| We talked yesterday about a partnership between Kalshi Inc., the prediction market, and StockX, the sneaker market, to offer prediction markets on sneakers and other collectibles. Now you can go on StockX and buy ASICS Gel-1130 “Black Pure Silver” sneakers for $125, or you can go on Kalshi and pay 80 cents for a contract that pays $1 if the average price of ASICS Gel-1130 “Black Pure Silver” sneakers on StockX this month is above $120, or $0 if it is below that price. [1] If you buy the sneakers on StockX, you get the sneakers. If you buy the contract on Kalshi, you don’t get the sneakers, but you get a pure financial bet: If the price of the sneakers averages more than $120 this month, you get a 25% return on your money. If you want the sneakers, buy the sneakers. If you have differentiated skill at predicting sneaker prices, buy the … well, I mean, if you have a lot of sneaker price prediction skill, and you think the sneakers will go up to $175, you could buy the sneakers now for $125, sell them later for $175, and make a 40% return on your money. But that requires $125 of capital and also, like, shipping the sneakers back and forth; buying the Kalshi contract is a simpler and cleaner bet. It isolates your price-predicting skill in a pure abstract financial trade; you don’t have to mess around with the sneakers. One point I made yesterday is that it is not an especially good way to structure the abstract bet. The intuitive way to structure this bet is as a regular futures contract: You agree today to buy the sneakers in a month for $125, and then if the sneakers trade at $175 in a month you cash out the contract for a $50 profit, without ever (1) paying the $125 or (2) sending or receiving any sneakers. If the sneakers trade at $150 you make a $25 profit, if they trade at $110 you make a $15 loss, etc.; your profit is a linear function of the final trading price. That is how most financial trades — stocks, commodity futures, etc. — work; you could buy a binary option on a stock that pays out $1 if the stock trades above $120 in a month and $0 if it trades below $120, but that would be kind of an odd thing to do. [2] The normal thing to do is buy the stock if you think it’s underpriced, and then hope it goes up. Kalshi’s sneaker contracts are not structured that way. I suggested several reasons why not, including (1) the weird regulatory history that got us to Kalshi’s current status as a regulated event-contract exchange and (2) that it’s easier to manage margin requirements for binary yes/no contracts than for regular futures contracts. [3] Another reason, though, is that if you offer traditional futures contracts on sneakers, you might want to offer physical settlement: If I sell a sneaker futures contract for $125, I might want to be able to deliver the actual sneakers when it expires. (This is not strictly necessary, and some commodity futures are cash-settled-only, but it is common.) The traditional way to do this in commodities futures markets is with a system of bonded warehouses. “Abstract commodity space,” I call this system: You can trade, say, nickel futures entirely electronically, and you can settle the futures by delivering receipts entitling the buyer to some nickel stored in some warehouse affiliated with the commodity exchange. If you want you can take the nickel out of the warehouse and use it to make stuff, but normally people just leave the nickel in the warehouse and trade the warehouse receipts back and forth. And I made some mild jokes about settling Labubu futures contracts by delivering warehouse receipts entitling the recipient to a box of Labubus on a shelf somewhere. A couple of readers reminded me that StockX actually went down that path before. In early 2022, StockX announced a new “vault” service to achieve exactly this: You could trade sneakers on StockX in abstract financial markets, without having to send or receive actual sneakers, because the sneakers stayed in StockX’s vaults. But you could take delivery — you could take your sneakers out of the vault — if you wanted to, which was both good customer service (you could wear the sneakers) and also an arbitrage mechanism (if the prices of sneakers on the abstract market diverged too much from the prices of actual sneakers, you could arbitrage between them by buying cheap abstract sneakers and converting them into real sneakers, or vice versa). Here is a lightly edited quote from StockX’s 2022 announcement: Today, we’re launching Vault [trading], an experience where our customers can invest in [financial contracts] tied to physical products and trade them instantly with lower fees. We believe that the physical items that trade on our platform are part of a new alternative asset class. ... The buyer of a StockX Vault [contract] will also own the corresponding physical item including the opportunity to take possession of it at any time. The physical products tied to our Vault [contracts] are stored in our own secure, climate-controlled facility. ... Vault [contracts] will help unlock new trading opportunities, reimagining what is possible when it comes to investing in current culture on StockX. By bridging the physical and digital worlds, we’re able to provide a more efficient trading experience anchored by lower costs and storage capabilities — a buyer no longer has to wait several days before they can resell a product, and they don’t have to pay the fees associated with multiple legs of shipping and physical authentication. Makes sense! Sadly, the words that I have edited out in that excerpt are mostly “NFT.” In 2022, when StockX asked itself “how can we let people trade sneakers electronically,” the answer it came up with was “of course with nonfungible tokens on the Ethereum blockchain.” The announcement went on: We’re excited about our digital future — a future where NFTs can be bought and sold across multiple platforms and paid for with cryptocurrency; a future harnessed by new NFT products that empower the creator economy; and a future where web3 unlocks marketplace efficiencies and new experiences for our global community.
Embarrassing for all concerned! This also ran into another problem, which is that Nike Inc. sued StockX, arguing that the NFTs were “unauthorized digital products based on its sneakers.” An NFT, in the thinking of 2022, was not simply the right to receive a sneaker. An NFT, in the thinking of 2022, was its own separate cultural product, distinguishable from the underlying sneaker: Owning a receipt to the sneaker on the blockchain might be worth more than the underlying sneaker, for mysterious blockchain coolness reasons. The NFT was its own digital product that got its value from Nike’s cultural cachet and branding, and Nike wanted a cut. That lawsuit was only settled this September; the terms of the settlement are confidential, but StockX apparently discontinued its Vault service in October. And, while the Vault webpage is still online, it now includes this disclaimer: The purpose of Vault NFT is solely to track the ownership and transactions in connection with the associated product. Vault NFTs do not have any intrinsic value beyond that of the underlying associated product. The associated product is subject to StockX’s own authentication process. The Vault NFT is not affiliated or associated with, sponsored by, or officially connected to any third-party brand or any brand subsidiaries or affiliates.
That is, these are just warehouse receipts, not separate digital products. The point that I want to make is that, in 2022, StockX thought “we have an online exchange for trading sneakers. A lot of people want to speculate on sneaker prices, and we are giving them that opportunity. But a lot of people who want to speculate on sneaker prices might not want to deal with the physical process of shipping and receiving sneakers. If we just kept the sneakers in our vaults, we could make the abstract financial speculation much more efficient, which would be good for sneaker speculators and also for our margins.” And after having this perfectly normal and sensible thought process, StockX went on: “So of course we should do NFTs.” NFTs, in 2022, were the exciting new way to offer abstract electronic bets on physical objects. Actually NFTs, in 2022, were the exciting new way to offer abstract electronic bets on all sorts of things. You could trade NFTs “of” physical objects, but you could also trade NFTs “of” entirely online art, or NFT’s “of” pure abstractions. In 2025, that’s prediction markets. In 2025, when StockX wants to allow abstract trading of sneakers, it launches contracts on Kalshi. In 2025, the general-purpose way to do abstract financial speculation is, increasingly, prediction markets. “The word kalshi means ‘everything’ in Arabic,” and that gives you a sense of Kalshi’s ambitions: Anything that you can think of, you can turn into a financial bet. Yesterday the Information reported that Coinbase is preparing to launch a prediction market powered by Kalshi, as “part of its broader plan to become an ‘everything exchange.’” I often point out that, actually, people don’t want to bet that much on everything. They want to bet mostly on: - Stocks, and
- Sports.
There are important regulatory barriers, in the US, to using prediction markets to bet on stocks: A bet on stocks is a “security-based swap,” and security-based swaps are heavily regulated and can’t really be offered to retail investors by exchanges like Kalshi or Coinbase. (Yesterday Bloomberg’s Joe Weisenthal asked on X “Why aren’t there @Polymarket futures of private company valuations,” and I think this is why, though one can never be sure.) There are also important regulatory barriers, in the US, to using prediction markets to bet on sports, or there were anyway: Prediction markets are regulated as commodity futures exchanges, and the US Commodity Futures Trading Commission’s rules prohibit them from listing contracts related to “gaming.” But everyone — at Kalshi and Polymarket but also at the CFTC — has decided not to worry about this rule, so now prediction markets are largely for sports betting. But while I cynically go around saying that “‘prediction markets’ is a polite way to say ‘sports gambling,’” everyone else seems to think of them as everything exchanges. Bloomberg’s Annie Massa, Katherine Doherty, Isis Almeida and Lydia Beyoud report today on “a dizzying frenzy of deals that has been announced over the past two months, turning prediction markets from fringe experiment into one of the hottest trends in both Silicon Valley and Wall Street”: Participants are betting that “event contracts” — financial instruments that allow wagers on outcomes in politics, sports and more — can sidestep decades-old rules separating gambling from finance. Proponents promote them as a new way to forecast the future and potentially reshape markets themselves. The opportunity — and the risk — took center stage this week in Chicago, where [Intercontinental Exchange CEO Jeffrey] Sprecher and other executives gathered for a major trading and derivatives conference. Tarek Mansour, the CEO of Polymarket’s main rival, Kalshi Inc., made an appearance in which he teased several upcoming deals and boasted that prediction markets would become a “trillion-dollar” industry competing with the biggest asset classes. The scramble to secure investments and strike alliances includes some of the world’s biggest exchanges, gambling giants, trading platforms, VC firms, crypto outfits, pro sports leagues — even the Trump family’s media company. All are trying to stake a claim in a highly contested legal gray zone. After that the article is mostly about sports gambling, but that’s not the point. Prediction markets today are arguably what crypto was in 2021, an inchoate but promising way to speculate electronically on everything. Do we need a way to speculate electronically on everything? Apparently.  | | | We talked last year about federal criminal charges against New York City Mayor Eric Adams for allegedly taking bribes in the form of business-class flights on Turkish Airlines. I argued that this was an inconvenient currency for bribes: Business-class flights on Turkish Airlines are nice if you fly to Turkey a lot anyway, but the mayor of New York does not, and the indictment is full of hilarious messages in which Adams contemplates flying from New York to Paris or Easter Island (!?!) via Istanbul. And of course Eric Adams does lots of stuff besides flying: He goes out to restaurants and members’ clubs, and business-class flights on Turkish Airlines are useless to fund his terrestrial lifestyle. It is hard to turn business-class flights on Turkish Airlines into a general-purpose currency to pay for everything else. [4] It is an interesting general problem, though. If someone else will pay for your X, for some X, can you turn that into a general subsidy for your lifestyle? It depends on the X, and on your lifestyle, and how creative you are. One promising possibility is legal fees. If someone agrees to pay all of your legal fees, without limit, how much of your lifestyle can that cover? You might naively think “very very little”: For most people, legal fees are a small and undesirable part of their budget, and it doesn’t sound like legal fees would cover rent or food or clothing or medical care or school tuition or flights to Istanbul or any of the other expenses that most people incur in their daily lives. But big law firms are in the business of (1) providing holistic and attentive client service and (2) billing the client for it. If you go to your lawyers’ office to negotiate a deal or prepare for a trial, and you’re there all day, your lawyers will probably order lunch, for you and for them. They will put the lunch on their firm’s credit card, and later their firm’s accounting department will send them the bill, and they will write your client code on the bill, and the accountants will add it to the invoice that they ultimately send to you. You’ll ultimately pay for the lawyers’ time, plus the lunch, for you and for them. Or, if someone else is paying your legal bills, someone else will pay for your lunch. You have turned legal fees into lunch. Of course if you’re at your lawyers’ offices all day, you (or someone) is probably paying tens of thousands of dollars for the lawyers’ time, and like $15 for your sandwich, so this is a wildly inefficient way to get lunch. But (1) you don’t care; it’s somebody else’s money and (2) you might as well ask them to get you a really nice lunch. Like, don’t order in sandwiches; take you out to Le Bernardin. So that’s lunch sorted. How much further can you go? I think if you show up at a big law firm’s office for a court date wearing sweatpants, and you ask your lawyer “hey could you real quick send someone out to buy me a suit,” the lawyer won’t bat an eye. Some paralegal will run out and buy you a suit, and it won’t be the first time that has happened, and it will quietly get added to your bill. If you casually mention that you want to discuss your case at the Super Bowl, etc. Ron Lieber writes about the legal bills that Frank founder Charlie Javice ran up in defending herself against criminal charges that she defrauded JPMorgan Chase & Co., bills that JPMorgan was on the hook to pay: What would you do if the federal government wanted you in jail and Jamie Dimon was paying your legal bills? Here’s what Charlie Javice did: She spent money on luxury hotel upgrades, extravagant meals and cellulite butter, a personal care product that some people use to treat their skin, as a lawyer for the bank said in a hearing on Friday. Then, she sent the receipts to the bank. All told, Ms. Javice has spent more than $60 million — and counting — on her defense, according to recent legal filings. … JPMorgan said in a filing last month that Ms. Javice engaged five separate law firms, and that she and her lawyers have treated the original ruling forcing the bank to pay for her defense as a “blank check to bill and expense whatever they please.” ... In response to a request for comment about the cellulite butter, the hotel upgrades and the meals, a spokesman for Ms. Javice said, “Charlie says she has nothing to do with that and it’s a ridiculous allegation.” She was convicted and sentenced to seven years in prison, so in a sense she did not get a ton of value for JPMorgan’s money, but then she did not have a ton of incentive to get value for the money. My basic story of private equity is that, within living memory, people discovered it. In the 1950s, nobody was borrowing lots of money to do leveraged buyouts of public companies; in the 1980s, several people were. In the 2020s … I don’t want to say “everybody is doing that,” but it is the case that there are multiple gigantic publicly traded financial institutions that each control hundreds of billions of dollars of assets and that are doing that. It has been normalized. In this story, you might assume that the low-hanging fruit was plucked first. People who did leveraged buyouts in the 1980s made dynastic fortunes by buying the most undervalued companies with the most leverage and selling them at huge profits. People who did leveraged buyouts in, like, 2021 were buying companies in an efficient and competitive market, and are now hoping to sell them back in an efficient and competitive market. There is less juice to be squeezed out of them, and private equity firms seem to be having a hard time exiting their deals and returning money to investors. This has always been a business that paid people on a lag. If you work in private equity, you get a nice paycheck, but the real money is in “carry”: Your fund buys some companies, it holds onto them for a while, it sells them back into the market, and you get a cut of the profits. In the olden days when private equity bought low and sold high and had lots of leverage, those profits were very large and people got rich, and so new generations of young people got into private equity to get similarly rich. But now there is less juice and it takes longer to squeeze: Exits are delayed, and they might not be as good as they were in the golden age. One advantage of paying people on a lag is that they are loyal: They have to stick around to get their carry. But that may not be true anymore. At the Wall Street Journal, Miriam Gottfried reports: Usually, the bigger the private-equity firm, the bigger the payday. But with the industry struggling to profitably unload companies, many employees are heading for the exits, opting for jobs at smaller firms where they are betting they will be able to earn more. A key form of compensation is driving the moves, with midlevel employees at big prestigious firms leaving potential paydays worth millions of dollars on the table. They are worried about when and if their carried interest, or “carry”—pay tied to the performance of their deals—will materialize. “The golden handcuffs aren’t so golden anymore,” said Stephanie Geveda, who previously oversaw business-services investing at private-equity firm Warburg Pincus. “Top talent is doing the math and realizing that a piece of a smaller fund that actually performs beats a theoretical windfall that may never materialize.” … One vice president who left a job this spring at a big firm to go to a small, sector-focused firm said he left in part because he was losing confidence that his carry would ever materialize. Eventually, it got to the point where his uncertainty about receiving it outweighed the amount he stood to earn, he said. Private-equity employees used to aspire to own their own jets, but now they just want to be able to afford their kids’ private-school tuition, he said. “When people’s perceived value of their carry goes down, mobility goes up,” said Hugh MacArthur, chairman of the global private-equity practice at consulting firm Bain & Co. Yes that is the natural evolution of a lot of industries: If you’re early to carve out an unexplored new niche, you get a jet; if you’re late, you get a prestigious job that pays for private school tuition. But you got into the business because you wanted the jet. If you are a co-founder of a THC drink company called Crooked Beverage Co., are you more or less likely than the average company co-founder to steal money from the company? My intuition is neither: My intuition is that having the word “Crooked” in the company name does not indicate anything one way or another about how crooked the founders are. But maybe that’s wrong. Maybe you think “with a name like ‘Crooked,’ my investors will be keeping a close eye on me, so I’d better not steal anything.” Maybe you think “with a name like ‘Crooked,’ my investors surely can’t complain if some money goes missing, so I’d better steal some money.” I don’t know. Anyway a data point: The co-founder of a Minnesota-based THC drink company is accused of embezzling tens of thousands of dollars from the business for personal expenses. Christian Schenk, 46, was charged last month with one count each of theft by swindle and theft, according to court documents filed in Hennepin County. Schenk is referred to in court documents as the “former co-founder” of Crooked Beverage Company. Charges say former Minnesota House Majority Leader Ryan Winkler, another co-founder, reported to authorities that Schenk had been making personal purchases using the company’s Square account. … In an interview with investigators, Schenk said he was "super pissed" and took the money to offset what he believed Crooked Beverage owed him, according to court documents. See, he thought they were crooked, so. Nvidia’s Upbeat Forecast Soothes Fears of AI Market Bubble. OpenAI Era Pushes Old-School Stock Analysts Into Private Markets. Blue Owl Money Machine Sputters in Face of Private Credit Cracks. Tower Research is quietly recruiting top quants using hedge-fund style deals. HSBC Overhauls Trading Business in Bid to Become Debt Powerhouse. McKinsey Keeps a Lid on Size of New Partner Class. Meta’s Chief AI Scientist to Depart for New Venture. Musk’s xAI and Nvidia to Develop Data Center in Saudi Arabia. Ellison overtures for Warner Bros kick off bidding war. Christian tech group tests investors’ faith in AI deals on Wall Street debut. Wall Street Wants Everyone Using AI Except Its Job Applicants. The Tiny Dogs That Can Pull 100 Times Their Weight. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
