We Should Be in a Bubble (EP.202)

Episode Summary

Executive Summary: The episode ranges from investing philosophy and social media judgment to market concentration, crypto mania, Robinhood’s growth, wage inflation, and housing shortages. The hosts argue that better outcomes often come from higher incomes and strong peer groups, not just financial literacy, while noting how mega-cap tech dominates returns and how speculative assets like crypto and meme stocks have attracted both adoption and scams.

Main Topics: Social media, disagreement, and outgrowing peers (Priority: 5/5): The hosts discuss how internet discourse encourages overreaction when people like Charlie Munger, Scott Galloway, or Mark Cuban say something controversial. They argue it is healthy to respect people while disagreeing with specific takes, and that friendships and peer groups can naturally evolve over time. Mega-cap tech dominance and market concentration (Priority: 5/5): They highlight how Apple, Amazon, Alphabet, Microsoft, and Facebook continue to generate enormous revenue and earnings, making the market increasingly dependent on a few giants. Even after strong earnings, the stocks pulled back, suggesting lofty expectations are already embedded. Bubble debates, valuation, and the role of crypto (Priority: 4/5): The conversation weighs whether markets are in bubble territory, especially given high Shiller CAPE levels, ultra-low rates, and speculative behavior. They also suggest crypto may be absorbing some speculation that otherwise would push equities even higher. Stock picking difficulty and value/growth rotation (Priority: 5/5): Citing Morningstar and Fama-French-style data, they emphasize how hard it is to own winning stocks even during an exceptional bull market. They also note the first quarter's strong value performance and a move toward cyclical/physical-world sectors. Robinhood, fintech growth, and customer service (Priority: 4/5): The hosts debate Robinhood’s valuation potential, its heavy crypto focus, and its operational weaknesses. They criticize its anti-elite rhetoric and note that customer-service failures are prompting the hiring of many FINRA-registered professionals. Crypto adoption, scams, and retail speculation (Priority: 4/5): Institutional and retail crypto adoption is accelerating, but so are scams and inexperienced participation. They stress that crypto is fertile ground for fraud and that many users now hold only crypto, with TikTok influencing investment decisions. Inflation, wages, labor shortages, and housing (Priority: 5/5): The episode argues that labor shortages are forcing wage increases across restaurants, retail, and large employers. They also discuss rising millennial homebuying share, missing HELOC availability, and how more income may matter more than financial literacy in improving personal finances.

Key Arguments: You can respect a thinker like Charlie Munger or Scott Galloway while rejecting a specific opinion; disagreement should not trigger total dismissal. Social media makes people react too literally, which amplifies misunderstandings and performative dunking. Mega-cap tech firms are so large and profitable that they distort market indices and dominate aggregate earnings growth. Even after a decade-long bull market, picking winning stocks has been extremely difficult; most individual stocks underperform the index or cash. The market may already reflect bubble-like conditions in valuations, but crypto speculation could be partially substituting for more extreme equity speculation. Robinhood has real business momentum, especially in crypto, but weak customer service and combative branding could limit its long-term credibility. Financial literacy alone will not materially improve most people’s finances; higher incomes and more savings capacity matter more. The economy is experiencing broad physical-world shortages, wage pressure, and supply-chain strain, which are reshaping sector leadership away from stay-at-home growth stocks. Young investors are increasingly entering markets through crypto and apps like Robinhood, often with weak diversification and limited investing background. Home equity and housing scarcity remain key financial issues, and banks’ reluctance to offer HELOCs may be constraining additional liquidity.

Data Points: Contemporary art price appreciation: 14% annually (1995-2020) - Used in the ad read for Masterworks to justify art as an inflation hedge. Facebook revenue annual run rate: Over $100 billion - Cited as evidence of how massive the largest tech platforms have become. Facebook incremental net income margins: 54.8% - Mentioned while discussing the profitability of big tech. Apple buybacks announced: $90 billion - Described as larger than 400 S&P 500 components. Combined annual revenue of Apple, Amazon, Alphabet, Microsoft, Facebook: $1.2 trillion - Used to illustrate the scale of the mega-cap cohort. Revenue comparison: Five giants make more sales in less than a week than McDonald's does in a year - From the New York Times comparison discussed on the show. Apple market cap: $2.2 trillion - Referenced when discussing how large Apple has become. Apple post-earnings pullback: About 7.5% below highs - Noted to show the market had even higher expectations than analysts did. Shiller CAPE ratio: About 37 - Compared to tech bubble-era extremes when debating market valuations. US stock market 10-year return: Close to 14% per year - Used in the stock-picking discussion. Individual stocks that finished positive over 10 years: 42% - Morningstar recreation of the Bessembinder-style finding. Individual stocks with 10-year loss: 36% - Shows how many stocks still underperformed over a strong decade. Stocks that went out of business or were taken over: 22% - Part of the long-run stock survival/underperformance data. Large US stocks trailing benchmark: 4 out of 5 - Illustrates how few large stocks outperform the index. Q1 2021 value factor result: Second-best quarter in history - Mentioned as the value/growth spread shifted sharply. Robinhood payment for order flow, 2020: $687 million - Used to argue Robinhood has massive monetization power. Robinhood payment for order flow, Q1 2021: $331 million - Shows the pace of revenue generation continued strongly. Twitter quarterly revenue: $1 billion - Used to compare Twitter’s scale with Yahoo assets. Yahoo entity revenue in 2020: $7 billion - Yahoo Finance, Yahoo Mail, TechCrunch, and Engadget combined. Coinbase institutional assets: Rose from $45 billion to $122 billion in Q1 - Evidence of institutional crypto adoption. Bitcoin futures revenue at CME: Higher in Q1 than all of last year - Shows rapid growth in crypto derivatives demand. Crypto-related scams and fraud losses: More than $16 billion globally - Used to show the fraud risk in crypto markets. Luno survey: 55% had no other investments - Meaning many customers held crypto as their only investment. Personal savings rate: Rose above 30%, later around 21% - Discussed as a sign that income increases, not just literacy, drive saving. Consumer confidence gap chart: Higher-income consumers vs. lower-income consumers - Used to argue lower-income households are benefiting from rising wages. Companies with hard-to-fill openings: 42% - National Federation of Independent Business survey. Millennial share of home purchases: 33% in 2014 to 54% in 2020 - Shows millennials’ rising role in housing demand. HELOC origination pause: Since April 2020 - Wells Fargo and JPMorgan had suspended new HELOC origination. Target card sales restriction: Fridays at 8 a.m. only - Sign posted for MLB, NBA, NFL, and Pokemon cards due to demand.

Pivotal Quotes: "You constantly want to be upgrading your peer group. You want to hang out with smarter, more successful, more interesting, higher character people because you will rise or fall to the level of your peer group." — Scott Galloway (quoted by hosts): Discussing the viral peer-group tweet and whether it was misread as elitist. "If the last year has taught us anything, it is that people are tired of the Warren Buffetts and Charlie Mungers of the world acting like they are the only oracles of investing." — Robinhood blog (quoted by hosts): Used as an example of Robinhood’s combative stance toward traditional investors. "The point is have people around you who inspire you. They will inspire you in different ways. Make sure they inspire you and that you inspire them." — Scott Galloway (paraphrased/quoted): The hosts note this was the intended meaning behind the peer-group tweet.

Implications: Markets may stay concentrated in a few giants while retail speculation shifts to crypto and meme assets. Wage gains and housing shortages could keep benefiting lower-income households and millennials, but the next phase likely depends more on earnings growth and liquidity than on valuation discipline.