The Bet the Farm Edition

Summary

Slate Money – "The Bet the Farm Edition" (August 26, 2017)

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Episode Overview

In this lively late-August edition of Slate Money, hosts Felix Salmon, Anna Szymanski, and Jordan Weissmann serve up a "fruit bowl" of business and finance stories with a special focus on the worlds of strawberries and bananas—two fruits at the heart of global agribusiness innovation, risk, and culture. They're joined briefly by listener Carl from Los Angeles, whose question about the risks of index investing sparks a deep-dive on the pitfalls and macroeconomic effects of passive investment trends.

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1. The Risks of Index Investing (00:55–21:05)

Key Discussion Points

• Carl’s Listener Question (02:17)
  Carl from Los Angeles asks: Is widespread index-based passive investing inflating asset prices and creating bubbles? Are we entrusting too much power to the firms compiling indices?

• Active vs. Passive Investing:

  • Jordan (04:18): “As someone who just has all my money essentially in a Betterment account… the thing that does worry me sometimes is market risk.”
  • Felix (05:39): “If you are the kind of person who wants to avoid your portfolio dropping by… 30%, you shouldn’t be mostly invested in stocks.”

• Market Dynamics:

  • The panel distinguishes between risks to individual investors (volatility, market risk) and systemic risks (misallocation of capital, bubbles).
  • Felix asserts that stocks offer the best long-term returns historically, but no one can predict if that will persist (05:39).
  • Anna warns that as passive funds accumulate market share, it could create capital allocation mismatches:
    Anna (10:15): “When passive investment represents this much of the market, what does that mean for the market, and what potential dangers could that introduce…”

• Marginal Price Setter Debate (14:35–17:25)

  • Jordan pushes for clarification on what a marginal price setter is, prompting Felix to explain how even with a majority of passive holders, the active “marginal” traders still dictate real-time prices via price discovery.
    • Felix (15:06): “The reason the market moves from day to day is that the other 10% of the market is people who trade in and out of stocks... performing price discovery.”

• Concerns About Misallocation & Arbitrage:

  • Anna suggests that if all funds flow into large indices, small-cap and unlisted firms might not get enough capital.
  • Felix counters that any imbalances should create opportunities for active managers and arbitrageurs, who will exploit these inefficiencies and restore equilibrium (19:30).
  • The discussion references Howard Marks' memo on these systemic risks.

Notable Quotes

• Felix (05:39): “If you are... uncomfortable with that kind of volatility, then yeah, that’s one problem.”
• Anna (14:12): “...both index investing and ETFs... now represent a large portion of the market, of money that is going into securities not based on any analysis of the fundamentals…”
• Felix (20:04): “The price discovery mechanism of markets does not need everyone to be doing their own independent research. It just needs a tiny minority to be doing it.”

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2. "Big Strawberry": The Science and Business of Berries (21:09–32:05)

Key Discussion Points

• Driscoll’s & Modern Strawberry Innovation (21:10–22:47):

  • Sparked by Dana Goodyear’s New Yorker piece on Driscoll’s, the discussion explores how the strawberry industry is driven by continuous genetic innovation, less by traditional farming and more by R&D and branding.
    • Felix (22:08): “Driscoll’s is constantly creating and tweaking the genetics of strawberries… It’s more of a product lab than a farmer.”
    • Jordan (22:47): “They [Driscoll’s] think they design the strawberry, then they work with... farmers and then sell and market it around the world.”

• Patents in Berries (24:24–26:13):

  • Historical context on plant patents—lobbied for to protect innovation amidst rampant plant theft and to incentivize development. UC Davis becomes an important public innovator.
    • Jordan (26:13): “You actually can have a thriving, innovative economy without these patents… My strawberries are a good example of why patents don’t need to exist.”

• Rapid Variety Turnover & Obsolescence (26:13–27:04):

  • Strawberries are replaced quickly due to disease risks and the need for adaptation; the “same” strawberry seldom lasts more than a decade.

• GMO Parallels (27:04–28:43):

  • Anna notes how similar cross-breeding is to GMOs but how the language changes public perception.
    • Anna (27:36): “Normally when we’re talking about plants and modifying their genetics, we use the term GMOs… this article is essentially about creating new breeds...”

• Why Store-Bought Strawberries Taste Bland (28:44–31:04):

  • Answers Anna’s question about declining flavor—strawberries are bred for shipping durability and appearance, not always for taste.
    • Felix (29:30): “They need to be able to be shipped from one coast to the other... bred for their hardiness more than their taste.”
    • Jordan (28:50): “I actually like Driscoll strawberries... often a lot sweeter than at the farmer’s market.”

• Heirloom & Novelty Breeds:

  • The rise of “ugly” tomatoes and resurgence in wild-like strawberries caters to millennial novelty cravings (30:13).
    • Jordan (30:13): “There’s been this movement towards... experimenting with wild, ish strawberries... like Anna was finding in the bush.”

Notable Quotes

• Felix (24:22): “If you’ve eaten a raspberry, it’s almost certainly either one you picked yourself or a Driscoll’s raspberry.”

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3. Bananas: The Commodity Monoculture (32:05–41:00)

Key Discussion Points

• The Anti-Strawberry: Cavendish Bananas (32:05–34:48):

  • Market dominated by a single variety (Cavendish), globally cloned, highly vulnerable to new diseases.
    • Felix (33:19): “Cavendish bananas are famously really boring bananas... one species, it’s one banana, and... if a disease were to come along... there is now a disease which has come along...”

• Banana Extinction Risk & History (33:56–34:48):

  • Echoes the fate of the Gros Michel banana, which was wiped out by Panama Disease, with Cavendish now facing similar threats.

• Agricultural Monocultures vs. Innovation (34:48–35:42):

  • Contrasts strawberry R&D-driven adaptation with bananas’ commodity monoculture approach.
    • Jordan (35:15): “The strawberry industry... shows us the other approach... either academic institutions or big strawberry coming up with new strains... Bananas... just have commodity banana and sell the same thing everywhere.”

• Geopolitics of Bananas (36:16–36:57):

  • Economics and politics heavily entwined in banana-producing countries; trade wrangling over EU import preferences and Caribbean economies’ reliance on bananas.
    • Felix (36:21): “There are actual banana republics in the Caribbean whose main export is bananas and... where... trade terms... are vital to remain competitive...”

• Could the U.S. Embrace Artisanal Bananas? (37:08):

  • Would the West ever adopt diverse international banana strains? Panel is skeptical but intrigued.

• Bananas as a Loss Leader (38:50–39:17):

  • Supermarkets often sell bananas at or below cost to attract customers.
    • Anna (39:02): “Bananas are a loss leader… they bring people to your fruit stand or to your bodega and then you buy your blueberries and your blackberries that cost a lot of money.”

• Future Threats (39:17–41:00):

  • If Panama Disease devastates Cavendish, whole economies could reel, especially Ecuador, already struggling with oil price declines.

Notable Quotes

• Anna (36:16): “For the sake of poor Ecuador, I do not want us to have local bananas.”
• Felix (40:19): “They [banana producers] found this solution which worked and then there was no incentive... to create alternative bananas. And that could wind up, you know, like everything we know about the Irish potato famine, like, could basically happen to banana producers…”

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4. Numbers Round (42:01–46:13)

Key Numbers & Fun Facts

• MoviePass Subscription Price
  Jordan (42:06): “$9.95 a month. This company called MoviePass… lets you go to as many movies in theaters as you want per month... AMC freaked out and started saying we’re going to try and... bar this service from our theater…”

• Quinceañera Industry Size
  Felix (43:57): “My number is 400,000, which is the number of basically Mexican American girls who turn 15 each year... The average quinceañera... costs $15,000, which... works out at a $6 billion a year industry…”

• China’s Real Growth Minus Debt
  Anna (44:46): “5.3%. The IMF said that China’s growth rate from 2011 to 2016 would have been 5.3% instead of 7.3% if they hadn’t issued as much debt as they have... They know they have to rein back all this leverage, but if they do that, they’re not going to meet their growth targets…”

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5. Closing & Memorable Moments (46:00–End)

• Team Strawberry vs. Team Banana
  Felix and Jordan declare for strawberries in the great fruit rivalry, though Anna sticks with bananas.

  • Felix (45:45): “Team Strawberry.”
  • Anna (45:46): “Team Banana, man.”
  • Jordan (46:05): “No one gets joy out of a banana. No one is like, oh god, yeah, this is summer. I’m eating a banana.”

• Fruit Salad Philosophy
  Discussion ends with a lighthearted riff: what really makes the perfect fruit salad, and the necessary inclusion/exclusion of melon varieties.

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Timestamps of Key Segments

• Risks of Index Investing & Market Structure: 02:17–21:05
• The Strawberry Segment (IP, Patents, Taste): 21:09–32:05
• Banana Monoculture & Trade Politics: 32:05–41:13
• Numbers Round: 42:01–46:13
• Closing Fruit Debate: 46:00–end

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Memorable Quotes

• Felix (15:06): “The reason the market moves from day to day is that the other 10% of the market is people who trade in and out of stocks... performing price discovery.”
• Jordan (28:50): “I actually like Driscoll strawberries... often a lot sweeter than at the farmer’s market.”
• Felix (33:19): “Cavendish bananas are famously really boring bananas...”
• Anna (39:02): “Bananas are a loss leader…”

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Tone and Style

Throughout the episode, the hosts maintain their signature witty, offbeat, and informed banter. They mix food metaphors, hard business analysis, and a willingness to nerd out on everything from berry IP battles to the geopolitical intrigues of the banana trade. The episode is an engaging blend of economics, agriculture, and pop culture—a true “fruit salad” of thought.

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For listeners interested in the intersection of food science, investment strategy, and global trade—all seasoned with transparent disagreements and good humor—this episode is an essential, entertaining listen.

Transcript

[A]

The following podcast contains explicit language.

[B]

Hello, and welcome to the BET the Farm edition of Slate Money, your guide to the business and finance news of a lovely late August week. We would normally around this time do a edition, but we've done that a couple of times. And what goes better with than fruit? So this is gonna be the fruit edition. We are going to talk not only about bananas, but also and especially about strawberries.

[A]

He's not even kidding. Oh, no, that's actually what we're called. It's really true. It is officially late August.

[B]

Yes, it's late August and we are having a fruit bowl. It's actually we are, we are doing our own little sleep money fruit salad here. It's gonna be delicious. It's going to be full of antioxidants, antioxidants, vitamin C. Yeah. And. And maybe squeeze some lemon on top so it doesn't go bad. I don't know.

[A]

You squeeze lemon on your, on your strawberries.

[B]

I don't know. No, no strawberries. What you want to do is a little. A couple teaspoons of granulated sugar.

[A]

Yeah, that's. If your strawberries suck that anyway.

[B]

No, no, you do it. As my grandfather always used to say, he's not doing it for the taste, he's doing it for the crunch.

[A]

Interesting. Okay.

[B]

Yeah. So yeah, we're gonna talk about strawberries because actually there's this just. The world of big strawberry is kind of amazing. So we want to dive into that with Adam Szymansky.

[C]

Hello.

[B]

And Jordan Weissman.

[A]

Hello.

[B]

And a little walk on part from Carl in Los Ang. And a little walk on part from Carl in Los Angeles. Because before we get to fruit.

[A]

Yeah.

[B]

We are going to do this thing where we answer your questions.

[A]

Yes.

[B]

And Carl has written in and in fact phoned in with a question. Carl, what is your question? Or rather this is Carl's question on voicemail.

[D]

Hey there, Felix, Anna and Jordan. This is Carl from Los Angeles. You guys are always singing the praises of index investing, but I wonder, is it possible that we are all missing something with this move to index based passive investing? If everyone moves to passive index funds and just invest on schedule, won't this lead to inflated prices of the assets that make up the indices? All of the stocks, bonds and commodities that are included in the major global indices will get inflated, causing a bubble in the mainstream. And the smaller or less mainstream assets, ones that for every reason are not included in the dominant indices, will become undervalued. Basically, if too much money is dumb and passive, can't that in and of itself produce a bubble. And aren't we handing over a lot of power and oversight to the firms that are compiling these indices? So perhaps you could talk about the risks of index investing in a future show. Many thanks and great show. I always enjoy it.

[B]

So Carl, we did talk about the indexes and the way that they are doing things like preventing companies from having dual classes of shares. But we haven't talked in a huge amount of detail about the potential downside of passive investing. Mainly because we, I don't think, have had anyone on the show who believes that there's a downside to passive investing.

[A]

Until I think Anna has thrown some shade a little bit at ETFs, various ETFs before. So I think we're going to get deeper into that. But as I think there are multiple ways to take this question. There's the sort of macro approach, right. There's like, how could the rise of passive investing undermine markets and lead to communism or whatever? Like I think like Singer, Paul Singer may have suggested once, and this is.

[B]

I think a little bit what Carl was saying. Like if there's too much passive investing, what would like, you know, what are the potential effects and you know, too much, if anything, that's what too much means is like it's too much. But I think we are, I think everyone agrees that we're a long, long way from too much. Right.

[C]

Know if I agree with that, we're.

[A]

Going to get to that in the micro way. The other way to approach us is just if a regular investor, like what's the downside of it? And I kind of want to take a stab at this. I'm curious, I want to hear your guys take. But as someone who just has all my money essentially in a betterment account, like that's, that's where I am as an investor. The thing that does worry me sometimes is market risk. Right. Like the idea of index funds essentially is that you're just betting on the market and market risk is this pretty simple idea that sometimes the whole market goes down at once together because these, you know, there's stocks go up and.

[B]

Stocks go down and they do. Yeah, yeah.

[A]

The whole, you know, the economy tanks and you're screwed. And when you are just sort of, you know, the idea of diversifying is avoiding market risk. And with an account like part of it.

[B]

Not necessarily it's limiting.

[C]

Yes.

[A]

When I say diversity, like when you go stocks and bonds, because bonds are supposed to limit your risk to when the whole stock market crashes. So. But if you're fairly young, you're probably looking at like what, an 80, 20 diversification? 70, 30, 70, 30 stocks to bonds. So you're still betting pretty heavily on that stock market and exposing yourself to it. And that's sometimes I think, like whenever I hear, oh, stocks are really expensive and returns are not going to be great. And that's pretty over long term. And who knows, maybe this is a bubble, it's going to burst. Sometimes I sit there and think to myself, I've kind of bet on one very large horse.

[B]

So yeah, and I think that's an interesting question, right? You know, stocks have always provided the best long term return, you know, for decades and decades. If you're investing for like a 30 plus year time horizon, like no one has ever failed to outperform other asset classes by investing in stocks. And for the entire history of capital markets, people have said, well, is that going to continue to be the case in the future? And of course no one can foresee the future. The one thing we can foresee with certainty is that stocks will fall as an asset class by some reasonably large amount, 20, 30% at some point in the next 30 years. And if you are the kind of person who wants to avoid your portfolio dropping by that amount of money, you shouldn't be mostly invested in stocks.

[C]

This is why normally as you get older and as your time horizon towards retirement is shorter, you're going to be more heavily invested in bonds.

[B]

But and this is what Robo advisors are quite good at is changing your asset allocation according to your age and that kind of stuff. But the fact is that if you are in your 30s and you want a 0% chance of your portfolio falling by 30%, then no, you shouldn't be in stocks. The big question is, is this retirement funds, is this money which you are not going to touch until you retire, in which case you should be able to just sit there and ride it out and let the portfolio go down and then wait for it to come back up again. Anyone who had all of their money in the stock market in 2007 and then suddenly saw it cut in half in 2008 and then just didn't do anything is perfectly happy right now. You know, you wait a little bit of time and it, you know, what goes down goes up, what goes up goes down. And you don't stress the movements, but people do stress the movements. And if you're uncomfortable with that kind of volatility, then yeah, that's one problem.

[A]

So if you're going to be passive you have to be really passive. Yeah, yeah, chill the hell out.

[C]

Yeah, exactly. And I do think there are two issues here. Yeah. If we're going to talk about, I mean, I'm not going to give anyone investment advice, but you know, whether it makes sense for an individual investor to invest in passive funds versus a mutual fund product. Yeah, there's. Everybody understands why people have been shifting into passive funds. If you've looked at the underperformance by so many active managers over the past decade, it's significant. And then if you look at the fees that have been charged and how that further eats into your returns, everybody understands.

[B]

And just, just to give you an idea, like this year has been a good, very good year for active managers. Like weirdly, in the large cap space at least most active managers are outperforming the index. But people don't invest for eight months. You know, they invest for 30 years. And if you look at like the 15 year performance of any active manager in the world, none of them will have kept up with the index. The longer. Not true, less than 20%. And the chances of you being able to pick that one in the less than 20% who it's going to be able to outperform over a course over over 15 years is basically zero.

[C]

No, and I again, I'm. My argument I'm going to be making here is less about whether you should be in a passive fund or not in a passive on. It's more about the potential danger of so many people moving into passive funds. And because I agree, yes, if you have a lot of money and you can potentially find, you know, the more expensive investors that have stronger records, then that's a separate issue. But as an individual, again, there aren't a lot of great alternatives. But what I think is actually interesting, I know you poo pooed this a little bit at the beginning, but I am concerned about what this type of when passive investment represents this much of the market, what that means for the market and what potential dangers that could introduce to the market.

[B]

Okay, so let's. Potential danger number one, which Mike in Los Angeles came up with.

[A]

Carl. Carl in Los Angeles.

[B]

So potential danger number one that Carl in Los Angeles came up with is if everyone is investing in say the s and P500, which is the dominant index to invest in, then that's going to create a bubble in the 500 stocks in the S&P 500 and it's going to mean that all of the money goes to those 500 companies and not enough money goes to the rest of the stock market. And that is going to be like a capital allocation mismatch.

[C]

And I, I agree because the reality is when you're a passive, if you're running a passive fund, you're not making money a lot on because the fees are very small. So you can only make money on scale, which means you tend to be investing in the largest, most liquid assets. So the reality is, well, also by.

[B]

Definition, I mean nearly always you are tracking the S&P 500 like it's not.

[C]

Just the S&P 5. There are many different products here.

[B]

No, no, no. There are many, many different products and ETFs and passive investors, but the vast majority of them are S&P 500 products by a number. And my counter example here is just Tesla. You know, like there's no in, there's no indication that not being in The S&P 500 has in any way harmed, you know, the Tesla share price.

[C]

And Tesla is one counterexample. I'm sure people can come up with many others because one of the issues is when you have smaller companies that either aren't in these indices or just aren't like the, aren't going to be in as many of these passive products because they're smaller and less liquid, they're not going to have as much capital allocated there. And when, when you have an issue, if you're running an index fund and you have $100 million of inflows and you're saying, okay, so what am I doing? I am just simply putting it in whatever other people have bought. So what is going to be the most expensive? You could argue that that's going to lead to the, the, the much wanted buy high, sell low strategy that you are, you are now not only tracking the market, you are a very large part of the market, but you are.

[B]

Not the marginal price set. I think.

[C]

No, you are. No, that's not.

[B]

So this is where we fundamentally disagree. You are absolutely right that ETFs trade a lot for various reasons because they make for extremely liquid hedging vehicles. For starters, if I want to do some kind of a relative value trade and say this is going to outperform the stock market or underperform the stock market, then what I do is I one leg of that trade is going to be an ETF and people day trade ETFs all the time. And you know, there's a bunch of crazy activity going on in ETFs. But what we're talking about here is passive investing. Not talking about relative value trades, not about day trading. And the ETFs have a bunch of different uses. But as far as passive investors are concerned, as we were just talking to Jordan about, as far as the, you know, Robo Advisors and Vanguard and people like that are concerned, they are really boring. Set it and forget it. Long term shareholders who don't trade and they just sit there and they own the stocks for decades and they are not the marginal price.

[A]

Is that true? Because a lot, I know a lot of them try to do things like tax harvesting. Right? That's one of the products.

[B]

Yeah, that's tiny.

[A]

Okay, so I was gonna say because that does involve some selling when things fall and trying to reap the losses.

[B]

A little bit of that.

[C]

But right now, if you're talking about passive investing in the US Markets, it is representing close to, I think people think in about a year it would represent close to 50% of the activity. That is not a small amount.

[B]

And people say, no, it might represent 50% of holdings, but not of the.

[C]

And that's about market value. No, actually activity. I could be wrong, but I saw this debt yesterday.

[B]

No, you're wrong. Because 50% of the activity is just like high frequency trading.

[C]

Well, high frequency trading is also like not nearly as much of the market as people think it is and have not been doing very well lately. But.

[B]

No, no one's talking about that.

[C]

No, but my point is that passive investing is now becoming a significant part of the market.

[B]

And I think what you're doing is you're confusing two different things. One is passive investing and the other one is ETFs. And ETFs are used for many, many, many purposes, of which passive investing is only one.

[C]

Also used for many, many different purposes.

[B]

And so when you're saying that ETFs account for a huge amount of trading. That's true, but that's not the fault of passive investing.

[C]

No, but my point is, if you're talking about passive investing, you are talking about both index investing and ETFs. They are both examples of passive investing. They now represent a large portion of the market of money that is going into securities not based on any analysis of the fundamentals of the companies it's investing on, but simply because either it's in a specific category or because essentially it's a momentum trade, other people invested in it.

[A]

I want to go back to a concept you guys both brought up and I want you to explain it a little bit more to me because I feel like I intuitively get it but it could be teased out more. I bet some of the listeners it would be helpful. You mentioned the marginal price setter. Right. And Felix, you're saying that essentially these ETFs aren't functioning.

[B]

The passive investors are not marginal price.

[A]

And Anna saying that they are. Can you just explain a little bit more about what a marginal price is and like how that. Think about that.

[B]

Let's, let's take a sort of stylized stock market.

[A]

Yeah.

[B]

Where you have 90% of the market is passive investors who just bought the entire stock market and they're sitting on it and just doing nothing and they're not trading.

[A]

Okay.

[B]

And then the market still moves from day to day. And the reason the market moves from day to day is that the other 10% of the market is people who trade in and out of stocks. And they might do it on a high frequency level multiple times per second, or they might do it a few times a day or a few times a week or whatever. But they're, what they're doing is exactly what Ana is talking about. They're doing fundamental analysis. They're taking out the discounted cash flow models, they're doing momentum trades, they're doing relative value trades. They're doing whatever it is that people do when they try to make money in the stock market. And those people are engaged in one of the most important parts of markets, which is known as price discovery. And that basically when a stock looks cheap, those people will jump in and buy it until it's no longer cheap. And when it looks expensive, they'll jump in and sell it until it's no longer expensive. And what markets do is they move around all the time. But wherever the price is right now is like basically where the market thinks it should trade. And that price discovery mechanism is always performed by the active traders rather than the people who are just sitting there holding for decades, like Warren Buffett.

[C]

But again, when you have inflows coming in to passive funds and they're all going into the same equities and increasing their value, again, that is inflating the prices. That.

[A]

Yeah.

[B]

So, okay, so wait, that's, that's also a, that's also not a function of passive investing. That is a function of equity inflows. And anytime you have inflows into the equity market, the equity market is likely to rise. That's true. Whether they're active flows or passive.

[C]

No, you're up. When you have money going from active investors to pass, going from actively managed funds to passively managed funds, the money that's going to passively managed funds by definition is going into normally a smaller set at this point, a smaller set of securities.

[B]

I'm not sure I really buy that is true.

[C]

It is true.

[B]

And the reason I don't buy that is because as we all know, most active managers are shadow indexes. They more or less, they more, they benchmark the index, they more or less follow the index. Some of the, they will deviate from the index at the margins. But when you aggregate them all, pretty much by definition, what you get is the index. And so if you're rebalancing the investor base from active to passive, the actual amount of money which is moving into basically the s and P500 companies and out of everything else is surprisingly small.

[A]

I wonder. One of the concerns you brought up, Anna, is that a lot of these smaller companies aren't going to be getting funding like, right. The money's not going to flow to some small firm that couldn't even make the Russell 2000. My question is, is that really a bad thing or does that just mean they're going to have to look for funding elsewhere that they're going to.

[C]

It could be a bad thing because it's again, it's potentially a misallocation of capital that has nothing to do with the fundamentals of the companies that people are investing in. It simply has to do with again, momentum or when you, with a lot of ETFs, where it's like factors. So it's basically just the categorization. And I do think that could be a problem. I think it could be a misallocation of capital.

[A]

The point of markets allocate, I mean, like, couldn't private equity then deal with that saying, okay, these companies are underfunded, undervalued on the public markets, let's buy them up.

[B]

It's not even private equity. It's also venture capital. Right. The place where people are raising large amounts of money these days is not the public markets. And there hasn't been the public markets for many years. It's been the private market. Right.

[C]

But we're talking about companies that are already public. So. But look, I, I think your, your point is valid there. And I actually think this brings up another point that I do think is potentially interesting where I would argue that one of the things that could potentially help active managers moving forward is the fact that I think the movement into passive investing is creating misallocation of capital and potential dislocation markets that could create opportunities for active investors.

[B]

Right. And that's exactly it. That There will always be arbitrageurs. There will always be people saying, look at this nascent bubble that is happening in the index stocks. I can do a relative value trade where I basically sell those using ETFs and buy everything else. And if you believe that passive investing is causing an imbalance, then what you do is you make that trade and you buy everything else and you sell this index. And with any if you're right, then you make lots of money.

[C]

It's not just about relative value trades, it's just about like traditional trading in general.

[B]

But what that does is what arbitrageurs have always done. Is it just arbitrageurs? That's a different is it moves prices back into balance and markets are self correcting in that way. And there's no reason to believe that this like move from active to passive has stopped markets from being self correcting. The price discovery mechanism of markets does not need everyone to be doing their own independent research. It just is a tiny minority to be doing it.

[C]

But I do, again, I think it is when index investors represent a small segment of the market, then no one's going to criticize it as it becomes bigger and bigger. And with the rates that we're seeing of inflows, it could be very significant in the next five years. I think that is concerning a number of people. And I would just like to point out that a lot of what I'm saying here I'm somewhat cribbing from Howard Marks, his most recent memo, which I'll give a shout out. I used to work at Oak Tree, so I'm a little biased, but I have a lot of respect for him and he lays a lot of these ideas out very well.

[B]

Okay, let's talk about strawberries.

[A]

Let's do it.

[C]

Let's pick strawberry strawberries.

[B]

So let's talk about strawberries. And specifically, let's talk about one of the most awesome, like geeky, wonderful New Yorker articles to appear in ages by Dana Goodyear. If you haven't read it, we will urge you all to go ahead and read how Driscolls Reinvented the Strawberry in the New Yorker. It's just a glorious article and it's full of wonderful facts which I'm gonna just randomly drop into this conversation because.

[A]

The headline's a little misleading because like, basically one of their points midway through is that Driscoll's more or less discovered a French hybrid of an American and South American strawberry that first emerged in the 19th century, popularized that throughout the country. So that's what we now think of as a strawberry. But.

[B]

So, yeah, and. But the. So Driscoll's is a really fascinating company.

[A]

It's Kingberry.

[B]

And because it doesn't behave like bananas do now, we're going to talk about bananas later. But the main thing you need to know about bananas is that people grow bananas and then they sell bananas, and then the more bananas you grow, the more you can sell, the more money you can make.

[A]

Commodity. Yeah.

[B]

Strawberries are not like that. Driscoll's is constantly creating and tweaking the genetics of strawberries. And in fact, it doesn't grow a huge number of its strawberries itself. It's more of a product lab than a farmer.

[A]

It thinks of itself as comparative, like, compares itself to Apple. The idea is that, like, they designed the strawberry. Strawberry.

[C]

What?

[A]

Yeah, right. But no, they think they design the strawberry, then they work with a. They outsource manufacturing, or in this case, they send the germoplasm, the breed of strawberry, to the farmer and then they sell it and market it around the world. To or around the country.

[B]

To around the world, dozens of countries. And. And they, you know, so Disney has Imagineers, famously, and Driscoll has Joy Makers. These are the chemists who are doing the genetic engineering of the strawberries. They literally called themselves Joy Makers. It's an amazing.

[A]

So what I think there are so many different things you can take away from this piece. Right. And part of it hinges on this battle between Driscolls, which is, you know, it's corporate strawberry. Right. They're the big name, but they're actually not the ones who dominate the market. Most strawberries actually are essentially based on versions that are dreamed up at the University of California, Davis. And that's what they talk about as sort of this academic lab that then distributes its strawberries to all these different farmers.

[B]

So, I mean, I'll give you some numbers here just because I can't help from myself from dipping into this bowl of strawberries or this article. Well, the US berry market is $6 billion, and of that, Driscoll's controls 60% of organic strawberries, 46% of blackberries, 14% of blueberries, and just about every single raspberry.

[A]

Yes, every single raspberry.

[B]

If you've eaten a raspberry, it's almost certain certainly either one you picked yourself or a Driscoll's raspberry.

[A]

So. But here. Here's the. What's. What is intriguing to me about this story is that there's. It kind of gives this Sweeping history of the strawberry innovation business where you start off and it's sort, it actually is the Wild west because there were no, there used to be no such thing as plant patents. You, you did, you cross bred your plants, your apples, your strawberries, and you hope to God someone didn't sell it, or then you hoped to God no one stole it. Right. And so you had all these strawberry farmers in the US trying to come up with breeds that were more resistant to disease or tasted better or looked bigger and brighter and redder, whatever, and you had like thousands of versions of them. Everyone was innovating, trying to come up with their own strawberries. And then eventually you got this. They decided, we can't handle this anymore. This is, this is too chaotic. People are stealing all of our strawberries, you know. And so you ended up getting this lobbying campaign to create plant patents and you even had like Thomas Edison writing in, like, how great this would be for innovation. And now eventually plant, plant patents became a thing. So that's a big thing Driscoll does. It patents its strawberries. And it's a big thing that University of California Davis does. And there's all these controversies over, you know, people trying to steal their patented product now. And so now it's gone from sort of this. Now you have a world where a lot of the competition is about IP and IP rights and fighting over everything. Yeah, exactly. And so to me, it shows that you actually can have a thriving, innovative economy without these, these patents that then just kind of throw a legal wrench into the works. And so I think that this is, this is actually a good story for those of us who would like the idea of abolishing patents in a lot of respects, sort of. My strawberries are a good example of why patents don't need to exist, in.

[B]

My opinion, because you can just get your strawberries from UC Davis. Is the idea part of it? Yeah, but. And one of the themes of this article is the way that UC Davis has been, you know, well, it used to be at Berkeley and then it moved to Davis, you know, cultivating strawberries and coming up with new strawberries. One of the fascinating things about strawberries is that they become obsolete really quickly, that there are diseases which happen. And like, basically, if you ate a strawberry 10 years ago, you would never be able to find that strawberry on the shelves today. Exactly the same one that Driscolls and UC Davis and people like that are constantly having to invent new strawberries to replace the old strawberries which are becoming obsolete.

[C]

This was Something I also found interesting about this article was just normally when we're talking about plants and if you're talking about modifying their genetics, we use the term GMOs. And that's something that if you use the term GMOs, people get really upset and really nervous about what the GMO is. I know it's different. I know, I know it's technical different. I'm not saying it's exactly the same. I completely. But I did find this interesting that this article is essentially about creating new breeds, you know, doing all the things that are very similar to what you would actually do with GMOs. So because you're not using the term, it doesn't scare people.

[A]

Yes. And this is why GMO advocates, I mean, basically including everyone on Slate's staff, are just like, GMOs are not a big deal because this is the shit people been doing since Mendel.

[B]

Yeah. I mean, to be clear, they are not modifying the genes. They are catch genes breathing rather than actually going in and using CRISPR to alter.

[C]

That's fair. But you could argue that like. Well.

[B]

But yeah, I, along with everyone at Slate, you know, would agree that there's nothing inherently harmful about going in and using CRISPR to modify the strawberry gene, if that's what you want to do. One of the things, in fact, that the big strawberry, you know, really struggles with, and the number one reason why the strawberries you buy at your supermarket have been carefully bred is because they need a level of drought resistance. You know, the amount of rainfall that you get in strawberry growing areas can vary wildly. And if you just left up to nature, you could never produce the sheer quantities of strawberries that the American public is, is demanding.

[C]

So I have a question.

[A]

Yeah.

[C]

All this technology is going to strawberries. Why do strawberries taste so bad?

[A]

They don't like. I think, I think I see. I actually like Driscoll strawberries. I think they're actually a lot sweeter often than the ones you get the farmer's market, I think, I think locally grown farmer's market strawberries from random heritage breeds that have not been carefully pre selected and tested in a lab are often overrated. And that Driscoll's product, which I can get for $2.59 for a giant clamshell over in Pacific, like, is a great deal. I don't know.

[C]

I was gonna say, when I was a kid, we had like, there were strawberry patches and you could go like. It was, it was a lovely summer activity.

[A]

Oh, yeah. Okay.

[C]

Michigan just Saying, and they were so delicious. And then now I try to eat a strawberry and it tastes like moist cardboard. I don't.

[B]

I. Well, so one of the reasons. And we'll get to this more in the banana segment, but one of the main reasons is that they need to be able to be shipped from one coast to the other. The strawberries are mostly grown in California in the United States, and we here in New York don't have a lot of local strawberry farms. And so Driscoll's in particular is breeding strawberries for their hardiness more than for their taste.

[C]

So I hear you.

[B]

And then the other big thing, which is the really big thing and this and is the answer to your question is that they are also being bred to look pretty.

[A]

Yeah.

[B]

And it's a little bit like tomatoes is that the way it looks is more important than how it tastes.

[A]

But there's also sort of been a counter. And this is sort of what the article talks about. But in produce in general, they're realizing that millennials, like, kind of chase novelty. And so there's been this movement towards, okay, let's try and experiment with wild, ish strawberries. We're going to cross breed it with some version that's from Alaska, and they're gonna look more like the, you know, strawberries that Anna was finding in the bush. And then like. And same thing with tomatoes. Like, you've had the whole heirloom tomato sort of revolution, and now you get breeds like ugly tomatoes out of Florida.

[B]

But here's the thing, right? Is the heirloom tomatoes are big.

[A]

Yes.

[B]

Wild strawberries are tiny.

[C]

Yes. That's.

[B]

That is. And if you wanted a clamshell full of wild strawberries, can you imagine the picking, how many strawberries you would need to fit into there? They would be on top of each other. It's like, logistically, you can imagine that Driscolls would just shudder at the thought.

[A]

I don't know. You can do it. They do it with blueberries.

[C]

Well, this is what I'm saying. The blueberries I get. The blackberries I get, the raspberries I get delicious.

[B]

The strawberries, on the other hand, although, again, I will say the best blueberries, a bit like the best strawberries are really small. And it's very hard to find a little baby small blueberries outside Maine.

[A]

I was about to ask if your stance on blueberries is that they may only be eaten from a roadside vendor outside of, like, Kennebunkport.

[B]

No, my st. On blueberries is that there's only One way to eat blueberries, which is at Mabel's Crab Claw in Kennebas.

[A]

Oh, God.

[B]

Anyway. And which is run by my former colleague, David Rhodes cousin. And the blueberry pie there is not just the best blueberry pie you've ever had, it's the best pie you've ever had. It's amazing.

[A]

You're starting to sound like this is like Twin Peaks or something. Damn fine pie there.

[B]

It's amazing pie. You know, what can I say? It's the best pie.

[A]

Okay, are we gonna talk about bananas now?

[B]

Yes, let's talk about bananas. Okay, so bananas are like the anti strawberry.

[A]

Yeah.

[B]

There is no cross breeding going on. There is no genetic modification going on.

[A]

We should actually. Why are we talking about bananas? Well, at the same time, the New Yorker had this article about strawberries, the New York Times did this piece about how bananas get from the banana boat all the way to your local boat.

[B]

Although also the New Yorker had a great piece about bananas a few years ago. And one of the really interesting things about bananas is that precisely because they're the anti strawberry, they're in danger. There's this massive sort of tail extinction risk. Every single banana you have probably eaten in your entire life, unless you've been hanging out in sort of India near the equator or in India. And assuming that plantains don't count as bananas, is this thing called a Cavendish banana. And Cavendish bananas are famously really boring bananas. I mean, if you. If you say that strawberries taste like cardboard, Cavendish bananas really are the cardboard of banana.

[A]

I like that they have subtle. They're subtle. Yeah. They're light. They're. They're light.

[B]

But we know them, we love them. We're used to them. And it's one species. It's one banana. And there are thousands of bananas in the world, of which Cavendish is only one, but it's the only one we ever eat. And if the Cavendish banana were to go the way of the Gros Michel banana, which is what the world ate before Cavendish bananas came along, and the Gros Michel banana got wiped out by disease which attacked Gros Michel bananas. You know, if a disease were to come along. And there is now a disease which has come along.

[A]

So this is actually the irony, right? So this thing called the Gros Michel, and it was wiped out by something called Panama disease, and it just rots the tree from the inside out. And so all the Ben. All of the banana trees that were growing the banana the whole world ate kind of just went kaput. And so the Cavendish banana was like what they bred in response to say, okay, it's going to be resistant to Panama disease. And so they bred out the flavor and they bred in the disease resistance. And also it travels well. This is another example of a piece of fruit that is, you know, bred for globalization, not necessarily for flavor. Now it looks like because you have this like mono strain that the whole world has kind of cloned one after another. It is now vulnerable to another version of Panama disease. A. There is a slightly tweaked. That there's a tweaked strain that could come after the world's banana supply. And so you're having almost like a kind of grimly ironic repeat.

[B]

But yeah, we all intuitively understand that a heterogeneous Locavorean utopia of people growing a bunch of different bananas would be much more robust because if one strain wiped out one of those bananas, that you'd still have all of the other bananas to choose from. The problem is that there's no such thing as a banana. Locavorean banana. You know, you can't, you can't grow bananas in Maine, but.

[A]

No, but you could have. So I think the strawberry industry, though, is showing us the, the other approach, which is you have either academic institutions or big strawberry like coming up with new strains and trying to diversify their crop base. Bananas, it happens to be, they've gone this other route where they just have commodity banana and they sell the same thing everywhere, which is easy and good for business in some ways probably, but especially if you're just like a massive company that doesn't want to invest a lot in R and D, but it's not necessarily long term sustainable.

[B]

Yeah.

[C]

Although I would say, unfortunately, Big Banana does not have the greatest history.

[A]

No, they like take over small countries and they're involved in coups.

[C]

And also for the sake of poor Ecuador, I do not want us to have local bananas.

[B]

So Ecuador has two major, like commodity, like non oil commodity exports. One is shrimp, which tends to get killed every few years by El Nino. And the other one is bananas, which is basically controlled by this one guy called Gustavo Noboa and he has his own issues. And did he become president at one point or did he just run for president?

[C]

He just ran.

[B]

He just ran for president.

[A]

But like, wait, Ecuador's a natural banana republic? Is that what you're telling?

[B]

And there are actual banana republics in the Caribbean whose main export is bananas. And where you get serious geopolitical wrangling over banana imports into the EU and whether they should basically give preferential trade Terms to their former colonies in the Caribbean, which need preferential trade terms in order to remain competitive, because otherwise they face off against Gustavo Naboa and Big Banana. It's kind of crazy, the amount of politics that surrounds the banana, especially in the Caribbean.

[A]

So is it conceivable though, that you could ever have a shift towards a more artisanal approach? You have hundreds of breeds in India. This article mentions that in India they mock our Cavendish bananas.

[C]

They call it the hotel.

[A]

The Hotel banana. That's like the polite way of saying, like, the banana for white people. Right? Like, that's so like, could like you take some of those amazing breeds that they're apparently eating, like in Mumbai, and bring those around the world to diversify the banana stock and maybe give us more, more options? Is that something?

[B]

Or could we just start by like eating fewer bananas, more plantains?

[C]

No, I like bananas. I am very pro banana.

[A]

See, this is where the New York native comes in. Like, the plantain is the superior for.

[B]

But anyway, but it's true, the bananas, I mean, they are an astonishing fruit because they are so good at ripening after they've been picked.

[A]

Yeah.

[B]

And so what that means is that when you pick a banana, you pick it when it is rock hard and bright green. And you ship these rock hard, bright green bananas and you don't even need to refrigerate the ships. Like, you can treat them really quite badly because these things are like hammers and you can bash them around and they can sit on ships for weeks and it's no big deal. And then finally they go into this warehouse where you artificially ripen them using ethylenes and whatnot. And they can ripen in three or four days if you, if you put the right gas in them at the right temperature. And then bang, there they hit the supermarket shelves and the street stalls and they get sold and everyone goes, wow, that's a perfectly ripe banana. But it's all really artificial.

[A]

Well, I mean, it's like everything's artificial. The banana is like the perfect proxy for modernity. Right. That's what we're saying here. I don't know. I'm trying to make a great point.

[C]

Yeah. But bananas are also important because bananas are a loss leader in the sense, like you're not going to make money on bananas, but bananas bring people to your fruit stand or to your bodega and then you buy your blueberries and your blackberries that cost a lot of money.

[A]

Is that true that the banana itself is just not.

[C]

It's a Loss leader. Yes, it is.

[A]

Huh.

[C]

I actually said the person who wrote this article was like last week on Leonard Lope speaking about this.

[B]

And this is where you learned about people selling bananas below cost.

[C]

Yes.

[B]

Wow. So next time you buy, you're slicing banana over your breakfast cereal. Just, you know, wonder to yourself what would happen if this Panama variant wipes out the Cavendish? I mean, that would, that would be a serious recession level event for many countries near the equator.

[A]

I actually do have a question. So is there a reason why in the US you have these companies that really do approach agriculture as food science and they're not like they are trying to make multiple breeds and kind of make it sustainable? Is there a reason you don't necessarily have that in the major banana commodity, fruit producing countries, or is there any example of that? Is it just because that their products have been hardier, traditional, traditionally? They've never felt compelled to do the food science.

[C]

It could be an accident of history. I honestly don't know.

[B]

I mean, it's not that food science is hard to find in these countries. You know, there's a lot of extremely high tech rice out there.

[A]

Okay.

[B]

But bananas have basically, I would say, suffered from the if it ain't broke, don't fix it problem. They found this solution which worked and then there was no incentive for them to create alternative bananas. And so they didn't. And that could wind up, you know, like everything we know about the Irish potato famine, like, could basically happen to banana producers in various different countries.

[C]

Yeah, it's a serious issue, especially if you look at like the Ecuadorian economy because they're having a very hard time because of where oil prices are. And if you started to see bananas, I mean, that would be devastating. They're also dollarized, which hurts them a number of other ways.

[B]

So. Yeah, so that was bananas and strawberries. I feel like we've, we've really kind of done a good fruit salad this week. What else do you need other than bananas and strawberries? Oh, that's what you need a glass of.

[A]

I thought you were gonna say like cantaloupe.

[B]

You'll have Josh Barrow on you like a ton of bricks if you try and include a honeydew melon.

[A]

Honeydew melon is great. Yeah, yeah, agreed. Honeydew is wonderful.

[B]

Honeydew is an abomination to fruit.

[A]

What about canary melon? How do you guys feel? I'm a big fan of those.

[B]

Canary?

[A]

Yeah. The big yellow. Yeah, I think so.

[C]

There's pro melon.

[A]

Yeah.

[B]

Dan Schrader is A pro melon man.

[A]

Yes, pro melonist.

[B]

Okay, so on which heterogeneous locavorian note, we will bring this. Well, we won't bring this.

[A]

We have a numbers round.

[B]

Coming this to a close. We have a numbers round. I'm gonna start the numbers round because.

[A]

I, I have a number. For once I'm not just making. I'm ready.

[B]

Oh, wait, okay. What's your number?

[A]

My number is 995. So a month. So this company called MoviePass, which let's company called MoviePass, it's been around for a while, just lowered its subscription price to $9.95 a month. What the service does is it lets you go to essentially as many movies in theaters as you want per month for their subscription. You can go to one movie per day at any theater that accepts their MasterCard debit cards. And, and in response to this announcement, AMC freaked out and started saying we're going to try and figure out ways to bar this service from our theater because they don't want the value of a movie ticket essentially being devalued massively. And it's not clear they can though, because again, what MoviePass essentially does is just gives people a debit card that their account is linked to and then they pay the theater the full price.

[B]

I feel like this is a system which is bound to fail if it doesn't ultimately have the support of the theaters. And if it does have the support of the theaters, then all power to that.

[A]

Yeah, I wrote an article basically saying is, it's really interesting because unlike most third party ticket sellers, MoviePass doesn't need permission, doesn't need to work out a deal ahead of time with the theaters to offer this because it can just kind of insert itself. But then long term, its financial viability to some extent probably hinges on their willingness to cut.

[C]

I have a question here because it seems like an arbitrage opportunity. Is it 9.95 regardless of where you're going to see the movie. So like if you're in New York City versus you're in like Kentucky.

[A]

Yes. So if it is $9.95 a month, and so the average movie ticket price in the country is I think it's like 830 something. 860 something. And so if you're in New York, 985 is an insanely good deal because all movies are like 15 bucks unless you're like in deep Brooklyn. Whereas if you're in Kentucky or somewhere lower, a cheaper city, you might be paying seven, eight dollars for your movie ticket.

[B]

So my number is 400,000, which is the number of basically Mexican American girls who turn 15 each year. And of course, when you're a Mexican American girl and you turn 15, you have a quinceano. And the average quinceano, we are now told, costs $15,000, which, if you do the math, works out at a $6 billion a year industry on quinceanos.

[A]

So quinceanera is now bigger than bar mitzvah's.

[B]

So, I mean, what I would say is that the size of the quinceano industry is roughly the size of the berry industry, according to the New Yorker.

[A]

All right, there we go. A lot of pink tool being sold.

[C]

Yes, yes. So My number is 5.3%. I've had some variation of this number before, I will grant you. So the IMF came out and said that China's growth rate from 2011 to 2016 would have been 5.3% instead of 7.3% if they hadn't issued as much debt as they have. And the reason this is important is both because it speaks to the amount of debt that has been issued, but it also speaks to the fact that the Chinese government right now is in a situation where they know they have to rein back all this leverage and also the speculation in the housing market. But if they do that, they're not going to meet their growth targets, which they have to meet. So they are in a very difficult position.

[B]

So I think that's it. I think on the tough choices facing the Chinese government, just like the choice between strawberries or bananas, I'm going to pick strawberries. I'm team Strawberry.

[C]

Team Banana, man.

[A]

Wait, really?

[B]

I eat like, strawberries and cream. You have a little punnet of strawberries and cream while you're watching Wimbledon. And it's like the most English thing.

[A]

I was going to say. It's extremely, extremely English. I'm Team Strawberry.

[B]

Yeah. It's like, you know, almost everybody eats more bananas than they, but nobody gets.

[A]

Joy out of a banana. No one is like, oh, God, yeah, this is exactly. This is summer. I'm eating a banana.

[B]

I mean, look at your local orangutan. They get serious joy out of eating bananas. I don't know where this is going. On that note, we are just gonna. We're just gonna bring this. Wrap this one up. Thank you so much for listening to Slate Money. Thank you to Dan Schrader for trying to talk about melons. You know, I mean, that. That next week, melons. Email [e-mail] Listen to Represent, which is hosted by Aisha Harris and posts on Friday mornings. You can find [e-mail] represent and it is produced by Slate Money's former producer, Verilyn Williams. And it is basically this place where you get to talk about movies and TV and online shows all created by and or about women, people of color and other, like, marginalized communities. It's fun, it's interesting. So check that one [e-mail] represent and we will talk to you next week on Sleep Money.