November 1, 2024 • 34 mins
Katie and Matt talk on Halloween about what election market prices might mean, how to defer taxes and Super Micro's auditors resigning in a huff.
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Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:10):
Hello and welcome to The Money Stuff Podcast, your weekly
podcast where we talk about stuff related to money. I'm
Matt Levine and I write the Money Stuff column for
Bloomberg Opinion.
Speaker 1 (00:21):
And I'm Katie Greifeld, a reporter for Bloomberg News and
an anchor for Bloomberg Television.
Speaker 2 (00:26):
What are you talking about, Katie, Well.
Speaker 1 (00:29):
First of all, I think we should acknowledge that it's
Halloween and we are both phoning it in right.
Speaker 2 (00:36):
Now in the literal sense and the.
Speaker 1 (00:38):
Yeah, that's at home. I'm at my parents'.
Speaker 2 (00:41):
House, but.
Speaker 1 (00:48):
Just sitting here, none of our listeners would see it.
But we could have just lied.
Speaker 3 (00:53):
I guess.
Speaker 2 (00:53):
I took my daughter to get bagels today at like
six am, and she was wearing her costume, which is
She's Wednesday from the TV show. And she was like,
a weird that I'm wearing my costume this early. It
is like dark out and this guy watched by in
awere as well the costume. I was like, no, that
guy is too perfect perfect.
Speaker 1 (01:12):
It's weirder if people weren't wearing their costumes. I meant
to bring Caddis to the office, but I've forgotten, but
on television previous probably no.
Speaker 2 (01:22):
You like you were like should I wear these on
television and Halloween? And I was like yes, And then
you didn't do it.
Speaker 1 (01:27):
I almost certainly did not actually do that, but I
always slip in a lot of Halloween puns. I talk
about a monster rally, a spooky setup for stocks, things
like that. If you listen to all two hours of
the show, I'm sure it was overwhelming.
Speaker 2 (01:42):
Well, I hope you'll continue that during the.
Speaker 1 (01:44):
Yeah, speaking of overwhelming, what we're talking about today, we're
going to talk about speaking of spooky things, We're going
to talk about hollymarket and what's going on in prodiction markets.
Speaker 2 (01:57):
Something spooky.
Speaker 1 (01:59):
Yeah, I don't know. We're going to talk about tax
aware long short strategies, Matt, you're going to explain that
to me, and then we are also going to talk
about super Micro and Ernst and Young Okay, cool jumping
into the first one poly market. This was a fun
(02:21):
one and I don't think you've written about this. I
feel like I had to really twist your arm to
talk about this today.
Speaker 2 (02:25):
Yeah, you like texted me should we talk about probably
my kind? I was like no, and then you like
kept texting me until I got mad, and then I
was like, well, I'm mad enough about this, so you
can talk about it.
Speaker 1 (02:37):
Yeah, And I was like, this is the seeds for
a great discussion, given that at seven thirty in the
morning and we're so passionate. So poly Market, it's not
based in the US. US investors or betters can't.
Speaker 2 (02:51):
Okay, it's not based in the US. It's not based
in the US.
Speaker 1 (02:53):
Yeah. So the big news was basically that there was
one person who was pushing up the Trump odds. His username,
I assume it's a man, was Freddy nine, nine hundred
and ninety nine, and Polymarket's investigation found it. I don't know,
he spent like forty five million dollars and just pushed
up Trump's odds. But it seems like financial markets question
(03:16):
Mark ran with that.
Speaker 2 (03:18):
Yeah. There's also news today where like some like bly
Chain Analysis Company was like a third of trades on
polymarket or wash Trades.
Speaker 1 (03:26):
M Yeah, I did see that.
Speaker 2 (03:28):
Actually, So I don't know why is this interesting?
Speaker 1 (03:32):
So the reason I wanted to talk about this is
because so I am on television every day for two
hours and there's been this weird vibe shift in the
markets and among investors and analysts talking about Trump's odds
going up even though polls have been fifty to fifty.
Basically since Kamala entered the race, you have seen a
Trump trade, at least that's what people have been calling it.
(03:55):
Unfolded markets. You've seen long end treasury yields kind of skyrocket,
and the US dollar has had a great month, And
there's disagreement. Some people say it's just the fact that
economic data has been really strong. Other people say this
is because Trump's odds have been going up in the
prediction markets. So I find that interesting because the polymarket
(04:17):
experience has revealed that, you know, what we're looking at
is sort of real time chances of which candidates is
going to win the election. It can be swayed pretty easily.
I mean, forty five million dollars is certainly not nothing,
but it's certainly not a lot of money.
Speaker 2 (04:38):
So all these stories about polymarket being easy to make
it just feel to me like wishful thinking in a
couple of ways. And like I sympathize because I share
the wishes, but like, I just don't think I share
the thinking. Many people would rather not think that Trump
has a sixty seven percent chance of winning, and if
they could say, no, no, this is fake, it's really
fifty eight percent or fifty percent, then that would make
(05:00):
them happier, which I don't really understand because like you'll
never know like what the a priori odds were, and
in a week you'll know what happened. So it's like
being like, oh, this market is fake, it just doesn't
really do anything for it. But then the other thing
is like polymarket is a very crypto based prediction market.
By the way, like all of the other like non
crypto markets have kind of followed polymarkets odds. But anyway,
(05:22):
and like people love the idea that crypto markets are
being manipulated and are full of wash trading. There's a
lot of wash trading and crypto markets. But if you
thought polymarket is like a little bit more Trump skewed
because it's crypto people and crypto people are more Trump scued,
like that makes sense, you know, Like if you think
that like polymarkets prices are too high, you have to
do something about that, which means going to trade on polymarket,
(05:45):
and like you know that's kind of a pain. You
have to like go buy some crypto you have to
pretend to not be based in the US, and so like, yeah,
it was like some hurdles to jump through, and it's
possible that the people who want to bet on Kamala
Harris wouldn't want to go through those steps. But this
notion that you're gonna like find a secret trick that
(06:06):
actually polymarket is fake, Yeah, it doesn't really do anything
for me. No one's found that secret trick. The other
thing I say is like, you're like, people are making
enormous bets in the treasury market based on like their
assessment of Trump's odds. It's not like treasury traders are
idiotically following polymarket.
Speaker 1 (06:24):
No.
Speaker 2 (06:25):
No, the follow on trades in like real financial markets
are confirmatory, right, They're not like, oh, like polymarket has
tricked everyone. It's like whatever, you know, the vibes are
that have shifted on polymarket have shifted in like broader
markets as well, And so that gives your reason to
believe that the polymarket odds are correct, not in the
sense of like right, correct about reality, but in the
(06:46):
sense of like correct about reflecting sort of like roughly
the market's view of the probabilities.
Speaker 1 (06:51):
Yeah, So a couple of points there to your point
about like, how does this compare with other prediction markets.
You look at Predicted for example, which you know that's
been around for longer than polymarket. At least in my consciousness,
odds of Trump winning were sixty percent at least at
one point this week, So that's not too out of
(07:11):
line with what poly market is showing right now on Halloween,
showing like fifty five percent. But I think I don't know,
there's like a chicken in the egg thing here, which
is is poly market reflecting and like tracking the odds
in the broader market, or is the broader market I'm
talking about the treasury market following poly market to that
(07:33):
latter scenario. I mean, you do have part of the
cell side community actually taking polymarket into account. JP Morgan
has these baskets, these long short baskets that are sort
of putting together stocks that are expected to rise in
whatever outcome, and part of that model looks at moves
(07:54):
that align with poly market probabilities. So I mean, people
in the actual real markets are using polymarket as a tool.
So I think that's interesting. I'm not even saying like
polymarkets being manipulated I'm just saying, like it would be
easy to affect pricing, Yeah, I guess.
Speaker 2 (08:14):
But if you're saying, like everyone in like the real
markets is paying a lot of attention to polymarket prices
and they're easy to manipulate, like that suggests they're easy
to manipulate on both sides, right, Like, if you want
to be like long treasuries, you can go tue some
polymarket contracts and move the market significantly, right if, like,
if the story here is true that like real investors
are sort of reflexively pricing based on polymarket ods and
(08:36):
that polymarket odds are relatively easy to manipulate, which I
just like, I don't really believe you other of those
stories entirely. I don't know.
Speaker 1 (08:42):
It is kind of a fun thought experiment, though, The thought.
Speaker 2 (08:45):
Experiment that I love is like, so I never mind treasuries.
The stock of DJT Trump media is kind of a
proxy for Trump's odds of winning and like kind of
a bigger one than the polymarket markets, and so like,
people constantly email me like, could you make money by
manipulating polymarket ods and then selling DJT on the back
(09:07):
of that? And I don't know the answer, but like
that's a fun little trade. Like DJT is such a
stranger proxy for Trump's odds than the poly market. Yeah,
markets are, and definitely one where there is like real
money to be made.
Speaker 1 (09:20):
DJT has been frustrating to talk about on air because
every morning I go to like my most function on
the Bloomberg terminal, this is at like six point thirty
in the morning, and I look at what the biggest
moves are. It's been DJT this week, obviously, and then
I look at the biggest volume and it's also DJT.
(09:41):
So it's not even that it's just a couple Yahoo's
trading DJT. Like there is serious turnover in DJT, which
is pretty wild.
Speaker 2 (09:49):
Yeah, it's like a good way to express an opinion
on his election, which is weird because polymarket is a
way to express an opinion on his election outcomes, because
like there's a contract that pays off zero one depending
on whether he wands they elects. DJT is nothing like that,
and yet it sort of functions as that, which is,
you know itself a fascinating fact about modern financial markets,
Like why is dj T a referendum in elections? It
(10:11):
seems like it should.
Speaker 3 (10:11):
Be, so it is it has Trump been the name,
you know?
Speaker 1 (10:15):
And Trump is running for president, So I don't think
it's like I mean.
Speaker 2 (10:19):
Look, if he wins, I don't do that if he loses, right,
So like it's a correct thesis. It's just like why.
Speaker 3 (10:23):
Yeah.
Speaker 1 (10:24):
We had Nick Colas from Data Trek on TV this
week and one of the things that he emailed over
to the team was on the topic of offshore gambling odds.
He said that everyone thinks this is an untainted prediction market. Maybe,
but these odds are also affecting financial markets. You look
at the peso, you look at bank stocks, you look
(10:44):
at yields. Could savvy traders move the gambling odds and
trade financial assets for profit just like we're talking about.
You could spend forty five million dollars to move Trump's
odds and then also pair that with a short on
like ten your treasuries. That could have been interesting like
three weeks ago. And maybe that's what that French national
(11:05):
was doing. I don't know.
Speaker 2 (11:06):
I hope that's true. One thing about this, like this
market is easy to manipulate. Argument is like that's true
on both sides, right, Like, obviously get a lot about
this with liboard manipulation. Like with liboard manipulation, you could
just like make up a number and that would affect
the value of like trillions of dollars of terrifatives. And
so people just make up a number because they were
like long these drives, they want them to go up,
and so they would like make up a high number.
(11:27):
And empirically it turned out that people were doing the
same thing on the other side, and so like library
was like kind of made up, but it's also kind
of accurate because like everyone was doing the same thing
and they're trying to manipulate the market on both sides.
There's a little of that here too, where it's like
you could buy a million dollars or Trump contracts and
like sell a billion dollars of treasuries and make some money.
Like maybe that doesn't tell you which way that bet
(11:48):
is being made, and it could easily be made both ways. Right,
It's not like the like real financial markets are moving
like that dramatically in response to a five percent shift
in the polymarket. Ods, maybe that trade is worth it,
but it seems like a risky trade to do well.
Speaker 1 (12:02):
We'll find out in a couple of days or we will.
Speaker 2 (12:05):
We'll never know the correct odds, but we'll know the outcome.
Speaker 1 (12:08):
Yeah, we'll know how close to reality the polymarket odds
were depending on how they shift in the next couple
of days.
Speaker 2 (12:14):
I guess I don't think we'll ever know how close
to reality they were. Like either the winner, he won't,
but at no point, well, we know that he was
like sixty five ercent likely to win. Yeah, the market
will resolve to one.
Speaker 3 (12:27):
Zero taxes, taxes.
Speaker 1 (12:44):
I need you to just explain this to me. I've
read it, I've listened to it, and I feel like
I still am not grasping it. Yes, Robot told me
all about it.
Speaker 2 (12:55):
The two is that you get to decide for the
most part when you get taxable gains or losses. Right, So,
if you have stock and it goes up, you just
hold onto it and like you wait and eventually, twenty
years from now you sell the stock and then you
pay taxes on the gains. Or by the way, one
hundred years from now, you die and it passes on
to your airs and they never pay taxes on the
(13:17):
gains because of like basis. Step up, right, if you
have stocks that go down, you sell them right now,
and you have a taxable loss or capital loss, and
that can be used to offset capital gains elsewhere in
your portfolio. So if you're like you have capital gains,
you also have some stocks that have gone down. You
sell the stocks that have gone down and use them
(13:38):
to offset your gains. Obviously, you'd rather buy stocks that
go up right and not have any taxable losses, but like,
sometimes you want taxable losses because like, you have gains elsewhere,
and you would prefer not to pay taxes on them,
but you don't want to just like lose money for
no reason. And the conceptual trick is conceptually it's so
(13:59):
you have hundred dollars, right, you go long like five
hundred dollars of the S and P, and you go
short like four hundred dollars of the S and P.
So your net exposure is one hundred dollars, right, So
it's like you've made the investment you wanted to make,
but now you're long a lot and short a lot
to offset it. But you're you know, you're still that long.
And then either of the market goes up or down.
If it goes up, you make money on your five
(14:22):
hundre dollars long and you lose money on your four
hundred dollars short, and then what you do is nothing
with your long. You just keep it on so you
don't penny taxes on the gains. And you close out
your short and you get a big tax loss on
your short and you can use that to offset your
gains elsewhere. And then you put on another four hundred
dollars short and you do it again. And so every
(14:43):
year you can like generate tax losses without any real
economic losses because your long your short positions are offsetting
each other. Right, So like net you're just long one
hundred dollars of stock, but you have losses every year.
Did you go away? So, Katie, I just explained taxiware
long short in a beautiful way. That crashed your internet. Yeah,
(15:08):
cause you to go lie down for a while.
Speaker 1 (15:11):
It's too bad that I didn't hear that, because that
explanation was something that I needed.
Speaker 2 (15:18):
In brief, you buy like two hundred dollars of the
S and P. You're short one hundred dollars the SMP
met your longe hundred dollars the SMP. But no matter
what happens, you have tax losses. You realize the tax
losses each year and you use them to offset your
gains elsewhere in the portfolio, like if you've sold the
business or whatever, and then you go put on the
short again and you do it all over again. That's
(15:40):
like conceptually the trade, but in reality that's not the
trade at all, because you're not really just allowed to
do that. You're not allowed to just buy a thing
and go short the same thing and take the losses
and not take the games. Those are called like the
straddle rules and the wash sale rules, and so the
trick is to do this in a way where you're
not long and short the same thing, and also where
(16:02):
when you close out the position and then you go
put on the position again, you're putting on different positions.
So like you know, if you have like some losses,
you sell those stocks and you buy different stocks so
that you continue to have the same exposure, but you
can realize your losses on the stuff that you got
rid of. That's where the secret soloss comes in. But
(16:23):
it's not that secret because there are a lot of
stocks in the world, and you can sort of create
a bunch of different, diverse, bied portfolios that give you
the exposures you want. And ideally, you know, you go
long stocks that are good and you go short stocks
that are bad, and like maybe you don't have as
many losses and you just have a lot of gains,
But it's sort of like that's just gravy. What you
really want is to have a long short portfolio where
(16:47):
like your net exposure is the net exposure you want,
and where if you lose money on one side of
the trade, you get to didacti from your taxes.
Speaker 1 (16:55):
So your column in this conversation is inspired by a
great article by Justine of Bloomberg News last week, and
I feel like we're learning about a lot of different
methods if you're a really wealthy person to sort of
defer taxes. The question I had reading this article. Justina
describes an example of this brilliant Apple engineer. He has
(17:18):
a million dollars worth of Apple shares, He has years
of gains, So basically he does this strategy, you know,
maybe goes one hundred and thirty percent long thirty percent
short to do this trade. But why wouldn't he just
do a swap fund in that scenario, which we just
talked about like two weeks ago.
Speaker 2 (17:37):
Swat funds have like their own administrative complexities. If you're
doing this, you're sort of permanently generating tax seductions, Like
you can keep generating tax eductions every year. Like the
swap fund is a way to diversify out of your
appreciated asset without immediately paying taxes on it, but you're
not like generating any additional tax losses. Swat funds are
(17:58):
kind of weird. You're not getting the same diversification as
you would by like buying an S and P fund
because you know, you're sort of like in a swop
fund with other people who have also contributed to the
swap fund.
Speaker 1 (18:06):
Generally that makes sense.
Speaker 2 (18:08):
You know, ranny aout this. People have been emailing me
with a lot of like other ways that people defer taxes.
This is just like a sort of juice up version
of tax loss harvest thing which any financial advisor and
most robo advisors at this point will do, where like
just at the end of the year, you like sell
your stocks that have gone down so that you can
take tax losses, and then you know, you go buy
(18:29):
some different stocks. And one thing that people have found
is that people often don't really want to buy different
stocks because different stocks would give them a different risk profile,
and so ideally they would go sell their stocks, take
their losses, and then go buy the same stocks. But
you can't do that because the IRS has rules against
(18:49):
the wash sales where you sell us stock, take the losses,
and then immediately buy the back. And so people get
arbitrarily close to that in ways that make people mad.
And so the classic is like if you are invested
in ETFs and you have an ETF that is down
at the end of the year, you sell an ETF
and you buy back a different ETF with the same
(19:09):
like theme, right, so you know, it could even be
like you sell at S and PTF when you buy
back a different S and P ETF whatever theme you had, Like,
there's probably ten ETFs that sort of serve that basic
purpose and you sell one and buy back the other,
and the underlying holdings might be the same, and the
basic idea might be the same. But you can say, no, no,
(19:30):
I didn't do a watch sale. I sold the one
ETF and bought back a completely different ETF, And people
who email me are like, that's not really allowed, And
the rules on this are like a little bit unclear.
Like if you read the rules. They seem to be
quite broad in saying that you can't do this stuff right.
You can't take tax losses when you're sort of hedged
(19:50):
the whole time. But if you look at sort of
actual enforcement, the rules are kind of enforced more narrowly,
where like if you sell one thing and buy back
a very similar thing, you seem to get in trouble
for it. So there's a lot of stuff going on
here that people are like, yeah, it seems to work.
Speaker 1 (20:04):
I mean, it's kind of poetic that, like the origin
story of the etf rapper was just a way to
defer in dodge taxes, So you know, it's fitting with
the spirit anyway. I can't see your face, and I
don't like that. But something else that I wanted to
talk about from Justina's article, did you see the quote
(20:25):
that she had in there from David Schiser. He's the
professor at Columbia Law School. He said that basically, this
whole business of the taxaware long short, it feeds off
the complexity of the current rules, and in his view,
far too much time and energy is being expended by
these sophisticated players to pursue a lower effective tax rate
(20:47):
and I just thought that was funny. You know, like
what if like cliff Asnas was directing all of this
mental energy and this brain power at Bettering Society, for example,
That seems to be at least what this professor is suggesting.
Speaker 2 (21:00):
I simpathized. But I also used to be a derivative structure,
and I tell you that in the abstract, it is
hard to go to a client and say, here is
a brilliant product for you, because like the brilliant product
like comes down to, like I get you some variation
on market returns and you pay me one percent, right,
(21:21):
and like over time, the expectation is that one percent
really adds up. So it's really helpful to go to
the client and say the way I'm going to make
money for you is not with my special brilliance, but
by like just taking it from the irs. There's just
a rule that says we can take this money from
the IRS and give it to you, and we'll take
half of it. And the client is like, yeah, that's
(21:42):
a good deal. When I was a derivative structure at
a bank, if you go to a client and you're like, oh,
you know, like we have a thing where you can
manage your risk. It's like not that exciting, right, But
if you go to client, you're like, here's a thing
where the IRS just pay you to do the trade,
then like that's great, you know they want that, And
so on the one hand being like, oh, these people
doing these tax ARBs should be doing something else for society,
Like I get it. But on the other hand, like
I don't know. If you're a financial engineer, the thing
(22:04):
where it's like the IRS is your free money is
a great product compared to the thing where you're like
I have found a way to beat the market. It's
hard to beat the market. It's not that hard to
figure out a way to generate tax detections and like
defer tax cans. Yeah, it's not easy, as smart people
can paid a lot of money to do it. But
it's like more reliable. It's not entirely reliable, right, you
read about these things, there's always someone being like this
(22:26):
is not really allowed, like this is going to get
someone in trouble, Like this might not you know, the
rules might change. So it's not like entirely reliable. But
it is a good pitch in a way that like
we'll beat the market.
Speaker 1 (22:35):
Is not Yeah, they's true. There is an whole community
of people who would say, like, the government needs your
tax dollars, but that's a different story.
Speaker 2 (22:42):
Well, those people probably aren't doing this trade, I.
Speaker 1 (22:46):
Would imagine not.
Speaker 2 (22:49):
I mean, you know, I actually did hear from a
reader who is like, I got pitched this and it
felt bad for me to say this much on my
tax as. So I said, no, that's a that's a
reasonable approach.
Speaker 1 (23:01):
That sounds like a really good conscientious person. I don't
think a lot of people.
Speaker 2 (23:05):
But it's also it's like, you know, because you're like
like there's a little bit of uncertainty here and it's
really complicated, and like it's you know, like not everyone
who has pitched on a complicated financial product wants to
do it, and like it's not I would prefer to
pay higher taxes. It's this seems like a lot of
brain power to go through to save some money on
my taxes. But if you really want to save money
(23:26):
in your taxes, then like, no amount of brain power
is too much to spend on saving money on taxes.
Speaker 1 (23:33):
That's true. Do you want to get to the fun stuff?
Speaker 2 (23:50):
Okay?
Speaker 1 (23:51):
Super micro, super micro? So I feel like it's bad
it's just not a good look when your auditor resigns.
Speaker 2 (23:57):
Your auditor resigns in like a real huff, you know. Yeah,
super Micro's auditors at EUI, the former Ernst and Young,
resigned with a nasty letter being like, we can't trust
you anymore. Yeah, seems bad.
Speaker 1 (24:11):
I saw a version of that letter make its rounds
on social media. I was pretty sure too. I feel
like it was like a paragraph or two.
Speaker 2 (24:17):
Maybe you've seen a letter that I haven't seen.
Speaker 1 (24:19):
It could have been a fake letter, to be totally honest,
but anyway, a huff.
Speaker 2 (24:24):
So super Micro filed a disclosure saying that their auditor
EI had resigned because they had sent super Micro letter
saying that we can no longer rely on the representations
that management makes nor trust the audit committee, which is wild. Right,
Sometimes there are accounting scandals where the corporate managers are
(24:44):
doing bad stuff and then like the board finds out
and there's a scandal, and the board is shocked and
like works with the auditors to find the problems, right,
because like, the board doesn't really have incentives to do
a counting fraud, right, They're just there to get paid
a yearly fee and get sued when things go wrong,
like they don't want to do accounting fraud, but like
(25:05):
this is a somewhat unusual case where EUI is like,
not only do we not trust management, but like we
don't really want to talk to the audit committee anymore either,
which is a pretty smooth move right there. This is
such a salient, sorry, because Hindenburg put out a short
report on super Micro, you know, like a month ago,
saying that they're probably getting up to some accounting fraud.
(25:26):
When that happens, it's like the very natural like limit
on how seriously to worry about it is like, well,
their order hasn't resigned. The order is still auded in
their financial statement, so how bad can their accounting really be?
And then the utter resigns, Like yeah, there's no limit,
could be anything, you know.
Speaker 1 (25:42):
I feel like this checks two boxes for you, at
least two boxes. One on your campaign to make auditors
be cool again. I feel like this does a lot
of a lifting for you, and then also.
Speaker 2 (25:53):
Very cool to do this sort of I'm like this
is very cool, Like I would love to resign in
a huffle this and like you know, because like you
resign it off like this and you really like you're
getting your revenge, right, like the stock tanked. It's really
a bad look for the company, and so EI can
just be like, Nope, we're gonna resign, see you later,
and have like a really negative effect on the company
(26:15):
that's said You're gonna have a different interpretation of this,
which is EI has not like had the most amazing
run ever in terms of like being criticized for its
audit quality. And you could say, well, they are doing
this out of an abundance of caution, because like they
can't be caught standing close to a company with any
(26:36):
accounting problems because they've had some criticism of their audit work,
and in particular, you know, it reminds me of I
think last week EI was in the news for firing
people who are watching like two training videos at the
same time. Right, So, like their auditors have like continuing
education requirements and they have to watch videos on their
(26:57):
computers to check off the boxes, and some people were
watching two videos at the same time so they could
check off twice as many hours before getting back to
better things.
Speaker 4 (27:05):
I get that temptation, no comment, but EUI fired them,
which seems very harsh, And so you remember that EUI
has been like find a lot of money by regulators
for things like having its accountants cheat on continued education exams,
and so you can't really do that anymore.
Speaker 2 (27:20):
And so this is this whole thing where like they
are very much in a compliance culture because it's kind
of like risky out there for them to be doing
what they're doing, and so they don't have a lot
of tolerance for nonsense right now.
Speaker 1 (27:31):
Yeah, that's a fair point. The other box that I
was thinking about for you is that, you know, it
seems like you could be cast as sympathetic to the
short seller community, which has taken a lot of heat
over the past couple of years. And here's an example
of a short seller potentially doing good for society and
the health of markets potentially.
Speaker 2 (27:51):
Yeah. Yeah, Like it's a lot like this is like
a little bit of an overdetermined case because like the
things that are going on here is like one, Hindenberg
is putting out a comprehensive every saying this company's accounting
is bad. Two an employee has apparently gone to like
the authorities to like blow the whistle and is like
talking to the Justice Department, which is investigating because an
employee is, you know, independently of Hindenburg come out to
(28:13):
say that the accounting is bad. And then three like,
I don't know exactly what's motivating Ey, but it's not
necessarily they read the Hindenburg report like, oh wow, this
accounting is bad, right, Like they might have independently disagreed
with the accounting. So, I mean the timing is a
little odd. There are definitely some cases where it's like
the short cellars or the market's like only line of
(28:33):
defense against like problematic accounting. And here it's not so
clear that that's true, but like it is potentially confirmatory
of what Hindenburg has been saying.
Speaker 1 (28:41):
I guess we can't say for certain, had Hindenburg not
published its short report on August twenty seventh, whether we
would have seen Ey resign as their auditor in late October.
But I don't know.
Speaker 2 (28:52):
It's a good question, right, there is pressure on them
not to be near anything that gets any suspicion. But like,
did they independently decide there were problems or were they like, oh,
this is too high profile for us. We got to
get out of this, right, Like, did Hindenburg put the
pressure on them and by the way, like one possibility
here is that this company is like pure is the
(29:12):
driven snow and Hindenburg is wrong and EI read theurg
report and we're like this is too hairy for us.
We got to get out of here. And like, in fact,
this is like a very destructive thing that has happened
where EI, rather than being a stalwart independent auditor, has
like felt the public pressure to renounce its client. Like
(29:36):
that's a story you could tell.
Speaker 1 (29:38):
Yeah, if that plays out, we'll talk about it on
this podcast.
Speaker 2 (29:42):
Probably I'm not going to mark my calendar for it,
but it's like a thing that could happen.
Speaker 1 (29:45):
It's a watch this space sort of thing. Something that
I did want to talk about is that super Micro's
star has risen or had risen so quickly. This company
was only just added to the S and P five
hundred in March, which was kind of a controversial thing.
You know, even though index inclusion is based on rules,
(30:07):
there is some discretion on the part of the index committee,
and there was like this really brief moment in time
just the way that the timing worked out where super
Micro was I believe, in the Small Cap Index while
simultaneously being in the S and P five hundred. So
I don't know. It's just like this funny quirk that
I don't know if super Micro is really in the
(30:28):
pain locker and it's been dragging one of many things
dragging on the benchmark that it was only just recently
added to.
Speaker 2 (30:34):
This is definitely a thing that Schurtzeller's point too, like
companies often get added to nities because of like short
term price moves that are sometimes you know, bubbily or
basedline bad accounting or otherwise not sustainable, and then like
they're in the index and it's particularly embarrassing when the
problems are found. There could be some element of that here.
Speaker 1 (30:53):
Yeah, well we'll see also if it stays at least
like in the NASDAQ one hundred, in the S and
P five hundred, I mean, it still a big company.
Speaker 2 (31:01):
The other thing I liked about it is like the
Ey letter to super Micro resigning is not publicly filed,
although super Micro quotes it a little bit, but super
Micro's disclosure about it is like very sad, and it
includes the lines although the company recognizes Ey's decision is final,
it disagrees with Ey's decision to resign as the company's
(31:23):
independent registered public accounting from someone was like, it's like
a sad breakup, right, Like it's like we know we
can't do anything about it, but we're really sad about it.
But then the other thing that's crazy is that when
you put out a statement like this, EI gets like
a sort of right of response or like a right
of fact checking, where the statement that super Micro filed
(31:45):
comes with a little exhibit that is a letter from
EY to the SEC saying we have read super Micro's
disclosure and we agree with the statements contained in the
first paragraph, the first sentence of the second paragraph, the
third the first three sentences of the fourth pargraph, the
fifth paragraph, the seventh paragraph, and the eighth paragraph. We
(32:05):
have no basis to agree or disagree with the other statements,
which is like, first of all, it's just like an
incredibly like fun and embarrassing thing to have. But secondly,
like the things they don't agree or disagree with include
like supermankers, like we don't think this will affect any
of our financial statements, Like we don't have to restate
any of our financial statements. You. I was like, eh,
I don't know, I don't know. A good luck about
(32:27):
it's like really kind of like adding one more kick
on the way out the door.
Speaker 3 (32:31):
Yeah, he's on this letter saying that they.
Speaker 2 (32:33):
Don't agree with everything in the in the letter, in
the disclosure.
Speaker 1 (32:35):
I mean, public breakups are really hard, They're really messy.
Speaker 2 (32:38):
I almost have like pop culture reference here.
Speaker 1 (32:41):
But I don't Someone can make another Ben affleck j
Lo reference, but I don't know the other one.
Speaker 2 (32:47):
There's there's like a podcast host, right, her name is
Chicken something.
Speaker 1 (32:51):
Oh my god, Brionna chicken Fry. Well, I can't believe
that that's in your head. That is like so firmly
in my world.
Speaker 2 (32:59):
Yes.
Speaker 1 (33:00):
Yeah, well zach Bryan Dumpter on Instagram.
Speaker 2 (33:05):
Well they hit broken out basically the same thing as
Zachana Chicken.
Speaker 1 (33:09):
Fry Yeah, in a way. Yeah, that's amazing. We should
just cut the podcast off here. You know what else
has been pretty messy and hard is recording this podcast remotely.
This has been a little bit of a nightmare. But
I think we got through it.
Speaker 2 (33:24):
I think we can do there. Good guy.
Speaker 1 (33:26):
A happy Halloween.
Speaker 3 (33:27):
This was super spooky.
Speaker 2 (33:30):
And that was the Money Stuff podcast.
Speaker 1 (33:32):
I'm Matt Levian and I'm Katie Greifelt.
Speaker 2 (33:34):
You can find my work by subscribing to The money
Stuff newsletter on Bloomberg dot com, and.
Speaker 1 (33:39):
You can find me on Bloomberg TV every day on
Open Interest between nine to eleven am Eastern.
Speaker 2 (33:44):
We'd love to hear from you. You can send an
email to Moneypot at Bloomberg dot net, ask us a
question and we might answer it on air.
Speaker 1 (33:51):
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 2 (33:57):
The Money Stuff Podcast is produced by Anna Masarakus and
how is this on?
Speaker 1 (34:00):
Our theme music was composed by Blake Maples.
Speaker 2 (34:03):
Brandon Francis Munim is our executive.
Speaker 1 (34:05):
Producer, and Stage Bauman is Bloomberg's head of Podcasts.
Speaker 2 (34:08):
Thanks for listening to The Money Stuff Podcast. We'll be
back next week with more stuff.
Speaker 1 (34:21):
This was a nightmare, a Halloween nightmare.
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:10):
Hello and welcome to The Money Stuff Podcast, your weekly
podcast where we talk about stuff related to money. I'm
Matt Levine and I write the Money Stuff column for
Bloomberg Opinion.
Speaker 1 (00:21):
And I'm Katie Greifeld, a reporter for Bloomberg News and
an anchor for Bloomberg Television.
Speaker 2 (00:26):
What are you talking about, Katie, Well.
Speaker 1 (00:29):
First of all, I think we should acknowledge that it's
Halloween and we are both phoning it in right.
Speaker 2 (00:36):
Now in the literal sense and the.
Speaker 1 (00:38):
Yeah, that's at home. I'm at my parents'.
Speaker 2 (00:41):
House, but.
Speaker 1 (00:48):
Just sitting here, none of our listeners would see it.
But we could have just lied.
Speaker 3 (00:53):
I guess.
Speaker 2 (00:53):
I took my daughter to get bagels today at like
six am, and she was wearing her costume, which is
She's Wednesday from the TV show. And she was like,
a weird that I'm wearing my costume this early. It
is like dark out and this guy watched by in
awere as well the costume. I was like, no, that
guy is too perfect perfect.
Speaker 1 (01:12):
It's weirder if people weren't wearing their costumes. I meant
to bring Caddis to the office, but I've forgotten, but
on television previous probably no.
Speaker 2 (01:22):
You like you were like should I wear these on
television and Halloween? And I was like yes, And then
you didn't do it.
Speaker 1 (01:27):
I almost certainly did not actually do that, but I
always slip in a lot of Halloween puns. I talk
about a monster rally, a spooky setup for stocks, things
like that. If you listen to all two hours of
the show, I'm sure it was overwhelming.
Speaker 2 (01:42):
Well, I hope you'll continue that during the.
Speaker 1 (01:44):
Yeah, speaking of overwhelming, what we're talking about today, we're
going to talk about speaking of spooky things, We're going
to talk about hollymarket and what's going on in prodiction markets.
Speaker 2 (01:57):
Something spooky.
Speaker 1 (01:59):
Yeah, I don't know. We're going to talk about tax
aware long short strategies, Matt, you're going to explain that
to me, and then we are also going to talk
about super Micro and Ernst and Young Okay, cool jumping
into the first one poly market. This was a fun
(02:21):
one and I don't think you've written about this. I
feel like I had to really twist your arm to
talk about this today.
Speaker 2 (02:25):
Yeah, you like texted me should we talk about probably
my kind? I was like no, and then you like
kept texting me until I got mad, and then I
was like, well, I'm mad enough about this, so you
can talk about it.
Speaker 1 (02:37):
Yeah, And I was like, this is the seeds for
a great discussion, given that at seven thirty in the
morning and we're so passionate. So poly Market, it's not
based in the US. US investors or betters can't.
Speaker 2 (02:51):
Okay, it's not based in the US. It's not based
in the US.
Speaker 1 (02:53):
Yeah. So the big news was basically that there was
one person who was pushing up the Trump odds. His username,
I assume it's a man, was Freddy nine, nine hundred
and ninety nine, and Polymarket's investigation found it. I don't know,
he spent like forty five million dollars and just pushed
up Trump's odds. But it seems like financial markets question
(03:16):
Mark ran with that.
Speaker 2 (03:18):
Yeah. There's also news today where like some like bly
Chain Analysis Company was like a third of trades on
polymarket or wash Trades.
Speaker 1 (03:26):
M Yeah, I did see that.
Speaker 2 (03:28):
Actually, So I don't know why is this interesting?
Speaker 1 (03:32):
So the reason I wanted to talk about this is
because so I am on television every day for two
hours and there's been this weird vibe shift in the
markets and among investors and analysts talking about Trump's odds
going up even though polls have been fifty to fifty.
Basically since Kamala entered the race, you have seen a
Trump trade, at least that's what people have been calling it.
(03:55):
Unfolded markets. You've seen long end treasury yields kind of skyrocket,
and the US dollar has had a great month, And
there's disagreement. Some people say it's just the fact that
economic data has been really strong. Other people say this
is because Trump's odds have been going up in the
prediction markets. So I find that interesting because the polymarket
(04:17):
experience has revealed that, you know, what we're looking at
is sort of real time chances of which candidates is
going to win the election. It can be swayed pretty easily.
I mean, forty five million dollars is certainly not nothing,
but it's certainly not a lot of money.
Speaker 2 (04:38):
So all these stories about polymarket being easy to make
it just feel to me like wishful thinking in a
couple of ways. And like I sympathize because I share
the wishes, but like, I just don't think I share
the thinking. Many people would rather not think that Trump
has a sixty seven percent chance of winning, and if
they could say, no, no, this is fake, it's really
fifty eight percent or fifty percent, then that would make
(05:00):
them happier, which I don't really understand because like you'll
never know like what the a priori odds were, and
in a week you'll know what happened. So it's like
being like, oh, this market is fake, it just doesn't
really do anything for it. But then the other thing
is like polymarket is a very crypto based prediction market.
By the way, like all of the other like non
crypto markets have kind of followed polymarkets odds. But anyway,
(05:22):
and like people love the idea that crypto markets are
being manipulated and are full of wash trading. There's a
lot of wash trading and crypto markets. But if you
thought polymarket is like a little bit more Trump skewed
because it's crypto people and crypto people are more Trump scued,
like that makes sense, you know, Like if you think
that like polymarkets prices are too high, you have to
do something about that, which means going to trade on polymarket,
(05:45):
and like you know that's kind of a pain. You
have to like go buy some crypto you have to
pretend to not be based in the US, and so like, yeah,
it was like some hurdles to jump through, and it's
possible that the people who want to bet on Kamala
Harris wouldn't want to go through those steps. But this
notion that you're gonna like find a secret trick that
(06:06):
actually polymarket is fake, Yeah, it doesn't really do anything
for me. No one's found that secret trick. The other
thing I say is like, you're like, people are making
enormous bets in the treasury market based on like their
assessment of Trump's odds. It's not like treasury traders are
idiotically following polymarket.
Speaker 1 (06:24):
No.
Speaker 2 (06:25):
No, the follow on trades in like real financial markets
are confirmatory, right, They're not like, oh, like polymarket has
tricked everyone. It's like whatever, you know, the vibes are
that have shifted on polymarket have shifted in like broader
markets as well, And so that gives your reason to
believe that the polymarket odds are correct, not in the
sense of like right, correct about reality, but in the
(06:46):
sense of like correct about reflecting sort of like roughly
the market's view of the probabilities.
Speaker 1 (06:51):
Yeah, So a couple of points there to your point
about like, how does this compare with other prediction markets.
You look at Predicted for example, which you know that's
been around for longer than polymarket. At least in my consciousness,
odds of Trump winning were sixty percent at least at
one point this week, So that's not too out of
(07:11):
line with what poly market is showing right now on Halloween,
showing like fifty five percent. But I think I don't know,
there's like a chicken in the egg thing here, which
is is poly market reflecting and like tracking the odds
in the broader market, or is the broader market I'm
talking about the treasury market following poly market to that
(07:33):
latter scenario. I mean, you do have part of the
cell side community actually taking polymarket into account. JP Morgan
has these baskets, these long short baskets that are sort
of putting together stocks that are expected to rise in
whatever outcome, and part of that model looks at moves
(07:54):
that align with poly market probabilities. So I mean, people
in the actual real markets are using polymarket as a tool.
So I think that's interesting. I'm not even saying like
polymarkets being manipulated I'm just saying, like it would be
easy to affect pricing, Yeah, I guess.
Speaker 2 (08:14):
But if you're saying, like everyone in like the real
markets is paying a lot of attention to polymarket prices
and they're easy to manipulate, like that suggests they're easy
to manipulate on both sides, right, Like, if you want
to be like long treasuries, you can go tue some
polymarket contracts and move the market significantly, right if, like,
if the story here is true that like real investors
are sort of reflexively pricing based on polymarket ods and
(08:36):
that polymarket odds are relatively easy to manipulate, which I
just like, I don't really believe you other of those
stories entirely. I don't know.
Speaker 1 (08:42):
It is kind of a fun thought experiment, though, The thought.
Speaker 2 (08:45):
Experiment that I love is like, so I never mind treasuries.
The stock of DJT Trump media is kind of a
proxy for Trump's odds of winning and like kind of
a bigger one than the polymarket markets, and so like,
people constantly email me like, could you make money by
manipulating polymarket ods and then selling DJT on the back
(09:07):
of that? And I don't know the answer, but like
that's a fun little trade. Like DJT is such a
stranger proxy for Trump's odds than the poly market. Yeah,
markets are, and definitely one where there is like real
money to be made.
Speaker 1 (09:20):
DJT has been frustrating to talk about on air because
every morning I go to like my most function on
the Bloomberg terminal, this is at like six point thirty
in the morning, and I look at what the biggest
moves are. It's been DJT this week, obviously, and then
I look at the biggest volume and it's also DJT.
(09:41):
So it's not even that it's just a couple Yahoo's
trading DJT. Like there is serious turnover in DJT, which
is pretty wild.
Speaker 2 (09:49):
Yeah, it's like a good way to express an opinion
on his election, which is weird because polymarket is a
way to express an opinion on his election outcomes, because
like there's a contract that pays off zero one depending
on whether he wands they elects. DJT is nothing like that,
and yet it sort of functions as that, which is,
you know itself a fascinating fact about modern financial markets,
Like why is dj T a referendum in elections? It
(10:11):
seems like it should.
Speaker 3 (10:11):
Be, so it is it has Trump been the name,
you know?
Speaker 1 (10:15):
And Trump is running for president, So I don't think
it's like I mean.
Speaker 2 (10:19):
Look, if he wins, I don't do that if he loses, right,
So like it's a correct thesis. It's just like why.
Speaker 3 (10:23):
Yeah.
Speaker 1 (10:24):
We had Nick Colas from Data Trek on TV this
week and one of the things that he emailed over
to the team was on the topic of offshore gambling odds.
He said that everyone thinks this is an untainted prediction market. Maybe,
but these odds are also affecting financial markets. You look
at the peso, you look at bank stocks, you look
(10:44):
at yields. Could savvy traders move the gambling odds and
trade financial assets for profit just like we're talking about.
You could spend forty five million dollars to move Trump's
odds and then also pair that with a short on
like ten your treasuries. That could have been interesting like
three weeks ago. And maybe that's what that French national
(11:05):
was doing. I don't know.
Speaker 2 (11:06):
I hope that's true. One thing about this, like this
market is easy to manipulate. Argument is like that's true
on both sides, right, Like, obviously get a lot about
this with liboard manipulation. Like with liboard manipulation, you could
just like make up a number and that would affect
the value of like trillions of dollars of terrifatives. And
so people just make up a number because they were
like long these drives, they want them to go up,
and so they would like make up a high number.
(11:27):
And empirically it turned out that people were doing the
same thing on the other side, and so like library
was like kind of made up, but it's also kind
of accurate because like everyone was doing the same thing
and they're trying to manipulate the market on both sides.
There's a little of that here too, where it's like
you could buy a million dollars or Trump contracts and
like sell a billion dollars of treasuries and make some money.
Like maybe that doesn't tell you which way that bet
(11:48):
is being made, and it could easily be made both ways. Right,
It's not like the like real financial markets are moving
like that dramatically in response to a five percent shift
in the polymarket. Ods, maybe that trade is worth it,
but it seems like a risky trade to do well.
Speaker 1 (12:02):
We'll find out in a couple of days or we will.
Speaker 2 (12:05):
We'll never know the correct odds, but we'll know the outcome.
Speaker 1 (12:08):
Yeah, we'll know how close to reality the polymarket odds
were depending on how they shift in the next couple
of days.
Speaker 2 (12:14):
I guess I don't think we'll ever know how close
to reality they were. Like either the winner, he won't,
but at no point, well, we know that he was
like sixty five ercent likely to win. Yeah, the market
will resolve to one.
Speaker 3 (12:27):
Zero taxes, taxes.
Speaker 1 (12:44):
I need you to just explain this to me. I've
read it, I've listened to it, and I feel like
I still am not grasping it. Yes, Robot told me
all about it.
Speaker 2 (12:55):
The two is that you get to decide for the
most part when you get taxable gains or losses. Right, So,
if you have stock and it goes up, you just
hold onto it and like you wait and eventually, twenty
years from now you sell the stock and then you
pay taxes on the gains. Or by the way, one
hundred years from now, you die and it passes on
to your airs and they never pay taxes on the
(13:17):
gains because of like basis. Step up, right, if you
have stocks that go down, you sell them right now,
and you have a taxable loss or capital loss, and
that can be used to offset capital gains elsewhere in
your portfolio. So if you're like you have capital gains,
you also have some stocks that have gone down. You
sell the stocks that have gone down and use them
(13:38):
to offset your gains. Obviously, you'd rather buy stocks that
go up right and not have any taxable losses, but like,
sometimes you want taxable losses because like, you have gains elsewhere,
and you would prefer not to pay taxes on them,
but you don't want to just like lose money for
no reason. And the conceptual trick is conceptually it's so
(13:59):
you have hundred dollars, right, you go long like five
hundred dollars of the S and P, and you go
short like four hundred dollars of the S and P.
So your net exposure is one hundred dollars, right, So
it's like you've made the investment you wanted to make,
but now you're long a lot and short a lot
to offset it. But you're you know, you're still that long.
And then either of the market goes up or down.
If it goes up, you make money on your five
(14:22):
hundre dollars long and you lose money on your four
hundred dollars short, and then what you do is nothing
with your long. You just keep it on so you
don't penny taxes on the gains. And you close out
your short and you get a big tax loss on
your short and you can use that to offset your
gains elsewhere. And then you put on another four hundred
dollars short and you do it again. And so every
(14:43):
year you can like generate tax losses without any real
economic losses because your long your short positions are offsetting
each other. Right, So like net you're just long one
hundred dollars of stock, but you have losses every year.
Did you go away? So, Katie, I just explained taxiware
long short in a beautiful way. That crashed your internet. Yeah,
(15:08):
cause you to go lie down for a while.
Speaker 1 (15:11):
It's too bad that I didn't hear that, because that
explanation was something that I needed.
Speaker 2 (15:18):
In brief, you buy like two hundred dollars of the
S and P. You're short one hundred dollars the SMP
met your longe hundred dollars the SMP. But no matter
what happens, you have tax losses. You realize the tax
losses each year and you use them to offset your
gains elsewhere in the portfolio, like if you've sold the
business or whatever, and then you go put on the
short again and you do it all over again. That's
(15:40):
like conceptually the trade, but in reality that's not the
trade at all, because you're not really just allowed to
do that. You're not allowed to just buy a thing
and go short the same thing and take the losses
and not take the games. Those are called like the
straddle rules and the wash sale rules, and so the
trick is to do this in a way where you're
not long and short the same thing, and also where
(16:02):
when you close out the position and then you go
put on the position again, you're putting on different positions.
So like you know, if you have like some losses,
you sell those stocks and you buy different stocks so
that you continue to have the same exposure, but you
can realize your losses on the stuff that you got
rid of. That's where the secret soloss comes in. But
(16:23):
it's not that secret because there are a lot of
stocks in the world, and you can sort of create
a bunch of different, diverse, bied portfolios that give you
the exposures you want. And ideally, you know, you go
long stocks that are good and you go short stocks
that are bad, and like maybe you don't have as
many losses and you just have a lot of gains,
But it's sort of like that's just gravy. What you
really want is to have a long short portfolio where
(16:47):
like your net exposure is the net exposure you want,
and where if you lose money on one side of
the trade, you get to didacti from your taxes.
Speaker 1 (16:55):
So your column in this conversation is inspired by a
great article by Justine of Bloomberg News last week, and
I feel like we're learning about a lot of different
methods if you're a really wealthy person to sort of
defer taxes. The question I had reading this article. Justina
describes an example of this brilliant Apple engineer. He has
(17:18):
a million dollars worth of Apple shares, He has years
of gains, So basically he does this strategy, you know,
maybe goes one hundred and thirty percent long thirty percent
short to do this trade. But why wouldn't he just
do a swap fund in that scenario, which we just
talked about like two weeks ago.
Speaker 2 (17:37):
Swat funds have like their own administrative complexities. If you're
doing this, you're sort of permanently generating tax seductions, Like
you can keep generating tax eductions every year. Like the
swap fund is a way to diversify out of your
appreciated asset without immediately paying taxes on it, but you're
not like generating any additional tax losses. Swat funds are
(17:58):
kind of weird. You're not getting the same diversification as
you would by like buying an S and P fund
because you know, you're sort of like in a swop
fund with other people who have also contributed to the
swap fund.
Speaker 1 (18:06):
Generally that makes sense.
Speaker 2 (18:08):
You know, ranny aout this. People have been emailing me
with a lot of like other ways that people defer taxes.
This is just like a sort of juice up version
of tax loss harvest thing which any financial advisor and
most robo advisors at this point will do, where like
just at the end of the year, you like sell
your stocks that have gone down so that you can
take tax losses, and then you know, you go buy
(18:29):
some different stocks. And one thing that people have found
is that people often don't really want to buy different
stocks because different stocks would give them a different risk profile,
and so ideally they would go sell their stocks, take
their losses, and then go buy the same stocks. But
you can't do that because the IRS has rules against
(18:49):
the wash sales where you sell us stock, take the losses,
and then immediately buy the back. And so people get
arbitrarily close to that in ways that make people mad.
And so the classic is like if you are invested
in ETFs and you have an ETF that is down
at the end of the year, you sell an ETF
and you buy back a different ETF with the same
(19:09):
like theme, right, so you know, it could even be
like you sell at S and PTF when you buy
back a different S and P ETF whatever theme you had, Like,
there's probably ten ETFs that sort of serve that basic
purpose and you sell one and buy back the other,
and the underlying holdings might be the same, and the
basic idea might be the same. But you can say, no, no,
(19:30):
I didn't do a watch sale. I sold the one
ETF and bought back a completely different ETF, And people
who email me are like, that's not really allowed, And
the rules on this are like a little bit unclear.
Like if you read the rules. They seem to be
quite broad in saying that you can't do this stuff right.
You can't take tax losses when you're sort of hedged
(19:50):
the whole time. But if you look at sort of
actual enforcement, the rules are kind of enforced more narrowly,
where like if you sell one thing and buy back
a very similar thing, you seem to get in trouble
for it. So there's a lot of stuff going on
here that people are like, yeah, it seems to work.
Speaker 1 (20:04):
I mean, it's kind of poetic that, like the origin
story of the etf rapper was just a way to
defer in dodge taxes, So you know, it's fitting with
the spirit anyway. I can't see your face, and I
don't like that. But something else that I wanted to
talk about from Justina's article, did you see the quote
(20:25):
that she had in there from David Schiser. He's the
professor at Columbia Law School. He said that basically, this
whole business of the taxaware long short, it feeds off
the complexity of the current rules, and in his view,
far too much time and energy is being expended by
these sophisticated players to pursue a lower effective tax rate
(20:47):
and I just thought that was funny. You know, like
what if like cliff Asnas was directing all of this
mental energy and this brain power at Bettering Society, for example,
That seems to be at least what this professor is suggesting.
Speaker 2 (21:00):
I simpathized. But I also used to be a derivative structure,
and I tell you that in the abstract, it is
hard to go to a client and say, here is
a brilliant product for you, because like the brilliant product
like comes down to, like I get you some variation
on market returns and you pay me one percent, right,
(21:21):
and like over time, the expectation is that one percent
really adds up. So it's really helpful to go to
the client and say the way I'm going to make
money for you is not with my special brilliance, but
by like just taking it from the irs. There's just
a rule that says we can take this money from
the IRS and give it to you, and we'll take
half of it. And the client is like, yeah, that's
(21:42):
a good deal. When I was a derivative structure at
a bank, if you go to a client and you're like, oh,
you know, like we have a thing where you can
manage your risk. It's like not that exciting, right, But
if you go to client, you're like, here's a thing
where the IRS just pay you to do the trade,
then like that's great, you know they want that, And
so on the one hand being like, oh, these people
doing these tax ARBs should be doing something else for society,
Like I get it. But on the other hand, like
I don't know. If you're a financial engineer, the thing
(22:04):
where it's like the IRS is your free money is
a great product compared to the thing where you're like
I have found a way to beat the market. It's
hard to beat the market. It's not that hard to
figure out a way to generate tax detections and like
defer tax cans. Yeah, it's not easy, as smart people
can paid a lot of money to do it. But
it's like more reliable. It's not entirely reliable, right, you
read about these things, there's always someone being like this
(22:26):
is not really allowed, like this is going to get
someone in trouble, Like this might not you know, the
rules might change. So it's not like entirely reliable. But
it is a good pitch in a way that like
we'll beat the market.
Speaker 1 (22:35):
Is not Yeah, they's true. There is an whole community
of people who would say, like, the government needs your
tax dollars, but that's a different story.
Speaker 2 (22:42):
Well, those people probably aren't doing this trade, I.
Speaker 1 (22:46):
Would imagine not.
Speaker 2 (22:49):
I mean, you know, I actually did hear from a
reader who is like, I got pitched this and it
felt bad for me to say this much on my
tax as. So I said, no, that's a that's a
reasonable approach.
Speaker 1 (23:01):
That sounds like a really good conscientious person. I don't
think a lot of people.
Speaker 2 (23:05):
But it's also it's like, you know, because you're like
like there's a little bit of uncertainty here and it's
really complicated, and like it's you know, like not everyone
who has pitched on a complicated financial product wants to
do it, and like it's not I would prefer to
pay higher taxes. It's this seems like a lot of
brain power to go through to save some money on
my taxes. But if you really want to save money
(23:26):
in your taxes, then like, no amount of brain power
is too much to spend on saving money on taxes.
Speaker 1 (23:33):
That's true. Do you want to get to the fun stuff?
Speaker 2 (23:50):
Okay?
Speaker 1 (23:51):
Super micro, super micro? So I feel like it's bad
it's just not a good look when your auditor resigns.
Speaker 2 (23:57):
Your auditor resigns in like a real huff, you know. Yeah,
super Micro's auditors at EUI, the former Ernst and Young,
resigned with a nasty letter being like, we can't trust
you anymore. Yeah, seems bad.
Speaker 1 (24:11):
I saw a version of that letter make its rounds
on social media. I was pretty sure too. I feel
like it was like a paragraph or two.
Speaker 2 (24:17):
Maybe you've seen a letter that I haven't seen.
Speaker 1 (24:19):
It could have been a fake letter, to be totally honest,
but anyway, a huff.
Speaker 2 (24:24):
So super Micro filed a disclosure saying that their auditor
EI had resigned because they had sent super Micro letter
saying that we can no longer rely on the representations
that management makes nor trust the audit committee, which is wild. Right,
Sometimes there are accounting scandals where the corporate managers are
(24:44):
doing bad stuff and then like the board finds out
and there's a scandal, and the board is shocked and
like works with the auditors to find the problems, right,
because like, the board doesn't really have incentives to do
a counting fraud, right, They're just there to get paid
a yearly fee and get sued when things go wrong,
like they don't want to do accounting fraud, but like
(25:05):
this is a somewhat unusual case where EUI is like,
not only do we not trust management, but like we
don't really want to talk to the audit committee anymore either,
which is a pretty smooth move right there. This is
such a salient, sorry, because Hindenburg put out a short
report on super Micro, you know, like a month ago,
saying that they're probably getting up to some accounting fraud.
(25:26):
When that happens, it's like the very natural like limit
on how seriously to worry about it is like, well,
their order hasn't resigned. The order is still auded in
their financial statement, so how bad can their accounting really be?
And then the utter resigns, Like yeah, there's no limit,
could be anything, you know.
Speaker 1 (25:42):
I feel like this checks two boxes for you, at
least two boxes. One on your campaign to make auditors
be cool again. I feel like this does a lot
of a lifting for you, and then also.
Speaker 2 (25:53):
Very cool to do this sort of I'm like this
is very cool, Like I would love to resign in
a huffle this and like you know, because like you
resign it off like this and you really like you're
getting your revenge, right, like the stock tanked. It's really
a bad look for the company, and so EI can
just be like, Nope, we're gonna resign, see you later,
and have like a really negative effect on the company
(26:15):
that's said You're gonna have a different interpretation of this,
which is EI has not like had the most amazing
run ever in terms of like being criticized for its
audit quality. And you could say, well, they are doing
this out of an abundance of caution, because like they
can't be caught standing close to a company with any
(26:36):
accounting problems because they've had some criticism of their audit work,
and in particular, you know, it reminds me of I
think last week EI was in the news for firing
people who are watching like two training videos at the
same time. Right, So, like their auditors have like continuing
education requirements and they have to watch videos on their
(26:57):
computers to check off the boxes, and some people were
watching two videos at the same time so they could
check off twice as many hours before getting back to
better things.
Speaker 4 (27:05):
I get that temptation, no comment, but EUI fired them,
which seems very harsh, And so you remember that EUI
has been like find a lot of money by regulators
for things like having its accountants cheat on continued education exams,
and so you can't really do that anymore.
Speaker 2 (27:20):
And so this is this whole thing where like they
are very much in a compliance culture because it's kind
of like risky out there for them to be doing
what they're doing, and so they don't have a lot
of tolerance for nonsense right now.
Speaker 1 (27:31):
Yeah, that's a fair point. The other box that I
was thinking about for you is that, you know, it
seems like you could be cast as sympathetic to the
short seller community, which has taken a lot of heat
over the past couple of years. And here's an example
of a short seller potentially doing good for society and
the health of markets potentially.
Speaker 2 (27:51):
Yeah. Yeah, Like it's a lot like this is like
a little bit of an overdetermined case because like the
things that are going on here is like one, Hindenberg
is putting out a comprehensive every saying this company's accounting
is bad. Two an employee has apparently gone to like
the authorities to like blow the whistle and is like
talking to the Justice Department, which is investigating because an
employee is, you know, independently of Hindenburg come out to
(28:13):
say that the accounting is bad. And then three like,
I don't know exactly what's motivating Ey, but it's not
necessarily they read the Hindenburg report like, oh wow, this
accounting is bad, right, Like they might have independently disagreed
with the accounting. So, I mean the timing is a
little odd. There are definitely some cases where it's like
the short cellars or the market's like only line of
(28:33):
defense against like problematic accounting. And here it's not so
clear that that's true, but like it is potentially confirmatory
of what Hindenburg has been saying.
Speaker 1 (28:41):
I guess we can't say for certain, had Hindenburg not
published its short report on August twenty seventh, whether we
would have seen Ey resign as their auditor in late October.
But I don't know.
Speaker 2 (28:52):
It's a good question, right, there is pressure on them
not to be near anything that gets any suspicion. But like,
did they independently decide there were problems or were they like, oh,
this is too high profile for us. We got to
get out of this, right, Like, did Hindenburg put the
pressure on them and by the way, like one possibility
here is that this company is like pure is the
(29:12):
driven snow and Hindenburg is wrong and EI read theurg
report and we're like this is too hairy for us.
We got to get out of here. And like, in fact,
this is like a very destructive thing that has happened
where EI, rather than being a stalwart independent auditor, has
like felt the public pressure to renounce its client. Like
(29:36):
that's a story you could tell.
Speaker 1 (29:38):
Yeah, if that plays out, we'll talk about it on
this podcast.
Speaker 2 (29:42):
Probably I'm not going to mark my calendar for it,
but it's like a thing that could happen.
Speaker 1 (29:45):
It's a watch this space sort of thing. Something that
I did want to talk about is that super Micro's
star has risen or had risen so quickly. This company
was only just added to the S and P five
hundred in March, which was kind of a controversial thing.
You know, even though index inclusion is based on rules,
(30:07):
there is some discretion on the part of the index committee,
and there was like this really brief moment in time
just the way that the timing worked out where super
Micro was I believe, in the Small Cap Index while
simultaneously being in the S and P five hundred. So
I don't know. It's just like this funny quirk that
I don't know if super Micro is really in the
(30:28):
pain locker and it's been dragging one of many things
dragging on the benchmark that it was only just recently
added to.
Speaker 2 (30:34):
This is definitely a thing that Schurtzeller's point too, like
companies often get added to nities because of like short
term price moves that are sometimes you know, bubbily or
basedline bad accounting or otherwise not sustainable, and then like
they're in the index and it's particularly embarrassing when the
problems are found. There could be some element of that here.
Speaker 1 (30:53):
Yeah, well we'll see also if it stays at least
like in the NASDAQ one hundred, in the S and
P five hundred, I mean, it still a big company.
Speaker 2 (31:01):
The other thing I liked about it is like the
Ey letter to super Micro resigning is not publicly filed,
although super Micro quotes it a little bit, but super
Micro's disclosure about it is like very sad, and it
includes the lines although the company recognizes Ey's decision is final,
it disagrees with Ey's decision to resign as the company's
(31:23):
independent registered public accounting from someone was like, it's like
a sad breakup, right, Like it's like we know we
can't do anything about it, but we're really sad about it.
But then the other thing that's crazy is that when
you put out a statement like this, EI gets like
a sort of right of response or like a right
of fact checking, where the statement that super Micro filed
(31:45):
comes with a little exhibit that is a letter from
EY to the SEC saying we have read super Micro's
disclosure and we agree with the statements contained in the
first paragraph, the first sentence of the second paragraph, the
third the first three sentences of the fourth pargraph, the
fifth paragraph, the seventh paragraph, and the eighth paragraph. We
(32:05):
have no basis to agree or disagree with the other statements,
which is like, first of all, it's just like an
incredibly like fun and embarrassing thing to have. But secondly,
like the things they don't agree or disagree with include
like supermankers, like we don't think this will affect any
of our financial statements, Like we don't have to restate
any of our financial statements. You. I was like, eh,
I don't know, I don't know. A good luck about
(32:27):
it's like really kind of like adding one more kick
on the way out the door.
Speaker 3 (32:31):
Yeah, he's on this letter saying that they.
Speaker 2 (32:33):
Don't agree with everything in the in the letter, in
the disclosure.
Speaker 1 (32:35):
I mean, public breakups are really hard, They're really messy.
Speaker 2 (32:38):
I almost have like pop culture reference here.
Speaker 1 (32:41):
But I don't Someone can make another Ben affleck j
Lo reference, but I don't know the other one.
Speaker 2 (32:47):
There's there's like a podcast host, right, her name is
Chicken something.
Speaker 1 (32:51):
Oh my god, Brionna chicken Fry. Well, I can't believe
that that's in your head. That is like so firmly
in my world.
Speaker 2 (32:59):
Yes.
Speaker 1 (33:00):
Yeah, well zach Bryan Dumpter on Instagram.
Speaker 2 (33:05):
Well they hit broken out basically the same thing as
Zachana Chicken.
Speaker 1 (33:09):
Fry Yeah, in a way. Yeah, that's amazing. We should
just cut the podcast off here. You know what else
has been pretty messy and hard is recording this podcast remotely.
This has been a little bit of a nightmare. But
I think we got through it.
Speaker 2 (33:24):
I think we can do there. Good guy.
Speaker 1 (33:26):
A happy Halloween.
Speaker 3 (33:27):
This was super spooky.
Speaker 2 (33:30):
And that was the Money Stuff podcast.
Speaker 1 (33:32):
I'm Matt Levian and I'm Katie Greifelt.
Speaker 2 (33:34):
You can find my work by subscribing to The money
Stuff newsletter on Bloomberg dot com, and.
Speaker 1 (33:39):
You can find me on Bloomberg TV every day on
Open Interest between nine to eleven am Eastern.
Speaker 2 (33:44):
We'd love to hear from you. You can send an
email to Moneypot at Bloomberg dot net, ask us a
question and we might answer it on air.
Speaker 1 (33:51):
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 2 (33:57):
The Money Stuff Podcast is produced by Anna Masarakus and
how is this on?
Speaker 1 (34:00):
Our theme music was composed by Blake Maples.
Speaker 2 (34:03):
Brandon Francis Munim is our executive.
Speaker 1 (34:05):
Producer, and Stage Bauman is Bloomberg's head of Podcasts.
Speaker 2 (34:08):
Thanks for listening to The Money Stuff Podcast. We'll be
back next week with more stuff.
Speaker 1 (34:21):
This was a nightmare, a Halloween nightmare.
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