Three cheers for financial assets

March 20, 2019 (1956 words) :: Bill Gates has joined the $100b club. Lyft is going to IPO at over $23b. You can trade municipal bonds without even doing any research on them.
Tags: inequality, financialisation

This post is day 79 of a personal challenge to write every day in 2019. See the other fragments, or sign up for my weekly newsletter.

Three separates strands investigating the fickle nature of value.

1. Bill Gates

According to the Bloomberg Billionaires Index (isn’t it so great that we live in a world where such a thing exists), Bill Gates has, as of today, re-joined Jeff Bezos in the $100b club. (Although, as of just after midnight EST on Mar 21, it seems he’s back down to $99.9b.)

The political implications of this are pretty obvious - every billionaire in our current economic climate is a policy failure. But let’s take a minute to think about what it means for Bill Gates to suddenly catapult from sub-$100b to $100b and then fall back down within 24 hours. What does this tell us about the nature of wealth in our increasingly financialised economy?

In a previous fragment on Jeff Bezos’ net worth, I wrote:

[…] Imagine if Jeff Bezos were to liquidate all his shares tomorrow, for whatever reason (a religious epiphany, say). The price would drop like a rock. He would not be able to sell all 79 million shares at the current buying price of $1,600 a share. Where would the buyers come from, and why would they choose to buy shares of a company whose CEO had just decided to abandon it?

So net worth is more like an asymptote than a real figure. An analogy to the observer effect in physics is useful - trying to accurately measure someone’s net worth would require actually selling all that stock, which would itself have the effect of changing the value you are measuring.

I mean, we all kind of know this - it’s fairly intuitive - but it’s useful to make it explicit now and then. We behave as if these numbers have meaning (think empty rituals like Forbes’ billionaire rankings) but they only have meaning in a semiotic sense. That’s true of money in general, really, but when it’s in the form of stock market wealth, its virtuality is even more apparent. And once you recognise the virtuality of this wealth, and its ubiquity in our increasingly financialised economy, it becomes harder to accept. You start to question the legitimacy of the stock market, and the way it enables some imaginary numbers to be created out of thin air by corporate fiat which then end up having very real effects on the world. […]

When you’re at the scale of Bezos or Gates, your net worth can fluctuate a lot because it’s utterly unmoored from reality. Given that it consists primarily of financial assets, the estimated total “value” depends on what the current selling price happens to be, which is itself a highly ephemeral phenomena that we treat as if it’s permanent. The amounts strewn about in the Bloomberg Billionaires Index are ultimately fictitious - claims on future surplus value extracted from workers, priced according to what a few traders working in tandem with algorithms think they’re worth. There’s increasingly little resemblance to anything actually real, though, of course, everybody tends to act as if it is.

In that sense, all these empty rituals to track these billionaires’ net worth feels a bit like tarot cards or fantasy football or something. In fact, I’m going to go a step further and say that financialised capitalism is just one giant game of fantasy football that nearly everybody on the planet has been roped into playing. Don’t like football, either the US or the UK version? Too bad; you’re playing anyway.

2. The Lyft IPO

Today was the second day of Lyft’s IPO roadshow, and it sounds like they’re doing really well: Bloomberg reports that they’re already oversubscribed, meaning they’ll probably exceed the $23b valuation they were expecting.

Coincidentally, earlier today, Lyft experienced some sort of major bug or outage or something which prevented a lot of riders and drivers from actually using the app. In other words, their most core functionality wasn’t working for an unspecified number of people a short time today. Nothing seems to have come of it, though - I haven’t seen any reporting on this, and Lyft has only been acknowledging the technical problems in one-on-one customer support tweets. I doubt it’ll have any impact on their IPO, even though, well, it kind of should.

But nothing about this IPO is working the way it should. As Matt Levine, an opinion columnist for Bloomberg, writes:

Lyft Inc. is a ride-sharing company that loses a lot of money every year and is in second place in an apparently winner-take-all industry. It is going public as part of a huge wave of expected initial public offerings by big-name tech companies, including, presumably, its much bigger competitor Uber Technologies Inc. Its founders “will own just under 5 percent of the company’s stock but control 49 percent of the company’s votes” after the IPO, a dual-class structure that big institutional investors vocally oppose and that will cause Lyft to be excluded from some indexes.

(Incidentally, you can get Matt Levine’s insightful writing on finance in your inbox every weekday if you sign up here. His politics aren’t exactly of a radical orientation, but he’s knowledgeable and reasonably critical.)

Now, you might think these would be bad signs. But given that the round is already oversubscribed, I guess not. As Levine writes:

Lyft is going public with huge losses and dual-class shares because now is an amazing time to bring a tech company public with huge losses and dual-class shares; it’s doing it as part of a unicorn stampede because everyone else recognizes that too. (It’s doing it before most of those other unicorns, and especially Uber, because it is smart and eventually the window will close.) Everything in that previous paragraph is not just a random independent fact about Lyft; it’s a sign of the market’s high level of receptivity to big tech IPOs. So of course the market is going to be receptive to this one.

The word that immediately comes to mind here is, of course, ‘bubble’. But I’m actually wary of using that word because it seems to imply that the frothy state is the exception, concealing a less inflated state underneath. As if the tech industry was ever not a bubble. As if the whole idea of Silicon Valley doesn’t sit like a mold on top of various overlapping bubbles, each liable to burst as soon as enough people realise how unsubstantiated their business models are.

Some bubbles are frothier than others, of course. But the tech industry in particular rests in a perpetual state of froth, because the valuations are always detached from reality, always created out of thin air with a concentrated dose of Silicon Valley optimism. People criticise late-stage investors like SoftBank (a Japanese conglomerate) for making their own valuations (essentially upping their own previous valuations, through large, private rounds), but really, how is the stock market any different? It may be theoretically distributing price-setting power to the masses, but actual distribution is far more concentrated than it should be, and in any case, what proof is there that giving buy/sell ability to random individuals (who don’t know what’s going on inside the company) will help the market converge on some “true” value?

While we’re at it, is there even a true value at all, or is this all just so much fantasy football? I’m not convinced.

3. Municipal bond trading

This brings us to the last point, featuring Matt Levine’s commentary on a very esoteric part of finance: municipal bonds trading. In the same opinion column linked above, Levine writes about a small financial services firm called Headlands, whose specialty is applying algorithmic trading to municipal securities.

Sounds complicated, but all it means is that they’re trading municipal bonds without doing any due diligence on what the bonds represent. Instead, they’re relying on mathematical models to try and eke out some profit, which really means hoping that other people have done all the necessary due diligence and that the current price accounts for all the risk factors. In other words, counting on someone else to deal with systemic risk factors.

Disregarding ethical or long-term considerations, this is actually not a bad way to make money in this market, as long as you’re one of the only actors doing this. As Matt Levine writes:

There is obviously an approach to municipal bond trading that involves, like, reading the prospectus for a local water-authority bond, and poring over the financial statements, and reviewing the minutes of the water authority’s public meetings, and traveling to the town to taste the water, but it is not the only approach. Another approach would be like “meh, all munis are basically the same, if you know the price of one bond you can infer the rough prices of other bonds with simple adjustments for credit ratings and geography, and then if the bid-ask spread is wide enough and you get to buy at the bid and sell at the ask you will be fine.” This approach is not perfect, and every so often you will own some water-authority bonds that idiosyncratically default, and you’ll look a bit dumb because you didn’t read the prospectus or taste the water, but if you are doing your job right they will be a tiny part of your portfolio and you won’t hang on to them for long so the risk is manageable.

Apparently the benefit of Headlands is that they provide “liquidity”. I am, again, not convinced. I suspect that the benefits brought by this aforementioned liquidity could be provided just as well by an alternative system, one that does not permit some algorithmic trading assholes to indirectly profit from me paying my water bill.

Going back to the Bill Gates thing. Lots of people I follow on Twitter shared that today, and among the replies were some defending Bill Gates, under the reasoning that at least he’s been donating his money to charity and deploying it in decent ways. He’s not the worst billionaire, in other words. He could be one of the Koch brothers.

And I mean, I agree; he could be a lot worse. But let’s just take a step back and think about how sad it is to find Bill Gates’ really minor sacrifices inspiring, when he can give away almost 99% of his income and still be a billionaire. My god, the bar for billionaires is low.

There’s something really messed up about the idea that some random billionaire nerd (who, let’s remember, was like the central villain in the open source wars of the 90s) is actually the best hope for humanity. People may actually be right in saying that Bill Gates has been better at disposing of his money than others, and even that he’s a better person to trust with your money than purportedly democratic entities like the state (which, in the US, will just be funnelled into the military anyway).

But that’s not really a positive statement about Bill Gates - it’s actually a highly critical statement about the sheer unaccountability of those who currently have power, as well as the social wastefulness of obscene wealth concentration.

Compounding the issue is the fact that both Bezos’ and Gates’ wealth is primarily financial - i.e., fictitious, imaginary, a social construct. But that doesn’t mean it’s not real, because capitalism is in the last instance about belief, and people have learned to believe that stock market wealth is real just as they believe that banknotes are real. Personally, I am not convinced that it is real, but I have to act as if I do, so what’s the difference?

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