The Trump Trades Worked. By Matt Levine

The Trump Trades Worked. By Matt Levine

Trump Media, crypto, the CME and farmer’s market pricing bylaw loopholes.

November 6, 2024 at 6:02 PM UTC

By Matt Levine

Matt Levine is a Bloomberg Opinion columnist. A former investment banker at Goldman Sachs, he was a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz; a clerk for the U.S. Court of Appeals for the 3rd Circuit; and an editor of Dealbreaker.

Hmm

I wrote what I think eight years ago, and I think it holds up pretty well. We live in a society of rules, of fundamental principles of freedom and due process and limited government, but that is all contingent:

Those principles can’t automatically enact themselves; they only work if the human actors in the system choose to follow them and to demand that others follow them. They persist because the people constrained by them believe themselves to be constrained by them. The Constitution, separation of powers, religious liberty, freedom of the press, an independent judiciary, the rule of law, equality of all citizens: There is a complacent sense in America that these things are independent self-operative checks on power. But they aren't. They are checks on power only as far as they command the collective loyalty of those in power; they require a governing class that cares about law and government and American tradition, rather than personal power and revenge. Their magic is fragile, and can disappear if people who don't believe in it gain power.

Maybe it’s fine though.

The Elon Musk connection this time is also interesting. I think of Musk as the great legal realist of our time, a guy who is unusually strong-willed and clever about seeing rules he doesn’t like and saying “well what can they really do about it?” I was driven somewhat insane by his efforts to get out of his merger agreement with Twitter because he didn’t feel like doing it anymore. His reported drug use would seem to violate federal policies about SpaceX’s government contracts, but what are they gonna do, cancel the contracts? Tesla Inc. gave him a pay package that, a judge ruled, violated Delaware law, so he moved Tesla to Texas to get a more congenial law. Most people do not get to choose which laws apply to them, but Musk is evidence that, with enough money and willpower, maybe you can. And now he has a more congenial president.

DJT

What is the Trump Media and Technology Group trade? Trump Media, which is usually called by its ticker, DJT, is the social media and streaming video company with Donald Trump’s name on it; he owns about 52.9% of the stock. Its main product is Truth Social, Trump’s social media site. With incredible timing, DJT announced third-quarter earnings yesterday; it lost $19.2 million on $1 million of revenue. That revenue is down 6% year-over-year and also, I mean, the social media site owned and used by the voluble winning candidate in a US presidential election managed to make $1 million of advertising revenue in the summer leading up to that election? Recently Elon Musk has been paying $1 million per day to individual pseudorandom voters to advertise for Trump, but somehow Truth Social only sold $1 million of ads between July 1 and Sept. 30.

Anyway DJT’s market capitalization was about $7.4 billion at yesterday’s close, and it’s up this morning. What makes it worth more than $7 billion? I can think at least five possible answers:

1.Pure meme stock. DJT goes up based on Donald Trump’s power and newsworthiness, and those are up, so the stock is up. DJT’s stock was a bet that Trump would be elected president, and he was elected president, so now the bet pays off. And this can continue indefinitely, so that “Donald Trump is the president” will be enough for $7 billion or so of market capitalization for the foreseeable future. This is not a very financially sophisticated theory but, this far into the meme stock era, it strikes me as totally plausible.1

2.Business case. Right now DJT’s business is tiny, but Donald Trump is about to be president and will have ways to steer business to DJT. For one thing, he can keep posting his thoughts on Truth Social, and those thoughts will be newsworthy, so Truth Social will attract a lot of users and advertisers. “In fact, I have just set up a Truth Social account just to make sure we don’t miss anything,” an institutional sales trader told Bloomberg News. If everyone needs to be on Truth Social to do their jobs or keep up with the news, surely it can sell a lot more than $1 million of ads per quarter. I don’t think we’ve ever had a situation where the president of the United States makes official pronouncements on a platform where he also sells ads.2

3.Merger case. If you are a very rich person or government and you want something from Donald Trump, one way to get it might be to give Trump a lot of money. One plausible-seeming way to give him a lot of money would be to acquire DJT in a merger. I linked yesterday to a Charlie Gasparino story about speculation that Elon Musk — who is rich, backs Trump, and owns a social media company — could buy Trump Media. One flaw in this case — from the perspective of public shareholders of DJT — is what I think of as the Paramount problem: Donald Trump owns 52.9% of DJT, but he owns 100% of the shares with the “giving Donald Trump money” property. You could just buy his shares, rather than all the shares.

4.A vaguer “give Trump money” case. Actually acquiring DJT in a merger, or buying Trump’s stake from him, might raise eyebrows and would also cost billions of dollars. But people with lots of money (but not many billions of dollars) who want something from Trump could go in for a lighter version of this trade: Buy a 1% stake in DJT, disclose it, say “see I’m a co-investor in DJT,” and indirectly push up the price and make Trump richer. This sort of loops around to the meme-stock case: The idea is something close to “people who like Trump and want to be on his good side will buy the stock, so the stock will go up.”

5.Reverse merger case. A reader suggested a better idea than Musk buying DJT: Why not use DJT’s public listing to take X public again? Musk bought Twitter Inc. in 2022, took it private and renamed it X; it then seems to have lost value as its advertising business softened. But a public X would probably be worth more, because of its meme-stock, Musk-fan potential. I wrote last year: “If Twitter is a private company and you own almost all of the equity, you are mainly exposed to its cash flows, not the meme potential of its stock. If you take it public and sell a bunch of stock to your ardent fans, the business results matter less, and your ability to attract attention matters more.” That was a case for an initial public offering, but another thing Musk could do would be to merge X with DJT (with him, Trump, and their co-investors splitting the ownership in some negotiated way). The combined public X/DJT would trade on Musk’s and Trump’s meme-stock powers and would be pretty much unstoppable.

Lots of options. By the way, Ben Thompson writes today about Musk and the election:

What is fascinating is how this fundamentally transforms any attempt to evaluate the Twitter acquisition. From a business perspective it’s a massive failure, and might always be: Musk paid too much for Twitter as it was, and in the intervening years the flight of advertisers from the platform has made it worth even less. From a Musk Inc. perspective, however, X played a pivotal role in ensuring that the incoming administration will do whatever Musk needs at the exact moment that SpaceX is gaining the capabilities to actually make a trip to Mars, if only the FAA in particular will give him the freedom to do so. That alone is almost certainly worth $44 billion to Musk!

So, yes, arguably another case of one part of the Musk Mars Conglomerate helping out the other parts. I think it’s also a good case for overpaying for DJT?

Elsewhere in memes, here’s a roundup of Trump trades that includes stocks (up), Bitcoin (up), the Mexican peso (down), the yuan (down), Treasury bonds (down3), but also this:

Trading for a Chinese software company, whose name, “Chuan Da Zhi Sheng,” can be literally translated as “Trump Big Wisdom Win,” was halted after its Shenzhen-listed shares rose 10%. Meanwhile, a China-based thermo-flask manufacturer with a name that phonetically sounds similar in Mandarin to “Harris” declined more than 7% before recovering some losses.

Makes as much sense as anything else.

Crypto

I guess a counterargument to what I said at the top is, if you like the rule of law, and you work in crypto, you have some reasonable complaints about the last four years. To some extent I sympathize with the US Securities and Exchange Commission, which under Chair Gary Gensler has brought a lot of cases against crypto companies: Many crypto tokens are pretty clearly “securities” under established US law, so the SEC can insist that they follow existing rules about registration and disclosure of securities sales and about registration of securities brokers and exchanges. And there’s a lot of bad stuff in crypto — crypto token issuers who are fleecing investors and not building anything, and also occasionally unregulated crypto exchanges who are misusing their customers’ money — so it makes sense for the SEC to want to enforce the investor protection rules of the securities laws.

Still it sure looks to me, and everyone, like the SEC’s goal is not to protect crypto investors but to prevent crypto investment. The big crypto exchange that was in the news most recently for misusing customer money was of course FTX, which the SEC did sue, after it went bankrupt. Meanwhile the SEC is pursuing Coinbase Global Inc. for operating an illegal securities exchange, but Coinbase (1) is a US public company with good disclosure and audited financial statements, (2) seems to basically be trying to comply with the law as best it can, conditional on being a crypto exchange, and (3) doesn’t seem to be doing risky stuff with the customer money.

Coinbase, that is, is pretty much the exact sort of crypto exchange that US regulators should want — a US-based, publicly listed, audited, compliance-focused, not-particularly-leveraged one — if US regulators wanted any crypto exchanges. Oh you could quibble; you could imagine some list of improvements that Coinbase could make to protect customers more. You could imagine an SEC that made a list like that, took it to Coinbase, and tried to negotiate for an approved, regulator-blessed exchange. The current SEC, under Gensler, just wants to shut it down.

Or recently the SEC sued a couple of brokerage firms, including eToro USA LLC and Cumberland DRW LLC, for brokering crypto trades for customers without a securities license. The SEC’s theory is that these brokers let their customers trade crypto tokens that count as securities, so they should have registered with the SEC as securities brokers, and they didn’t, so they violated the law. But this theory is plainly wrong: eToro and DRW are registered with the SEC as securities brokers, or rather, they have entities that are SEC-registered broker-dealers. eToro is a retail stockbroker! But they do their crypto trades out of different, unregistered entities, because the SEC won’t let them do crypto trades in their registered broker-dealers. From Cumberland DRW’s statement last month:

The SEC asserts these transactions required us to register as a broker-dealer. While we strongly disagree, we took that step and acquired a registered broker-dealer in 2019. Only then — despite Chairman Gensler’s call to “just come in and register” — were we told we could only use our broker-dealer to trade BTC or ETH (both commodities and not under the jurisdiction of the SEC).

More generally, a lot of people in crypto would like clear US rules about what sorts of registration, disclosure and investor protections are required in crypto. The current SEC position seems to be roughly “the rules are clear perfectly, you can’t trade crypto.” This strikes me as (1) a plausible interpretation of the law and (2) not a crazy policy position, but I can see why crypto traders find it frustrating.

And now obviously Donald Trump has promised to be more crypto-friendly, and his SEC can’t possibly be less crypto-friendly than the current one, so the crypto industry is thrilled. The Information reports:

Investment bankers from top Wall Street firms including JPMorgan, Goldman Sachs and Morgan Stanley have been meeting with crypto executives, according to industry participants, hoping to get a foot in the door for lucrative initial public offerings that crypto companies might pursue after the election.

The new enthusiasm reflects optimism that improving market and regulatory conditions after a Donald Trump victory in the U.S. presidential election could clear a way for companies like Kraken, Fireblocks and Chainalysis to go public. Bankers’ interest in meetings is also a shift from much of the past two years, when many investment banks saw crypto companies as too risky to do business with, advisers say.

I have two questions here. One is: What will crypto regulation look like under Donald Trump? There are two main possibilities:

1.Someone — Congress, the SEC, the Commodity Futures Trading Commission, some new crypto regulator, Donald Trump by executive order, etc. — writes new disclosure and investor protection rules tailored to crypto, with public notice and comment and some input from the crypto industry. And the result is that there is a path to registration for crypto token issuers, exchanges and brokers, and that path does protect investors and give them useful disclosure, and being a US-registered project/exchange/broker is helpful for raising capital. Basically the US government does to crypto what it did to the stock market in the 1930s: Impose requirements that are somewhat costly and restrictive, but that increase investor confidence in the market and so allow it to grow and become more institutional.

2.Nobody will do that, but the SEC will stop trying to enforce securities laws against crypto, and everyone will be able to do whatever they want? That is sort of the simplest outcome: It is hard for the SEC or CFTC or Congress to write new rules for crypto, but pretty easy for the SEC to just stop bringing cases. And while a lot of people in crypto probably do want clear rules for market-confidence and/or incumbent-protection reasons, others don’t. Because, uh, part of the case for crypto sometimes is “this is a way to raise money from investors for dubious projects without any regulation”? Here it is worth noting that Donald Trump himself has some involvement with a crypto project called World Liberty Financial that is, uh, I mean, it’s not Coinbase, you know?

The other question is: What will crypto do with its new freedom? It is possible to overstate how bad Gensler’s SEC has been for crypto. Right now I think it’s fair to say:

1.Bitcoin is fine. Bitcoin is not regulated by the SEC, you can trade it in lots of retail brokerage accounts, the SEC doesn’t object to Coinbase trading it, there are Bitcoin exchange-traded funds (over the SEC’s objection) and derivatives, there are rules for institutional custody, it’s all pretty integrated into the mainstream financial system.

2.Stablecoins are where a lot of the action is in crypto, in terms of using crypto as payments infrastructure, and the SEC has not really done much to stop stablecoins, in part because it’s harder to argue that they are securities. A different SEC might make it easier to pay interest on stablecoins, and a friendlier crypto regulatory environment might be better for stablecoin development, but stablecoins do kind of work under the current rules.

3.Meme coins are also fine under the current rules, for the most part: If you’re not making any promises about building the decentralized future of whatever, but just issuing a token like “this token is named after a dog,” the SEC can’t really argue that it’s a security, so they can’t stop you.

Instead, what the Gensler SEC particularly prevents is tokens of the form “we are building a new decentralized infrastructure for ______, and we are raising money for it by selling tokens that allow users to participate in _____,” where you fill in the blank with like “file storage” or “WiFi” or “derivatives trading” or “political prediction markets” or whatever. And here the tokens are arguably investment securities, and the SEC cracks down on them. But these are arguably the good projects, where the innovation is happening: Building the future of _____ is arguably more useful than trading coins named after dogs.

But you hear less about those projects than you used to: The idea that crypto would build the decentralized future of work or the internet or whatever was more popular a few years ago; now when people talk about real-world use cases for crypto they tend to default to “stablecoins for payments.” And when they talk about world-changing technological paradigm shifts they tend to talk about artificial intelligence, not crypto.

Possibly that’s because all the crypto stuff was vaporware and people have moved on to the next, more actually promising thing! Or possibly it’s because the SEC stifled crypto innovation and now, freed from those bonds, crypto actually will build the future of the web. I suppose now we’ll find out.

CME

Speaking of crypto exchanges. One thing that the SEC does not like about crypto exchanges is that they tend to combine the roles of (1) a customer-facing broker, (2) an exchange that matches trades and (3) a clearinghouse that moves tokens to settle trades. In traditional finance, and thus in the structure of the securities laws, these functions are done by different entities; crypto exchanges tend to combine all of them. There is a lot to be said for the crypto model, in terms of giving customers easy and open access to exchanges, but to be fair FTX would probably have been in better shape if there was a separate clearinghouse for its trades.

Anyway traditional markets are moving a bit in the crypto direction. The Financial Times reports:

Customers of CME Group have strongly criticised the US futures exchange after it was given the green light to become one of their main competitors.

Banks and small brokers have sharply criticised the Chicago group after it won approval last week to also act as a futures broker — blurring the traditional dividing line between operating an exchange and being a member of it. ...

CME is the world’s largest derivatives exchange, handling an average of 28.3mn contracts a day during the third quarter on futures tied to interest rates, Treasuries, energy and equities.

Its new licence will allow it to offer trading directly to investors and ask for the margin that is the insurance for futures trading. It also means the exchange can bypass banks and brokers, which normally do the job as part of their membership of the exchange.

“Only a monopolist would brazenly attempt to disintermediate its clients,” said Lou Scotto, chief executive of FMX, part of billionaire Howard Lutnick’s interdealer broker BGC Group, which recently launched interest rate futures in direct — and fierce — competition with CME.

It doesn’t seem like the CME is actually moving to the crypto model. (“We remain committed to the FCM model and believe in the time-tested risk management benefits it continues to provide,” said CME Chief Executive Officer Terry Duffy, referring to the futures commission merchants who normally provide customers with access to the exchange.) But it is keeping its options open: Perhaps it would be more convenient for the CME to just have a website where retail customers could trade futures, and to collect margin from them directly rather than making them go through a broker. Perhaps crypto really has pointed the way to the future of, uh, centralized finance.

Farmer’s markets

We talked yesterday about possible algorithmic collusion among farmers at farmer’s markets, in the form of a Cornell project that uses point-of-sale data to aggregate prices and tell farmers how much they should charge. I was being somewhat tongue-in-cheek describing this as “algorithmic collusion”: Some variations on this — services that collect pricing data from many sellers and share it with those sellers so they can set prices — do raise antitrust concerns, and we have discussed a Justice Department lawsuit against RealPage, which does it for rental apartments, but it is hard to see anyone getting mad at the farmers.

Or so I thought, but then I got an amazing email from a reader:

I wanted to bring your attention to the Ottawa Farmers’ Market, which was investigated for anticompetitive practices by Canadian authorities a few years ago. At that time I was a farmer selling strawberries in this market. Each day before the market opened all vendors would gather for a mandatory “price meeting” and collude on prices for each type of produce that was available that week. Adherence to these prices was even codified in the market bylaws! I found a loophole by sourcing unique container sizes so I could set my own prices and undercut the competition. Everyone else had 1 qt and 4L baskets of strawberries but I found non-standard 2.5L baskets and sold them for half the price of the 4L baskets.

Now I’m a data scientist at [a large tech company] where I design ad auctions to align advertiser incentives with business goals of the platform.

Perfect story, perfect kicker. I hope a tech company recruiter was shopping at the farmer’s market and saw this reader’s non-standard strawberry baskets and thought “now this is the person we need designing our ad auctions.”

Things happen

Betting Markets, Vindicated by Trump Win, Set to ‘Run the World.’ AI Startup Perplexity to Triple Valuation to $9 Billion in New Funding Round. China Hack Enabled Vast Spying on U.S. Officials, Likely Ensnaring Thousands of Contacts. Super Micro says review found ‘no evidence’ of fraud after auditor resigned. ADM Discloses More Accounting Issues, Cuts Profit Outlook. “We are here by an accident of birth, but it provides a nice mix of perspectives.”

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