“I want people to understand how this game really works.” ~Tan Liu
Ponzi scheme similar to Bernie Madoff’s, except it was legally done. This kind of scheme, Tan realized, involves all synthetic financial instruments, such as credit swaps and the stock market, as these actually have no real-world value. He decided to focus on the stock market to keep to a coherent subject matter, and while pointing out the Ponzi scheme nature of the stock market was easy, he needed to devote a lot of time addressing the side issues related to stocks which, he points out, are all hypothetical arguments.
Tan points out that “financial theory” is an unprovable idea, and that the arguments set forward by the academe to support these are unfounded and unproven hypotheses. He gives the example of a company’s stock equity value being equivalent to:
Price x The Number of Stocks a Company Has
and gives the example of Google, which has 348 million Class C stocks (wherein the stock owners have no voting rights and receive no dividends; and these stocks comprise half of their market capital - effectively, half of all their stocks) and which, based on an increase of $100 on a trade of 1.5 million stocks, increased its financial equity value by some $80 billion without needing to do anything or exert any effort to increase its profitability, as this increase would be applied to all of its stocks. Tan also points out that Google does not back the value of their stock and doesn’t issue dividends, which was the original way by which stocks earned money for their owners.
Tan remarks that, prior to the 1900s, stock was an instrument by which the person who owned that stock owned part of a company. That owner earned money from the dividends paid out on the stock, and the company tied in the value of the stock and any dividends paid out to how profitable the company was. The stock owner also had another, secondary way of making money from stocks, and that was by selling those he owned at a price higher than what he bought them, which is called capital gains. Capital gains, on the other hand, are presently the primary method by which people can, supposedly, make money on stocks, and Tan remarks that, with this method, stock prices move only when money comes in from another investor, thus creating a system where money is only shuffled amongst investors, rather than created through profits generated; and this is what makes it a gambling system and a de facto Ponzi scheme.
Tan notes that companies buying back stocks is very rare, and points out that such buybacks, where companies buy back stocks and thus take these off the trading floor, are scams of their own. He cites, as an example, a Google buy-back of 5 million shares in 2016 when, in that same year, their stocks available for trade increased by 3 million shares, indicating that, if Google did indeed, buy 5 million shares back, they also somehow released 8 million new shares for trading.
At present, Tan points out that there is no relationship between stocks and company profitability, citing Tesla, which issued 74 million shares in the past 7 years. During that time, its stock value rose from $20 to $380, while the company lost $4.7 billion, which indicates a disjunct between a company’s profitability and stock price, as a company’s stock value is supposed to rise if it turns a good profit and drop when it loses money. This behavior, Tan notes, is possible only with a Ponzi type scheme in play, one which is clearly observable and factual.
Tan remarks that, from an investment viewpoint, cryptocurrencies aren’t much different from stocks, in that these are as much gambling instruments as stocks presently are. There are many different kinds of cryptocurrencies, and the type which is most analogous to stocks are the Initial Coin Offerings (ICOs), which are essentially tokens issued by companies to people with a promise that that person, at a future time, can redeem a company’s goods and services in the future. This makes ICOs somewhat more legitimate than other cryptocurrencies.
Tan remarks that academic institutions which teach finance are one of the major driving forces behind the present way stocks are being viewed and handled, and notes that his reaction to what is being taught is usually one of incredulous laughter. Academic institutions, according to Tan, teach unproven material which disconnects stocks from the money a company actually makes. He notes that academics have a vested interest in continuing to push their theories, as all of these would become meaningless in light of fact.
Tan points out the fallacy that a stock owner can “just sell my stock tomorrow,” as the money available to buy out sold stocks just doesn’t exist. He remarks that the total value of the stock market in the United States is $30 trillion, but that the most lenient measure of money supply in the United States is around $13 trillion, most of which is used in things other than stocks, such as infrastructure development and defense spending; and of this, only $1.6 trillion is actual, hard money in circulation. Thus, the value of a person’s stock isn’t effectively “cash in hand,” and that they actually hold $0, as they parted with their money, which is something tangible, can be possessed and can be handled, whereas the value of a stock portfolio is an intangible idea.
Tan recommends that stocks should be classified as gambling instruments, and to ground and connect stocks to company profits, Tan recommends that companies be required, by law, to pay reasonable dividends to all of their shareholders, rather than dividends just for compliance. For startup companies who choose to raise capital by issuing stocks, Tan recommends that the stocks of these companies not be traded until the companies themselves make enough money so they can issue reasonable dividends.
To would-be investors, Tan recommends investing in more solid assets, such as real estate, or investing in stocks that actually pay dividends.
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