The PUNZI Papers Essay Eight · The Stock Market Is a Ponzi

This essay is part of The PUNZI Papers, a series of essays explaining the reason for our project, PUNZI WARS, and the potential we think it points to.

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Advisory: PUNZI WARS is a game and an on-chain research experiment. It is not an investment. Participate at your own risk.

A share is meant to be a claim on a company’s profits. A great many shares now pay no profits and promise none; they are bought for one reason, that someone later will pay more, and their price is held up not by what the business earns but by the company buying its own stock, the accountancy that flatters the result, and a wall of retirement money required to keep buying whatever the price. This is the asset every other structure in this series was quietly standing on, and on inspection it is running the same pattern as the things it is supposed to anchor.

The Madness of People

In January 1720 a single share in the South Sea Company cost about £128. By the following August it cost about £1,000. The company held, on paper, a monopoly on British trade with the Spanish colonies of South America, and it conducted almost none of it, because Spain controlled those colonies and the concession actually granted amounted to little more than a contract to supply slaves and a single shipload of goods a year.

The business beneath the share was, in any ordinary accounting, close to nothing. What the company actually did was convert government debt into its own stock and talk, endlessly and brilliantly, about the riches to come. The price rose because the price was rising, and because everyone who bought at £300 needed someone to buy at £400, and for most of a year someone always did. Then, quite suddenly, no one did, and by the end of 1720 the shares were worth a fraction of their peak and a good deal of England’s gentry was ruined.

Isaac Newton, who had sold early at a handsome profit, bought back in near the top and lost a fortune. The line usually attributed to him afterwards, whether or not he said it, has survived because it is exactly right: he could calculate the motions of the heavenly bodies, but not the madness of people.

The South Sea Company is remembered as a mania, a one-off lunacy of a credulous age. It is more useful to read it as a prototype. Strip away the costumes and the machine is plain: an asset whose price is sustained not by what it produces but by the arrival of the next buyer, defended the whole way up by serious men assuring everyone that this time the value is real. Three centuries later the same machine is not a scandal at the edge of the market. It is, in large and growing part, the operating mode of the market itself, and a great deal of the developed world’s retirement savings has been routed into it on the understanding that it is the safe and sensible thing to do.

The Company Gets Nothing

Begin with the thing almost no one says out loud about a share of stock. When a buyer purchases one on the open market, the company gets nothing. It received its money once, at the initial public offering, when it sold the share into the world. Every trade after that is between the buyer and an earlier holder; the cash goes to whoever sold, not to the business. The share entitles its holder, in theory, to a slice of the company’s future profits. In practice, for a large and rising share of the market, those profits are never paid out at all.

Profits used to be the point of owning stock. A company earned money and sent its shareholders some of it, as a dividend, on a schedule, in cash they could spend without selling anything. The dividend was the tether between the share price and the business: a stock was worth roughly the stream of payments a holder could expect from it. That tether has been quietly cut.

The dividend yield on the broad American market, once four or five per cent, now sits near one per cent, and a large cohort of the most valuable companies pay no dividend at all and state plainly that they do not intend to. The modern shareholder is not, in the main, buying a claim on profits that will be handed over. They are buying a thing they intend to sell to someone else for more.

Set the three features the opening essay used to define a Ponzi-like structure against that arrangement, and they line up with uncomfortable precision.

1. Earlier participants are paid from later ones. A holder’s gain, when there is one, is realised by selling the share to the next buyer at a higher price. The company did not pay it; the next entrant did. The chain holds only as long as the next entrant keeps arriving, and is willing to pay more than the last buyer did.

2. Continued operation depends on continued inflow. A market priced on the expectation that prices will rise needs a steady supply of new money to keep rising. Slow the inflow and the prices cannot be maintained, because in many cases there is no stream of distributed profit underneath them large enough to hold them up on its own.

3. The structure produces nothing it references. The trading of a share creates no goods and no earnings; it only moves a claim from one holder to the next. And increasingly the company beneath the share distributes nothing either, so that the claim is on a profit the holder will not receive, valued entirely on the price the next person will pay for the same claim.

None of this means the company is fake. Many are extraordinary, and produce real things at real scale. It means the price of that company has come loose from its production, and floats instead on the conviction that it will keep going up. This is the same conviction the South Sea Company ran on and the conviction every Ponzi-like structure in this series runs on. The value is no longer the thing being bought. The expectation of resale is.

What the Market Is For

The concession has to be made in full, because the functions are real and large, and a critique that skips them is not honest.

A public equity market does work no other institution does as well. It lets a company raise permanent capital to build things, by selling ownership to people who could never otherwise fund it. It lets the investors who took the early risk get their money back out, so they will take the risk again on the next company. It produces a continuous public price, which for all its faults disciplines management and moves capital, however imperfectly, towards its more productive uses. And it offers the ordinary saver a share in the productive economy that was, for most of history, the preserve of the already-rich. The index fund in particular is one of the genuine consumer triumphs of modern finance: it gave the median household diversified ownership of the corporate economy at a near-zero fee, and the worker quietly enrolled in one has, across the long run, been served far better than the one sold expensive active funds or frightened into cash.

The honest critique begins after all of that is granted. It is not that the market is fake or that owning shares is foolish. It is that the mechanisms which set the price have, in the era of cheap money and automated saving, hardened into machines for manufacturing that price ahead of the production beneath it. Three of those machines are worth naming, because they increasingly run together, and because each takes a defensible tool and turns it into a way of paying earlier holders out of the expectations of later ones.

The Company as Its Own Buyer

The first machine is the company buying its own shares.

For most of the twentieth century this was, in the United States, close to illegal. A corporation purchasing its own stock in the open market ran an obvious risk of being charged with manipulating the price, and the exposure kept the practice small. In 1982 the Securities and Exchange Commission adopted Rule 10b-18, a safe harbour: a company that stayed within stated limits on volume, timing and price would not, on those grounds alone, be charged with manipulation.

What had been suspected as manipulation became a standard treasury operation overnight, and the composition of how companies return cash inverted. In 1980 dividends were the large majority of shareholder payout; by the late 1990s buybacks had overtaken them, and they have been the larger share in most years since. Between 2018 and 2022 the companies of the S&P 500 spent roughly $3.9 trillion buying their own shares, with the calendar-year figure crossing $922 billion in 2022. Apple alone repurchased over half a trillion dollars of its own stock across a decade, a sum larger than the entire market value of all but a handful of companies on earth.

The mechanism is worth seeing clearly, because it is the legalised descendant of the thing Rule 10b-18 used to forbid. A company buys its own shares, which reduces the number outstanding, so the same earnings are divided across fewer shares and earnings-per-share rises whether or not the business did anything better. If the market keeps paying the same multiple, the price rises with it, and the holders are richer, very much including the executives whose pay is indexed to the per-share figure and the share price the buyback lifts. The firm has become the marginal buyer of its own stock, and the price it pays itself is then reported as the market’s verdict on its worth.

To understand how bad the situation truly is, one must keep in mind that a meaningful share of this was paid for not out of surplus cash but out of debt. Companies borrowed, and used the proceeds, directly or indirectly, to buy back equity: future obligations to bondholders taken on so that present per-share metrics could be lifted for current holders. Every step was disclosed in every filing. Nothing was hidden and nothing was illegal. The cost was simply moved forward, onto a balance sheet that does not yet have to answer for it, and the capital that might have built the productive base was instead routed out of it, to lift a number, for the people holding the shares that quarter. The more successfully the machine runs, the thinner the base beneath it grows.

The Figure the Disclosure Does Not Have to Show

The second machine is the accounting, and this is where the structure does its most patient work.

Everything about a public company is, in the legal sense, disclosed. The quarterly report is filed, the annual report runs to a couple of hundred pages, the auditors sign it, the regulator receives it. On any procedural definition of the word, the market is transparent. The trouble is the difference between what is disclosed and what can actually be read, and that gap is not an accident of complexity. It is the condition on which the price is allowed to stand.

The number a company leads with is increasingly not the profit its own accountants are required to compute, but an adjusted figure of its own design for public consumption, from which it has removed the costs it would rather not have counted. The definition of that figure (which expenses are “one-time”, which are “non-cash”, which are quietly excluded year after year) lives in a footnote, and the footnote often turns on another definition several pages away, which refers in turn to a policy note further back still, so that establishing what the headline number actually means is a research project few investors and not all professionals will undertake. When earnings-per-share rises eight per cent in a quarter, the filings contain everything needed to work out how much of that came from the business improving and how much came merely from the share count having fallen, but that split is never the headline, and reconstructing it is left to whoever cares to dig. The valuation rests on the figure the disclosure does not have to show.

This is the functional opacity this series has tracked through every institution, in its purest commercial form. Nobody is lying in the narrow sense the law polices. The prospectus is filed, the metric is defined somewhere, the auditor’s name is appended. The disclosure is complete, and the structure remains illegible to the person whose savings are inside it, which is exactly what the structure needs. The documents say everything; the saver is told nothing they could act on. A reported result built on inflows that have not arrived, presented as though they had, and certified compliant the whole way through, is not a fraud in the legal, technical sense. It is something the law has no name for, which is why it has been allowed to become the standing way the market reports itself.

Where the Bid Comes From

The third machine is the bid itself. A structure that runs on inflow needs the inflow to be reliable, and the modern market has solved that problem more completely than any other structure in this series. It has made the buying automatic.

The largest single source of demand for shares is no longer an investor weighing a price against a value. It is an index fund mechanically buying whatever is in the index, in proportion to its size, with money that arrives every payday from the retirement contributions of people who were automatically enrolled and will never look. The pension essay in this series named this from the other side: automatic enrolment and target-date defaults route a continuous, price-insensitive bid into the equity market, tens of millions of contributions invested on schedule with no reference to whether prices are high or low.

From the market’s side, that bid is close to ideal fuel. It does not judge. It does not leave when valuations stretch. It buys the overpriced share and the fairly-priced one in the same proportion to their size, which means it buys more of whatever has already risen, because rising is what makes a company large. The bigger the price grows, the more the captive bid is required to buy.

It is the perfect closing of the circle. A company can manufacture its per-share numbers with buybacks, present them through accounting that flatters and does not have to explain itself, and watch the automatic savings of a generation buy the result on schedule, no matter the price, because the people supplying the money were correctly told that low-cost, diversified, passive investing was the wise course, and were not told that it had quietly made them the buyer of last resort for whatever the market had most inflated. The prudent saver and the reckless speculator end up holding the same position. There was no way to opt out of it that was not also opting out of having a retirement.

The Three Axes

The structure carries the three Ponzi-like features. The question this series then asks of any Ponzi-like structure is which ones fail, and how badly, along three axes: efficiency, transparency and longevity.

Efficiency

The axis asks how much of the value moving through the structure is taken before it reaches the people the structure exists to serve. The market’s legitimate function (turning savings into productive capital, giving ordinary people a cheap stake in the corporate economy) is real, and in the index fund it is genuinely efficient. The failure is the now-familiar bundling: the same market that allocates capital productively also runs a large apparatus of extraction riding on the productive part. The fees on the debt that funds the buybacks. The executive pay indexed to per-share metrics a buyback lifts regardless of operations. The banking fees on every issuance. The analyst apparatus that sustains the multiples. And one extraction is structural rather than skimmed: the capital a buyback returns to shareholders is capital not reinvested in productive capacity, so the better the design performs, the thinner the real base beneath it becomes.

The aggregate has tilted, across the past decade and more, towards financial engineering over real investment, a shift documented since William Lazonick’s ‘Profits Without Prosperity’ in 2014 and traced through named firms in the Reuters ‘Cannibalized Company’ series the year after. The market is efficient at the thing it is praised for, ruthlessly inefficient at the thing it is not discussed for, and the two are sold as one.

Transparency

The axis asks whether the participant can understand what they are inside, and it demands not mere legal disclosure but the second-tier kind a non-specialist could actually parse and act on. On the first, the market passes completely. On the second it fails almost as completely. The share of an earnings rise that came from a shrinking share count rather than from the business is reconstructible and never in the headline. The adjusted metric that frames the result is defined where few will follow the definition. The captive bid is told it owns a diversified slice of the economy, which is true, but is not told that its automatic contribution is a price-insensitive buyer funding whatever has been most inflated, which is also true. Everything is disclosed and almost none of it is legible. The disclosure is complete; the disclosure exists is to be filed, not actually read.

Longevity

The axis asks whether the structure is built to survive the failure of its growth assumption, and the assumption here is simply that the inflow continues: that the next buyer keeps arriving, that the captive bid keeps buying, that prices keep rising because they have been rising.

It is the most-tested assumption in the series and the one with the worst recent record. The 2020 airline episode showed how fast it breaks: roughly $45 billion of buybacks across the preceding decade, then a revenue collapse, then roughly $54 billion in federal support over the year that followed (the surplus privately captured on the way up, the shortfall publicly absorbed one quarter later). The premium placed on loss-making growth companies in 2021 collapsed by some three-quarters in little more than a year when the rate environment turned, revealing how much of the valuation had been a function of capital-market mood rather than of anything a customer did.

A structure whose entire stability depends on the inflow never pausing, in a market that has repeatedly shown it can reprice a sector by three-quarters in a year and a half, is not built to survive the pause. It is built to postpone it, and to hand the cost to whoever is holding when it ends.

The Base Beneath the Claims

The stock market is not a fraud in the literal sense. It is the greatest engine of capital formation ever built, it has made ordinary people part-owners of the productive economy, and the index fund is a genuine gift to the saver. The achievement is enormous and should not be lost in describing what has been built on top of it.

But the most-rewarded designs in the market have become ways of manufacturing price and inflow ahead of production, and they have reached their fullest form at the very moment the savings of an entire generation were routed into them by default. Prices have come loose from the dividends and profits that once anchored them; companies lift their own shares with borrowed money; the accounting frames the result and is not required to explain itself; and the buying that holds it all up is the forced, price-blind contribution of people who were correctly told that passive and diversified was the wise course, and were not told it had made them the last buyer in the chain. On efficiency the productive function is real and the extraction rides on it and grows as the design succeeds. On transparency the disclosure is complete and the substance is illegible. On longevity the one assumption that everything rests on, that the inflow never stops, has been tested again and again in the last five years and failed each time.

This matters beyond the people who chose to own shares, because nothing in this series stays inside its own institution, and this is the one all the others lean on. The sovereign’s solvency rests on the tax revenue of a productive economy. The bank’s loans rest on going concerns. The pension and the index fund rest on corporate earnings. The central bank’s asset-price floor rests on the firms whose shares it lifts. Every one of those defences, when pressed, points downward to the same place: the real economy of companies actually earning money, the solid thing all the paper is written against.

This is the essay about whether that floor is itself solid, and the finding is that the floor is, in large part, running the same pattern as the structures it is supposed to hold up. A base that privatises its surpluses and socialises its shortfalls is not a foundation, and a base that hollows itself out in proportion to how well it appears to perform is not one either. When it fails, it will not fails for one company. It will fails under everything that was priced against the assumption that the market beneath it was real - the pensions and the index funds, the bank capital and the sovereign’s tax base, and the savings that store the accumulated work of a generation.

Whether that combination of opacity and authority is removable (in this market, or in any Ponzi-like structure of any kind) is the question this essay does not answer. It leaves it with the reader, who holds the index fund, owns it without quite having chosen each thing in it, and is, whether they ever agreed to it or not, the next buyer the whole arrangement is waiting on.

Conclusion · The PUNZI Papers Essay Eight

This completes the present essay of The PUNZI Papers, a series of essays explaining the position behind our project, PUNZI WARS, and the potential it points to.

In the next essay: The AI Bubble and Circular Finance Ponzi

Visit us: https://punzi.xyz   Follow us on X: @PUNZIwars

Advisory: PUNZI WARS is a game and an on-chain research experiment. It is not an investment. Participate at your own risk.

Sources

1. South Sea Company share-price history and the 1720 bubble; Isaac Newton’s losses and the line attributed to him (‘I can calculate the motions of the heavenly bodies, but not the madness of people’)

2. Robert Shiller, Irrational Exuberance (3rd ed., 2015): price-to-earnings, dividend yield, and the detachment of price from fundamentals

3. William Lazonick, ‘Profits Without Prosperity’, Harvard Business Review (September 2014)

4. Karen Brettell, David Gaffen, and David Rohde, ‘The Cannibalized Company’ (Reuters Investigates, 2015)

5. US Securities and Exchange Commission, Rule 10b-18 under the Securities Exchange Act of 1934 (adopted 1982)

6. S&P Dow Jones Indices, S&P 500 Buybacks (quarterly releases)

7. Apple Inc., Annual Reports on Form 10-K (fiscal years 2013 through 2024)

8. Meritech Capital and Bessemer Cloud Index, public SaaS revenue-multiple time series (2020–2023)

9. US Department of the Treasury, Payroll Support Program disclosures under the CARES Act and subsequent extensions (2020–2021)

10. Federal Reserve Bank of New York, working papers on stock buybacks and corporate cash-out