Winners of the Financial Crisis (EP.106)

Episode Summary

Executive Summary: The episode ranges across private equity’s post-crisis rise, the backlash against venture capital and IPO hype, market structure shifting toward passive and quant trading, and how low fees and platform economics reshape finance. The hosts also discuss media disruption, labor market strength, housing weakness in Manhattan, parenting allowances, and a book recommendation tying current debates to historical economic cycles.

Main Topics: Private equity as the financial crisis winner (Priority: 5/5): The hosts discuss a Bloomberg piece arguing PE benefited most from the post-2008 environment: low rates, regulation on banks, and abundant capital. They debate why PE has stayed relatively under the radar compared with VC and hedge funds, and whether that will change as disappointments mount. Tech/VC scrutiny and overvalued unicorns (Priority: 5/5): Scott Galloway’s calls on overvalued unicorns and likely failures spark a broader discussion about hype, public criticism of venture-backed companies, and the way high-profile startup losses attract attention more than slower-moving PE stories. IPO performance and delayed going-public timing (Priority: 5/5): The hosts review a Fortune piece on 2019 IPOs, noting that many high-profile debuts had weak post-IPO performance because companies now stay private much longer and capture more of their growth before listing. Markets increasingly driven by quant, passive, and algorithms (Priority: 4/5): They discuss The Economist’s piece on market structure, noting the growing share of quant trading and the decline of human-driven informational edges, while questioning whether the era of superstar traders is over. Fee compression and brokerage economics (Priority: 5/5): The conversation covers zero-commission trading, Schwab’s business model, Fidelity’s likely response, and the idea that firms still earn money through cash balances, spreads, and platform economics even as commissions vanish. Consumer/media disruption and labor market strength (Priority: 3/5): They touch on Sports Illustrated layoffs, the rise of The Athletic, record-low unemployment, weak Manhattan real estate, and shifting household formation patterns among young adults. Recommendations and historical perspective (Priority: 3/5): The hosts review movies including Joker and a Liam Neeson thriller, then discuss Frederick Lewis Allen’s The Big Change and its insights into the Great Depression and World War II as economic anomalies.

Key Arguments: Private equity benefited from the post-crisis environment more than hedge funds because it was favored by low rates, client capital, and less public scrutiny. PE attracts less scrutiny partly because it invests in older, less glamorous businesses, unlike VC-backed tech names that dominate headlines. Many 2019 IPOs performed poorly because the best growth had already occurred in private markets before listing. The shift toward quant funds and passive investing has reduced the informational edge that once powered old-school trading superstars. Zero commissions are good for investors, but brokerage firms will continue making money through spreads, cash sweeps, and other fees. Fidelity is positioned like Microsoft in asset management: under-discussed but powerful, with durable economics and a dominant 401(k) franchise. Investor behavior may not change much when commissions fall from low to zero, but ultra-high historical trading costs likely suppressed turnover more than today’s pricing does. The labor market remains very strong despite media layoffs and industry disruption, with unemployment at historic lows. Historical context from The Big Change suggests major crises do not automatically trigger systemic overthrow, and WWII uniquely reshaped the economy and inequality patterns.

Data Points: Private equity-backed companies: 8,000+ - The hosts cite Bloomberg numbers showing the scale of PE-backed businesses, nearly double publicly listed companies depending on the definition used. PE managers earning at least $100M annually: More than investment bankers, top financial executives, and professional athletes combined - Used to illustrate how much wealth has accumulated in private equity. Average weekly child allowance: $30 - AICPA survey cited by the New York Times; up from $17 in 2016. Parents expecting chores for allowance: 4 in 5 - Survey result suggesting most allowance is conditional on household work. Average weekly chores tied to allowance: 5 hours - Reported average time children are expected to work for money. U.S. unemployment rate: 3.5% - Referenced as evidence of a very strong labor market. Unemployment for workers without a high school diploma: 4.8% - Lowest since the Labor Department began tracking it in 1992. Manhattan condo/co-op median sale price: $915,000 - Third-quarter median, down 8% year over year. Manhattan inventory priced above $3M: 29% - Shows the high-end concentration of supply in the borough. Manhattan closings above $3M: 9.7% - Highlights weak absorption at the top of the market. Young adults living with parents: Almost 30% - Apartment List/Census data showing a major shift since 1968. Young adults living with a spouse in 1968: Almost 80% - Historical comparison for household formation trends. Young adults living with a spouse in 2018: 24% - Shows the large decline in early marriage/independent household formation. Average U.S. tech company IPO timing in 1994: 4 years after founding - Equities First data cited to show how quickly firms once went public. Average U.S. tech company IPO timing recently: 11 years after founding - Indicates much later exits and more growth captured privately. Median time from founding to IPO, 1999-2018: From 5 years to more than 10 years - Another measure of delayed public listings. Private tech capital invested: $11B in 2005 to $75B in 2015 - Shows the rapid expansion of private funding. Private tech capital growth, 2013-2015: Tripled - Emphasizes the acceleration in private-market funding. Companies reaching $10B+ valuation before IPO: 6 companies between 2004 and 2015 - Illustrates the prevalence of late-stage private valuations. Institutional trading by volume: quant funds: About 20% to 40% over 10 years - Economist chart discussed as evidence of quant dominance rising. Daily shares traded: 7 billion shares - Referenced as part of the modern market structure discussion. Daily trading value: Around $320 billion - Shows the scale of contemporary market activity. Schwab cash balances: $208 billion as of June 30 - Used to explain how Schwab earns on cash spreads. Schwab Intelligent Portfolios cash allocation: 6% to 30% of assets; average 10% cash - Illustrates how cash drag supports brokerage economics. Roughly adults not reading a book in the past year: 27% - Pew Research survey cited by the hosts, who suspect the true figure is higher. Critics score for Joker: 69% - Mentioned in the movie discussion. Audience score for Joker: 90%+ - Contrasted with critics to show polarization. Critics score for Taken: 58% - Used as an example of questionable Rotten Tomatoes scoring. Critics score for a Liam Neeson remake discussed: 70% - The hosts disagreed with the positive critic reaction. Critics score for a thriller starring Ethan Hawke: 93% - Used to argue that critics can be badly misaligned with audience reaction. Audience score for the Ethan Hawke thriller: 68% - Still considered too high by the hosts.

Pivotal Quotes: "Private equity won the financial crisis." — Michael Batnick: Opening the discussion of Bloomberg’s argument that PE was the major beneficiary of the post-2008 era. "I think Fidelity is the Microsoft of asset management." — Ben Carlson: A comparison suggesting Fidelity’s scale and durable economics are underappreciated. "Anything that can be automated will be automated." — Ben Carlson: Used to answer the question of whether a finance degree is still worthwhile in an AI-driven future.

Implications: Investors should expect continued fee compression, more private-market scrutiny, and a market structure increasingly shaped by algorithms and passive capital. Firms with durable distribution and cash-flow models may keep winning even without flashy growth.