Do Economies Need to Go Bust? (EP.124)

Episode Summary

Executive Summary: This episode spans Tesla’s explosive rally and the limits of valuation, the nature of market efficiency and short squeezes, and broader debates about media bias, platform moderation, recession fears, personal finance, gambling, private equity, and financial literacy. The hosts repeatedly contrast sensational narratives with structural realities, arguing that human behavior, incentives, and context matter more than slogans.

Main Topics: Tesla’s melt-up and valuation skepticism (Priority: 5/5): The hosts react to Ron Baron’s claim that Tesla could reach $1 trillion in revenue in 10 years, using it to discuss how extraordinary growth assumptions can sound absurd yet still be underestimated by markets. They frame Tesla’s move as a blend of short covering, euphoria, and the company’s powerful narrative and product appeal. Market efficiency and the danger of dunking on forecasts (Priority: 5/5): They argue that efficient markets do not mean prices are always correct, citing Malkiel and examples like Tesla and Amazon to show that stocks can be wildly mispriced for long periods. The point is not that forecasts are right, but that no one can know with certainty when they are wrong. Ray Dalio, media skepticism, and the financial press (Priority: 3/5): A Wall Street Journal profile of Ray Dalio sparks a discussion about whether the piece was fair or a hit job, and whether financial media has become excessively skeptical since the financial crisis. The hosts suggest the press shifted from cheerleading to chronic distrust after being burned in 2008. Zero Hedge, free speech, and platform moderation (Priority: 4/5): They discuss Twitter’s permanent suspension of Zero Hedge, rejecting First Amendment arguments and framing it as a platform’s right to remove repeat purveyors of conspiracy content. The hosts note the distinction between being deplatformed and being silenced entirely. Recessions, perma-bears, and who gets hurt (Priority: 4/5): The episode explores whether people are rooting for recessions for ideological reasons and argues that downturns disproportionately harm lower-income households. They also question whether a mature economy like Australia’s can keep expanding longer than expected and whether booms must inevitably bust. Personal finance limits, financial literacy, and behavior (Priority: 4/5): The hosts challenge simplistic advice like saving 10% of income and argue that structural constraints make saving impossible for many households. They also question whether financial education alone can overcome family influence, habits, and the decay of learned behavior over time. Alternative markets: gambling, private credit, HFT, and crypto (Priority: 4/5): They examine sports betting growth, the rise of private credit, skepticism toward high-frequency trading critiques, and Bitcoin as a diversifier. The recurring theme is that financial innovation often brings both costs and benefits, and simplistic narratives miss the tradeoffs.

Key Arguments: Tesla’s revenue growth assumption is extraordinary, but the market has repeatedly proven that seemingly impossible outcomes can happen when a company captures a huge market and narrative. Ron Baron’s Tesla call looks outrageous in the moment, yet his past Tesla bet was enormously successful, showing how easy it is to dismiss long-term winners too early. Efficient markets do not imply prices are always right; they imply that no one can confidently prove prices are wrong at the time. Tesla’s rally likely reflects a combination of short covering, new buyers, and euphoria rather than only fundamental improvement. Ray Dalio’s complaints about media coverage reflect a broader shift in financial journalism from cheerleading before 2008 to aggressive skepticism afterward. Zero Hedge was not removed because of one isolated market opinion; the hosts view it as a platform decision against repeated misinformation and conspiracy content. Recession is not an abstract cleansing event; it hits lower-income and lower-middle-class workers hardest, so cheering for one is ethically questionable. Financial literacy is useful, but education alone cannot solve structural savings problems or override family and social conditioning. Many households cannot realistically save 10% of income because necessities already consume too much of what they earn. Bitcoin may not hedge stocks like gold, but its low or near-zero correlation with traditional assets can make it a valuable diversifier. Private credit’s higher yields can be misleading because default risk can overwhelm nominal income and reduce realized returns. High-frequency trading may impose a small explicit cost, but it can also narrow spreads and improve market functioning, so evaluating it requires looking at both sides of the ledger.

Data Points: Tesla current revenue base: about $24 billion - Used to frame Ron Baron’s 10-year $1 trillion revenue target and implied growth rate. Tesla revenue target: $1 trillion in 10 years - Ron Baron’s forecast discussed on CNBC and debated by the hosts. Implied Tesla revenue CAGR: 45% per year - Calculated growth needed for Tesla to grow from roughly $24 billion to $1 trillion in a decade. Walmart trailing 12-month revenue: $520 billion - Used as a comparison for the scale Tesla would need to exceed. Tesla shares purchased by Ron Baron: 1.3 to 1.6 million shares - Referenced to show how successful Baron’s past Tesla investment was. Tesla investment cost: about $350 million - Approximate amount Baron spent on Tesla shares. Tesla short interest on Jan. 15: 13% to almost 14% - YCharts data cited during discussion of the squeeze and rally. Tesla short interest at end of May: 25% - Used to show short interest was higher when the rally began. Tesla move since discussion on Jan. 22: up 60% - The hosts note the stock’s rapid rise since their prior podcast episode. Tesla move since end of May: up 400% - Illustrates the scale of the melt-up. S&P 500 companies with 45%+ sales growth: 10 companies - Used to show how rare that growth rate is among large public firms. Biggest revenue grower among S&P 500 names discussed: EOG Resources at $17 billion revenue - Example of a smaller company among the firms growing sales by 45% or more. Top 4 legacy U.S. automakers revenue: about $700 billion combined - Toyota, GM, Ford, and Chrysler/Fiat Chrysler cited to show what Tesla would need to approach to dominate autos. Bridgewater / Ray Dalio 2019 performance: roughly rough / disappointing - Mentioned qualitatively as part of the WSJ profile discussion; no exact figure given. MCI ACWI top 40 stocks weight: 28.5% as of Oct. 2019 - Used to highlight concentration in global equity markets. Private credit assets in 2010: $109 billion - From the discussion of private credit growth alongside private equity. Private credit assets in 2019: $261 billion - Shows the expansion of private credit funds. Private credit assets in 2004: $37 billion - Historical baseline for the growth of private credit. Number of private credit funds: 436 - Up from 261 five years earlier, cited in the private credit discussion. Number of private credit funds five years earlier: 261 - Shows industry expansion. Lending Club lowest-grade interest rate: 26% - Used to illustrate that higher yields can still produce poor investor outcomes. Lending Club highest return shown: 5.7% - Despite the apparently high interest rates on loans. Lending Club worst-category return: 3.1% - For the highest-interest, riskiest loans due to defaults. HFT annual profit estimate: nearly $5 billion - From a study claiming HFTs extract a small tax from investors. HFT estimated tax on daily trading volume: 0.0042% - The number used in the study discussed by the hosts. Gallup library-visit survey: 10.5 trips per U.S. adult in 2019 - A statistic the hosts strongly doubted. U.S. sports betting estimate: $150 billion illegally bet each year - Used to argue for the size of the potential legal sports betting market. Number of states with legalized sports betting: 20 states - Cited as evidence of rapid expansion. Additional states likely to approve sports betting: another dozen - Estimate mentioned in the gambling discussion. New Jersey casino betting and payouts: $54 million bet, $58 million payout - Used to show the operator lost money on sportsbook activity in that period. Traditional retirement saving benchmark: 10% of income - Discussed as common advice that may be inadequate and unrealistic for many households. Bottom share of households with major savings constraints: roughly bottom 40% to 50% - Nick Maggiulli’s analysis of why many households cannot save consistently. U.S. high school graduation rate in 1900: 6% - From the book discussion emphasizing long-run progress. U.S. tree count vs. 1950: more trees today - Another progress statistic cited from the book they discussed. Adults surveyed for library-visit poll: 1,025 - Sample size from the Gallup poll the hosts questioned.

Pivotal Quotes: "The price is never right. In fact, prices are always wrong." — Michael quoting Ben Malkiel: Used to explain efficient markets: prices can be off, but no one knows for sure when they are wrong. "If we’re going to do it, let’s do it, right?" — Ben: Said in response to Tesla’s euphoric run and the possibility of a broader market melt-up. "There are way too many people out there that are rooting for a recession." — George Perks discussed by the hosts: Referenced in the debate over recession cheering and who bears the costs of downturns.

Implications: Listeners should be cautious of easy narratives: huge winners can defy skepticism, but euphoria and leverage can also distort markets. The episode encourages skepticism about media, ideology, and simplistic finance advice while emphasizing human behavior and structural constraints.