This Is Weird: A Mailbag Episode

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On my desk yesterday arrived a tungsten cube.

On the tungsten cube is engraved, this is weird.

It arrives in a box with no note.

I was not expecting a tungsten cube.

Was it checked for anthrax first?

Was it dusted?

I don't want to give anyone ideas, but I assume the Bloomberg Mailroom is quite comprehensive and it's anthrax dusting.

I hope so.

I didn't even think about it.

I was just like, ah, it's come through the Bloomberg Mailroom.

It's fine.

Anyway, I have this tungsten cube now.

So if anyone sent me a tungsten cube that says this is weird, be in touch.

That's fun.

I have to say that, first of all, a tungsten cube with this is weird engraved on it is very much my jam.

And secondly, sending that with no note and thereby making it weird is kind of a good joke.

So I have no complaints, but I wouldn't mind hearing from whoever sent it to me.

I didn't realize that this is weird was engraved on it.

When you posted it on Instagram, I thought that you added the text onto it.

No, no, no, no, no, no.

Yeah, I posted it on my Instagram close friend stories, but I'm also holding it up to the camera in our Zoom.

Another way that you can't see it.

That is a pretty good gag.

Yeah, yeah, yeah.

This is my life.

It's pretty good.

You have a little bit of a collection now.

I do.

I have my Money Stuff 10-year anniversary collection.

I'm now holding both of them up to the camera.

and

again no one can see it speaking of things that come in the mail

oh

good one

successful transition i've ever done on this podcast it's a mailbag episode that was smooth i wasn't even expecting it i know right when you least expect it a transition we got some pretty good ones this week mailbag mailbag

Hello and welcome to the Money Stuff Podcast, Euroweekly podcast where we talk about stuff related to money.

I'm Matt Livian and I write the Money Stuff column for Bloomberg Opinion.

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

And today we're doing a mailbag.

Sound effect.

Mailbag.

Mailbag.

Great questions.

Thank you everyone for sending them in.

Let's just dive right in.

We got a great one out of the gates from Rod.

He asks, why not more frequent reporting?

As a CFO of a small but private equity-owned business, I close our books monthly and report out our financial results each month.

Every public company in the world is doing the same.

It's no additional cost to release those results publicly in some form, even if not a full 10Q.

This was interesting.

The ostensible purpose of financial reporting is to give investors the same financial data that management is using to manage its business so that the investors can sort of sit in the shoes of management.

Everyone knows that's not true, but like that's sort of like the ostensible.

That's why there's a, you know, in your 10K, you have to have a management discussion analysis where you sort of say what management is thinking about the financial results.

Rod is surely right that every public company closes its books every month and has some sense of the financial results for that month.

And if they had private equity investors, they would just send over the spreadsheet and the private equity investors would be like, thanks, this is helpful.

But they have public investors, which means primarily that they have people who can sue them everything that happens in u.s financial regulation and especially u.s financial disclosure is in the shadow of litigation right so if you put out a 10q and your numbers are wrong you will get sued and you will be like yep our numbers are wrong here is some money plaintiffs lawyers And I think that's a lot of what is going on here.

Like when you put out a 10Q, like a 10Q does not have audited financials, but you like spend three days with your auditor going through the 10Q and making sure that you have auditor comfort on every number in the financials, because if they're wrong, you'll get very sued.

And so that I think is why companies do not put out more frequent disclosure, because sure, you have those numbers, but the task of turning those numbers into something you could give to shareholders and not worry about getting sued over is monumental.

People like understand that this is like not great, right?

Like this is why periodically the SEC tries to have some reform that tries to make it harder for shareholders to sue public companies.

But, you know, I always say everything is securities fraud.

I think the arc of the universe bends towards it, making it easier to sue public companies.

This question did make me think a little bit about how occasionally you will see companies pre-announce their earnings, even though they're wedded to quarterly updates.

They will go early sometimes, but usually it's for bad news.

Also, that's not monthly.

Yeah, people pre-announce for offerings or for bad news, but

to have a monthly schedule of putting out financial information no matter what would be

three times as stressful as doing it quarterly.

Yeah.

But in all these conversations, I feel like, you know, as we continue to bat around like quarterly versus semi-annual, I just feel like when it comes to shareholder reaction in terms of how the stock actually performs, it just needs to be consistent.

You know, whether you announce monthly or every three months or every six months, I feel like switching around between the different time frames is what really matters for investors trying to make decisions.

Yeah, I mean, I think Rod points out that like monthly reporting would smooth a lot of volatility and just, you know, make things more predictable and investors could have more information and not react as strongly to every three-month announcements.

But yeah, I think like the disconnect here is between the burden of actually doing the financials and the burden of like public company reporting, which is an entirely different beast.

Kitty is wiping her screen.

There's like a beam of light going.

It feels like she's trying to wipe me off her screen.

No way.

As you might know, if you've been listening closely or listened last week closely, Katie is recording this from Colorado.

Colorado.

And I'm recording this from my house.

So it's the somewhat unusual but not unheard of remote Money Stuff podcast recording.

Yeah, it's always a little bit worse.

So thanks for listening.

All right.

Great question, Rod.

Mailbag.

Mailbag.

Let's see.

We have another one from Josh, and this one is about ETFs, and Josh wants to know about them.

He says, You've done a great job covering the flaws of levered equity ETFs, especially how daily resets make them diverge from long-term leveraged exposure.

Do you see potential for retail products that actually deliver true long-term levered equity performance?

Suppose you think corporate America is too conservative with their use of leverage, but simply buying on margin is too costly for the ordinary retail investor.

But an ETF sponsor could implement leverage far more efficiently.

Is there a path for this to exist?

Great question.

So, Josh, I think this has been ETF filled by Katie.

So we've talked about like levered ETFs ordinarily rebalance every day to give you two times or three times the daily returns of a stock.

And that creates this weird volatility drag.

And if you wanted to have like two times the returns of a company for like a year, there's not really a product that will give you that other than buying the stock on margin and waiting a year but there's no like etf product since we started talking about this trader did a like a weekly and monthly rebail etf which gives you a month of two times the returns i think for like the s p

but it is very hard to do an etf that is like we'll give you levered return on a stock for five years

because

The whole point of an ETF is it has daily liquidity.

And so people can buy into the ETF each day.

And you're giving them a different proposition each day if you're giving them you know five years return starting on September 25th instead of saying we're giving you daily levered returns but there is no reason that if the thing that you want is long-term levered exposure to a company or an index or whatever there's no reason that you should get that in the form of a daily liquidity ETF that you can get out of at any time, right?

Like there are other ways to build that product.

Now, the classic way to build that product is something like a private equity firm, which buys companies, levers them up, and takes investors.

And

as we talk about a lot around here, it is getting easier and easier to put private equity into your retail brokerage account.

And so one day in the not-too-distant future, you'll just like, you know, get a KKR fund in your brokerage account, and that'll be that.

But otherwise, yeah, I mean, like, it is hard because the sort of classic retail products are mutual funds, whether or not they're ETFs.

And mutual funds have leverage limits.

And so it is a a little hard to invest in a retail product that gives you 2x the exposure to corporate America, other than that retail product being your own margin account.

But, you know, watch this space.

In like a year, it's just going to be private equity funds in your phone.

Okay.

I'm glad you brought up the trader ETFs.

I have some sad news.

A bunch of them actually shut down.

I'm not surprised.

It's a super niche product, right?

To be like, I want two times the monthly return on the S ⁇ P.

Like, eh, why?

Yeah.

like two times the daily returns is a fun gambling product right and two times the long-term returns is yeah

maybe feel like a month like why a month yeah i think at least one of them still exists they did on the q's spy and also the philadelphia semiconductor index sure and the monthly q's reset etf still exists but i mean it's small it just seems like the demand isn't there it's 61 million but still.

There's two traits here, right?

There's like what Josh asked about is like, if you think that corporate America is too conservative with their use of leverage, right?

So like you can think that

the capital structure of the SP is under-levered and you want to back lever it yourself and you can't do that through a margin account because like you can't get good margin terms, but you wish some investment advisor would do it for you.

That's a sort of set of corporate finance theses that are reasonable.

The other one is like,

if you enjoy gambling, you'll enjoy a double gamble twice as much.

And that, I think, I think is a levered bet on a semiconductor index.

Like, I don't know.

I don't know.

But I think you're coming to that being like from the perspective of like, ah, the semi-industry is too under-levered.

I need to synthetically lever up that industry.

I think you're like, ooh, these stocks will go up a lot.

Why not make them go up twice as much?

Yeah.

Josh, great question.

Mailbag.

Mailbag.

Another Jay named Justin asks: According to a recent op-ed in the New York Times, the number of publicly traded companies has decreased by 50% over the last 30 years.

Companies are choosing to remain private to avoid the additional regulatory requirements, but also because of the evolution in the funding models for promising tech startups.

How will this impact the investment options available to individual investors?

Will 401k investors in the future have to allocate some portion of their investment portfolio to private capital funds with management fees that are much higher than standard equity index funds?

I just feel like the answer is yes, right?

Like it's not a first-best state of affairs, right?

Like the first best state of affairs, I think, I think in the abstract, is like somehow it gets easier to go public and companies like feel some sense of like patriotic obligation to go public.

And they're like, you know, we're a good company.

We want mom and pop investors to be able to participate in our growth.

And so all the little companies go public and we make it really cheap and easy and hard, you know, we don't get sued when you go public.

And so all the companies go public and like the big, fun, fast-growing companies are available to mom and pop investors.

They're available in index funds.

They're available in like standard low-fee equity mutual funds and life is great.

The second best outcome is like all the companies stay private and big institutional investors have access to their private shares.

And those big institutional investors get bigger and bigger and bigger.

And they tap out all of the the available institutional capital.

And they're like, hey, there's a lot of money in 401ks.

And then they lobby the president to let them take 401k money.

And everyone's like, ooh, yeah, it'd be great to put individual retail investors into private investments because those are the ones that go up a lot.

And then the alternative asset managers are like, great.

So we'll just charge like $2 and $20 for that.

And then that's the equilibrium you end up in.

I think that's like clearly happening.

And it's not how anyone would design a financial system from like first first principles, right?

Because like the point, you know, what you have is like historically what you have is like a lot of companies that want a lot of money are public and they're available to everyone, including retail investors.

And then like a smaller number of companies that don't need as much money are private.

And they don't have access to retail investors, but like it's fine because it's like they're the smaller companies, the weirder companies or the companies that don't need capital.

And now we've moved to a model where like the big companies that do need a lot of capital can get it in private markets, but the private market capital providers are like, hey, we we could really use some retail money.

And so you have this like second layer of intermediation where you can just charge people a lot higher fees for investing in companies that would have been public 20 years ago.

So the answer is yes.

That's just a good yes.

Yeah.

All right.

Like, I don't know.

Prove me right.

I'd love to be wrong.

I'll just say it's right.

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This is really interesting to just me, but we have another question from another J-Name.

This one comes from Jordan.

Jordan.

I know.

That'd be funny.

Okay, Jordan.

Jordan asks: One of the recurring trends across both betting markets and crypto is that things that were previously illegal are now legal.

If you go through these venues, not legal advice, does there exist a way to get around the Onion Futures Act of 1958 by creating a betting market on polymarket on the price of onions?

Gosh, this question was written just for you.

I feel like the answer is no.

Okay, so we've talked about the Onion Futures Act of 1958 in the past.

Basically, in the United States, there are regulated commodity futures trading markets except for onions because onions are specifically, it's specifically illegal to trade onion futures.

And the reason for that is like someone cornered the onion market in the 50s and they were like so mad that they said no more onion futures.

Also, motion picture receipts.

I don't actually know why that is, but like the Onion Futures Act also says it's illegal to trade futures on motion picture receipts.

But otherwise, you can trade futures on any commodity, which like people used to understand to mean like wheat and corn and metals and whatnot.

And then in like the 70s, they started to understand it to mean like treasury rates and stock indexes and stuff like that.

And from there, we have very recently expanded into a brave new world for commodities include who will win the football game tonight and who will win the election.

And so now we have this brave new world where like

almost everything is by default

with many objections, with many complaints, with like many people believing this is wrong, but almost everything is currently legal to trade as a commodity futures contract on Calci.

Like if you can think of a proposition, you can make it into a commodities future contract on Calci.

But there are a few exceptions.

And one of them is onions, because onions are actually covered by the statute.

They say you can trade commodities futures on everything but onions.

So everything includes sports, includes elections.

It doesn't include onions.

Mailbag.

Mailbag.

I'm going to read the next question because it segues directly from that.

It's from Jamas.

I mean, Thomas.

Thomas writes a syllogism.

One, gambling is legal if it is a commodities trade.

True.

Two, stock movement can be gambled on.

Well, true.

Three, company can insider trade on a commodity which it directly deals with, except onions, of course.

Nice callback.

So is insider trading of a company's own stock legal if it happens on a prediction market, aka a commodities exchange?

So I think the other exception to like everything is a commodity that can be traded on commodity exchange, the other exception is

stock, because stock is a security and there are

detailed, complicated, I do not pretend to fully understand, but there are rules about securities-based swaps.

So like there are commodities futures, which are regulated by the Commodities Futures Trading Commission and are, you know, traded on commodities exchanges.

And then there are stock derivatives, which are regulated by the SEC and

have

a more or less completely separate set of rules that apply to them.

So if you were to try to list stocks on a prediction market, just like stocks, or I think like binary options on stocks, I think questions like, will Tesla be up or down today?

is I think a securities-based swap.

And I think you could not list that on a commodities exchange like Calci, although this is not legal advice.

And people are pushing the boundaries of this every day.

So I don't feel confident that this will always be true.

But for right now, I think it is the case that you can't just have straight up stock bets on prediction markets.

Now, I went and looked at Polymarket and Calci, and there's some stuff.

There's some like, what will be the biggest AI company at the end of the year?

There's stuff where you're like, that's a little bit like a securities-based swap, but it's like far enough away that people don't think of it as betting on stocks.

I don't know the answer to the question.

I mean, I think if you think that like pretty straightforward bets on stocks will end up existing on these prediction markets, I don't know the answer to the question, would it be legal for the company to gamble on its own stock?

I feel like the intuitively correct answer is no, but the tracing through the commodities rules might be yes.

But in any case, I wouldn't worry about it because these contracts are never going to be that liquid.

And no one's, you know, Tesla's not going to go around and be like, I can make $40 betting my stock will be up today.

I feel like a company just has to do it so we can find out the answer once it's going to be a good thing.

So there's a series of things you have to do, which include getting some sort of bet on your stock listed on a prediction market, which is,

you know, that's your first problem right there.

By the way, I do think that more of that happens in Europe.

Like you can have bets on stocks and prediction markets, but you can start your trading rules and commodities rules are different there.

That was a good one-two punch of questions.

Onions and stocks, the two things that are not legal to trade on commodities futures.

Mailbag.

Mailbag.

I'm really pleased to say that the next question comes from another Josh.

So we're back to the J names, which is interesting.

Anyway, this Josh asks, sports betting apps regularly ban or limit so-called sharp betters, gamblers that have a history of winning a high percent of the time.

This has always seemed weird or kind of unfair to me, but whatever.

If these apps and other prediction-type markets begin allowing bets on equities, can they legally do the same thing?

If I'm consistently winning bets on if the S ⁇ P will go up or down on a specific day, can they ban me from making that bet?

I love this question.

I have no idea, but boy, is it fun to think about.

So a couple of points.

One is, as we just said, I think it's going to be hard for these prediction markets to list stock trades because I think that's a securities-based option.

Now, there isn't, the exception is, is indexes for some reason trade on commodities exchanges, like stock indexes.

So

you can probably, probably have a bet on the SP whereas you can't on like Tesla or Nvidia.

So like it is plausible that like consistently winning bets on the S ⁇ P on your prediction market app is a thing that could happen.

And then the question is can they ban you?

So in traditional sports betting, you like have an account with a sports book that takes the other side of your bets and the sports book doesn't want to lose.

And so it will think about, are you going to be a winning better?

And it has various data to you know, evaluate that, including your track record and, you know, the time of day that you make bets and things like that.

And if it concludes you're going to be a winning better, it will probably limit how much you can bet or even cut you off entirely because it doesn't want to lose big bets to you because it's taking the other side of your trades.

A commodities exchange can't really do that.

A commodities exchange has to have some sort of like fair open access.

And so

if

you are betting on a commodities exchange, it can't limit you or cut you off.

Now,

the other thing that's true about a commodities exchange is it isn't taking the other side of your bets.

It's just an exchange.

Like in a classic sports book, the person facing you is like both like the people providing the interface and the people taking the other side of the bets are the same or the bookmaker.

In a commodities exchange, there's the exchange that provides the venue for the bets.

And then the person taking the other side of your bet is just another better.

It's probably a market maker in like these prediction markets.

It's probably a professional or semi-professional market maker who is like in the business of taking the other side of bets.

If you like look at actual U.S.

equity market structure, it's not quite the case that like if you're good at you know trading stocks, they will cut you off or limit you because you know

equities markets have a higher standard of fairness and openness than like sports books.

But it's not entirely not the case either.

Like one thing that happens is that like the stock exchanges have programs, separate venues to segregate retail and institutional orders because, you know, in this world, the institutions are the sharps and the retail orders are the, you know, like noise gamblers.

And so

market makers, who are the equivalent of bookmakers, want to trade on the other side of retail and they don't want to trade on the other side of sharps.

And so you have ways to segregate the order flow.

So like the exchanges do some of it where they have like retail execution facilities where like you can trade with only retail on the exchange.

But the main way this happens in the U.S.

equity market is payment for order flow where you know Robinhood will route stock orders to market makers because those market makers want to interact only with retail orders so most retail is noise traders and it's fun for a market maker to interact with them but some retail is sharps and i have heard anecdotally that market makers do limit those sharps and that if you are really really really good at trading stocks in a particular way like if you're picking off quotes or if you're like if you have like really good like short-term alpha, possibly because you have like some weird algorithm, possibly because you're spoofing, which some retail traders traders do, or possibly because you're incredibly smart.

And you're doing that on your Robinhood account, and Robinhood is routing your orders to some market maker.

That market maker might notice and it might call Robinhood up and say, Hey, we don't want these orders anymore, right?

There's some possibility of like, if you're too sharp, you'll get limited in some way in the equity market.

Although, I think it's much more like unclear and uncertain than it is in the sports betting world.

I don't think that any of that is in the near future for like Calci,

but in the far future when, you know, sports betting on commodities exchanges is a huge business, will

bookmakers pay like app providers to route orders directly to the bookmakers?

And will the bookmakers say, I don't want these orders because they're too sharp?

Like, yeah, maybe.

I don't know.

So maybe we revisit this question in like 10 years?

I would just say there's a continuum of how

much a market maker can limit sharps, and like bookmakers do it most clearly and explicitly.

But in the rest of the financial world, there's a little bit of it.

In professional, institutional bond trading, you see a certain amount of this.

Where

if you continue to pick off your brokers, your brokers will stop answering their calls, right?

I mean, like, there's a lot of

if you're too sharp, people will notice and you'll get less ability to trade.

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Mike asks: During earnings season, a company misses beats or hits expectations, but the reality is that earnings are what they are.

It's the analysts who hit or miss or come close in their predictions.

When a category five hurricane drops to a category four, meteorologists don't say the hurricane underperformed.

Instead, they say it took a different path, etc.

Shouldn't the hit or miss burden be on the analysts rather than the company?

So I think this is interesting, but I also feel like it is on the company because they're in pretty regular communication with the sell side and are in the business of managing expectations.

Yeah, like no one wants to hear that, but that's the answer, right?

I mean, like

earnings expectations are not like analysts like putting their finger in the wind and saying, ah, I think those guys will go up.

The earnings expectations are analysts talking to the companies and it's sort of seeping out through the analysts.

So, right.

If you miss expectations, like you have done a poor job of managing your analysts.

Yeah.

This is a common complaint.

And it's like, no, the analysts were wrong, not the company.

And it's like, that's fine.

Like, you can say that.

But like, the point is that when you, Katie, go on television and you say, a company missed expectations.

What you're doing is explaining why the stock has gone down.

Right.

Yeah.

And like the stock went down because people did have expectations right and when the company underperformed those expectations or the expectations overperform the company in any case like what happens next is the stock goes down and so it is natural for the investors to feel disappointed right

oh this company disappointed us like i don't know like it does feel like the company is the one that is the immediate cause of the disappointment and so i think it's completely fair to say that they missed expectations It's in some ways similar to the lead up to big Fed decisions.

Like the Fed doesn't like to surprise the market.

The Fed is almost certainly going to tell you without telling you what exactly it's going to do at their policy decision.

They do have a blackout period, so you see like a real parade of Fed speakers get in what they're going to say before the blackout period.

Like no big Fed decision should be that big of a surprise.

You have like a range of possibilities.

And I feel like it's the same at the micro level with all these companies as well.

It is.

And like, I think that like there are some regulatory concerns about like the mechanism that you and I have just posited of like companies manage their analysts pretty closely.

No one would quite say that.

Like it's a little awkward.

You're not supposed to disclose material non-public information to the analysts without disclosing it to everyone.

But like, yeah, you know, like.

But we're on a podcast, so we can say it.

We can say it.

It's like the truth is somewhere in between.

But right.

If you're a company and it's like two weeks before earnings and analysts expect you to make $2 a share and you're going to make $1 a share, like

it's too late to make the extra dollar a share.

Like, what you're trying to do is figure out a way to communicate to the market that the market is going to be disappointed.

Yeah.

And if you fail to do that, then you missed expectations, man.

Or you could pre-announce it.

Good question, though, Mike.

We appreciate it.

Mailbag.

Mailbag.

Charlie, I really like this question from Charlie.

Charlie asks, you both seem to hold primarily orthodox Fintwit views.

Parentheses, it is good to buy low-cost index funds.

Elon is wild, but makes the number go up.

M2 graphs are not a useful way to consider price, etc.

Do either of you hold any heterodox opinions in this area?

I'll let you go first.

I hold no heterodox opinions.

I probably hold some heterodox opinions.

I have like tried to start fights on FinTwit because I think that comparing stocks and flows is completely normal and happens every day.

And the word for it is valuation.

And for a long time on Finance Twitter, there was a stocks and flows police where people would see that Apple is worth more than the GDP of Kazakhstan.

And they'd be like, that's a stock and flow.

You can never compare stocks and flows.

And that's right.

But this is a very minor heteroxym.

And for the most part, I hold only orthodox opinions.

And I think often that my job is just to explain recent financial events in terms of like corporate finance 101.

And the most orthodox and normal corporate finance theories remain counterintuitive to a lot of people.

And so it's fun to just explain them again.

I would say the heterodox opinion that I hold about investing, investing, and this is not investing advice, et cetera, I don't know.

Fixed income and bonds seem kind of stupid to me.

Like, I don't,

it just seems dumb.

I don't know.

That's really heterodox.

I love that.

You know, I like come from an equities background, right?

I was a convertible bond guy.

And so, like, I do have a bit of like

grievance that like everyone thinks that equities are dumb, but I appreciate that you're, that you think fixed income is dumb.

Money market funds, sure, but that's basically cash, but why on earth would anyone buy like even the belly of the treasury curve and especially out from there?

They're unreliable as

a hedge.

And also, I don't get that excited about the yield, but that's not investing advice.

That is just a heterodox opinion that perhaps I hold.

We're going to get canceled now.

Can't believe you said that.

I know.

I'm sorry.

All right.

That was a mailbag.

That was a mailbag.

Thanks for the great questions.

Thanks for joining us from your vacation.

Yeah.

I'm really eager to sign off, so I'm gonna dip.

All right, goodbye.

And that was the Money Stuffed Podcast.

I'm Matt Levine.

And I'm Katie Greifeld.

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

And you can find me on Bloomberg TV every day on the close between 3 and 5 p.m.

Eastern.

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 the air.

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.

The Money Stuff Podcast is produced by Anna Mazarakis and Moses Ondam.

Our theme music was composed by Blake Maples.

Amy Keen is our executive producer.

And Sage Bauman is Bloomberg's head of podcasts.

Thanks for listening to the Money Stuff Podcast.

We'll be back next week with more stuff.

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