Extraordinary Popular Delusions and the Power of Positive (and Negative) Thinking

Manifest your destiny today with Donald Trump, SPACs, Memes and Motives!

You wouldn’t expect to see Donald Trump mentioned in The Middlebrow except when cited as maniac Patrick Bateman’s obsession in American Psycho or as a billionaire trapped in the body of Bloom County’s Bill the Cat (ack!). But, this week, the Donald serves as inspiration for a post that is not at all political. It’s about fraud, how we value things, why our beliefs matter and maybe, just maybe, what we can do with all of this.

You’ve probably heard that Donald is staring down two civil court judgments that together are in excess of half a billion dollars. The former president plans to appeal them both, but the rules are that you have to pay before the appeal, or at least put the money in escrow so it can be taken if the appeal fails. You’ve already lost the case, see. The odds stack quickly against you. Donald can’t write checks for these amounts. He is, kindly, “illiquid,” because his wealth is tied up in real estate assets that can’t be sold quickly and is, less kindly, “not as rich as he claims,” which is really the basis for the largest judgment against him.

In his indispensable “Money Stuff” newsletter, Bloomberg’s Matt Levine describes what Trump did and wonders if it’s fraud or just dishonesty:

“Because he is Donald Trump, he delivered inflated vanity financial statements to the banks, and because he is Donald Trump, the banks ignored those financial statements. Everyone knew he was lying about his wealth, because he has very publicly done that for decades, but the banks were able to underwrite the loans without paying too much attention to his inflated estimates of his own net worth, and in fact the loans at issue in this case were paid back and the banks did fine.

As a philosophical matter, I think there’s a good argument that lying about something immaterial to your banks should not be treated as fraud, and if the banks knew you were lying about your net worth then that lie is not quite fraud.[6] As a practical matter, though, if you are filling out a loan application at a bank and lying about how much money you have, you should probably expect to get in trouble. A lot of people do not have a sense of humor about these things and are not interested in the philosophical arguments.”

There is also an argument to be made here that this judgment against Trump amounts to punishment for a victimless crime. The banks, as Levine points out, were not shafted, knew what they were getting into and indeed, wanted the business. They didn’t rely on Trump’s statements, they did their own diligence. Nobody forced them.

In any event, says Levine, Trump might have a way to get liquid in time to put up the escrow to cover the fine to appeal the judgment caused by his lies. That’s because Digital World Acquisition Corporation, which is a Special Purpose Acquisition Corporation (a SPAC) is set to buy Trump’s social network, Truth Social. When that deal closes (and the SPAC was raised pretty much for the sole purpose of doing this deal, so it likely will close) the newly public company will have a valuation north of $4 billion unless something changes radically. So, Trump might suddenly have liquid assets worth an order of magnitude and perhaps even ten times his obligations to put up bonds to seek his appeals.

You might be wondering how Truth Social, a network that I bet no readers of The Middlebrow use (at least without irony) can be worth $4 billion. It’s probably a money-losing piece of trash, right? Well, how stocks get their value is a really complicated question. The most basic answer is usually, “company stock is a present claim on future cash flows,” and so you have to decide how far into the future you’ll have to wait to get your share of that cash, and what discounted rate you’ll pay now to own a share of something to be paid later. There are a whole lot of ways to do that, from a discounted cash flow analysis to a sum-of-the-parts valuation of the company, to a factor analysis or to an analysis of micro and macro-economic conditions. Everybody has their favorite metrics, from price-to-book or earnings ratios to free cash flow yields to dividend yields and what works for valuing one type of company won’t always work to value another.

A simpler answer to the question of whether Truth Social can be worth $4 billion is that it can be worth that, and more, if people are willing to pay that to own it. What’s your house worth? Your car? That piece of art on the wall? It’s worth what people will pay to own it. This is why, “My six year old can draw that,” is not a good answer to a piece of abstract expressionism that auctions for $40 million (well, there are two reasons it’s a bad answer: 1. No your 6-year-old cannot; 2. Even if they can, it doesn’t mean anyone will pay $40 million for it, they are making a bid on that art, not your hypothetical piece.)

While people believe that, in the long term, the market values companies based on the cash flows they create, the market’s mechanism for doing this is to run a constant popularity contest that reflects not just people’s dispassionate analysis of business conditions but their hopes, fears and tastes. In short, people can make a stock price go up or down and, with the internet, they can even coordinate their efforts.

But this all predates the internet. In Extraordinary Popular Delusions and the Madness of Crowds Charles MacKay tells us about (among other things) tulip-mania, a 17th century event where investors drove the prices of Dutch tulips to insane levels. More recently, there was the GameStop pump, where investors used Reddit to bid up prices of stock in the video game retailer, mostly for fun, community and to wreck a hedge fund that had heavily sold the company short. I recommend the movie Dumb Money, for a fun and breezy account. The point of a “meme stock” is that its price reacts to sentiment, which can be a powerful force, and not just in the short term.

Levine has pointed out that cryptocurrency values are almost entirely sentiment driven. Prices go up because people like their names, logos or backers. These tokens can be marketed (and, I suppose they have to be).

A company associated with Trump seems well-positioned for a sentiment-driven valuation since he inspires such passions among his supporters and detractors. In markets, the people buying have a larger voice than those on the sidelines, so this deal might be the financial rescue he’s looking for — Trump might become very liquid very quickly. For a man who has dodged comeuppance his entire life, this is a pretty amazing development.

As for the rest of us, I guess we know that markets are both an expression of what we value and a rigged system as “one dollar-one vote” is a very different proposition than “one person-one vote.” But it is interesting to note that in an age of massive investment funds and markets supposedly controlled by institutions that individuals can still have a major impact.

It’s also interesting that, from the standpoint of values, that so much of what companies, commodities, items and ideas are worth is based in sentiment, even when it’s disguised as science. We’re all just people, trying to figure things out together, often in chaos but never truly in doubt.