The Opposite of a Falling Knife (EP.151)

Episode Summary

Executive Summary: The episode dissects the 2020 retail-trading frenzy, arguing that Robinhood/day-trader activity mostly boosts volatility in individual names rather than moving the broad market. The hosts compare speculation in bankrupt Hertz, debate CalPERS’ use of leverage, revisit private equity fees, warn against doom-scrolling/fear headlines, and discuss pandemic-era changes in consumer behavior, media, and entertainment.

Main Topics: Retail speculation and the Robinhood/Portnoy phenomenon (Priority: 5/5): The hosts argue retail traders are not moving the S&P 500 but are amplifying volatility in smaller, lower-quality names like Hertz. They view the surge as partly driven by free commissions, boredom, and entertainment value, with Portnoy serving as an attention magnet rather than a serious market analyst. Financial media, narrative bias, and hype cycles (Priority: 4/5): They criticize the financial press for treating Portnoy and retail trading too literally, while also noting the media benefits from the traffic. The conversation frames most of this as a story about attention, humor, and speculation rather than a permanent structural change in markets. Hertz, bankruptcy, and speculative absurdity (Priority: 5/5): Hertz becomes the poster child for speculative excess: the company was bankrupt, warned its equity could be worthless, yet its stock still surged on retail interest. The hosts use it to illustrate how markets can detach from fundamentals in the short run. CalPERS and the case for leverage (Priority: 4/5): They react to CalPERS considering up to 20% leverage to help meet a 7% return target. One host is skeptical of the backlash, arguing that modest leverage in a low-rate environment may be a rational response to underfunding, not reckless behavior. Private equity returns and fee drag (Priority: 4/5): A paper arguing public pensions have earned similar returns in private equity and public markets since 2006, while PE firms collected massive fees, leads to a debate about democratizing PE via 401(k) access. The hosts suggest lower-fee structures could make private equity more viable for individuals. Doom-scrolling, fear, and bank-collapse narratives (Priority: 4/5): They discuss a fear-heavy article about a looming bank collapse and contrast it with rebuttals emphasizing that today’s CLO market is not the same as 2008’s CDO crisis. The broader point is that downside stories are easier to sell and psychologically more compelling. Pandemic-era lifestyle, entertainment, and investing behavior (Priority: 3/5): The episode touches on masked outings, restaurant changes, sports-ticket refunds, Instacart/Peapod usage, possible birth declines, podcast monetization, and movie recommendations. These asides reinforce the theme that COVID changed daily life and redirected attention toward trading and digital media.

Key Arguments: Retail traders can create volatility in small, illiquid, or junky names, but they are far too small to meaningfully move the overall market. Robinhood’s growth and free commissions have made speculation more accessible, but the larger story is about entertainment and crowd behavior, not market-wide price control. Dave Portnoy is more entertainer/agitator than traditional market commentator; financial media misreads him when they take his commentary too seriously. Hertz is a classic example of speculative excess: a bankrupt company with negative equity value can still attract buyers because short-term market behavior often ignores fundamentals. CalPERS’ proposed leverage is not automatically irresponsible; if borrowing costs are low and the fund needs higher expected returns, moderate leverage can be a rational tool. Private equity has produced enormous wealth for GPs while delivering public-market-like returns to LPs; lower-fee access could let retail savers capture some of the upside without enriching managers. Fear-based market commentary is easier to market than balanced analysis, and headlines often amplify worst-case scenarios beyond what the underlying facts justify. Pandemic distortions are temporary and could reverse, but some behaviors—more trading, more customization, more digital media consumption—may persist in altered form.

Data Points: Robinhood customers (end of 2019): 10 million - Referenced as the user base before the retail-trading surge Robinhood customers added in first quarter: 3 million - Used to estimate the platform’s growing scale Estimated Robinhood customers in second quarter (hypothetical): ~16 million - Speaker extrapolates growth to illustrate potential market impact Average Robinhood account size: $2,000 - Used to argue retail flow is too small to move the broad market Estimated Robinhood customer assets: ~$30 billion - Illustrates why retail trading is a drop in the bucket for the overall market Hertz post-bankruptcy high price: $5.53 - Used in the Matt Levine quote about Hertz equity valuation Hertz market value at post-bankruptcy high: ~$785 million - Shows the speculative stock value despite bankruptcy Hertz corporate bonds trading price: ~40 cents on the dollar - Used to infer the equity’s negative value Hertz implied equity value: At best negative $1.8 billion - Matt Levine estimate quoted in the discussion Hertz shares outstanding: ~142 million - Used in the valuation discussion CalPERS potential leverage: Up to 20% of fund value - Plan discussed as a way to boost expected returns CalPERS leverage amount: Nearly $80 billion - Based on current asset size CalPERS target return: 7% - The hurdle rate leverage is meant to help achieve Private equity fees collected since 2006: $230 billion - From the Oxford paper cited by the hosts PE multi-billionaires: From 3 in 2005 to 22 in 2020 - Illustrates wealth concentration among managers Twitter app store rank: #7 on Apple’s app store - Used as evidence of doom-scrolling demand Potential U.S. birth decline: 300,000 to 500,000 births - Brooking Institution speculation based on pandemic conditions U.S. annual births: ~4 million - Used to contextualize the potential decline Joe Rogan average listenership: 11 million per podcast - Used to argue Rogan’s audience exceeds Howard Stern’s Howard Stern audience/subscriber context: ~34 million Sirius subscribers - Compared against Rogan’s reach Instacart valuation: $14 billion - Mentioned in the context of pandemic demand and possible IPO timing

Pivotal Quotes: "If active managers don't outperform this year, when are they ever going to do it?" — Michael Batnick: Opening argument that retail volatility could create opportunities for active managers "They are a comedy site with no agenda. In an increasingly humorless world, we tend to piss people off." — Dave Portnoy (quoted by the hosts): Used to explain why Portnoy should be treated as entertainment rather than a literal market signal "If the lockdown is effective, and it appears that it was, then with the benefit of hindsight, people will say, see, we didn't need to be so aggressive." — Adam Butler (quoted by the hosts): Illustrates the episode’s theme that successful risk management often looks unnecessary after the fact

Implications: Retail trading, leverage, and fear-driven narratives are likely to keep distorting short-term market signals. Investors should focus on process, fees, and position sizing rather than sensational headlines or viral personalities.