| Man, it is way past time for someone to write a textbook of meme finance. Here's roughly how I understand it: - There is a thing — a meme — that gets attention. It could be a person, an idea, a product, a joke, a cartoon, a picture of a dog, whatever.
- Someone creates an electronic token and asserts that the token is the token "of" the meme, that the token represents the meme. Sometimes there will be a real connection between the token and the meme: Trump Media & Technology Group Corp. (generally referred to by its ticker, DJT) is a meme stock (the token) representing the meme of "Donald Trump," and Trump in fact owns a majority of DJT's stock and was involved in its creation. Other times the token will just appropriate the meme: Dogecoin is the meme coin (the token) representing the meme "Doge, the Shiba Inu dog with cutesy text," but the creators of Dogecoin did not create Doge or have any real connection to it. They just created the token.
- The token does not, in the general case, convey any ownership of the meme. If you own Dogecoin you don't get any royalties from images of Doge. DJT is more complicated: It does carry economic ownership of a business that has something to do with Trump's popularity, but it is not a business with much in the way of revenue.
- But the connection works. Some people — enough people, anyway — accept the identification of the token with the meme, and the notion that the value of the token should reflect the popularity and attention paid to the meme.
- And so when the meme is in the news, the token spikes up. When it's not, the token drifts down.
This is not correct in every particular; it is not a perfect model of, for instance, GameStop Corp. stock. (It's not that far off!) It's not even quite right about Dogecoin, which has grown beyond Doge. But it's a rough cut at the thing that is going on here. What I want to say about it is: - It has very little to do with traditional financial logic of, like, the present value of future cash flows. You don't have to think that Dogecoin, or DJT, will become real businesses in order to be bullish on their prices.
- But it has its own logic; it is not purely irrational. There are analyzable things going on here. You could build some sort of clear-eyed rational model of how attention affects the price of Dogecoin, and then trade it based on signals of attention. Alameda Research, once an influential and professional-ish crypto trading firm, infamously traded Dogecoin "based on noticing how it goes up when Elon [Musk] tweets," and that part of its trading went fine. "When a rich famous online person tweets about a meme, buy that meme's token" is not a crazy approach to modern finance. The link between the price of the token and the attention paid to the meme is not perfect, it might not be permanent, it might not make a ton of sense to you, but it does seem to be real. And if that linkage is real then you can trade on it.
Anyway here's this: Billionaire Elon Musk and entrepreneur Vivek Ramaswamy will lead a new Department of Government Efficiency tasked to "dismantle Government Bureaucracy, slash excess regulations, cut wasteful expenditures, and restructure Federal Agencies," President-elect Donald Trump announced Tuesday. … But it's not clear what the size or structure will be, or how Musk and Ramaswamy will drive the dramatic overhaul of the government they've promised. The effort, which abbreviates to DOGE, is a play on one of Musk's favorite internet memes, and Musk has been an advocate of the digital token Dogecoin.
Musk tweeted a logo for the DOGE with a cartoon Shiba Inu on it. And naturally: Dogecoin shot higher on Tuesday night, extending its postelection surge after President-elect Donald Trump formally announced the creation of the Department of Government Efficiency, which he referred to as "DOGE" in his statement. ... Dogecoin was up nearly 20%, before paring gains. It has been one of the biggest winners in the postelection rally, gaining 153% since Election Day compared with bitcoin's 30% rise in the same period. It also shot past XRP this week to become the sixth-largest cryptocurrency by market cap.
Musk is widely assumed to be a big holder of Dogecoin, though it's never been all that clear to me how true that is. Presumably Dogecoin is not a big percentage of his net worth, and the benefits of a Trump administration for Tesla and SpaceX and his other companies are obvious. Still there is something so pure about this. This is like … the president of the United States announced a new government department (or, fine, whatever, vague blue-ribbon commission with a name that makes it sound like a government department) whose name acronyms to the name of a meme token that the president's big financial backer — who will run the department — promotes online and presumably owns a lot of. And so the token goes up. It is so much simpler than, you know, giving SpaceX government contracts or whatever; you just tweet the name DOGE and Dogecoin goes up. It is trolling, but with a market value, and a government department. We talk a lot about meme finance as a market phenomenon, but we are in early days, and it will be interesting to see what transactions it enables. "I'll buy some of this token because I think it will get more attention" is one thing, and "I'll buy this token and then tweet about it a lot so that it gets more attention" is another, but there are so many bigger possibilities. "I'll do a merger with this token so we both get more attention." "I'll reward my biggest financial supporter by naming a government department after a meme token he likes." Meme finance has found efficient new ways to turn attention directly into money, and there are deals to be done. Which is better: - You buy a bunch of large-cap tech stocks at the beginning of 2023, a very good year for large-cap tech. The stocks bounce around a lot, but at the end of the year, you are up 50%.
- You buy some tech stocks and short some other tech stocks. Net, you are long as much as you are short, and you have no net exposure to the market or the tech industry. Also you neutralize everything else on a long list of standard risk factors: You don't, for instance, go long large-cap tech and short small-cap tech, or long high-growth companies and short low-growth ones; you are completely neutral. You make a bit of money every day, and at the end of the year you are up 10%.
Almost every normal person would choose Option 1. That number is bigger! Making more money is better than making less money. But in some important corners of finance — at multistrategy hedge funds, at some institutional allocators, in academia — Option 2 is obviously better, and it would be very eccentric indeed to pick Option 1. Option 2 — 10 percentage points of pure alpha! — is an amazing result; Option 1 is dumb luck. Let us call this — the idea that Option 2 is obviously better — the "quant perspective." The ideas here are roughly: - What you want are high risk-adjusted returns. Option 2 has neutralized every identifiable risk; its risk is low, while its return is pretty good. Option 1 has a higher return, but a much higher risk; the large-cap tech sector is very volatile. For many, many purposes — maximizing your long-term wealth, running a steady endowment, attracting capital as a hedge fund, getting hired at a hedge fund, getting leverage — the most important thing is a high risk-adjusted return, not one year of high absolute return.
- If you are a professional investment manager, doing Option 2 adds value and demonstrates skill and justifies your fees, while Option 1 does not. Your clients can easily and cheaply get exposure to all the large-cap tech stocks: They can buy a passive sector index fund, with near-zero fees, instead of paying you a lot of money to pick those stocks. Whereas Option 2 is pure alpha; that is just you being really good at identifying the right stocks.
- The quant perspective tends to be a bit skeptical of market timing. Saying "sure I just bought the tech sector, which seems easy, but I did it right before the tech sector went up a lot, which is hard," is not a good argument from the quant perspective. "You just got lucky," is the normal answer; "you have no real skill there, and next year you'll probably buy some sector just before it goes down."
- If you are an institution allocating money to investment managers, you won't pay much for Option 1, since the market price of it is a couple of basis points at most. Also, though, you are looking for uncorrelated returns: You would like to make money in any environment, and you will pay more for an investment manager who makes money even when the market goes down than for one who doesn't. You cannot necessarily identify that in advance. But a manager who makes money without any net exposure to the market or sectors or other factors will have returns that are not correlated with the broader market, and will probably make money even when the market goes down, and you like that.
- If you are a multistrategy hedge fund, similarly, you are fanatical about risk, so someone who makes money with no market exposure is better than someone who makes big bets on a sector. And you can probably get more cheap leverage against a market-neutral portfolio than just being long a bunch of stocks.
Again, though, this is one perspective. Many people would rather make more money than less money, and don't entirely believe in risk. If the tech stocks went up, then they weren't that risky, were they? But if you have the quant perspective, you might be a bit rude about it. We have talked about the paper on "Buffett's Alpha," by Andrea Frazzini, David Kabiller and Lasse Pedersen, finding that some factor exposures "almost completely explain the performance of Buffett's public portfolio," so when you think about it he's not even that good of an investor. We have also talked about Erik Stafford's 2015 paper on "Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting," which is pretty much what it sounds like: Private equity funds — with their 2-and-20 fees and highly paid, hardworking professionals — more or less look like "borrow money to buy value stocks," which you can do way more cheaply with index funds. "Quants being rude about private equity" is a theme around here — we have talked about Cliff Asness's version a few times — but here is a wonderful story about it from Bloomberg's Justina Lee titled " Wall Street Math Wizards Are Decoding Private-Market Returns." What is fun is that the quants are at the private equity firms, but still fairly rude: Barry Griffiths is one of a small group of quantitative analysts giving it a try. He's the driving force behind an alternative method for gauging unlisted investments that he says has the potential to demystify the world of private markets, from buyout funds to venture capital. The claim is it will help investors compare returns with those of other asset classes, as well as reveal the true value provided by managers in the business along the way. ... "Many times we found that somebody who had great absolute returns just happened to be invested in the right sector at the right time," Griffiths says. In one study published in 2023, he and co-authors Oleg Gredil at Tulane University and Ruediger Stucke, head of quant research at private equity firm Warburg Pincus, conducted a direct alpha analysis on a database of more than 2,400 funds specializing in buyouts. Their average reported internal rate of return (IRR)—the annual rate of growth based on a fund's cash flows—was 12.3%. But how does that compare with other investments? The researchers found that the funds' direct alpha was 3.1% using a broad market benchmark and 1.7% based on industry indexes.
It gets worse: In a 2021 paper, Griffiths, [Avi] Turetsky and other co-authors laid out a way to calculate private-market alpha in dollar terms. It would, they wrote, "enable performance compensation to be paid only for outperformance versus a public market benchmark."
That strikes me as extremely rude, but I suppose it doesn't have to be. Arguably the big multistrategy hedge funds really have found a way to measure their alpha and be paid only for outperformance, and they still get paid a lot of money. Also here is just a tremendous quote from the other side, the Option 1 side, the "making more money is better than making less money" side: Direct alpha is "certainly not a standard way" of looking at performance, according to Hugh MacArthur, chairman of Bain's private equity practice. He says investors care about two things: the absolute return over time and whether it's repeatable. "People try to torture the data to try and say, 'Well, the returns aren't really what you think they are,'" MacArthur says. But at the end of the day, "the cash goes in, and whatever cash comes back, I look at it and I measure it and it's more, so what am I going to do? Deny that it's more and not do the rational thing?"
Yes no right there is a huge edifice of financial thought that says exactly that, that you can measure something other than "my money went up," that you can figure out how much money you are making per unit of risk and how much of your performance is attributable to skill versus luck, that trying to do that decomposition is more rational than just looking at the cash that goes in and the cash that comes back. And then there is a considerably larger segment of the financial world that says "I look at it and I measure it and it's more" and would rather have more money. Elsewhere in private-market value measurement: How much has the present value of the future cash flows of SpaceX increased over the last two weeks? SpaceX printed a tender offer at a $210 billion valuation in June, and it seems improbable that the value of a $210 billion company could double or triple in a few months, but who knows, man. A lot has gone right for SpaceX since then. If you told me that SpaceX was worth $500 billion now I'd be like "sure okay I guess." But we do not regularly get market prices for SpaceX stock, because SpaceX is a private company and its stock doesn't really trade. What we get is this: Destiny Tech100 Inc. (ticker DXYZ), which holds shares of private-market unicorns like SpaceX and Sam Altman's OpenAI, has already surged roughly 280% over the past week since Trump recaptured the presidency, data compiled by Bloomberg show. The rally triggered multiple volatility halts Monday, and sent its shares up as much as 38% after a 64% jump Friday. … While investing in SpaceX is anything but simple for individuals, Destiny Tech100 gives small traders a way to get a piece of the popular private firm. The fund, which reported $56 million net asset value, had about 38% of its holdings in SpaceX as of end of June, according to its filing.
This is a fund that most recently reported $56.7 million of assets, of which about $21.2 million was SpaceX stock. As of noon today its market capitalization was $365 million, which is about a 540% premium to its reported net asset value. I have made fun of Destiny Tech100 before, and this does seem like the sort of thing that has to end in tears. If you are investing in Destiny Tech100, I have argued, you are not really investing in SpaceX. Less than 6% of your money is going into SpaceX stock. Less than 16% of your money is going into any private-company stock; 84% of your money is just going into that premium to net asset value. If all of the stocks in the fund went up 500%, they'd be worth $340 million, which means that you would lose money on your investment. On the other hand, those valuations are on a pretty long lag. They are as of June, and they reflect estimated values in private markets. Is it possible that SpaceX has gone up 10 times in value since then, but since SpaceX doesn't trade publicly, the only way to observe that change is by looking at the price of Destiny Tech100? I mean, probably not, no, but it's something to think about. If there is not enough meat in your burrito, is that securities fraud? Honestly that is maybe the most securities fraud thing we have ever discussed in this column. Everything is securities fraud, but the main things that are securities fraud, the things at the core of the concept of "securities fraud," are (1) making up numbers in financial statements and (2) not putting enough meat in burritos: Chipotle Mexican Grill was sued on Monday by shareholders for concealing how many of its restaurants were skimping on portions, forcing the chain to spend more on ingredients and hurting its stock price. In a proposed class action filed in Santa Ana, Calif., federal court, shareholders said Chipotle failed to disclose growing unhappiness among customers with inconsistent portion sizes for its burritos and rice bowls.
Just think about it! You are an enterprising lawyer, you watch television news, you see a story that is like "Chipotle doesn't put enough meat in burritos," and you would like to turn that news item into several million dollars for yourself. How do you do it? The obvious victims of Chipotle's actions here are the customers who pay $11.50 for a burrito with an ample scoop of meat but get only a skimpy scoop of meat. There are, perhaps, tens of millions of these people. What are their damages? What sort of compensation can they sue for? Well, I don't know, maybe their burrito was overpriced by … 50 cents? Okay so tens of millions of people times 50 cents is certainly millions of dollars; if you can bring a class action lawsuit on their behalf, maybe you can get millions of dollars of damages and keep 25% for yourself. It's something. It's not much, though. One problem is in the proof. How do you prove that all of those millions of people, at hundreds of different Chipotle locations over the course of months or years, actually got too little meat? You can find some evidence — you can sample some stores and weigh the portions; you can find employee whistle-blowers or embarrassing internal memos saying "skimp on the meat but don't tell anyone!" — but you can't prove it for every burrito for every customer. Maybe you can get a few customers to testify tearfully about how traumatized they were by not having enough meat in their burritos, but you can't practically get millions of customers to do that, and the ones who do testify, I mean, how much can they possibly have spent on Chipotle? (If the answer is "thousands of dollars over the course of years," then they weren't that traumatized.) I don't know, I am tired and embarrassed just typing this. But the other, more convenient victims here are Chipotle's shareholders. Here's the actual complaint in this case; it's 20 pages and extremely straightforward. It quotes a bunch of official Chipotle statements saying "the portions aren't getting smaller," it quotes a bunch of social media posts saying "actually they are," and then there's a section titled "The Truth Begins to Emerge" that describes what, in securities class actions, is called the "corrective disclosure." Chipotle did an earnings call saying that it expected its cost of sales to increase in the next quarter as "an investment we are making as we focus on outlier restaurants to ensure correct and generous portions," which is (arguably) an admission that in fact it was skimping on portions. And then the stock fell. The lawsuit is "a class action on behalf of persons or entities who purchased or otherwise acquired publicly traded Chipotle common stock between February 8, 2024 and October 29, 2024," and "the price of Chipotle stock fell $4.76 per share, or 7.86%, to close at $55.73 on October 30, 2024," after profits fell due in part to increased costs for bigger portions. There are 1.36 billion shares of Chipotle outstanding, times $4.76 is about $6.5 billion in damages to shareholders. That's so much more than you could get for the customers! Chipotle's total sales last year were $9.8 billion. Even if Chipotle had to refund half of the price of every customer's burrito, that would be less than the stock drop. The securities fraud case is so much bigger and easier! You sue for $6.5 billion, you settle for one cent on the dollar, you take a quarter of the money, boom, easy $16 million for you. Also I mean … if you actually went to court to be like "my clients were traumatized by not having enough meat in their burritos," people would laugh at you? That's not a real lawsuit? Come on. Whereas "my clients bought stock based on misleading disclosures, and then the stock dropped" is absolutely a normal sort of lawsuit to file in America in 2024. Even if it is ultimately about not enough meat in the burritos. OpenAI, Google and Anthropic Are Struggling to Build More Advanced AI. Spirit Nearing Bankruptcy That Would Wipe Out Shareholders. Investment Firm Executive Lindberg Admits $2 Billion Fraud. ( Earlier.) John Malone Reorders Media Empire as C.E.O. Exits. Real-Estate Scions Are Breaking a Cardinal Rule: Never Sell. SoftBank Plans Supercomputer With Nvidia Blackwell Chips. Mali's junta escalates fight with mining groups over profit share. Justice Department Sues to Block UnitedHealth's $3.3 Billion Bid for Amedisys. Gamblers Pay 400% Loan Rates to Fund Betting Frenzy in Brazil. Citadel Warns Recruiters: Don't Pitch Fake Jobs. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! |
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