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