The Next Big Short? (EP.91)

Episode Summary

Executive Summary: This episode ranged across market microstructure, consumer finance, and investing behavior. The hosts argued that most investors should avoid trading at the open/close and not try to beat high-frequency firms. They discussed fading fads, bank disruption, inequality data, value investing’s struggles, student-loan distortions, and the risks of leveraged ETFs and structured products, while also previewing WealthStack and sharing media recommendations.

Main Topics: Market microstructure and algorithmic trading (Priority: 5/5): They discussed Bloomberg’s report that a growing share of equity volume occurs in the last half-hour of trading, and argued retail investors should avoid market orders and short-term trading battles against faster participants. Fads and fading brands (Priority: 4/5): HQ Trivia’s collapse and Mad Magazine’s winding down were used as examples of businesses fading with changing consumer attention and generational turnover. Wealth inequality and Fed data (Priority: 4/5): The hosts reviewed FRED’s wealth-share data, highlighting concentration at the top and the tiny share held by the bottom half of households. Banks, fintech, and the future of deposits (Priority: 5/5): They debated whether traditional banks are becoming obsolete as younger consumers switch more readily and fintech/tech giants could offer better cash-management products. Value investing and factor performance (Priority: 4/5): They revisited why value has underperformed, including the role of low inflation, and referenced work showing value does better in bear markets and higher-inflation regimes. Student loans and negative amortization (Priority: 5/5): A long discussion centered on why federal student loans carry wide spreads, how income-driven repayment can cause balances to grow, and whether the system should be simplified rather than forgiven wholesale. Leveraged ETFs and product complexity (Priority: 3/5): They criticized 2x/3x ETFs and crypto structured products as products that are hard for most investors to use well and often serve issuers better than buyers.

Key Arguments: Most investors do not need to trade at the open or close; avoiding those windows and market orders can reduce the chance of being disadvantaged by algos. Competing with high-frequency traders on very short time horizons is a losing game for ordinary investors. HQ Trivia and Mad Magazine illustrate how quickly attention-driven businesses and legacy media can vanish. Wealth inequality data show the top 10% control most wealth while the bottom 50% hold almost none, reflecting asset/liability imbalances and a shrinking middle. Traditional banks are vulnerable because younger consumers switch banks more often and may migrate to online-first financial services. Goldman/online-bank style products may be better positioned than legacy banks to win deposits in the future. Value stocks may be cyclical rather than permanently broken; low inflation and prior regime shifts have hurt them. Student-loan problems are not just about forgiveness; the structure of rates, spreads, and income-driven repayment can trap borrowers in negative amortization. Leveraged ETFs and structured products are often designed for specific scenarios and can destroy value for most users. Good investors make investing harder for active managers by pushing assets into passive strategies and forcing price discovery onto fewer participants.

Data Points: Equity trading volume in last half-hour: 23% - Bloomberg report on how much U.S. equity volume now occurs in the final 30 minutes of trading, up from 18% in 2010. Equity trading volume in 2010 last half-hour: 18% - Historical comparison for the final half-hour of the trading day. HQ Trivia downloads (Jan-Jun 2019): 827,000 - TechCrunch figure cited as evidence of collapse from its peak. HQ Trivia downloads decline from 2018: 92% down - Compared with 10.2 million downloads in the same period of 2018. HQ Trivia peak valuation: $100 million - Referenced as the company’s estimated peak private valuation. Top 1% wealth share: 31% - FRED wealth distribution data discussed by the hosts. Top 90th-99th percentile wealth share: 39% - Part of the wealth-share breakdown from FRED. 50th-90th percentile wealth share: 29% - Middle-to-upper-middle cohort share in the wealth data. Bottom 50% wealth share: 1.3% - Illustrates how little wealth is held by half of households. Amazon share of online retail: 38% - Used in the discussion of Walmart’s e-commerce challenge. Walmart share of online retail: 4.7% - Shows Walmart’s relatively small position in e-commerce. Walmart e-commerce as share of US business: 5% - Context for why online losses are strategically important but still small relative to total operations. Walmart e-commerce revenue: $21-22 billion - Revenue range cited in the Vox article about the division. Projected Walmart e-commerce loss: $1 billion - Illustrates the cost of competing with Amazon. Primary bank switch rate, all Americans: 4% - Shows strong consumer inertia in banking relationships. Primary bank switch rate, under 40: 9% - Younger consumers are much more likely to switch banks. Student loan rate cited: 6.8% - Interest rate discussed as being charged to students under the federal loan structure. Treasury borrowing rate for student-loan program: 2.8% - Used to explain the spread captured by the Education Department. Spread retained by Education Department: 4% - Described as a profit spread in the lending structure. Borrower couple example: $160k initial balance to $220k - Illustrated negative amortization despite years of payments. Monthly payment in borrower example: $1,800/month - Payments were still barely covering interest. Inversion duration: 30 straight days - The 10-year/3-month yield curve had been inverted for 30 consecutive days. ProShares lifetime flows vs current assets: $55B flows vs $31B assets - Bloomberg chart showing cumulative investor losses of $24B in the sponsor’s products. ProShares implied investor loss: $24 billion - Difference between lifetime flows and current assets in levered ETF products. Jared Dudley career earnings: $57 million - Mentioned during NBA/brand discussion. Woj Twitter followers: 3.5 million - Used to illustrate his brand value and market influence.

Pivotal Quotes: "Don't place market orders at the open" — Ben Carlson: Advice for retail investors reacting to the discussion of heavy volume and algorithmic trading near market open and close. "The ball didn't even hit the bowling alley. It just went straight into the pins." — Michael Batnick: Analogy for how impossible it is to compete with high-frequency traders at their own game. "Good investors make investing harder" — Matt Levine (referenced by hosts): Used to describe how passive flows and market structure changes make active management more difficult.

Implications: Listeners should focus on simple, durable financial habits: avoid unnecessary trading, understand loan terms, beware of complex products, and use automation to build savings. Industry-wise, banks and active managers face pressure from fintech, passive investing, and changing consumer behavior.