You are a free subscriber to Me and the Money Printer. To upgrade to paid and receive the daily Capital Wave Report - which features our Red-Green market signals, subscribe here. How and Why Smart People Get Suckered...A Money Printer follow-up to yesterday's “The Five People You Meet in Liquidity Hell...”
Dear Fellow Traveler: People think massive financial fraud and system-wide instability happen because amateurs get reckless. They picture a retail trader buying the wrong meme stock, a guy wiring money to a Nigerian prince, or a kid sitting in his basement speculating on some crappy cryptocurrency coin… Or, unfortunately, these new scams. But that’s not what brings a system to its knees. Systemic fraud happens, and confidence craters because the smartest people in the room… the people who are supposed to be immune and have entire teams of risk managers… convince themselves that something stupid is brilliant. That is the funniest, darkest truth in all of finance. It’s never the idiots who fall for the biggest lies. It’s the titans. The pedigreed… The ones with friends in high places, Harvard MBAs, corner offices, and advisory roles on government panels. The people who should know better… So, why do smart people, people who run sovereign wealth funds, elite endowments, hedge funds, and multinational banks, get absolutely duped in ways that would embarrass a first-year accounting student? I won’t answer this question with something… stupid… like… “We’re all human.” There’s No Shortage of ExamplesLet’s start with the best examples… so you can feel good about losing a little bit of money on Ethereum or some nuclear stock recommended by a person on Twitter… Who’s been hoodwinked at scale in the last decade? How about Rupert Murdoch? He lost $125 million on Theranos, a company that claimed to revolutionize blood testing but could not actually test blood.
The Walton family, heirs to the Walmart fortune, lost more than $150 million in the same company run by Elizabeth Holmes... Sequoia fell for the cryptocurrency plague known as FTX and published a glowing founder profile that they later tried to scrub from existence.
Harvard had exposure to Bernie Madoff through feeder funds that passed his returns into their portfolio, without anyone pausing to ask how a single manager could deliver those types of returns in a market that isn’t that consistent… SoftBank’s Masa Son reportedly invested billions in WeWork and Adam Neumann after a short meeting in which Neumann’s charisma did most of the talking, and a pitch to elevate the world’s consciousness somehow sounded like a business plan.
Pension funds, the ones managing the retirement money of teachers and firefighters, fell for Wirecard, a company whose claimed 1.9 billion euros in cash didn’t exist. And Nobel economists backed Long Term Capital Management shortly before it imploded and nearly took the financial system with it in the late 1990s... When it comes to being fooled, intelligence is not an antidote. It’s often an accelerant… Smart people trust the wrong signals.Elizabeth Holmes might be the best example of collective stupidity out of all these examples… She never fooled anyone with science… because there was no science to fool them with. She fooled them with branding. She had a black turtleneck, a deep voice, and was a Stanford dropout. Some people compared her to “Steve Jobs…” because of her outfit… She didn’t have to do a damn thing beyond that... With that persona, she somehow built a board of directors stacked with cabinet-level officials who didn’t understand blood diagnostics. Their presence on this board offered credibility. But it wasn’t credibility she had sold… She sold “costume design.” Smart people fall for people like Holmes because of a concept called social proof. This is the idea that if enough important people believe something, you’re supposed to believe it too. Sam Bankman-Fried was a master of this, too… But Theranos was on a different level. If former Secretary of State Henry Kissinger sat on the board, surely someone checked the technology… Right? If George Shultz vouched for her, surely the product worked. Holmes didn’t sell technology. She sold other investors proximity to power. And powerful people, especially powerful men, fell for it like tourists at a Three Card Monte table. Smart people stop doing math when liquidity is free.Sam Bankman-Fried did not hypnotize the world. He operated during a period when money cost nothing, and arithmetic was optional. When money rounds to zero, nobody does math. They do vibes. This is how you end up with Sequoia Capital publishing a gushing profile of SBF playing League of Legends during fundraising calls. As if that were a leadership principle. People mistook his sloppiness for genius because cheap money turns nonsense into inevitability.
I remember sitting at a conference that SBF was hosting… and I asked people from VC shops and funds at dinner if all of this seemed a little too good to be true. They looked at me like I was insane… one of them told me not to be rude. Five months later, they’d collapse… If the financial cycle had turned six months earlier, nobody would have funded a man sleeping on a beanbag who could not explain his own balance sheet. That’s the issue… But liquidity was abundant, and abundant liquidity makes even the PhDs lazy. What’s stunning is that we can clearly see people in the same situation lining up right now… and we’re still willing to trust them blindly… no questions asked… It’s amazing what money will do to common sense… Smart people mistake confidence for competence.As I’ve said… It’s always “boring,” which leads to real problems… It’s not some newsletter writer promising 150% gains that can lead to financial ruin… Remember… Bernie Madoff didn’t promise insane returns. He promised something far more seductive. He offered predictability. How about a market beating 10% a year? Those returns are smooth… and steady… and most of all boring. They're the financial equivalent of being fed melatonin through a gerbil feeder. Investors didn’t buy performance. They bought emotional anesthesia. And in a system overflowing with liquidity… anesthesia sells better than truth. Smart people fear missing out more than they fear being wrong.Here is the Shakespearean comedy of elite finance. No group on earth is more terrified of missing out than wealthy, credentialed people. George Shultz, a former Secretary of State under Reagan, joined the Theranos board and publicly defended Holmes. But here’s what’s wild. Schultz’s grandson worked at Theranos. Tyler Schultz warned his grandfather that the technology didn’t work. And George Shultz STILL SIDED with Holmes… and caused family strain in the process until he had to admit that he was wrong… That is how powerful the spell can be. SoftBank didn’t invest billions in WeWork because Adam Neumann was a visionary. My goodness… They did it because they convinced themselves he might be. They didn’t want to be the dinosaurs who missed the rocket ship... The Saudi PIF wired $45 billion into the Vision Fund in roughly the time it takes a normal person to pick out a sandwich. Fund managers repeated the story that SBF was the next JP Morgan of crypto because repeating it made them feel early to something world-changing. That fear, the fear of looking outdated, destroys more capital than recessions ever have. Smart people want to be early more than they want to be right.Fraudsters in this world of venture capital and startups don’t sell a product… They sell an identity. They sell a version of YOU that you want to believe. Invest now… and YOU TOO get to be the visionary. Be a Series A or even better, a seed investor, and you will be the early backer. You’ll get to put on your LinkedIn profile that you saw the future while everyone else was still living in the past. Holmes positioned herself as the heir to Steve Jobs (the media helped...) SBF was positioned as the Rockefeller of crypto infrastructure… (the media helped) Neumann positioned himself as… some creepy spiritual guru who reimagined the “future of work…” (the media really helped…) (Okay, guys… work will still take place in offices… but with beer… GENIUS!!!). These people did not pitch companies. They pitched futures. They pitched the idea of belonging to an exclusive tribe of early believers. Smart people fall for this because ego is easier to hack than code. But then… liquidity turns. It All Falls Down…And then… the tides go out… and the capital dries up… Not just at the company… but in the whole system… quickly… This is the moment when all illusions collapse. Total addressable market (TAM) projections suddenly look like fever dreams. Collateral gets questioned… and reputation doesn’t count... Market-neutral strategies stop being neutral. Startups built on buzzwords collapse into paperwork and unpaid bills. When liquidity is abundant, everyone looks brilliant. When liquidity tightens, everyone has to prove it. This is where the entire world realizes the truth. Smart people do not fall for fraud because they are dumb. They fall for fraud because liquidity makes reality optional for too long… And because they were in a race against themselves to find that next big thing… Again…. we’re heading into a global refinancing cycle that will force the truth into daylight. Trillions of dollars must roll. Governments need dollars. Private credit is wobbling. Banks are thin. Emerging markets are begging for swap lines. Every fantasy built on cheap capital is about to face gravity again. This is when the five characters from Liquidity Hell get exposed. Not one. Not two. All of them. Because when liquidity tightens, you do not discover a single fraud. You discover how the entire system operates and where the incentives live… On Sunday, I’ll return with the last part of this impromptu series… How to Build a Fool-Proof Mindset… Stay positive, Garrett Baldwin P.S. Tomorrow… I’ll be checking in with our first Extraction Recommendation…
About Me and the Money Printer Me and the Money Printer is a daily publication covering the financial markets through three critical equations. We track liquidity (money in the financial system), momentum (where money is moving in the system), and insider buying (where Smart Money at companies is moving their money). Combining these elements with a deep understanding of central banking and how the global system works has allowed us to navigate financial cycles and boost our probability of success as investors and traders. This insight is based on roughly 17 years of intensive academic work at four universities, extensive collaboration with market experts, and the joy of trial and error in research. You can take a free look at our worldview and thesis right here. Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.
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