The arrest last week of several ex-NBA players – and one current head coach – on gambling charges, seems to have no connection to markets or investing or the economy. Miami Heat player Terry Rozier is accused of providing insider information about NBA games and his own performance to gamblers who placed bets and laundered their winnings. Chauncey Billups, an NBA Hall of Fame guard who, until his arrest, was coaching the Portland Trailblazers, was accused of participating in rigged poker games hosted by the Mafia. Damon Jones, an ex-player and assistant coach, was accused of participating in both schemes. Rozier and Billups both had career NBA earnings in excess of $100 million while Jones earned nearly $22 million during his playing career. While rumors have circulated for some time about Jones’ extravagant lifestyle and gambling habits, there has been no indication the other two have had financial difficulties. Why would these men risk their reputations – and freedom – to participate (if the allegations are true) in these illegal gambling schemes?

These are not the first sports gambling scandals to emerge since the Supreme Court struck down the federal ban on sports betting in 2018. Jontay Porter, formerly of the Toronto Raptors, was handed a lifetime ban for betting on his own stat line last year. Baseball had its own scandals with two Cleveland pitchers suspended for a gambling probe and the case of Shohei Ohtani’s translator/personal assistant, who stole from his employer to cover gambling debts. There were scandals before nationwide sports gambling was legalized – remember Pete Rose? – but the industry is surely larger today with the practice now legalized in 39 states. Americans bet $148 billion on sports last year and that is just the legal portion; the total is certainly higher. Placing a bet on the Super Bowl used to require a trip to Vegas or the acquaintance of some shady character; today all it requires is turning 18, a cell phone and a credit card you haven’t maxed out. And I’d be shocked if the “turning 18” part is really a requirement.

The gambling app in your pocket runs on algorithms that use push notifications and other attention grabbers to keep the addicts in the game. The big players like DraftKings, MGM, bet365 (in case you didn’t know you could gamble any day of the week), Fanatics, Caesars and the worst of all in my opinion for directly marrying media and gambling, ESPN Bet, are insistent and ubiquitous. Celebrities like Kevin Hart, Jamie Foxx, and Jon Hamm are used much as Billups was, to lure players to the casino in your pocket where they can be systematically relieved of their cash. Lebron James, Tom Brady, Kevin Garnett, Charles Barkley, Michael Jordan (who is an advisor to the board of DraftKings and an equity investor), Conor McGregor, Neymar, and Wayne Gretzky are all paid endorsers of gambling apps. There’s a reason gambling helplines are overwhelmed with calls, mostly from young men who’ve lost the rent money – or worse – on some sure thing sports bet.

These gambling apps are really no different than any other social media app; they are all designed to be highly addictive. On social media it might come from likes, comments, and push notifications that lure you back in. The apps provide personalized content based on your past behavior and make sure that it is endless so you feel like you can’t disengage. On a gambling app, it is the pursuit of the big win, the massive hit of dopamine you get from that illusion of precognition. Retired athletes, like the ones arrested last week, spend most of their lives in pursuit of the dopamine hit of the big play, the big win. The thrill of ripping off the house with a bet made on insider information or fleecing the mark at the poker table has to be better than just getting lucky. 

The nexus of dopamine now includes financial markets. Dave Portnoy, founder of Barstool Sports – which of course has a sportsbook – and self-described degenerate gambler, spent a good portion of the COVID sports blackout betting on financial markets and live-streaming it to his followers. Investing in the stock market has long been derided as gambling by moral scolds but the stock market does serve a critical service to the economy by allowing companies to access capital cheaply. Most of the activity in the stock market on a daily basis, though, has nothing to do with that function. What Mr. Portnoy demonstrated so openly is that most of the trading that goes on day-to-day is nothing more than gambling. I suppose it could be compared more to poker than a spin of the roulette wheel but if you are trading on a time frame of anything less than months, you are gambling. This isn’t a new phenomenon; the average stock holding period in 1970 was 5 years and it has fallen steadily over the last 55 years to today’s 5.5 months.

Wall Street does its part by producing a continuous stream of “investment” products with the implicit promise of big returns. 2x, 3x, 4x, and now 5x leverage! Why if I buy that 5x leveraged ETF and the market goes up 10%, I’ll make…um…gosh I have to take off my shoes….50%! Except you won’t because as with all derivative products, timing matters. A lot. Or they lure you in by telling you the product will give you access to something only rich “sophisticated” investors have had access to before now. Don’t know how to trade options? No problem. Don’t know how to trade futures? No problem. Don’t know how to hedge your portfolio? No problem. Think you know where the market is going tomorrow? No problem. Want access to private deals like the big boys? No problem. Want to lend money to companies you’ve never heard of to which banks wouldn’t lend? No problem. Okay, I’ll admit that last one doesn’t sound all that appealing but you’d be shocked by how much money is being “invested” in private credit these days.

The gambling mentality even extends to the corporate boardroom.  A company called Microstrategy, which until a few years ago was a small software company of occasional profitability and a market cap of about $1 billion, started stockpiling bitcoin in August of 2020. As the price of bitcoin rose so did the price of the stock. With the stock trading in excess of the value of it’s bitcoin stash (no one cares about the software part of the company anymore), the company sold more equity (or convertible bonds) to fund more purchases of bitcoin, which drove the price of bitcoin and Microstrategy’s stock price higher still. Rinse, repeat. Today the company owns 640,418 bitcoin and has a market cap of $83 billion for a company with $460 million in revenue. Trailing 12-month “profit” is $4.8 billion which comes from nothing more than marking their bitcoin holdings to market (selling software lost them about $60 million in the last 12 months). The strategy worked so well they dropped “micro” from the company name; now it’s just Strategy. There are now over 200 publicly traded “Bitcoin Treasury” companies like this (how risky could they be; they have Treasury right in the name!). They are companies that produce nothing of value whose stocks are valued based on their holdings of an asset that has – almost – no utility. To paraphrase Jerry Seinfeld, they are investments about nothing.

The AI boom is a giant leveraged bet that AI will usher in a new age economy of high productivity growth, where Google cures cancer, OpenAI harnesses AGI for the good of all mankind, the AI slop on Instagram and Reels turns out to be an improvement and we never have to use google to figure out how to get Excel to do what we want it do. AI related firms have borrowed nearly $150 billion to keep this illusion going with some of the recently announced deals having a distinctly circular, almost ponzi-like feel to them. Nvidia “invests” $100 million billion in OpenAI so OpenAI can buy Nividia chips. Oracle floats $18 billion in bonds to fund expansion to service OpenAI (with bids for $88 billion) while Vantage Data Centers floats another $38 billion in bonds to build data centers that will be leased by Oracle. The backing for all that is a cloud computing contract between Oracle and OpenAI for $300 billion over five years to be paid with money OpenAI doesn’t yet have. Oh, by the way, Oracle has a debt/equity ratio of 4.6 to 1; shareholder’s equity of $24.2 billion, total liabilities of $156 billion and expectations of negative $16 billion in free cash flow over the next year. Larry Ellison is literally betting the company on AI.

Meta recently raised $27 billion in private debt to fund the construction of its Hyperion data center. Hyperion is 80% owned by Blue Owl Capital, a “manager” of private credit which in this case seems to mean using Meta’s name to borrow a boatload of cash. The debt was issued through a joint venture so it doesn’t show up on Meta’s balance sheet. Mark Zuckerberg recently said it was “quite possible” that Meta’s AI spend will go over the previously announced $600 billion by 2028. That’s 10 times what Zuckerberg wasted on the Metaverse, a division which has cost $70 billion so far to generate $2.1 billion in revenue last year and lose another $17.7 billion. Zuckerberg reminds me of someone I know who got very lucky early in his career and then spent the next 20 years – so far – trying to replicate it.

The gamification of the economy, where everything is a speculation, a chance to Win Big! has transformed our markets, our economy, and our society and not for the better. A new company, Coverd (because who needs to spell in the AI economy?), now allows you to gamble on your bills. From Coverd’s About Us page:

The future of personal finance is interactive. We disrupt through gamification.





Coverd offers games of chance for users to risk small against large cash rewards that pays for past and future spendings: from covering credit card bills to funding a dream vacation for as little as $1.

After launching through a mobile app and website, Coverd will introduce the Covered credit card with gaming features embedded.

Created by problem-solvers with expertise in derivative pricing, high frequency trading, and software engineering from Morgan Stanley, Hudson River Trading, Google, and Meta, Coverd gives everyone a chance to live big.

(emphasis added)

John Maynard Keynes once said that “the market can remain irrational longer than you can remain solvent” by which he meant that betting (pun intended) against market irrationality is a good way to go broke. I don’t know when this speculative phase will end but it will end just like all the others before it have ended – with a lot of losses that people in the future will look back on and say, what the hell were they thinking? A lot of what I see in markets today looks like the ponzi finance stage of Hyman Minsky’s financial instability hypothesis. Oracle, Meta, and others using joint ventures and other vehicles to move financing off their own balance sheet is a warning, one that I’ve seen before (Enron) that was widely ignored because everyone was too busy making easy money to read the footnotes. The fact is that the revenue to pay back the sums being borrowed and spent on data centers does not yet exist and may never. When is the Minsky Moment?

Joe Calhoun