The Golden Age of Fraud (EP.157)

Episode Summary

Executive Summary: The episode argues that the 2020 market and retail-investing environment strongly rhymes with the late-1990s bubble, but with technology and pandemic-era policy compressing cycles and amplifying behavior. The hosts discuss retail mania, soaring tech stocks, SPACs, and the disconnect between markets and a weak economy, while also covering housing, gold, active fund outflows, and how work-from-home may reshape cities and commercial real estate.

Main Topics: Bubble parallels: 1999 vs. 2020 (Priority: 5/5): The hosts compare the current surge in tech stocks, day trading, IPO/SPAC activity, and value-stock underperformance with the late-1990s internet bubble, citing William Bernstein and Adam Smith to suggest the market may be in a late-stage speculative phase. Retail trading mania and 'shoeshine' signals (Priority: 5/5): Anecdotes about plumbers, Facebook stock groups, Robinhood/TD Ameritrade growth, and investors piling into speculative names are used as evidence that retail participation has become manic and potentially near a top. Technology as a cycle-compressor (Priority: 4/5): The episode argues that phones, free trading, Zoom, Slack, and digital platforms amplify human emotions and speed up market/economic cycles, making historical analogies less reliable and reaction times much faster. Market vs. economy and fiscal support (Priority: 4/5): The hosts debate whether the stock market reflects the economy, emphasizing that the two can diverge sharply. They discuss the impact of enhanced unemployment benefits and how government transfers supported consumer spending. Housing, cities, and remote work (Priority: 4/5): They cover surging home sales and prices, urban flight, and uncertainty about the long-term future of Manhattan offices and city living, while suggesting commercial real estate may face more lasting pressure than residential housing. Gold, Bitcoin, and diversifying assets (Priority: 3/5): Gold’s new highs, its low correlation with stocks, and its role as a currency/commodity/speculation hybrid are discussed as part of a broader environment where multiple asset classes are rising despite economic weakness. Active funds, flows, and the future of investing (Priority: 3/5): The episode highlights massive outflows from active mutual funds and the rise of index funds, noting that active management is shrinking structurally even as the industry still employs many people and manages huge assets.

Key Arguments: The current market behavior resembles the late-1990s bubble almost point-for-point: speculative tech leadership, IPO/SPAC frenzy, retail day trading, and value-stock weakness. Technology has accelerated both market cycles and human emotion, making bubbles and recoveries occur faster than in the past. Retail traders are prominent, but the hosts argue Wall Street and institutions also participate in and feed these manias through supply creation and thematic products. The economy and stock market are related over the long run, but can diverge sharply in the short run; trying to time one from the other is unreliable. Enhanced unemployment benefits materially supported consumer spending and may have propped up the economy more than many expected. A broad move to cash because things look expensive can be dangerous if the market keeps rising; diversification remains the boring but often best answer. The rise of passive investing is pressuring active mutual funds structurally, not just cyclically, and many smaller active managers may not survive. Gold is acting as a true diversifier because it has near-zero long-term correlation with stocks and can respond to rates, the dollar, and risk sentiment for different reasons. Commercial real estate and airlines may suffer more persistently from remote work and reduced business travel than residential housing. Shorting crowded growth stocks is dangerous because timing matters enormously; getting in too early can be as damaging as being wrong outright.

Data Points: Timeframe for next major bubble, per Bernstein quote: around the year 2030 - Referenced as the next generation when a similar bubble might be expected, though the hosts argue it arrived earlier. Russell 1000 constituents that doubled off lows: 17% - Used to illustrate how strong the rebound in stocks was during the pandemic rally. Wayfair rally from bottom: up 800%+ - Example of extreme post-bottom performance in speculative growth stocks. E-Trade retail accounts opened in March: more than 260,000 - Cited as evidence of an unprecedented retail trading surge. TD Ameritrade average client trades per day: up 300% year over year - Shows the scale of retail trading activity increase. TD Ameritrade new retail accounts: 661,000 - Another sign of retail investor influx. Top trading days at TD Ameritrade: 10 of the top 15 in firm history were in June - Highlights the intensity of the trading frenzy. GLD AUM peak in 2011: $77 billion - Gold ETF reached this size when it briefly became the world’s largest ETF. GLD AUM low after the gold bust: about $21 billion - Shows the asset base collapse after gold’s earlier peak. GLD AUM near present in episode: $75-$76 billion - Indicates the ETF has nearly round-tripped to its prior peak. Gold weekly fund flows: GLD, IAU, and SLV all in top five weekly inflows - Evidence of a gold craze alongside the price rally. U.S. existing home sales change: up 21% in June - Used to show the housing market’s strength despite broader economic weakness. Weekly home price appreciation: 10% year over year - Shows fast rising U.S. home prices. Adults who moved temporarily or permanently due to COVID: 3% - Bloomberg/Pew data on pandemic-driven relocation. Adults who had someone move into their home because of COVID: 6% - Part of the broader migration effect caused by the virus. Adults who moved, knew someone who moved, or had someone move in due to virus: more than 1 in 5 - Illustrates the widespread social impact of COVID-related relocation. Young adults (18-29) who moved: nearly 1 in 10 - Shows migration was especially common among younger adults. Potential payroll decline without $600 UI boost: 6% lower in May than February - From Matthew Klein/Barron's, describing the support’s macro effect. Employee compensation plus jobless benefit with support: 3.5% higher - Compared with pre-pandemic February, due to relief payments. Weekly payments as share of previous GDP: about 4% - Describes the size of the unemployment support relative to the economy. Business travel share of U.S. airline sales: 60%-70% - Used to argue airlines may face a permanent demand hit from Zoom and reduced travel. Gold vs. stocks correlation: effectively zero - Long-term relationship cited as evidence that gold is a diversifier. Morningstar active equity funds under $100M: 1,086 - Illustrates the fragility of small active managers. Actively managed funds liquidated/merged in first half of 2020: 225 - Shows industry consolidation pressure. Actively managed funds below $500M: nearly two-thirds - Indicates how many funds are subscale. Mutual funds in outflows over prior three months: 65% - Supports the view that money is leaving active funds broadly. Cloud companies reaching $100M ARR: Slack in 3 years; Twilio and ServiceNow in 5-6 years - Example of accelerating software/company scaling due to prior infrastructure. Podcast/industry note on Google office return: employees home until summer 2021 - Used to underscore the long-lived effect of remote work.

Pivotal Quotes: "We are all at a wonderful ball where the champagne sparkles in every glass... what time is it? What time is it? But none of the clocks have any hands." — Adam Smith (quoted by Ben Carlson): Describing late-stage bull-market euphoria and the difficulty of knowing when a market top is near. "I have 130 grand in the market and I've got absolutely no freaking clue what I'm doing." — Plumber anecdote: Illustrates unsophisticated retail speculation and the 'shoeshine boy' signal. "The factors that drive gold prices tend to fluctuate. It is a fickle kind of asset." — Ben Carlson: Explaining why gold can surge for different reasons at different times and still diversify portfolios.

Implications: Listeners are warned that speculative excess can persist longer than expected, but retail mania, asset inflation, and policy support may be distorting markets. Diversification and patience matter more than market timing, while remote work and low rates could reshape housing, cities, and asset pricing for years.