Racket of the Week: The $2 Billion Deli

How does a small sandwich shop near Philly that did $13,976 in sales last year come to have a $2 billion valuation?

For decades, any debate about spending was a zero-sum affair, with stimulus advocates butting heads with deficit hawks warning of inflationary disaster. But after Joe Biden’s “transformational” relief package, the hawks have retreated, seemingly for good. It feels very Alan Greenspan, very New-Paradigm to say so, but maybe it’s true, as NPR noted this year, that “Government borrowing doesn’t mean what it used to.”

Paul Krugman even wrote a piece called “Who’s afraid of the big, bad boom?” that sounded like an economist’s version of “How I learned to stop worrying and love the bomb” — except his guilty pleasure was a rapidly expanding economy. While society drowns in other cultish fears, of maskless faces, naughty words, misinformation, Russians, “trauma,” and a hundred other bugbears, debt seems the one area where conventional wisdom hasn’t given in to safetyism. Traditional vices like sex, drugs, and even dirty jokes are out, but deficit spending has been deemed an acceptable, if not mandatory national indulgence.

Perhaps that’s a good thing, but there’s an emerging flip side to the limitless liquidity era: shenanigans! We’ve seen it in stories like GameStop, Archegos, the 12,000% rally in DogeCoin, and the unprecedented boom in penny stocks that’s caused hundreds of microcap stocks to surge to market capitalizations exceeding S&P 500 companies. Money is still scarce in the pockets of ordinary people, but in the finance sector, the economy’s blood pressure just seems too high: we have vessels bursting and cash flying out all over, in what one analyst describes as signs we’re nearing the top of a hyper-speculative, “bubblicious” market.

Take the fatalism of post-Trump, lockdown America, add it to the general conviction that markets are corrupt, lubricate it all with trillions of new dollars, and people suddenly seem game to bet on anything, even if they’ve been warned against it — why?

“Why do people pay $3 to watch two rats fuck?” asks short-seller Marc Cohodes. “You don’t do it because you believe it, because there’s nothing to believe. They do it for the action.”

And what action! Take the story of Hometown International:

Back on April 15th, investor David Einhorn, author of Fooling Some of the People All of the Time, wrote a letter to investors that began with an assessment of the state of the financial services sector:

Many who would never support defunding the police have supported – and for all intents and purposes have succeeded – in almost completely defanging, if not defunding, the regulators… quasi-anarchy appears to rule in markets… For the most part, there is no cop on the beat. It’s as if there are no financial fraud prosecutors; companies and managements that are emboldened enough to engage in malfeasance have little to fear.

Einhorn went on to list examples of that “quasi-anarchy,” mentioning the investigation by New York Attorney General Letitia James of Tether, a cryptocurrency that had risen above $40 billion in market capitalization. At the end of February, James found that Tether was hiding $850 million in losses, and its “claim that its virtual currency was fully backed by U.S. dollars at all times was a lie.” For all that, the company wasn’t shut down, there were no charges, and trading was only halted “with New Yorkers.”

It’s not every day that a company gets caught in a $40 billion lie by a regulator and is only barred from trading to some customers. Even the notion — once pushed by the company, but no longer — that every Tether is backed by one real dollar wasn’t punctured by James’s “lie” pronouncement. In fact, by the first week in May, Tether was back cruising in news reports, as Bloomberg cheered: “Tether, the crypto stablecoin backed 1-for-1 by fiat currencies, surpassed $50 billion in circulation, a sum that’s more than the insured deposits of all but 44 of the thousands of U.S. banks.”

Einhorn’s grumblings about Tether didn’t garner much attention. Another story he mentioned did:

Someone pointed us to Hometown International (HWIN), which owns a single deli in rural New Jersey. The deli had $21,772 in sales in 2019 and only $13,976 in 2020, as it was closed due to COVID from March to September. HWIN reached a market cap of $113 million on February 8. The largest shareholder is also the CEO/CFO/Treasurer and a Director, who also happens to be the wrestling coach of the high school next door to the deli. The pastrami must be amazing.

The Paulsboro, New Jersey-based Hometown Deli, which did barely any business two years running, and appears to be owned by the wrestling coach and a math teacher from the local high school, really was and is the core business in an investment vehicle now “worth” over $100 million. It came out that initial shareholders also hold warrants allowing them to purchase 20 times their investment, putting the overall theoretical valuation of Hometown at $1.9 billion.

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