As the government financing business shrinks and excitement builds over the completion of the Union Pacific and Central Pacific linking New York to California, Cooke turns to the Northern Pacific transcontinental railroad. The structure is elegant on paper but the project combines massive capital needs with a speculative vision on an unprecedented scale.

This is the perfect story to answer the question of what happens when enormous capital funds transformative infrastructure ahead of the demand that must eventually pay for it.

Chapters

(05:01) Jay Cooke in Philadelphia, 1839 as a young banker

(11:51) The retail distribution in Pennsylvania

(16:38) The financier of the Civil War

(22:56) Jay Cooke looks for non-government business after the war

(30:19) The Northern Pacific comes calling

(36:13) Jay Cook signs a deal with the Northern Pacific

(45:47) Harris Fahnestock, Cooke’s partner, warns him about funding the Northern Pacific

(50:36) Jay Cooke & Co. almost fails on October 1872

(56:10) Fahnestock closes the New York office and triggers the Panic of 1873

(59:15) The realization of a vision

References

Jay Cooke, Private Banker by Henrietta Larson (link)

1873: The Rothschilds, the First Great Depression, and the Making of the Modern World by Liaquat Ahamed (link)

Jay Cooke’s Gamble: The Northern Pacific Railroad, The Sioux, and The Panic of 1873 by M. John Lubetkin (link)

Panic on Wall Street: A History of America’s Financial Disasters by Robert Sobel (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn more and explore the latest data on energy affordability, go to eqt.com/eqt.com/permitting-reform-now.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

Markets are systems, not monoliths

Most industries are better understood as a series of interconnected markets, each with its own suppliers, customers, economics, and sources of power.

Energy, for example, includes upstream production, midstream infrastructure, refining, oilfield services, trading, and distribution. Technology includes components, devices, operating systems, app stores, applications, cloud services, and attention. AI similarly includes power and data centers, chips, cloud infrastructure, foundation models, model routing, applications, workflows, and data.

Analyzing an entire industry—or even an entire market—as a single, static unit, obscures the competitive dynamics that lead to breakthrough insights about the source of durable returns.

Follow the constraint

Within each layer, ask: what is scarce, and who controls it?

Scarcity creates bargaining power. Scarcity creates leverage. The scarce resource might be physical infrastructure, a uniquely low-cost resource, distribution, customer trust, proprietary data, intellectual property, network effects, economies of scale, a novel business model that cuts against the competition’s self-interest (aka counter-positioning) or something else that competitors can’t easily copy.

In energy, low-cost resource owners can earn extraordinary returns, while constrained pipeline or refining capacity can temporarily move power elsewhere. In 19th-century railroads, strategically located tracks, bridges and terminals could become physical chokepoints while trunk lines connecting shippers with endmarkets set rates and schedules. In technology, control over the operating systems and customer relationships translate to market power.

The scarce resource might be an asset or a person that consistently delivers outcomes. The Wall Street Journal recently published an article on the Rams version of NFL moneyball—paying fair prices for extremely valuable players that have a proven track record of performance in the NFL at hard-to-replace positions.

Forbes recently wrote about how Christopher Nolan commands movie star paydays in Hollywood.

Follow the constraint to find the potential profit pool.

Then ask what protects the constraint

Scarcity alone is not enough. A temporary shortage can create enormous profits without creating durable market power.

Durable power requires some mechanism that prevents competitors from eliminating the scarcity: high switching costs, network effects, economies of scale, regulatory barriers, physical geography, proprietary resources, control of distribution, or another difficult-to-replicate advantage.

This distinction separates temporary scarcity from durable market power.

Oilfield services and equipment manufacturers can gain enormous pricing power when capacity is scarce, but competitors can eventually add capacity. A railroad controlling the only economically viable entrance into an important city possesses something much harder to reproduce.

Control of the customer relationship can be a chokepoint

The bottleneck does not have to be a physical asset.

Meta demonstrates this particularly well. It does not control the mobile operating system, but its enormous aggregation of users and attention gives it power over advertisers seeking those users. But Meta is not alone in this value chain because Apple controls access to iPhone users. In this part of the technology market system, they share power (and continue to compete against each other for more of it).

There can therefore be multiple powerful actors within the same value chain, each controlling a different scarce relationship or resource.

Distinguish present power from claims on future value

Contrasting two giants of the railroad era, Jay Cooke and Cornelius Vanderbilt, illustrates an important distinction.

Cooke was, at his core, a promoter. He was arguably the best fundraiser of his era after raising $1.6 billion for the Union government during the Civil War. Thanks to that feat, he came to be known as the “Financier of the Civil War” and became one the three or four wealthiest people in America at the time.

His power was a powerful fundraising machine built on top of an extraordinary intuition for retail financial markets. His understanding of capital markets, especially the retail market in the US, but also his relationships in Europe, made his financing machine a force of nature. His firm, Jay Cooke & Co., employed hundreds of salesmen and loosely controlled hundreds of newspapers. This network gave him the ability to target capital pools across every segment of society. No one else at the time, not even JP Morgan, had this combination of mainstream reputation and distribution.

But Cooke’s power depended on investors’ appetite and the broader health of the capital markets. The best investment bankers understand that success often depends on swimming with the current.

Vanderbilt, on the other hand, increasingly controlled productive assets—railroads that generated cash flows. By combining the Harlem and Hudson River railroads and then leveraging the chokepoint into New York City to win control of the New York Central trunk line, he could retain bargaining power over shipping rates, avoid disastrous competition with alternative routes, and deploy growth capital based on demand signals. Most importantly, he could be conservative with debt financing because he was profitable and could defend his market position.

Vanderbilt derived his market power for control over strategic, profitable assets he could defend. Cooke derived power from his ability to convince investors and from investors’ ability to fund investments.

When Jay Cooke & Co. overextended itself financially by funding runaway capital expenditures at the Northern Pacific, they put themselves in a vulnerable position financially. When the market turned in 1873 and Cooke’s distribution machine collapsed, the firm failed and its failure triggered the Panic of 1873.

Vanderbilt’s railroad empire suffered but survived, his power intact, even as his profitability and wealth temporarily eroded.

Market power follows control of scarce and valuable assets. Durable returns follow when that power is acquired for less than the value it generates—whether that’s business cash flows or box office ticket sales.

References

• The Rail Revolution series by Backtest Podcast

• 7 Powers: The Foundations of Business Strategy by Hamilton Helmer

• Nvidia’s Risky Business by Ben Thompson

• The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail by by Clayton Christensen

• Competitive Advantage: Creating and Sustaining Superior Performance by Michael Porter

In the 1860s, railroads are rewiring the American economy. The old value chain built around steamboats, canals, and local commerce is coming apart, and nobody knows which parts of the new one will be profitable.

Cornelius Vanderbilt is almost 70 years old and one of the wealthiest men in America. He has spent four decades mastering steamboats. He comes to railroads without a master plan for an empire. Instead, he sees a problem he thinks he can fix: the New York and Harlem Railroad, an unprofitable line that Wall Street brokers joke is only good for wrapping paper, and the only railroad running into the heart of Manhattan.

What follows is five years of escalating fights, each one set off by a structural problem Vanderbilt discovers as he’s trying to turn railroads from speculative projects to great businesses. Along the way we ask what actually built Vanderbilt’s moat, why he tried diplomacy before waging battles almost every time, and what operating in a fog with enormous amounts of capital, market, and operational risk might teach us about today’s markets.

Chapters

(02:02) How a technology revolution rewires an entire value chain

(06:04) Vanderbilt forcing a boat up the San Juan River in Nicaragua

(13:31) Railroads as an accessory and saving the Harlem in the Panic of 1857

(16:20) Selling the steamships and buying a railroad nobody wants

(20:37) The Harlem Corner

(23:21) No market power with the Harlem

(27:28) Diplomacy first and taking on the Hudson

(38:17) The January 1867 blockade of the Central

(47:35) The Erie War against Daniel Drew, Jay Gould and Jim Fisk

(1:00:06) The Lake Shore campaign and Black Friday in 1869

(1:05:37) The Vanderbilt playbook and what it means for the AI buildout

References

The First Tycoon: The Epic Life of Cornelius Vanderbilt by T.J. Stiles (link)

The Invention of the Trillionaire by T.J. Stiles, WSJ Article (link)

The Visible Hand: The Managerial Revolution in American Business by Alfred D. Chandler, Jr. (link)

History of the New York & Harlem Railroad by E. Clarence Hyatt

Increasing Returns and the New World of Business by W. Brian Arthur (link)

The Innovator’s Dilemma by Clayton Christensen (link)

7 Powers: The Foundations of Business Strategy by Hamilton Helmer (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn more and explore the latest data on energy affordability, go to eqt.com/energy-affordability.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

The war for independence started and ended on a financial note, and the man at the center of the money problem was someone most of us have never heard of: Robert Morris, the Financier of the American Revolution.

Morris was a Liverpool-born merchant who moved to America at thirteen in 1747 and went on to become one of the most important leaders of the American Revolution. He understood shipping, credit, and global trade well enough to keep Washington’s army from collapsing.

We trace the arc of the war to understand how a small group of colonies banded together to finance a rebellion against a world superpower. We cover colonial paper money, the fiscal tensions leading up to Lexington and Concord, how the Continental Congress tried to fund everything, and how they ultimately saved the war by handing extraordinary executive powers to Robert Morris.

Chapters

(05:35) The colonial economy: farming, a chronic trade deficit, and a chronic shortage of gold

(08:15) Robert Morris: the Liverpool-born merchant who masters colonial trade

(12:50) Money as a flashpoint: the Currency Acts and Morris’s own private currency experiment

(17:38) From taxes to revolution: the Stamp Act, the Intolerable Acts, and Lexington and Concord

(19:43) Funding a war with no power to tax: Congress invents the Continental Dollar

(29:35) Christmas Supplies: Morris helps Washington cross the Delaware

(34:02) “Not worth a Continental”: hyperinflation and the collapse of the printing era

(44:17) Superintendent of Finance: a desperate Congress hands Morris near-total control

(52:13) Yorktown: kegs of French silver and the financing behind the decisive victory

(54:47) Newburgh and the Treaty of Paris: the army nearly turns and the war ends

References

Robert Morris: Financier of the American Revolution by Charles Rappleye (Link)

The Continental Dollar: How the American Revolution Was Financed with Paper Money by Fairley Grub (Link)

Financial Founding Fathers: The Men Who Made America Rich by by Robert E. Wright and David J. Cowen (Link)

Founding Finance: How Debt, Speculation, Foreclosures, Protests, and Crackdowns Made Us a Nation by William Hogeland (Link)

One Nation Under Debt by Robert E. Wright (Link)

The Power of the Purse by E. James Ferguson (Link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To join us in celebrating America’s 250th anniversary, go to https://www.eqt.com/community/america-250.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

At the center of it stood another George. This time, it’s not George Stephenson, the father of locomotives. This time it’s the Railway King, George Hudson, who started as an orphaned draper’s apprentice in York, inherited a fortune at twenty-seven, and use it to dive into politics, to start a bank, and ultimately to build the largest railway empire in Britain, controlling a third of the nation’s track at his height.

We follow Hudson’s rise from a single line through York, to the serial mergers that built the Midland Railway, to a seat in Parliament and a place at the epicenter of the mania that he both rode and amplified. Then we trace the unraveling: the Irish famine, the Bank Crisis of 1847, collapsing dividends, and the shareholder meeting in 1849 where a single question started a snowball effect that brought George down. But it didn’t bring down the vast network of railways he built; a network that would go on to underpin the Victorian golden age.

Along the way we dig into how this market actually worked (cash calls, parliamentary approval, project dividends), and how, as the mania took off, investors ignored competitive pressures and succumbed to a “collective hallucination”.

Chapters

(08:00) Intro to George Hudson

(10:18) The inheritance

(18:15) George Hudson meets George Stephenson and builds the York & North Midland

(19:03) How the capital structure of railways actually worked

(30:07) The 1844 Midland merger masterstroke

(38:32) Railway Mania at its peak

(43:12) Conflicts of interest everywhere

(46:02) The Bank Crisis of 1847

(52:22) The dominoes fall

(1:02:14) Takeaways from the story

References

George Hudson: The Rise and Fall of the Railway King by AJ Arnold and Sean McCartney (link)

George Hudson: The Railway King: A New Biography by Matthew Wells (link)

History of Railway Mania by Gareth Campbell (link)

Papers on Technology and Financial Manias by Andrew Odlyzko (link)

Boom and Bust: A Global History of Financial Bubbles by William Quinn & John Turner (link)

Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor (link)

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Perez (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn more and explore the latest data on energy affordability, go to eqt.com/energy-affordability.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

AI capex should land at ~2.4% of GDP this year per Goldman Sachs.2

That’s significantly higher than the peaks of: the highway buildout, the space race, the telecom boom fueled by the internet in the 1990s, and the shale revolution in the 2000s. It’s similar to peak spend on electrification in 1930 when we spent 2.6% of our GDP on building the electrical grid.3

But projections (and the booming equity markets, from upcoming IPOs by OpenAI and Anthropic to Google’s recent $80 billion equity raise 🤓) say we’re just getting started on AI capex. AI capex might reach 4.4% of GDP or higher by 2030.4

There’s only one period that beats that.

It’s the 1840s Railway Mania in the UK when capital deployed to railway projects in a single year reached an all-time record of 7.3% of GDP.5

That’s the story we’re going to tell in episode 2. After covering the technological breakthrough of steam-powered locomotives in episode 1, we’re going to dive into the rip roaring story of the time the UK went bananas for railways.

Coming soon to your favorite podcast player.

We are living through one of these revolutions right now, sparked by artificial intelligence. When you look at other revolutions in history, nothing quite compares to AI… except for rail.

This is the first episode of our Rail Revolution series. We start with the technology breakthrough in this episode before turning to the markets it unleashed in our next episode. It’s the story of how steam power and the railway were born, and why that story rhymes so closely with the AI buildout happening right now.

We begin in 1700s England, a country running out of wood and forced underground for coal, where flooding mines created the desperate problem that the steam engine was invented to solve. From there we trace a century of breakthroughs including Newcomen’s atmospheric engine, James Watt’s separate condenser, Richard Trevithick’s high-pressure locomotive, and the incremental improvements in iron technology.

We tell the story of George Stephenson: born dirt-poor in a colliery village, illiterate until 18, with no patrons and no formal training. We follow him from his first locomotive through the Stockton & Darlington, into a brutal Parliamentary cross-examination engineered by the canal lobby to break him, and on to the Rainhill Trials and the opening of the Liverpool & Manchester Railway, which was a national spectacle with a great tragedy that could have derailed the growth of railways.

Why did the railway take decades to arrive when the technology was ready years earlier? What does it actually take to commercialize a working invention? And what allowed a self-taught underdog to pull it all together?

Stay tuned for our next episode: the railway works, the dividends are real, and the fuse is lit. George Hudson and one of the largest investment manias in history.

Chapters

(04:48) Life in 1700s England: the wood crisis and the desperate need for coal

(08:13) How a steam engine works: vacuum, pistons, and Newcomen’s atmospheric engine

(15:13) James Watt’s separate condenser and the partnership with Matthew Boulton

(16:41) Richard Trevithick, high-pressure steam, and the first locomotive on rails

(21:49) The iron problem: why cheap wrought iron unlocked the railway

(22:56) Meet George Stephenson: from illiterate colliery boy to the Stockton & Darlington

(29:51) Liverpool’s canal monopoly and the fight for a Parliamentary bill

(38:02) George crushed in Parliament

(48:49) The Rainhill Trials

(53:00) Opening day 1830: spectacle, the Duke of Wellington, and the Huskisson tragedy

(1:04:48) Takeaways: the total product and the three ingredients of a tech revolution

References

George and Robert Stephenson: The Railway Revolution by LTC Rolt (link)

Richard Trevithick: Giant of Steam by Anthony Burton (link)

The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention by William Rosen (link)

History of Railway Mania by Gareth Campbell (link)

Papers on Technology and Financial Manias by Andrew Odlyzko (link)

Visualizations of the Newcomen and Watt steam engines, and the Puffing Devil locomotive by Michael De Greasley (link)

AI Could Be the Railroad of the 21st Century. Brace Yourself by Derek Thompson (link)

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Perez (link)

Crossing the Chasm by Geoffrey Moore (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn more and explore the latest data on energy affordability, go to eqt.com/energy-affordability.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

Howard Marks grew up in Queens, studied finance at Wharton, and trained under the Chicago School’s efficient market hypothesis before watching the Nifty 50 collapse early in his career. He learned that it’s not what you buy, it’s what you pay. He eventually moves into high yield bonds and becomes one of the first institutional investors in the market.

Bruce Karsh was a rising star as a lawyer before stepping out to work for Eli Broad analyzing investments and structuring transactions. His work on the Johns-Manville asbestos bankruptcy planted the seed of an idea that would evolve into distressed investing.

By 1988, the two had found each other at TCW in Los Angeles with a shared philosophy around investing at the right price, tracking the market cycle, and finding good companies with bad balance sheets to invest in. By 1990, with high yield default rates above 10%, Drexel bankrupt, and collapsing demand for bonds, Howard and Bruce were on their way to building a reputation as legendary credit investors.

Chapters

(02:50) Context on Howard Marks and Bruce Karsh

(06:45) Howard’s early career: Wharton, the Chicago School, and the efficient market hypothesis

(10:32) The Nifty 50: one-decision stocks and their collapse

(15:26) Howard moves to bonds and Bruce Karsh goes from law to investing

(19:47) Howard meets Milken and discovers high yield bonds

(25:22) Howard builds Citi’s high yield portfolio and moves to TCW

(30:34) Bruce Karsh’s distressed debt thesis and joining TCW

(39:42) The Howard Marks investment philosophy: market cycles and probabilistic thinking

(42:39) The 1989-91 crisis: S&L collapse, FIRREA, and the high yield market meltdown

(52:18) Deploying capital in the crisis, TCW’s 45% returns, and founding Oaktree

References

Howard Marks Investor Series with Bruce Karsh (link)

Howard Marks Memos, The Complete Collection (1990-2025) (link)

The Most Important Thing by Howard Marks (link)

Mastering The Market Cycle: Getting the Odds on Your Side by Howard Marks (link)

Acquired with Howard Marks and Andrew Marks (link)

Junk Bonds: How High Yield Securities Restructured Corporate America by Glenn Yago (link)

Beyond Junk Bonds: Expanding High Yield Markets by Glenn Yago, Susanne Trimbath (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn more and explore the latest data on energy affordability, go to eqt.com/energy-affordability.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

But that’s not the whole story. As our guest Bob McNally so eloquently points out, part of what makes this market so fascinating and so complex is how volatile oil prices can be and how often the load-bearing assumptions of market participants break down.

Arguably the entire history of oil is the history of our repeated attempts to manage its price volatility. And no one understands that better, or has been right more often during times of crisis, than Bob McNally.

In this episode, we sit down with Bob—founder of Rapidan Energy Group, former White House energy advisor to President George W. Bush, longtime hedge fund analyst at Tudor Investment Corporation, and author of Crude Volatility—to add historical context to the crisis in the Strait of Hormuz, to better understand how oil markets work, and to shed light on the psychology of market participants and policy makers.

You can find Bob on X (@Bob_McNally) and LinkedIn. You can find Rapidan Energy Group at https://www.rapidanenergy.com/

Chapters

(01:38) Variant perception and Bob’s Iran call

(08:19) Why the market misread Hormuz

(10:56) Why oil prices are uniquely volatile

(17:06) The Texas Railroad Commission: OPEC before OPEC

(23:00) Spare capacity and the swing producer

(30:38) How the U.S. lost the swing producer role

(38:11) How OPEC took over market management

(49:50) How shale changed the oil market

(54:11) How policy makers make decisions during energy crises

(1:01:28) Second and third order effects from the current crisis

References

Crude Volatility: The History and the Future of Boom-Bust Oil Prices by Robert McNally (Link)

“Ships stranded by Strait of Hormuz closure” 60 Minutes on CBS, March 15 2026 (Link)

Chart: oil supply shocks and spare capacity since 1955 (Link)

Oil Market Black Swans: Covid-19, the Market-Share War, and Long-Term Risks of Oil Volatility by Robert McNally (Link)

A Crude Predicament: The Era of Volatile Oil Prices by Robert McNally and Michael Levi (Link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn how EQT is unlocking energy to power AI, go to PoweredByEQT.com.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

The answer leads us to Fred Carr, a largely forgotten figure who may be the most important person in 1980s finance that almost nobody has heard of. A scrappy outsider from Watts, Los Angeles, he first rose to fame as the hottest mutual fund manager in America during the go-go years of the late 1960s before flaming out spectacularly with the Enterprise Fund.

His second act was even bigger. In 1974, Carr took over a near-bankrupt life insurance holding company called First Executive Corporation and transformed it into a powerhouse. He pioneered single premium insurance products that offered higher yields than competitors, built a revolutionary sales incentive model, and earned top-tier safety ratings that unlocked massive institutional capital flows from pension plans and municipalities.

First Executive became the largest buyer of high-yield bonds in America, participating in 90% of all Drexel underwritings between 1982 and 1987. But when the junk bond market collapsed, the same concentration that fueled Carr’s rise became his undoing.

Along the way, we explore how insurance companies work, why the end of the Great Inflation broke every financial business model in America, how regulatory gaps allowed risk to build invisibly, and why the California aftermath of First Executive’s collapse became very relevant to one of the biggest financial institutions in modern finance.

Chapters

(01:36) Set up to sources of capital for the junk bond boom

(07:11) Fred Carr’s origin story: from Watts to Wall Street outsider

(12:16) The go-go years and the Enterprise Fund’s meteoric rise and fall

(19:30) First Executive: taking over a near-bankrupt insurer and starting over

(23:23) The Great Inflation breaks insurance: why old business models stopped working

(27:22) The Milken-Carr flywheel: high-yield bonds meet single premium insurance products

(39:03) First Executive becomes a junk bond giant: growth, ratings, and warning signs

(48:56) The collapse: Drexel’s bankruptcy and its consequences for the junk bond market

(1:03:15) Seizure, conservatorship, and the wild aftermath with Apollo and Credit Lyonnais

References

The Fall of First Executive: The House That Fred Carr Built by Gary Schulte

Perceptions and the politics of finance: Junk bonds and the regulatory seizure of First Capital Life, Journal of Financial Economics, 1995 (link)

Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken by Robert Sobel (link)

Junk Bonds: How High Yield Securities Restructured Corporate America by Glenn Yago (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn how EQT is unlocking energy to power AI, go to PoweredByEQT.com.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

Instead, as soon as the board issues the customary press release announcing the buyout bid, RJR Nabisco is in play as the most prized buyout target on Wall Street.

Ross Johnson alienates not one, but two major players on Wall Street: Henry Kravis from buyout specialist firm KKR and Jeff “Mad Dog” Beck from junk bond specialist Drexel Burnham Lambert. It turns out $75-per-share is far from a winning bid.

What follows is the most dramatic LBO fight in history: bear hugs and tender offers, bank exclusivity plays, bidders posturing and bluffing, interlopers wanting to plant their flag in the LBO game, and directors getting ambushed in the hallways by bankers hunting for an edge.

Chapters

(01:04) Recap: Ross’s $75 management bid frames as an “inside raid”

(03:30) The board meeting and the press release that put RJR in play

(06:31) Kravis takes it personally: why KKR has to enter the fight

(07:54) Meet Drexel’s “Mad Dog” Jeff Beck (and why he matters)

(14:33) The stock becomes a battlefield: arbitrage, piling in, and momentum

(17:11) KKR goes on offense: the $90 tender offer and the greed narrative

(25:30) The auction gets hot: new bidders, higher prices, and board pressure

(42:28) The final vote—structure, certainty, and the aftermath of the deal

(45:54) Lessons learned

References

Barbarians at the Gate: The Inside Story of America’s Most Notorious Corporate Takeover by Bryan Burrough, John Helyar (link)

RJR Nabisco: A Case Study of a Complex Leveraged Buyout, Financial Analysts Journal, 1991 (link)

Junk Bonds: How High Yield Securities Restructured Corporate America by Glenn Yago (link)

Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken by Robert Sobel (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn how EQT is unlocking energy to power AI, go to PoweredByEQT.com.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

Ross Johnson, the CEO of RJR Nabisco, watches as his stock price gets cut in half in a day… even though the business and the economy are fine.

Over the next year, he tries everything from asset sales to share buybacks to convince the market there’s a lot more value at RJR Nabisco than they’re giving him credit for. Nothing works.

Meanwhile, leveraged buyouts are hot on Wall Street but that’s the one solution Ross Johnson isn’t willing to try. He’s a brilliant political operator who can manage board members, who loves perks, and hates constraints. But above all, he can’t stand that the market keeps pricing RJR Nabisco like a doomed tobacco company. That frustration overcomes his aversion to LBOs, and he makes his move on October 19th, 1988—exactly one year after Black Monday.

Chapters

(00:43) Welcome + recap: from junk bonds to the LBO era

(03:35) 1987 at the top: bull market euphoria, Berlin Wall optimism, Fed hikes

(05:24) Portfolio insurance: Black-Scholes in the wild and the “mechanical” selling logic

(09:58) Black Monday: the crash day and why it shocked everyone

(11:35) RJR’s stock collapse: the bargain that changes the story

(11:45) Meet Ross Johnson: perks, power, and the 80s CEO archetype

(28:17) LBOs 101: the mortgage analogy + why leverage can create value

(31:54) ERISA & pensions: Prudent Man Rule clarification unleashes institutional capital

(41:22) KKR’s rise: Henry Kravis, fund economics, and the LBO machine

(52:03) Ross’s playbook: buybacks, tobacco overhang, and the $75/share MBO spark

References

Barbarians at the Gate: The Inside Story of America’s Most Notorious Corporate Takeover by Bryan Burrough, John Helyar (link)

RJR Nabisco: A Case Study of a Complex Leveraged Buyout, Financial Analysts Journal, 1991 (link)

Junk Bonds: How High Yield Securities Restructured Corporate America by Glenn Yago (link)

Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken by Robert Sobel (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn how EQT is unlocking energy to power AI, go to PoweredByEQT.com.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

Before all that, in the early 1970s, a young Michael Milken joined Drexel to focus on low-grade bonds. He had discovered the research of W. Braddock Hickman, which concluded low-grade bonds could generate attractive investment returns, and he became obsessed. He was ambitious, smart, and an outsider when he got to Wall Street. Within a decade, he would be at the center of it.

In this episode, we tell the origin story of the high-yield bond market—and how Michael Milken, from a backwater desk at Drexel, turns a stigmatized corner of finance into the most powerful funding engine on Wall Street.

At first Drexel focused on trading “fallen angel” bonds. Then they moved aggressively into underwriting new high-yield deals, and created a flywheel: more issuance, more buyers, more liquidity—all underpinned by a rigorous knowledge of the market that no one else could match.

Along the way, we pull out lessons that rhyme with modern cycles: why market “infrastructure” matters as much as the math, how scar tissue from the last decade warps risk-taking, and how a productive innovation can—at scale—start to fuel excess.

Chapters

(04:06) Wall Street in the 50s/60s

(07:25) Michael Milken’s background

(11:24) Intro to bonds and market structure

(12:56) Braddock Hickman research and the logic for high-yield bonds

(18:34) Michael Milken lands at Drexel

(23:42) The 1970s, stagflation and brutal markets

(30:41) Michael Milken almost leaves Drexel then he gets capital to manage and doubles it

(49:13) Expanding the market by creating new high-yield bonds from scratch

(57:48) High yield fuels the rise of leveraged buyouts and corporate raiders

References

Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken by Robert Sobel (link)

The High-Yield Debt Market: 1980-1990 by Richard Jefferis, Jr. (Federal Reserve Bank of Cleveland) (link)

Junk Bonds: How High Yield Securities Restructured Corporate America by Glenn Yago (link)

Innovations in Finance, Medicine, and Education with Michael Milken, Capital Allocators Podcast by Ted Seides (link)

Sponsors

Big thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn how EQT is unlocking energy to power AI, go to PoweredByEQT.com.

Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed.

We launched the show in 2025 because we love Acquired and Founders, and we wanted a similar show for market history.

2025 was about landing the format. 2026 is about spreading the word.

That’s why we’re partnering with EQT Corporation to bring you Season 2 of Backtest.

Every technological breakthrough in history rides on infrastructure—canals, railroads, electricity, fiber. In the AI era, infrastructure increasingly depends on energy, and EQT is building and modernizing the natural gas ecosystem to enable affordable, reliable power at scale.

This partnership helps us keep doing what we do best—hundreds of research hours, sharp storytelling, and lessons you can apply—while expanding our reach and connecting our community to the infrastructure story behind the AI boom.

We’re grateful for EQT’s support, and we thank you, the Backtest community, for joining the journey to build the go-to podcast for market history.

Stay tuned for our first episode of Season 2 later this week. Spoiler alert: we may have to wear blue dress shirts with white collars and suspenders to really land this story.

For previous episodes of Backtest, and to keep up with future announcements, subscribe at backtestpodcast.com.

To learn more about EQT, go to PoweredByEQT.com and keep up with the latest updates by following them on X and LinkedIn.

First, we wanted to spend more time diving into the defining moments in market history—deconstructing what happened, how it worked, and why it mattered.

We are constantly reading, but we wanted to add structure and rigor to our approach.

We wanted to supercharge our learning.

Second, we suspected other founders, investors, and operators wanted the same thing. For years, we’ve tuned into shows like Founders, Invest like the Best, Acquired, The Rest Is History, and Dan Carlin’s Hardcore History.

We realized that a podcast could be a great way to channel our energy and curiosity. What’s more, we realized that even though we had a go-to podcast to “learn from history’s greatest entrepreneurs” (Founders) and a go-to podcast to “learn the playbooks that built the world’s greatest companies” (Acquired), we didn’t have a go-to podcast to learn the lessons from market history.

So we decided to build it.

As we look back on our first year, we are happy that we found a topic valued by so many of you. We shipped a total of 13 episodes, each backed by hundreds of hours of research.

We are proud of how far we’ve come, expanding our understanding, not just of market history, but of how to tell compelling stories.

Most of all, we are grateful for all the people who helped us this year by giving us honest feedback about the name, the format, the stories, and the research.1

We couldn’t end the year without reflecting on lessons we learned and how they may inform our understanding of markets in 2026.

The stock market bubble narrative

Today’s booming stock market driven by AI might sound a lot like the dot com bubble of the 1990s.

And yet, despite high valuations, stocks right now are not as expensive as they were in early 2000—especially once you compare cyclically-adjusted earnings yields to interest rates.2

During the dot com bubble, the Nasdaq price-to-earnings multiple (PE) reached 150x. Today it trades around 32x and the average since 2003 has been 23x. So valuations are certainly above the historical average, and we should keep a watchful eye on stock prices, but a major market crash from extreme valuations is not a foregone conclusion.

But it’s worth noting the level of concentration in the market. In contrast to the early 2000 period when the top 5 companies represented a little less than 20% of the S&P 500’s market cap, today’s top 5 companies represent closer to 30%.

The capital investment trends

One of the most noteworthy trends this cycle is the magnitude of capital being deployed on AI infrastructure. Capex is an important signal of future growth, cash flow, and productivity. It lights the way on where the economy, and underlying markets, are trending.

In the Shale Revolution series we touched on the natural gas pipeline build out in the 50s and 60s. We concluded that it was one of the most attractive investment opportunities at the time.3

We also talked about the massive amounts of capital invested in drilling activities during the 2000s, and how the returns failed to materialize after oil and natural gas prices crashed from oversupply.

In Part 2 of the Dot Com Boom series we talked about the capital deployed to build out fiber networks for the internet. This capital also failed to generate a financial return for investors despite laying down the infrastructure that allowed the internet to thrive for decades after.

These boom cycles tend to be sparked by a fundamental technological revolution. Then at some point, psychology gets a hold of market participants and hype drives capital towards less productive projects. We saw this in the 1990s when the telecom industry based investment on the belief that internet traffic was doubling every 90 days—true early in the cycle, but false by the time it was being used to justify projects.

The AI buildout is expected to become the largest privately funded capital project in history—bigger than Telecom, Pipelines, and Railroads. With trillions of capital on the line, and infrastructure underpinning another revolutionary technology, this will continue to be a trend to keep an eye on.

The high-yield credit markets

We didn’t expect the high-yield credit markets to play a prominent role across both the Dot Com Boom and Shale Revolution series.

We were surprised to learn that the dot com bubble burst in two separate waves. Before 9/11, the animal spirits fueling the dot com craze reversed in early 2000, crashing dot com stock prices. However the broader market and the real economy remained unscathed until late 2001 when economic weakness following the 9/11 terrorist attacks combined with a mountain of telecom debt to drive a much deeper, credit-driven bear market.

Tech & Telecom represented 35% of the high-yield market before the crash. For context, it was typically 10% prior to 1995 and has settled closer to 20% since the crash.

Similarly, during the height of the Shale Revolution, energy companies’ share of high-yield was 16%—much higher than its typical 12%.

Financing AI infrastructure will likely follow a similar pattern with some exceptions. The investment-grade nature of hyperscalers along with the relative magnitude of modern private capital markets means the high-yield credit market will likely absorb less of these capital needs. This will make it harder to track excesses in AI infrastructure.

The global monetary system

We studied the Nixon Shock to better understand what happens when the world restructures its economic operating system. The rise of China as a competing superpower to the United States suggests we may be going through another restructuring.

This is huge.

There are implications for defense, trade, and importantly for the dollar’s role as the world’s reserve currency.

We learned in Part 3 of the Nixon Shock series that Treasury Secretary John Connally helped usher in the fiat era in 1971 by telling the world “it’s our currency but it’s your problem.” The world was much different then, but gold remains a key indicator.

The fact that central banks—most notably China—have been increasing the share of gold in their reserves, and that gold prices, particularly relative to oil, have been consistently rising for several years are powerful market signals.4

But the US dollar remains firmly within the historical range when compared to other major currencies. With a new Fed chairman taking over in May 2026, this dynamic is worth watching.

Looking ahead

“The reward for great work is more work… The reward for great work is not money, power, fame. It is the privilege to get to do more of this thing that I love doing.”

—Patrick O’Shaughnessy in conversation with David Senra | Dec 21, 2025

We’ll be adding two core features to Backtest in 2026.

A few of you have been pounding the table for these since we started. We preferred to take our time to get these right. We’re confident we did and we’re excited to announce them soon.

We are also deep in research mode for our next series—the first episode will drop at the end of January.

In the meantime, thank you for coming on this journey with us.

Stay tuned and please spread the word.

We follow Papa and his lieutenants Bill Thomas and Gary Thomas as they see what others miss: shale’s success in natural gas will eventually create a glut that will crash prices. EOG must pivot to oil or stall. From a dramatic 2007 offsite where Mark tells his team to stop looking for natural gas, to early experiments in the Bakken, to a quietly assembled position in the Eagle Ford, EOG’s edge leads it to become a top US oil producer.

But before they can enjoy their success, the market turns again. On Thanksgiving day 2014, Saudi petroleum minister Ali Al-Naimi announces to the world that OPEC won’t cut production to balance global oil markets. Oil prices collapse by 60% over the next 12 months and the shale boom faces its first true stress test. We unpack why so many companies break—and why EOG doesn’t—ending with the playbook that helped shale survive: low cost operations, productivity gains from technology, focus on premium wells, and operating discipline built to survive boom-bust cycles.

Chapters

(04:56) Two questions: will shale oil work and can shale production be profitable?

(07:28) The operators: Mark Papa, Bill Thomas, and Gary Thomas at EOG

(08:16) The history of EOG

(11:32) The 1990s oil & gas market

(13:34) Two forces converge at Enron in the 1990s

(20:03) Being the low cost operator in commodity businesses

(21:55) Four things that define EOG

(29:32) The commodity supercycle of the 2000s

(33:03) EOG pivots from natural gas to oil

(45:55) EOG announces the Eagle Ford discovery

(55:25) The commodity supercycle and the zero interest rate environment

(57:21) OPEC surprise on thanksgiving 2014

(1:08:04) Lessons learned

References

Saudi America: The Truth About Fracking and How It’s Changing the World by Bethany McLean (Link)

Crude Volatility: The History and the Future of Boom-Bust Oil Prices by Robert McNally (Link)

The Accidental Oilman by Lawrence Strauss, Barron’s, October 2011 (Link)

The Frackers: The Outrageous Inside Story of The New Billionaire Wildcatters by Gregory Zuckerman (Link)

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Perez (Link)

In this episode, we tell Aubrey’s story: from deep family roots in oil & gas to hustling as an independent landman in the brutal 1980s bust, to co-founding Chesapeake, taking it public in 1993, and doubling production year after year even as gas prices went nowhere. We follow the moment he and partner Tom Ward fly to San Jose to sit across the table from Calpine executives and realize just how much gas-fired power demand is coming—and why that meeting gives Aubrey the conviction to pivot Chesapeake almost entirely to gas in the late 1990s, just before Alan Greenspan warns Congress about tight natural gas supplies in the US.

We walk through how he uses every financing tool available—bank lines, high-yield bonds, converts, joint ventures, volumetric production payments, and massive midstream commitments—to plug billions in capital needs and amass premier shale positions in the Barnett, Marcellus, Permian and beyond.

We draw lessons on effective fundraising, capital cycles, commodity cycles and technological revolutions—and why going to the source for real market signals is still the best way to build conviction.

Chapters

(02:35) Alan Greenspan on natural gas as a headwind for US growth

(04:05) Aubrey McClendon’s early life

(07:02) Aubrey graduates from Duke and joins Jaytex

(09:48) Setting out on his own as a landman

(16:07) Chesapeake goes public in 1993

(22:55) 1998 natural gas inflection point for Chesapeake

(26:30) Chesapeake gets into shale

(32:55) How big capex gets financed

(44:38) Aubrey loses substantially all of his Chesapeake stock from a margin call

(49:29) Aubrey gets pushed out of Chesapeake & starts AEP

(52:47) Lessons learned

References

The Frackers: The Outrageous Inside Story of The New Billionaire Wildcatters by Gregory Zuckerman (Link)

Saudi America: The Truth About Fracking and How It’s Changing the World by Bethany McLean (Link)

Chesapeake’s 1993 Annual Report (Link)

By answering that question they changed the US natural gas market, global geopolitics, and the daily life of everyday Americans.

In this episode we tell the story of George Mitchell, the son of Greek immigrants who clawed his way from financial hardship in Galveston to build a multi-billion dollar energy business—first by using his technical skills to find natural gas others missed, then by signing a pivotal long-term contract to feed Chicago’s growing demand. That deal generates substantial cash flow, but it also becomes a ticking time bomb: as US gas markets lurch through decades of regulation, shortages, and deregulation, Mitchell’s core field starts to run out, and the company faces the real prospect of defaulting on its obligations.

Backed into a corner, Mitchell bets the future of his firm on the Barnett Shale—rock that industry experts say can’t be produced economically. We follow two decades of failed experiments, internal skeptics, and near-disaster until a young engineer, Nick Steinsberger, stumbles into a cheaper way to frack wells and finally cracks the code that turns the Barnett from science project into scalable resource.

Along the way, we zoom out to the larger gas market: how postwar pipeline build-outs, 1970s energy crises, and 1980s deregulation set the stage for Mitchell’s moonshot—and why this quiet breakthrough in North Texas is the reason today’s AI data centers, power grids, and geopolitics have the luxury of assuming abundant US energy supply.

Chapters

(01:07) Excerpt from The Frackers

(02:30) The US supply of energy for AI was unlocked by the Shale Revolution

(06:40) George Mitchell’s childhood

(11:21) George and Johnny Mitchell start Oil Drilling Co

(14:05) Finding the Boonsville Bend gas field

(20:30) The market for Boonsville gas & signing the Chicago contract

(25:00) US natural gas markets through the decades

(30:30) Mitchell Energy goes public

(33:15) The decline of gas reserves from Boonsville leads to Barnett experiments

(34:21) Shale geology versus conventional formations

(42:22) Mitchell Energy sued by landowners

(46:10) Bill Stevens, COO of Mitchell Energy, skeptical of the Barnett project

(47:09) Chevron’s Barnett project

(51:20) Nick Steinsberger stumbles into an insight & unlocks the code

(58:30) Mitchell Energy tries to sell itself, fails, then succeeds

(01:03:31) Lessons learned

References

The Frackers: The Outrageous Inside Story of The New Billionaire Wildcatters by Gregory Zuckerman (Link)

George P. Mitchell: Fracking, Sustainability, and an Unorthodox Quest to Save the Planet by Loren C. Steffy (Link)

A Retrospective Review of Shale Gas Development in the United States: What Led to the Boom? By Zhongmin Wang and Alan Krupnick, 2013 (Link)

Windfall: How the New Energy Abundance Upends Global Politics and Strengthens America’s Power by Meghan L. O’Sullivan (Link)

Elon Musk famously said that PayPal wasn’t a hard company to create. It was a hard company to keep alive.

In 1999, three future titans of technology—Max Levchin, Peter Thiel, and Elon Musk—charge straight into the blaze to bring payments and finance into the internet age. This is the story of how a handful of brilliant founders and their team navigate from crisis to crisis, face constant near-failure, and create the first successful internet payments solution. From the wreckage of the dot com bubble, they emerged refined—the founders, investors, and builders who would go on to shape the next two decades of Silicon Valley—and a lot of the world we live in today.

Chapters

(01:20) Mr. Buffett on the Stock Market

(02:17) The stock market in 1999

(05:21) Intro to Max and Peter

(09:49) Intro to Elon

(15:45) Why they choose to do startups this late in the cycle

(20:51) Insight of eBay as a perfect market for p2p payments

(22:51) Competition between Confinity and X

(26:55) Confinity and X merge

(34:09) Novel business model & technology innovation

(37:29) The stock market crash dynamics

(43:25) How PayPal navigates post-9/11 slump with an IPO

(48:42) The PayPal Mafia

(50:40) Nature vs. nurture

(54:02) Takeaways on market timing

(55:24) The internet delivered on its promise

References

The Founders: The Story of Paypal and the Entrepreneurs Who Shaped Silicon Valley by Jimmy Soni (Link)

The PayPal Wars: Battles with Ebay, the Media, the Mafia, and the Rest of Planet Earth by Eric M. Jackson (Link)

PayPal S-1 Filing in 2002 (Link)

Mr. Buffett on the Stock Market, Nov. 22nd 1999 (Link)

Jeff Bezos did just that. And while the Amazon story has been told many times, it’s fascinating to think about what he saw that gave him the confidence to leave his comfortable Wall Street job to start Amazon.

How did he see the wave before most people, and what gave him the conviction to go for it? We cover his key relationship with David Shaw, his market research, and his regret minimization framework.

Famously, Amazon focused on books and grew like a rocket ship. How did they navigate the hype cycle and the dot com mania? Was their approach to investing during the boom the right approach? What can we learn from how they navigated the crest at the height of the bubble?

Finally, we ask maybe the most important question of all—how did Amazon survive? What were the market conditions they had to navigate? Did they do anything specific to position themselves or did they just get lucky?

Chapters

(01:20) Increasing return games

(05:38) Jeff Bezos’s background

(10:27) Market backdrop in the late 1980s, early 1990s

(13:54) Jeff Bezos meets David Shaw

(16:47) How Jeff Bezos sees the wave and builds conviction

(32:22) How Amazon navigates the wave

(35:25) Joy Covey hired as CFO

(36:27) Amazon’s investment philosophy during the boom

(42:40) How Amazon survives the crash

(44:25) Amazon’s financings

(49:41) The market crash and Amazon’s reaction

(52:50) Why did Amazon survive?

(57:50) See the wave, ride the crest, survive the crash

References

The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone

Invent & Wander: The Collected Writings of Jeff Bezos

Amazon SEC filings & shareholder letters from 1996-2002

“Riding the Perilous Waters of Amazon.com” by Peter de Jonge, New York Times Magazine, published on March 14, 1999 (link)

Increasing Returns and the New World of Business by W. Brian Arthur (link)

2,300x web growth from ‘93-’94, John Quartermann, Matrix News, Vol. 4, No. 2 (link)

Acquired Episodes (History, Tom Alberg)