It’s in a way convenient to point to Hertz day traders and lol, or smh if your mood tends to the reflective. The phenomenon of a bankrupt company’s common stock surging in value, out of nowhere and for no good reason, is unheard of. Clearly, it is said, a company is in bankruptcy to begin with because it can’t support financial obligations, and thus the value of these ranking liabilities is written down, while the deeply subordinated equity layer is left worthless. If there is any worth at all for common stock, it’s some tiny option value; and tiny for good reason, it is said, because it’s only in the mind of hopeful and imaginative gamblers. When that value surges, the gamblers have lost their collective mind. Or, so it goes.
The reflectives and the laughers are, from a financially educated and market knowledgable point of view, correct. Especially when history is taken in consideration. But, just for kicks (in keeping with the subject), it’s interesting to think about a world where the event makes sense. What if, in such a world, minds haven’t been lost, option value hasn’t been distorted, financial obligations don’t get written down, the market is as it ever was, and there is nothing strange about Herz or its day traders? A wonderful and fascinating world: admittedly, a speculative fiction, per the masthead.
In this world, all value is predicated on financial outlook, a perspective of the future that gets discounted to time present; and, since perspectives vary, the market clears at some point of common ground. There is give and take, there is supply and demand, but, in this world it’s recognized and factored into calculations that, really and if one is being honest, it’s all a guess, no matter how educated.
In this same world, when the estimated value of the asset dips below its corresponding liabilities, this is an indication that the collective market guess has caused it to be so. Just as a short-term dip in earnings (or even a continuing multi-year series of financial losses) may not matter to the long-term value of a stock because the market guesses a bright future, so in bankruptcy the market guesses a future less bright, and takes corrective action. In this world, the difference between the first and second case is merely one of the accepted guess and the degree of its acceptance.
Sometimes, additionally, there are in this world cases of circularity. The more the commonly accepted guess prevails, the more it becomes self-fulfilling. They call it reflexivity in this world, where there are countless instances of market guesses driving capital access (in either direction), which in turn contributes to the guess’s plausibility.
Finally, it sometimes happens in this world that very large disturbances of questionable precedent will cause the markets to guess wildly. The turbulence, in such a world, serves to increase option value, as possibilities get magnified when almost anything is possible. Sometimes letters get assigned to various shapes of future outcome – V, U, L, W, M, and even K, it is said – the growing alphabet of which only draws attention to the assortment in the rich bouquet of guesses and their almost equal probability.
It would seem absurd, in such a world, although it has been known to happen, for one group to treat another with righteous indignation about the nature of its guess…
All things considered, that would seem even more absurd than the guess itself, and its multitude of consequences…