Who is John Galt? The libertarians know. But who is John Law?
I would’ve gotten along with him as he liked probabilities. At one point by his own estimation – reducing its veracity – he was the richest man who ever lived. A Scotsman and a gambler, he had an uncanny knack for math and economics.
He became the Treasury Secretary of France (not his title but his function). France was deeply in debt in the early 18th century due to endless war. Law proposed a sort of debt-for-equity restructuring. In a sense, it’s how the United States ended up with the Louisiana Purchase.
Law created a bank that bought France’s debt by issuing bank notes (a version of the quantity theory of money). Then he combined the bank with a company holding the vast development rights to the Mississippi Valley region in the “New World,” thanks to his relationship with the regent of New Orleans.
Then he sold stock of the new company to the public.
It was ingenious. The company owned the government’s debt, and a massive amount of natural resources, which Law leveraged into a compelling equity investment opportunity.
People piled in. Law got rich and bought castles and vineyards and mansions and stuff. It became known as the Mississippi Bubble when it blew up. Law died poor in Venice.
Eighty years later, France offloaded the Mississippi River Valley and more to Thomas Jefferson for $15 million in the Louisiana Purchase.
What I find instructive about the story – which is wholly true – is how markets may become imbued with a Faith Premium, let’s call it. The probability of implied value.
Stock options are also a probability of implied value. Exchange Traded Funds are priced on tomorrow’s probability of today’s implied value in a basket of stocks.
So what about yesterday when the basket jumped 2%? We’ll come to that.
John Law was tackling the problem consuming the planet today: Debt. He tried to securitize obligations with investment in growth. For our part, we print money and bleat nonsense about a 2% inflation target, the same as saying stealing is fine.
Jakob Dylan, Bob’s son, has a song with The Wallflowers (great live band, we’ve seen them twice) called Three Ways. Three ways out of every box/crawl out the bottom or you climb out the top/And if you can’t find your way out, then you just burn it to the ground…
I’ve concluded there’s one way out of a debt box and governments always try the two others. You can print money to pay your debts. Same as writing bad checks and just as stressful. Crawling out the bottom.
You can try to climb out the top, grow your way out. Create economic opportunity so revenues exceed expenses, and you can start hacking the mountain down a shovel at a time. Except it never happens. You can only stop spending.
John Law sought to replace debt with growth, so in that sense it was at least optimistic. But you can’t crawl out or climb out of a debt box.
You’ve got one choice: Restructure. Things mired in debt will and should fail. There must be a reset. John Law restructured France’s debt by backing it with land. It might’ve worked, timed differently.
As to the stock market and its structure, it’s inherently inflationary. Money plows into ETFs, as WSJ writer Jack Pitcher said (subscription required) in an article May 25.
Ah, but ETFs are substitutes that expand reach to the same stocks. Everybody piles in. And stocks keep going up as Demand outstrips Supply and we wonder how the SPX trades at 22 times earnings (ETFs don’t use multiples).
We aren’t minting a new Nvidia every year to absorb those flows. We’ve had 75 or so IPOs in 2025 but most are well less than a billion dollars. Tallied, they don’t make a single Colgate-Palmolive, Infosys, Apollo Group.
As we add hundreds of ETFs annually. There are 3,822 now in the US market, 1,950 of those pegged to US equities. It’s not that I’m concerned. Heck, we’re interested in creating ETFs with our intellectual property. We’ve got great quantitative data for doing it.
No, what I think about is how do stock-pickers compete with the insatiable demand from ETFs? If ETFs get all the flows, the arbitrage mechanism sets the prices. And machines know it and race the value of the basket up outside markets hours.
It happened yesterday (May 27). Delaying a tariff that didn’t exist hasn’t altered the fortunes of European or American importers and exporters. Why did the stock basket jump, then?
Excess demand, an arbitrage trade between this and that, the implied value of derivatives. I’ve said it before. I return to the theme because it explains everything.
The problem with this Faith Premium, as evidenced in the John Law story, is that a good idea imbued with too high a belief premium blows up just as surely as a bad idea.
So investors, always know what the money is doing (and come to our live Discussion this week). And public companies, have a plan for a stock market run by ETFs.
