Slate Money – "The Worse Than Marxism Edition" (August 27, 2016)

Episode Overview

In this week’s episode of Slate Money, host Felix Salmon (Fusion) is joined by Jordan Weissmann (Slate Magazine) and guest co-host Lynette Lopez (Business Insider, host of "Hard Pass") in a brisk, candid, and unsparingly skeptical discussion of the week’s biggest business and finance stories. The trio delves into the EpiPen drug pricing scandal at Mylan, the waning appeal of hedge funds, and the provocative claim that passive investing is "worse than Marxism." The conversation is lively, irreverent, and sharply critical of both business trends and industry talking points.

Key Discussion Points & Insights

1. The EpiPen Pricing Scandal at Mylan (02:13–15:27)

Background & Outrage

• The episode begins with the latest example of pharmaceutical price-gouging: Heather Bresch, CEO of Mylan, and the skyrocketing price of the life-saving EpiPen.
  • EpiPen, acquired by Mylan in 2007, has seen its price rise by about 500% (from ~$50 to $600+ per pen).
  • Mylan spent aggressively to push EpiPen into schools, dentist offices, and even Disney resorts— despite minimal innovation and unchanged ~$3 manufacturing cost.

"This is equal opportunity evil." – Lynette Lopez (02:17)

• The annual replacement cycle (due to EpiPen's 1-year expiration) further enforces continual repurchasing, amplifying costs for families and institutions.

Mylan’s Defense and Systemic Issues

• Heather Bresch appeared on CNBC attempting to deflect blame, citing industry complexity and overregulation:
  • "She says, you know, we have a system that incentivizes us to raise prices. No, no, no, honey, it incentivizes you to make money like any business. But no one told you to raise the price of an EpiPen 500%." — Lynette Lopez (05:43)
  • Critics argue Mylan is "pulling away the curtain" on an opaque system involving pharmacy benefit managers (PBMs), insurers, and kickbacks, especially prevalent in the private market.

"There's a systemic problem with the relationship between pharmacy benefit managers, insurers, and drug companies. There's a lot of collusion, opacity, and things that Elizabeth Warren referred to in an April congressional hearing as kickbacks." – Lynette Lopez (08:52)

Coupons & Patient Assistance: A 'Shell Game'

• Mylan responded to anger with $300 coupons for consumers, but these don’t lower overall cost—insurers and, ultimately, everyone who buys insurance absorbs the hike (10:57).
  • Bresch’s compensation is heavily tied to raising earnings per share, providing a clear incentive to keep prices high.
  • "She stands to gain about... 75,000 shares or something in the company if she hits that $6 mark." – Lynette Lopez (10:57)

Context and Capitalism

• Widespread EpiPen distribution is not itself the problem; the scandal is in pricing and lack of alternatives:
  • "In the US we pay $600, where you go to Canada and you get it for 11 bucks. This is crazy talk." — Jordan Weissmann (13:05)
• Salmon ties the segment to the show’s theme: "Under capitalism, normally, if you produce a lot more of something, the price goes down. It’s only in this weird kind of pharma world where you can produce a lot more of something and the price goes up." (13:12)

2. Hedge Funds: Losing Their Luster (15:33–24:24)

Outflows and Poor Performance

• Hedge funds are seeing significant outflows ($25B in July 2016), the largest since 2008–9.
• "Hedge funds are a compensation scheme that have passed themselves off as an asset class..." — Jordan Weissmann (15:48)
• Managers admit to a lack of investable ideas; even professionals resort to buying common stocks like Microsoft and Morgan Stanley.

Industry Dynamics

• The proliferation of hedge funds (reportedly more than Taco Bells in the US):
  • "What they want is all the old school guys... just the younger guys to get the fuck out. Like, do not pass go. Do not collect $200. See yourself to jail." — Lynette Lopez (18:11)
  • Groupthink and crowded trades (e.g., Valeant Pharmaceuticals) have led to increased correlation among funds and amplified losses.

The Brand, Not the Strategy

• Hedge funds morphed from alpha-seeking boutiques to a brand—drawing easy fundraising and little accountability.
• "At some point [a hedge fund] stopped being an investment scheme or even a compensation scheme...it became a brand." — Lynette Lopez (22:22)

Market Dynamics

• Low interest rates and distorted asset values leave little of genuine worth to buy.
  • "Things that are actually worth anything are very, very rare. Things that are actually priced correctly are very rare..." — Lynette Lopez (22:31)
• With information spreading efficiently, alpha has become harder to generate. As a result, "even the most brilliant of them" are struggling.

3. Passive Investing Is "Worse Than Marxism"? (24:24–33:39)

The Sanford Bernstein Report

• Sanford Bernstein's sensational report alleges passive investing threatens efficient market allocation, imagining a scenario where if everyone index-invested, markets would fail to price risk/assets and allocate capital.
• "Companies could come out with monster earnings and the share price wouldn't move because passive investors don't react to earnings reports. Theoretically, a company could declare bankruptcy and the stock price wouldn't move..." — Felix Salmon (25:10)

The Rebuttal

• The hosts dismantle this as a strawman, noting that passive investing is (as of then) only about a third of the US market.
• Jordan Weissmann explains some academic basis ("countries where there was less synchronicity between stocks...investors did a better job...."), but overall, the claim is overblown (27:05).

Market and Capital Allocation Realities

• Salmon argues public markets’ capital allocation role is diminished; most companies raise money privately or via bonds, not IPOs or secondary offerings (28:09).
• Lopez posits that active management is no panacea: "Sometimes people are dumb. So that's something that we need to keep in mind here." (32:13)

Memorable Media Moments

• Lynette recalls the grandstanding public debate between Carl Icahn and Larry Fink on CNBC’s Delivering Alpha: "Carl Icahn told Larry Fink that...passive investing was taking the world into hell. Larry Fink clutched his pearls and said, you are a knave. And Carl Icahn was like, so what? And it was really awkward and very uncomfortable." (30:04)

Memorable Quotes & Moments

• "Anybody can Martin Shkreli." — Lynette Lopez (02:20)
• "They have the same compensation scheme...they shouldn't be called hedge funds, they should be called 2 in 20." — Lynette Lopez (16:06)
• "This market is just too tough for us. It's just too challenging. But one of the things that they've been blaming all of this on is the fact that there are more hedge funds in this country than there are Taco Bells." — Lynette Lopez (17:22)
• "Sometimes people are dumb. So that's something that we need to keep in mind here." — Lynette Lopez (32:13)

Important Timestamps

• 02:13–15:27: EpiPen price controversy and the dynamics of pharmaceutical pricing
• 15:33–24:24: Hedge fund woes, outflows, compensation, and asset class issues
• 24:24–33:39: The passive investing “worse than Marxism” debate, capital allocation, and market structure

Numbers Round (33:39–37:10)

• Lynette Lopez: "2014" — Since then, EpiPen has made $1B+ for Mylan, questioning price hikes.
• Jordan Weissmann: $0.05 — Portion of MA’s 20-cent ride-hailing tax going to subsidize the taxi industry; exemplifies political trade-offs.
• Felix Salmon: $10B — Apple’s R&D spend for 2016 (4% of revenue), exceeding both NIH and VC investments into Silicon Valley; discussion on innovation investment.

Conclusion

This episode puts a sharp, witty spotlight on contemporary business and financial controversies—challenging official narratives, breaking down financial industry groupthink, and questioning who really pays (and who profits) in modern capitalism. With a mixture of incredulity, exasperation, and humor, Felix, Jordan, and Lynette offer both context and critique for the stories behind the headlines.