like should be able to offer you either we'll give you the financing or we'll syndicate the financing right and i think there's like some of that in real banking and like that's a broker dealer model right that's like for some price we can just give you the money we can just face you on the trade and for some other price we we can find someone else to face you on the trade.

Speaker 8 And we'll do both because we're like working for you however we can. It obviously raises the possibility of conflicts because, like, what you could do is the opposite, right? What you could do is

Speaker 8 if it's the best deal for you, you take it. And if it's not the best deal for you, you send it to someone else.
But, you know, that's why it's a regulated business.

Speaker 9 It's a good thing you wrote yourself that question because that was an interesting answer.

Speaker 8 There you go. There you go.

Speaker 9 This is a long one. Anonymous asks, why does there need to be an actual stock to borrow when shorting?

Speaker 9 Seems like there would have been a more direct derivative contract that mimics the risk/slash reward slash cash flow structure of a short, but without having to worry about the actual shares of stock floating around to various parties.

Speaker 9 Is that the key? That three/slash four parties each bring something unique to the deal in relation to the short seller, and derivatives contracts aren't typically coordinated between multiple parties?

Speaker 9 If this does in fact exist, please don't make me look stupid on air.

Speaker 8 Okay. Okay.
So there's two points here.

Speaker 9 Yeah.

Speaker 8 One is like, what is a derivative? So like, are there derivative contracts to short stocks? Yeah. Like there's puts and there's total return swaps.

Speaker 8 Like you can, if you're a big hedge fund and you want to short a stock, you can easily go to a bank and say, I want to get short this stock on swap.

Speaker 8 So the derivative absolutely exists, but that doesn't matter because like a derivative is like you go to a bank to say, I want to get short this stock on swap.

Speaker 8 The bank says, fine, we'll charge you for it. And we will go hedge that derivative by shorting the stock ourselves.

Speaker 8 So you still need the shares of stock to borrow because you can't like manufacture the short out of nothing. The bank is not going to just make that bet against you like on its own account.

Speaker 8 It's going to hedge that bet and the way it hedges it by shorting. Now it doesn't have to hedge by shorting.
It can hedge by finding someone on the long side of the swap, right?

Speaker 8 So like if you want to get short on swap, the bank can find someone who wants to get long on swap, and they can match you up. And then no stock needs to be borrowed.

Speaker 8 But why would someone want to get long on swap rather than by buying the stock themselves? The answer is, I mean, they wouldn't, right?

Speaker 8 Because like then they're taking credit risk and it's like weird and it's like harder to get out of it's just more inconvenient the reason they do it is like if they get long on swap they could get paid more than by owning the stock themselves

Speaker 8 but that ultimately sort of leads you back to the stock borrow market right if like a stock is difficult to borrow then it's going to be just as pricey and difficult to get short on swap to get short via derivative as it would be to get short in the cash market because like everyone involved knows that and like if you get short on swap with the bank either the bank bank has to short the stock, which is expensive for the bank, so I won't do it, or the bank has to find someone to get long on swap.

Speaker 8 And the person getting long on swap knows that the stock is expensive to borrow and they could make a lot of money by owning it in cash and lending it out in the stock borrow market.

Speaker 8 So it doesn't work. The derivative contract doesn't work.

Speaker 8 It kind of works, but it doesn't solve the problem, which the problem is there are some stocks that are hard to borrow and therefore you can't short them.

Speaker 8 You can't, for the most part, practically get around that by using derivatives. You know, you can do options.
You can like sell put options on the stock or even buy put options on the stock.

Speaker 8 But again, the pricing is going to be affected by the borrow market. The second part of the question is like, why do we have that as a rule? And why not just allow naked short selling? Yeah, why not?

Speaker 8 And like, yeah, I've kind of written that like tentatively. People get really mad.
People get really mad. People really don't like naked short selling.
They think it's like a way to manipulate stocks.

Speaker 8 There's probably some limit where it could be a way to manipulate stocks, right?

Speaker 8 Where like, if you could just manufacture an infinite amount of stock and sell it, you could probably drive the price of the stock down and like maybe do some damage.

Speaker 8 I don't think that's as big a concern as people who get mad about naked short selling think it is. But it's like a real concern.
It's like fine.

Speaker 8 You probably can't have like unlimited naked short selling. You also have like weird voting effects with naked short selling.
Yeah.

Speaker 8 Because like if you manufacture an unlimited number of shares, the people who buy the shares don't know if they own actual shares and they can vote or if they own fake shares and they can't vote.

Speaker 8 So it's a little weird. But I don't know.

Speaker 8 I've always been sort of fond of the idea that like there has to to be some way to allow naked short selling to because it would make markets more efficient, it would just like allow you to bet against overpriced stocks.

Speaker 8 And you see that there are certain stocks where they're hard to borrow, and I won't name any names.

Speaker 8 There are stocks that are hard to borrow and that trade at very, very inflated prices where people would probably like to bet against them and be correct, but they can't do it because it's so expensive to borrow them.

Speaker 8 And if you could short stock without borrowing it, those prices would be more efficient. And I mean, mostly Trump media, but also,

Speaker 8 there's a few others.

Speaker 9 Sun Til from Chicago.

Speaker 9 He writes, since you both acknowledge being needy, no shame in that, and wanted more questions about yourselves, how do you talk to your children and or nibblings at all about money stuff? How do you?

Speaker 8 I

Speaker 8 don't talk to my children a ton about money stuff. No.
They have listened to the podcast in the car and I found it very amusing. Yeah.
My sons were like,

Speaker 8 listened and heard you talk to me and said, why'd she call you Matt? Because to them, I'm not Matt.

Speaker 9 I guess you're either dad or Mr. Levine.

Speaker 8 Yes, I'm Mr. Levine to my children.
Yeah, but like it is just a kick for them to just hear my voice in a format that normally plays, you know, Olivia Rodrigo.

Speaker 8 I don't talk about the newsletter that much, but I do remember that.

Speaker 8 I was once with my daughter and we met like another dad who is like a money stuff reader and I was like, oh, I'm a fan of the newsletter.

Speaker 8 And my daughter didn't like fully understand the economic model after he left. She was like, does he give you money for writing such a good newsletter? And I was like, ah, in a sense.

Speaker 9 Indirectly. He does, sweetie.
That's really cute.

Speaker 8 Every so often, I will try to like explain a financial user male feasence story at the dinner table, but like they're a little young for that. Yeah.
Yeah.

Speaker 8 Do you talk to your siblings?

Speaker 9 So my family are Money Stuff fans. They've been Matt Levine fans.

Speaker 8 The question is, Katie, how do you talk to your parents?

Speaker 9 More directly, how do you talk to your dad?

Speaker 9 No, but my brothers are as well. My mom likes you, but she isn't different.
She isn't particularly interested in the newsletter. But my parents do listen to the podcast quite a bit.

Speaker 9 I feel like my brothers listen on the side, but I said this in one of the trailers, like having this podcast is great proof that we actually are friends.

Speaker 9 Because before we launched it, and like you would come up in our conversations, like when we were gathered as a family, I'd be like, Oh, yeah, like I know Matt Levine, like we're friends, and they'd be like, Yeah, okay.

Speaker 9 Uh, I talked to your dad on your phone once, I know, I know, but still, I feel like my one brother in particular was skeptical.

Speaker 8 And then, I actually

Speaker 9 met him, yeah, I brought you to a Capital One cafe, and he was Capital One Cafe in the Bloomberg Building, yeah. And he was there, and I think he truly was like surprised

Speaker 9 me to show up, yeah. No, he thought it was like an elaborate long-con that we were actually friends.

Speaker 9 So, this podcast is a continuation of the long-con it is great, great proof to stick it to them that I have friends,

Speaker 8 and some of them are Matt Levine with as many as one of them, yeah,

Speaker 8 as many as one.

Speaker 9 My parents do listen to money stuff a lot, and I do get comments like on episodes that we recorded weeks ago.

Speaker 9 And then, like, my dad has like another point that he wants to tell me about, and I'm like, I cannot remember what that episode was.

Speaker 9 Yeah, he would

Speaker 8 give me my daughter.

Speaker 9 Oh, my gosh, that would be great.

Speaker 8 All right. That was the Money Stuff mailbag.
Mailbag. Thank you so much for these questions.

Speaker 8 It went great. We appreciate from the bottom of our hearts

Speaker 8 you sending us questions.

Speaker 9 It was hard to whittle it down, so we didn't get to everyone, of course. But keep sending us questions.
We'll do it again.

Speaker 8 This is great. Thank you.

Speaker 8 And that was the Money Stuff podcast.

Speaker 9 I'm Matt Livian. And I'm Katie Greifeld.

Speaker 8 You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com.

Speaker 9 And you can find me on Bloomberg TV every day on Open Interest between 9 to 11 a.m. Eastern.

Speaker 8 We'd love to hear from you. You can send an email to moneypod at bloomberg.net.
Ask us a question and we might answer it on air.

Speaker 9 You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

Speaker 8 The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andam.

Speaker 9 Our theme music was composed by Blake Maples.

Speaker 8 Brendan Francis Newnham is our executive producer.

Speaker 9 And Sage Fauman is Bloomberg's head of podcasts.

Speaker 8 Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.

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