When Hitler Took Cocaine (EP.44)

Episode Summary

Executive Summary: The episode argues that modern market valuation debates require historical context because accounting, globalization, and intangible assets have changed what metrics mean. It also warns against get-rich-quick behavior in crypto, highlights how competition is reshaping brokerages and retail investing, questions the usefulness of certain alternative strategies, and revisits ongoing problems in financial advice, pensions, media monetization, and sports media disruption.

Main Topics: Why old valuation metrics are harder to use today (Priority: 5/5): The hosts discuss a Wall Street Journal piece on market predictors and explain why measures like CAPE, Tobin’s Q, and Buffett’s indicator can be misleading because the economy and index composition have shifted toward intangibles, services, and global sales. Crypto speculation and the psychology of greed (Priority: 5/5): They react to New York Times stories about investors devastated by crypto declines, framing them as examples of people seeking shortcuts to wealth and ignoring the risks of concentrated speculation. Free trading, brokerage competition, and platform commoditization (Priority: 4/5): Robinhood’s rise and JPMorgan’s move to offer free trades are used to show how large incumbents can replicate fintech features, intensifying competition while potentially encouraging overtrading. Managed futures and trend-following underperformance (Priority: 4/5): The hosts debate whether trend-following funds have become crowded or over-diversified, and whether their poor returns should be judged against stocks given their role as non-correlated diversifiers rather than equity substitutes. Retail strength despite Amazon fears (Priority: 4/5): Target, Costco, TJ Maxx, Ross, Lululemon, Nike, and Best Buy are cited as examples of retailers thriving even amid narratives that Amazon would destroy brick-and-mortar commerce, suggesting consumers are still spending robustly. Financial industry misconduct and structural conflicts (Priority: 5/5): Several examples of predatory behavior at large firms are discussed, including excessive commissions, boiler-room schemes, and Wells Fargo-style incentives, underscoring how hard it is for ordinary clients to know whether advice is truly aligned with their interests. Media, subscriptions, and changing business models (Priority: 3/5): The Athletic, Walmart’s audiobook push, and the collapse in tech/media prices are used to illustrate how subscription models and digital distribution are replacing legacy advertising and physical media economics.

Key Arguments: Historical valuation metrics can still indicate overvaluation, but structural changes in accounting, globalization, and asset composition make direct comparisons across eras unreliable. The market may be expensive by many measures, yet valuation alone does not provide a decisive investing conclusion without context. Crypto and similar fads attract investors because they promise a secret path to wealth; people routinely ignore the possibility of large losses when assets are soaring. Lower trading friction helps firms and consumers in some ways, but it can worsen investor behavior by increasing the temptation to trade too often. Large incumbents can copy successful fintech features, so a first mover like Robinhood may not dominate as much as expected. Managed futures may be non-correlated, but the product has often been oversold as equity-like with crisis protection, creating unrealistic expectations. Many investors misunderstand diversification products and then abandon them after poor intermediate results, even if the strategy could help in a deep bear market. Retail data show that consumer spending remains healthy, challenging the idea that Amazon alone explains all retail outcomes or that the economy is weak. Financial services misconduct persists because incentives often reward asset gathering, product sales, and complexity rather than fiduciary alignment. Pension systems with large deficits may be forced into risky financial engineering, but borrowing to chase higher returns simply raises the hurdle rate and compounds the problem.

Data Points: Charging fee in 1948 investing ad: 85 basis points per trade - Used to illustrate how historical trading costs were much higher, supporting the gross-vs-net returns discussion. Intangible assets in S&P 500 market value: Less than 20% in 1975; more than 80% in 2015 - Cited to explain why old valuation metrics are less applicable in today’s economy. Intangible asset value increase: From less than $1 trillion to almost $20 trillion - Shows the scale of the shift toward intangible value creation. S&P 500 sales conducted overseas: 40% to 50% - Used to question the usefulness of Buffett’s indicator, which compares market cap to GDP. Crypto investor loss example: Down 90% - A Korean woman invested $90,000 into cryptocurrencies and saw most of it evaporate. Robinhood valuation: $5.6 billion - Used as an example of how quickly trading platforms can scale and attract competition. Free trades offered by JPMorgan: At least 100 free trades in the first year - Part of JPMorgan’s strategy to compete with Robinhood through its banking app and website. JPMorgan banking app users: 47 million - Indicates the scale of JPMorgan’s distribution advantage in brokerage competition. Managed futures performance since 2011: Lost 3.4% on average - HFR-managed futures funds were compared against a rising S&P 500 to show poor long-term results. S&P 500 performance since 2011: Up 124% - Used as the contrasting benchmark in the managed futures discussion. Target same-store sales growth: Strongest in 13 years - Referenced as evidence of solid consumer demand. Target digital sales growth: More than 40% - Shows e-commerce growth off a small base. Retail ETF performance: At an all-time high - Used to argue that retail strength is broader than just Amazon-led dynamics. U.S. audiobook market share: Kindle controlling more than 80% of U.S. sales - Mentioned during discussion of Walmart’s audiobook subscription strategy. Median new house to stock prices signal: Only happened five times before - A historical sell signal cited from MarketWatch/Greg Cardiff as a cautionary valuation indicator. TIAA survey: employer guess: 51% thought workers would prefer a $2,700 monthly stipend - Compared with employee preferences for retirement income choices. TIAA survey: employee preference: 62% would choose an annuity versus a lump sum - Used to show preference for monthly income over one-time payouts. Survey-implied return: About 6.5% - The monthly stipend’s implied return on a $500,000 lump sum was calculated in discussion. Chicago pension borrowing rate: 5.25% - Chicago reportedly considered borrowing at this rate to help address pension underfunding. Chicago pension bonds: $10 billion - The proposed size of borrowing to close the pension gap. Financial misconduct example portfolio value: $1.3 million - A JPMorgan account discussed in the New York Times investigation. Financial misconduct example commissions: $128,000 in 2017 - The amount charged in commissions on the $1.3 million portfolio. Commission burden: 10% of portfolio value - Shows how excessive the commissions were relative to assets. Sports participation decline: 2% - High school football participation fell year over year in 2017. High school athletes decline: 1 million fewer - Used to illustrate broader concern about football’s health and safety perception. Old video cassette advertisement cost: Over $150 for three tapes - A 1981 New York Times archive ad showing how expensive home video used to be. RCA video disc player cost: $500 - Illustrates how much technology prices have fallen over time.

Pivotal Quotes: "gross returns may be lower going forward, but net returns may be similar to what we've seen historically" — Michael Batnick / Ben Carlson discussion: Used in the opening segment on trading costs and market structure. "people want to have a shortcut. And they assumed crypto or any other fad is going to do it for them" — Ben Carlson: Commenting on crypto losses and investor behavior in fad markets. "you don't give a drunk another drink to fix the problem" — Ben Carlson: A critique of Chicago’s plan to borrow more to solve pension underfunding.

Implications: Listeners should expect more competition, lower visible fees, but persistent behavioral and structural risks. Historical metrics still matter, but only with modern context. The episode reinforces disciplined investing, skepticism toward fads, and awareness that incentives in finance often diverge from client interests.