Trust Economics<\/a> . <\/p>\n\n\n\nThe risks of an impending crash are not theoretical: this scenario, if not addressed immediately, could cause serious disruption in the global technology market.<\/p>\n\n\n\n
The recent merger of SpaceX and xAI was a financial spectacle that was greeted with celebration by the mainstream media. 25 years ago, Wall Street perfected the dark art of corporate mergers, sending valuations into the stratosphere before crashing back down to Earth.<\/p>\n\n\n\n
Like all great scams, this one is cloaked in pseudoscientific \u201crobes,\u201d the belief that a stock\u2019s price is the best indicator of its underlying value and a predictor of its future wealth, health, and profitability.<\/p>\n\n\n\n
The creative accounting behind SpaceX-xAI\u2019s $1.25 trillion valuation is questionable. That the valuation is absurd is clear from comparisons with other mergers that used \u201cweird\u201d accounting practices (e.g., AOL-Time Warner and Daimler-Chrysler).<\/p>\n\n\n\n
Stock prices are often \u201crigged,\u201d making them a poor indicator of profitability, while at the same time transferring wealth upward (Elon Musk cashes in), presenting the rot as a \u201cmarket miracle.\u201d<\/p>\n\n\n\n
The logic of the “spectacular” merger<\/strong><\/p>\n\n\n\nThe logic behind Musk’s spectacular merger: if we take two companies, the old Goodwidget with annual profits of $5 billion (E) and a capitalization of $50 billion (K), and the new entrant AIwidget with profits of $2 billion (E) and a capitalization of $100 billion (K), logically the merger should give a capitalization of $150 billion.<\/p>\n\n\n\n
But Wall Street does not do simple addition but multiplication: it adds the profits and multiplies them by the higher P\/E ratio of the inflated AIwidget (50:1)\u2026 As a result, the capitalization reaches $350 billion.<\/p>\n\n\n\n
Managers do it for the fees and commissions, and investors turn a blind eye not because they believe in fake mathematics, but because they believe that everyone else is doing the same.<\/p>\n\n\n\n
Mergers eventually fall apart, as happened with Time Warner and Chrysler, but that doesn\u2019t prove that the market is right on average.<\/p>\n\n\n\n
It shows that prices can be wrong for a very long time, until the music on the ship\u2019s deck stops and a lot of people lose huge sums \u2013 before the next manipulation game starts again.<\/p>\n\n\n\n
And then there are share buybacks, which prop up manipulated prices between booms and busts.<\/p>\n\n\n\n
They were legalized in 1982, despite having been wisely banned by US President Franklin Roosevelt\u2019s New Dealers in 1934, and are presented in the polite language of \u201creturning value to shareholders\u201d.<\/p>\n\n\n\n
The official narrative, that they are like dividends, is an intellectual fraud. Yes, both enrich shareholders \u2013 and that\u2019s where the similarity ends.<\/p>\n\n\n\n
The Example<\/strong><\/p>\n\n\n\nThink of a company as a pizza cut into eight slices. A dividend is an extra slice of pizza for each slice owner: you get an immediate benefit, but your stake in the company (your slice) remains the same. Plus, you pay taxes on the new slice right away.<\/p>\n\n\n\n
In contrast, a share buyback is the equivalent of the company buying and destroying two of the eight slices, so that you now own one-sixth of the pizza.<\/p>\n\n\n\n
You don\u2019t pay taxes until you sell, but you can benefit from the type of fake merger discussed above, which is based on artificially inflated valuations.<\/p>\n\n\n\n
Buybacks are a tool of manipulation, rather than a dividend that reflects real profits and growth, and these practices were allowed back in the US during the Thatcher and Reagan eras.<\/p>\n\n\n\n
The New Dealers banned buybacks because they recognized a tool of manipulation and plunder when they saw one. And that is why the kleptocracy that rose in the US under Margaret Thatcher and Ronald Reagan pushed for the practice to be allowed.<\/p>\n\n\n\n
In the era of mega-mergers, share buybacks, and cheap money since the 2008 crisis, the idea that stock prices reflect real value has become a gimmick, as in the case of Elon Musk\u2019s imaginary $1.25 trillion valuation.<\/p>\n","protected":false},"excerpt":{"rendered":"
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