Animal Spirits Podcast - The Biggest Rug Pull of Our Lives (EP.332)

Episode Date: November 1, 2023

On episode 332 of Animal Spirits, Michael Batnick and Ben Carlson discuss: why so many people hate this economy, anecdotes vs. data, a depression in the mortgage industry, the good news about falling stock prices, small caps look cheap, consumers need a recession, and much more! Thanks to Kaplan Schweser for sponsoring this episode. Learn more about how they can help you prepare for the CFA at: https://www.schweser.com/cfa?utm_source=animal_spirits_podcast&utm_medium=podcast&utm_campaign=infl_partnership&utm_content=cfa Find complete show notes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits is brought to you by Kaplan Schweiser. The CFA program is not, it's not an easy test. I don't think anybody would describe it as easy. No. The pass rates, I was looking at the pass rates. I think they've gone down over time, but I've got a theory. So, actually, never mind. Disregard the theory that I didn't even share.

That's how bad it was. I think there's more people taking it now. That's what I was going to say, but I don't know if that's true. My theory was going to be like, I think a lot of people in 2021 were like, eh, like I'll just give it a shot, right? But even in 2023, August 2023, so these are not give it a shoters. In August 2023, the pass rate was only 37%.

That's crazy. Do these people not know Kaplan Schraiser? I feel like if I had to guess, those that are just taking it with the CFA study material, which are literal, like, giant textbooks, have to be way lower than those that are using test prep like Kaplan Schraiser. So I see 2022, there was 80,

2,000 people who were candidates for level one and 40,000 for level two. Obviously, you get weeded out for the people who don't pass. But yes, you need to do everything you can. Does this surprise you that the pass rate in, so we're just using August. Level one was 37 percent. Level two is 44 percent. Level three was 47 percent? I mean, it's a little lower than when we took it, but not that much. It's always been relatively low. And I mean, if you're going to put the time and you might as well, you might as well buy a study guide to help help a help a little, right? The one-page sheet sheet with all the formulas? Oh, yeah. I forgot about that one.

The California choice are special. I'm going to go out on the limits. Not out of the limit. I'm going to go against a grain. Level three, that's the hardest one for me. Really? I thought I thought it was level two. Yeah, because a lot of people drop out at level two.

I actually thought level three was the easiest for me, which is surprising. That was the only one I walked out of it and I said, I definitely passed this. Well, maybe you got an easy one because I felt the opposite. All right. If you are interested in taking the CFA exam, if you're looking for a career as an analyst, portfolio manager, things like that, hit the link in the show notes to get the the Kaplan Shraiser test prep. Welcome to Animal Spirits, a show about markets, life, and investing.

Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben, starting off the show with some peace

and love. We're still getting emails to the old inbox. Michael is not happy about it. Well, now we're monitoring several inboxes. Captain of email etiquette here. That's Animal Spiritspot at e-mail.com, but I'm telling you right now, and I mean it, with peace and love, this is the last week that we're going to respond to those emails. I'm taking it off my phone.

I'm taking it off my computer. The new inbox is Animal Spirits at thecomoundnus.com. And here's what we're going to do. If you disregard this and just blow right past it and you email Animal Spirits Potageecom, I will go the extra mile and I'll apply to you and I will CC Animal Spirits at the CompoundNews.com. So this way you have it stored in your context.

But that's it. That's it. You just totally contradicted yourself there. You said you're never checking again. And then you said... Well, after this week. One more week. So, Ben, your tweet last week about when you kicked the hornets nest about like, not, it wasn't everything's great and nobody's happy, but it was, you know, sort of long.

It was the economy's doing well. Why are, why is everyone miserable about it? Yeah, okay. So I think, and we're going to, we're going to try, we're going to try and continue to unpack this on today's episode, but I think there's like, I don't know if this is like selection bias or something else or whatever the hell it is. It's not everyone, everyone's obviously not angry, right? It's just the people in your mentions, the only people that reply to you are people that

are angry. Nobody's going to be like, yeah, good point. Yes. It's a sampling bias. So the angry responders to the supportive responders, it's like 100 to one. It's like the people who write Yelp reviews. Like who writes Yelp reviews, right? The people who are really mad or really happy, but mostly people who are really mad.

Yeah. So I just think like it's easy to get lost in this. Oh, everybody's pissed. It's like, well, yeah. If you write something that. it's positive if you go on social media or you're going to see your negative mentions. So the people who are happy are not getting any replies and saying, hey, I'm on Twitter. Yeah, and they're not on Twitter.

Yes. The people who are doing okay in their life, they're not on Twitter like us. Okay, so Liz Anz Saunders is an example. Liz Anzsanders tweeted, real personal income excluding government transfer payments rose to new all-time highs in September. I'll read it one more time. Real personal income excluding government transfer payments rose to new all-time highs in September. I can guess what replies are.

By the way, happy Halloween. Sure. Are we saying that now? You and Duncan both just said it. I'm not, we're saying that. Okay.

I'm talking to the listeners. Okay. Happy day after Halloween. We're recording this on Halloween. Okay. So, it's going to snow in Michigan, by the way. Really? For Halloween.

Yeah, fun. That's fun. All right. So now there's 172 replies. I'm obviously not going to read all of them. My goodness. I'm guessing there's at least 25% of I'm saying, oh, yeah, what about inflation?

Well, let me just read the, let me just, let me just, this is not, I'm just going to read the first five. Now try and buy a house or car or food. Okay. So how are they measuring this? How many adjustments? Is this measure of minimum wage increases or only, only or heavily overweighted? There's a political one that's weird.

Not mine, I'm doing something wrong here. Yes, but it's decelerated year over year. I mean, it's just, it's nothing but I am throwing the challenge flag. does not even come close to passing the smell test. Not buying, here's another one, not buying it. No one I know is making more in real terms except billionaires. I mean, it's nothing but this, nothing but this. So going back to my point of, it's not just social media, it's not, but it's a huge

component of this. So here's, I have some more thoughts about this. So a bunch of people told me that I was out of touch, basically. And honestly, I think I've spent so much time in finance reading about like the behavioral side of things that I have like tried to take all the emotions out of everything that I look at to the point where my wife at times is like you're just like a robot like I never show enough enthusiasm unless it's like sports or something you can't tell a midwesterner that they're out of touch true but yes exactly but so a lot of people said I'm out of touch and I think like

if you're trying to look at the aggregate of the economy and look at it in a dispassionate way you're always going to be out of touch with someone's personal economy the person's personal economy that those anecdotes are always going to trump the data to them because that's what they're experiencing. That's their lived experience. So obviously, in our system, there are always winners and losers. The funny thing is, the hard thing for people to wrap their brains around, for until the last 200 years, 99% of all humans were in the lower class. And then the industrial revolution happened and you had like 1% of people who were doing really well. It wasn't really until like the 1900s when you had this middle class develop. So I think most of the time,

everyone was in the same boat and now we've had this bifurcation of people. And it's, when you were able to see other people of winning, because there's always going to be winners and losers in our capitalist system. It's right or wrong, that's a feature, not a bug. I also think in the past, people were way more used to economic volatility. Like, you look at the inflation rate back in like the 20s and 30s and the, whatever, in early 1900s. And GDP, changes in GDP. Both are way more stable now, except for the last couple of years. Yeah, there was a depression every three years. People were just kind of used to volatility. We're not used to this type of volatility. And the other thing is, like, the economy as a thing is still relatively new. Like, people,

People didn't, in the past, knew of things were good or bad generally because of their own situation, but we didn't have all this data to track. No one knew how the economy was doing. Like, GDP didn't come about until the 1940s after the Great Depression of like, you know, we should probably figure out a way to measure this thing. Like, people didn't know how the economy was doing. That's an interesting point. We talked so much about, like, facts versus feelings. So this chart from the economist showing index of consumer sentiment. This is the chart of the year right here, as far as I'm concerned.

The expected what they expect versus the actual. and it was in lockstep, and it completely diverged during the pandemic. So you could say, I mean, there's a lot to say on this. One is, like, oh, here's an interesting take. Jeff Mackie said to me, like, something along the lines of people miss COVID or something. I saw that. He said people secretly missed the pandemic or something. People secretly missed the pandemic.

So I said, oh, interesting take. And he said, America argued with passion, but no one got in fist fights. We fought over how to best defeat a singular threat, a good common enemy, the greatest possible stimulus. Everyone got to know their kids, consumers consumed. The cost was huge, but we won the best of us. I don't want to spend like an hour on this because I think it's a very interesting take. But I think there's more than a kernel of truth there. Yes. There was a lot of things like where you took away a lot of the stuff that you have to deal with on a regular basis. And as bad as it seems, the nine to five. Yeah, I think people probably found some solace

in that in a lot of ways. And then of course, you know, a big part of this is also price volatility in inflation. But you mentioned, like, we didn't have historical, we didn't have so much data. If we were living in a world without data, I think people would assume the economy is really bad. So, yes, probably. The Wall Street Journal tweeted something. And again, I think it's like lazy and sort of lame to blame the media. But I also think that there's, that they play a part of this. Like, they just do. They're competing for eyeballs and attention and clicks and I think a third of the revenue, a quarter of the revenue, a third of the revenue at the New York Times is from advertisers.

Guess what's going to get clicks these days? The bad stuff. Yeah. So it's a subscription-based business, but a not insignificant portion of it is getting your attention to click. But it is, like, if you look objectively at the economy, things like, there's more pros than cons right now. Like the GDP report last week was objectively, like objectively good, right? But that doesn't mean you can't see bad stuff.

There's bad stuff too, of course. Here's what was on the front page of the Wall Street Journal. Instead of a headline, like, despite the Fed raising rates, U.S. GDP grows at the largest, strongest clip in two years. Like, it was objectively positive. Just the headline did it. It was the strongest GDP growth since Q4, 2021, since we came out of the pandemic. The strongest growth.

And here was the headline. U.S. economy's summer surge may not last. Right. Are you kidding me? U.S. economy summer surge may not last. And that's my point. Like, considering all we've been through, it's okay to take a step back and be like,

wow, this is really impressive what's going on in the U.S. economy. Even if, like, this is, that's obviously going to be the highest growth rate we're going to have. It's going to go down from here. Here's the footer. Blow it.

There are warning signs underlying the eye-popping numbers. Like, not even for a second can we celebrate the fact that there's good news. So, Morgan Housel's book, same as ever. really nailed it. Like, why is news? Why does news have such a negative bent to it? And we know about like the incentives for clicks and all that sort of stuff.

But here's another really interesting take on this. So this is from, again, his new book, same as ever. So he's talking about how news used to be. He said information was harder to disseminate over distances. And what was going on in other parts of the country or the world just wasn't your top concern. Information was local because life was local. Radio changed that in a big way. It connected people to a common source of information. TV did it even more. The internet took it to the next level. Social media blew it up by orders of magnitude. Digital news has by and large

killed local newspapers and made information global. 1800 US print media outlets disappeared between 2004 and 2017. The decline of local news has all kinds of implications, one that doesn't get enough attention is that the wider the news becomes, the more likely it is to be pessimistic. Two things make that so. Bad news gets more attention than good news because pessimism is seductive and feels more urgent than optimism. The odds of a bad news story, a fraud, a corruption, a disaster occurring in your local town at any given moment is low.

When you expand your attention nationally, the odds increase. When they expand globally, the odds of something terrible happening in any given moment are 100%. To exaggerate only a little, local newspapers report on social. softball tournaments, global newspapers, global news reports on genocide. A researcher once ranked the sentiment of news over time and found that media outlets all over the world have become steadily, more gloomy over the last 60 years. Right. You're casting a wider net, which also the, I think one of my favorite parts about Morgan's new book is that the chapters are all really

short. It makes you feel like you accomplish something really quickly. Well, let's look at the numbers real quick. Okay. So this is from the BEA, which if you don't believe the government data or whatever, then I can't help you. Obviously, it's not perfect, but it's what we have. The increase in real GDP reflected. Before we get to the data, just one more thing because this is a nice little bridge to the data. So Gregor McDonald, who I think is a very smart guy, had another interesting take. He said, so he tweeted the chart that we mentioned, right, the gigantic gap between expected consumer sentiment versus actual. I saw it. He's like, he's like, I've got to figure this out to. Something's going on here. Yes. So this is what he said, have started to change my

mind on this. There must be something about economic reality that we're not measuring. I see no reason to let go of my materialist bias, even as I gave great credit to psychology. So if you come to me with a claim that the whole country has been put into a trans by the media, well, that's just a tipper-gore move claiming death metal is causing suicides. So unless economists want to come up with an explanation like Americans are now zombies, deeply unhappy despite the economic conditions, it's time to stop head-banging about all this and find out what's actually wrong. Do you think that we're measuring the data wrong?

Is there a part of it? Could that be a part of it? No, but I do think the whole trust factor has really changed where people don't trust experts anymore and they don't trust the government. I think that's a big piece of it too is like people don't want to trust what they're being. Well, how about this? What if what if data doesn't doesn't capture how people feel? I mean, I know it doesn't because that's what we're seeing here. But what if it's just that simple? Yeah. No, that's true. That stories of all stories have always matter way more than statistics. Last week we spoke about net worth or a couple of weeks ago.

I don't think network when net worth is any correlation in the short term with how people feel, especially, and I'm not talking about rich people. I'm saying even if the median is too full. I don't agree with you there. I don't agree with you. Hold on, which part? The net worth doesn't, like, I think, so I'm saying, hold on, here's my point. If your net worth, if the median net worth in 2019 was $210,000 in real terms, and now it's $240,000, do you think that impacts how people feel on a day-to-day basis? Absolutely not. I think it impacts how they spend their money. I think people spend more money if their net worth increases and they don't save as much. But yeah, you're right, the, you don't think, but the median person, the median person, even if it's just in their

retirement account of their home, I don't think that impacts spending or psychology. Where do you think the median person lives? Kansas? Like, when you think about, we're talking about the medium person, like it's a, I know. All right, so look at this. So the increase in real GDP, again, this is real after inflation, almost 5%, which is like the, the Atlanta Fed was pretty darn close, actually. But is the data real? Right. Reflected increases in consumer spending, private inventory, investment, exports, state and local government spending on it. People said, well, it's all government spending. But actually, Callie Cox said, Itoer looked at this, and 60% of it was consumer spending, right? This was a good report. 60% of the growth came from consumer spending.

It's not going to last. This is from Matthew Klein at the overshoot about people still spending money. Excluding spending at grocery stores and gas stations, monthly growth has been running at 8% annualized in consumer spending of retail sales, right? Which is crazy high. And he's saying, focus on the spending at restaurants and bars. Growth has been 11% annualized despite subsiding inflation. This is a significant acceleration into the end of last year. And he's saying, like, this is why growth has so much higher. People are spending money still.

People are still spending more money at, like, bars and restaurants. And it's 7% annualized with bars and restaurants since the pandemic. I think one of the reasons people are so unhappy is because they see the higher prices, but they don't change their habits. No one is changing their habits and spending less. I'm sure someone will say, yes, I am, I'm going to Walmart. whatever. The collective we are not changing our habits. And I think that's the hard part for people. It's like, you would assume if inflation is high and people are upset, okay, I'm going to

stop going to restaurants because prices are so high and tips are so big at DoorDash, whatever. So I'm going to stop spending there. People aren't doing that. That's true. And higher prices, I mean, it really pisses people off. I feel like when I'm at dinner with friends, like it comes up all the time. Could you believe from much this is, it really pisses people off. Listen to this one from the FT. In the third quarter, prices at Coca-Cola rose 5% and volume was flat. Not impressed? a year ago, the price increased was 15%, a year before that, 5%. Through all this, volumes have not fallen.

Coke is something like 25% more expensive than three years ago, and Americans drink just as much of it now as they did then. It's a great point. People are not changing their habits. So this is like, this is the U.S. economy right now is like, I hate higher prices, but I'm going to pay anyway. Well, to be clear, and I have to think about this. I'm just going off the cuff here.

But I would think if there was a pie chart on reasons for the gap, right, between soft data and hard data, I think inflation is a biggest slice of the pie. Yes. I don't think it's, I don't think it's like some crazy disconnect. I just think, I really just think that higher prices have people very upset, completely understandably so. And I look at like the misery index, which is unemployment rate versus plus the inflation rate.

When in the 70s, it was off the charts. Since 1948, we're technically below average for the misery index. Like, that's the thing that they made up in the 70s. like 60s to figure out how people feel, like how people should feel about the economy. Like unemployment and inflation, those are two things that you can gauge, right? Because the unemployment rate is remained alone.

I think we've realized that once you have a job, you stop worrying about it and then you move on to inflation. Here's another thing. You know how people get used to more money really quickly? Like you adjust to your raise very quickly. You can get a 15% raise and like, you know, cool. The first three-pitches.

The raises deserve. The prices are not deserved. Well, that's my point. So you get really used to the good news, the raise, and you, like, you discard it mentally, but you still are pissed off about the price increases because people have a tendency to overweight the negative. And again, obviously, there are people right now who are struggling. There's a story in the Wall Street Journal.

Yeah, and also, the people in your mentions, like, they're mostly earnest, right? I don't think those people are, like, making it up. Like, I'm sure those people are not doing great. Yeah. We're going to get to a story in the, like, about people in interest rate sensitive areas of the economy, like, they deserve to be really mad. So people say we're never bearish. Here's a bearish take for me.

Look at this. I reject that premise. What do you mean I'm never bearish? I know. Rejected. Hey, so what did you want to talk about? Well, I want to tell you about Wagovi. Wagoe?

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keeps the fun going. Keep the fun. Going. Twizzlers, keep the fun going. All right. U.S. personal income payments, interest payments, sorry. This is what people pay in their interest, and this is excluding mortgage interest. Look at this chart from white charts.

This thing is screaming higher. And then look at the, I put, so it's right below the Wall Street Journal one. I got it. Okay. So, U.S. personal interest payments. So this is mostly like car loans and credit cards. Look at how high this is screaming higher. And again, this excludes mortgage interest.

And then below it, I did the ratio of the payments to wages and salaries. So we could normalize it for income. So that is not nearly as high. It's like back to, you know, 2007-ish levels, which. some people would say is not a great thing, but it's a good chart, but the increase is mind bending. It's huge. And so that's the thing is that eventually those interest payments are going to crowd out spending. And that's bad for the consumer. So again, people are still spending now and pushing through it. If rates stay higher and even if, even if they go lower from

here, it's going to take away, it's not going to go back to like 3% days or whatever 0% days. This is this is crowding out spending in the future and consumers are going to be in pain in the coming years at some point. It's going to happen. Yeah, it almost certainly is going to happen. This is definitely a bifurcated economy. Even though, even though, like, we were talking last week on TCAF that the bottom desal has the highest real wage increase doesn't mean that they're doing great. That's not necessarily the message I was trying to send because their heart is hit

by higher costs of interest, right? Because especially if you assume you're in the lower income, strata, you probably have lower credit scores, too, meaning you're paying even higher rates than average. Right, right. So they're most exposed to higher interest rates. So this, I think, I think this is from car dealership guy's newsletter. So there's a chart showing subprime auto loan 60 day plus delinquency index.

And we talked about this last week. So it's at 6%, which is the highest it's been since at least 2006, not by orders of magnitude. Like in 2019, it kissed 6%. So just a little bit higher. But if you look at the 60-day delinquency index for prime borrowers, it's completely flat, looks completely normal. Right. And I think that I could be wrong.

I think the number of subprime borrowers is like a third, even though that's down. So it's a decent amount of people. Oh, it's a third? Wow. That is a lot. Like overall, based on credit. Based on credit score. That doesn't mean the number of people are taking them up, but that's based on credit score.

So for those with the best credit scores, interest rates are about 5% for a new car and 7% for a used car. For those with the worst credit rates are about 14% and 21%. And you've seen those commercials, right? Like, we don't care what your credit score is. Bring your old junker here and we'll give you $1,000 for it and give you a loan. That is paying exorbitant rates. That is brutal. All right.

The Wall Street Journal had a piece. This is like, if you've been through like interest sensitive parts of the economy, and I talked a couple weeks ago how we know someone. in like a loan department who is just like, I'm, I'm screwed. So the mortgage industry employment has already declined 20% to 337,000 people from 40020,000 in 2021. They anticipate a further 10% decline. This is mortgage bankers, brokers, loan processors, but not real estate agents, which I'm sure real estate agents are just, we always talk about how there's more agents than houses. I'm sure there's a lot of people who were part-time realtors that are not anymore.

Wait, I have that number. We double-dipped. I put this, I put this in the real estate. Oh, okay. So the number is, well, let me just, let me just read the lead in here. Oh, wait, this is a different one. The mortgage is so bad lenders want their, want their bonuses back. Is that a different article? No, that's the same thing. That's the same article. Okay, so here it is. Yeah. So David Siegel went to work for an affiliate of guaranteed rate in 2021 and got a signing bonus of more than $100,000. Now, remember, 2021 was obviously just mania for real estate market. interest rates were super low and mortgage bankers were raking in cash. Now that business has dried up, the mortgage company wants its money back.

He said it fired him one month shy of the date when it could no longer ask for the bonus back then demanded the money. Guaranteed rate and its affiliates are also telling hundreds of other former employees that they have to return their signing bonuses. That's crazy. So the industry, mortgage industry employment has declined 20% to these. I think you said that earlier. Yeah. The average loan officer closed 3.45 loans last month versus 8 in the same month in 2020. this is a wild one.

The mortgage market used to be Steve Walsh's cash cow, but now it's squeezing him on both sides. Business at a Scottsdale, Arizona mortgage brokerage is down about 90%. So depression. He said, and head count is fault. He's not alone on that, I'm sure. I'm sure that's tons of these places.

Head count has fallen to seven from about 25 at the end of 2020. To save money, Walsh wants a downsize, but he has been unable to sell a 7,700 square foot house at the $3 million he's asking. we got the rugpole of our lives. Everyone did. Rates are not supposed to be here. Average retail loan officer payment per month.

So it dipped in 2020. Then it skyrocketed. And it goes to $25,000 a month. And then it's crashed since then. So it was at like $12,000 in 2020 during the bottom. Then, yeah, to Ben's point, it went to $25,000, some more than doubled. And now then it crashed to $7,500. Yeah, it says average monthly pay ins it's a budget.

September was down by more than half from three years earlier. So these people have been on the roller coaster. And to your point about getting used to new salary, I'm sure there were a lot of people who said, like, this is going to last forever. This more money I'm making now is going to be here. Like, you do feel like we're in like a mini depression if you're in this industry, right? No, that's not many. Well, true.

Yeah, but I'm sure a lot of people have been laid out. It's, yeah, it's, so this is the kind of thing. Like, if you're an interest rate sensitive industry, you are feeling tons of pain right now. And I don't know when that is going to subside. I'm sympathetic to people that are really struggling seeing tweets like the economy is on fire. The economy is re-accelerating. Because how could they see that and not be like, fuck you? Right.

We're looking at the data. They're looking at anecdotes. And if your personal economy is all anecdotes, you don't care what the rest of the economy is doing. It's all anecdotes. So I get it. But it's also like, it's also okay to look at. at the aggregate to understand the trends how things are going. Like, I, that's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's,

that's, that's, that's, that's, that's, that's the way this system works, but, but I think, I think, I think, the situation is amplified in today's economy. It is a weird economy where the economy, where the economy and the aggregate is strong, but there's pockets of recessions and depressions. Yeah, unfortunately. All right. So as of last Friday, the S&P 500 was in correction territory down 10.3% on the year. I looked at the, I always look at these intra-year drawdowns because I think this is interesting.

So six out of the past nine years, we have a double-digit peak to trough correction intra-year, right? 2015, 2016, 2018, 2020, of course, 2022, and then 2023. I talked to Jeremy Schwartz last week and asked the compound, and we had an interesting discussion before. And in 2020 and 2021, the people who were, like, mad about the stock market were saying, everything is going up. There's nothing worth buying. This is crazy. And now it's like, well, wait, everything is going down, but seven stocks. There's nothing worth buying. And it's like, you can't have it both ways, right? If the stock market is going up and 95% of the stocks are

growing up and it feels like, this is crazy town, I can't invest in stocks. So sure, I understand that. But you can't say now everything is going down. Like, this is the blood in the street things. And the thing that people are contorting their brains into pretzels about is, well, this time is different, okay? The Fed is raising rates, and we've got $12 trillion of government spending, and World War III is coming, and all these things. And people, every time there's a correction, people try to talk themselves out of it being an opportunity. And I'm not saying, like, oh, generational buying opportunity. But like, small caps, look at this small cap, Mike McCarty said, fourth time in the last 23 years that Russell 2000 has been in a 33 percent.

drawdown. Look at these forward PE ratios of the S&P 500 versus the S&P 400 and 600, which is large caps versus small caps and midcaps. Dare I say small caps and midcaps are approaching like screaming buy levels. Yeah. Is that, is that overstating it? I don't think so. And this is, this is a wonderful, I'm not trying to just roll. You're not calling a bottom. No. For the next 35 years. This has been a, so people are saying, well, the stock market hasn't gone anywhere for two years. That's, that's correct. It's been volatile. this is a wonderful market if you're a dollar cost averager. Right?

And some people don't want to hear that. A lot of our listeners are. Yes. If you're dollar cost averaging, this is a great. So for my personal portfolio, since the pandemic, the way that I like try to rebalance and sometimes overrebalance is through new contributions. And the thing that I put more money into than anything over the past three plus years is small cap value stocks.

Because they're trading like eight times earnings or something. And the earnings yield on that is unbelievable. like 10% earnings yield or something, right? I don't know if all these companies are going to go out of business, but if I'm slowly but surely putting money into these stocks, I'm pretty sure over the long run. I think I'm going to do okay. That's the hope.

Like, this is the whole point. Like, Warren Buffett didn't say, be greedy of others are fearful, except when government debt is at this level and accept. Like, right? There's always going to be an accept. So, like, this, you know, U.S. stock returns are too high.

Okay, buy international stocks. international stock returns are too low, though. It's always something, right? And I think, like, going forward, if you have a more, like, diversified portfolio of small caps and midcaps and international stocks and U.S. stocks, and I think you have, like, the technology stocks still to, like, in case the AI thing takes off, like, I think you're going to be doing okay from here.

You know, every single behavioral finance book, like every single one, talks has some sort of mention. about our ancestors in the desert. Yes, I'm the Savannah running from the tigers or whatever. But it really is true. It really is true that we are hardwired. Our entire lineage of ancestors ran away from danger to stay safe. And so it is in our nature to protect ourselves and to protect our money.

And that is a really difficult thing to overcome. because all you see is risk, and I'm sort of the, I mean, I don't even say I'm guilty of this. I'm a human being. Everybody is, right? There's no, there's no, there's no reward for, like, being naive to risk and just acting like there's nothing wrong, right? True. Yes.

And obviously, like, it feels bad that the stocks that I own have been going down and not being going anywhere. But honestly, like two years worth of dollar cost averaging where the market goes nowhere, in 10 years, you're going to look back and go, oh, man, that was, that was great. I got to keep continuously buying at lower prices. The best way to overcome that thing that I just described, the temptation to protect yourself, i.e. reduce your stock exposure, go-to-cash, whatever. Just automate it.

And most people do, right? Like, it's, thank God we have the ability to just, every two weeks, out of sight, out of mind, buying stocks. It also depends what type of person you are. So they had this great piece in Barron's. and they interviewed Seth Clarman and Peter Lynch, two titans of the investment industry, like two of the greatest track records in history. And Clarman says, Claremont, who is more of a macro guy, the market is scary and vulnerable, the geopolitical strains seem heightened rather than clearly.

I think in some ways the magnitude of the disaster of the Fed holding rates at zero for a decade is now much more clear. Macro guy generally bearish. As for Lynch, he says, we've been in an incredible bare market for two years, except for 10 big stocks. Stocks are almost always, are almost selling for less than cash. Look at the Russell 2000. Is he bullish on the Russell 2000? Absolutely.

I love it when stocks go down. I think this is like the different mindset. And I think if you listen to the macro guys, they're literally always bearish. We did this Seth Klammer one before. We're in May of 2010. He said, I'm more worried about the world more broadly than I've ever been in my career. And I'm sure in the 2010s, his returns were fine. But the macro guys are always, this is Stanley Drucker Miller.

If you listen to his soundbites, he's always bearish. If you looked at his portfolio, I'm sure it's completely different than how bearish he is. That's a great point. So, like, the macro people versus the stock market people, I think it really depends on how you look at the world. Totally. Hey, Sean just sent us a tweet. Somebody tweeted, Joey Politana, point of view, you posted it, go to Slipon, so you could see this. You posted a chart of median real insert data here.

I retweeted that. You saw this? Yeah. It's great. So it's somebody, and it's just. just like they're in hell, I guess, and they're being attacked, and it's all the comments that we read from Lizette's others. It's pretty, it's pretty perfect. Okay. Let's talk about housing. Okay. I've been seeing this chart go around a little bit.

The current mortgage rate versus the effective mortgage rate, which is essentially the effective mortgage rate is like the average of everyone who's holding a mortgage rate already. Current rate is obviously what people are paying now in the market. And there's a massive divergence. I think you have to go back to like the late 1970s to see this type of divergence between what homeowners hold and what the current mortgage rate is. And again, this is another group that I think out of everyone that deserves to be angry over the past few years, young people probably deserve to be the most. I think young people got really screwed during COVID with schools being shut down. And that's like, if you missed out on like your last couple years of college

because of COVID, I can't even imagine that situation, like the once in a lifetime opportunity. And then, you know, job market is great, but like good luck buying home. I think young people deserve it a little bit. So I'll give them, so Bank of America also shows that they broke it down by generation. And they said, except millennials, a percentage of change in mortgage debt since Q42021 by generation, boomers is unchanged. What's traditionalist? Is that silent generation? That's a new one to me. Gen X is up 10%. Millennials are up like 20%. So that means millennials are the ones taking out the loans these days. And their change in mortgage debt has skyrocketed, which makes sense. That's why there's still demand for homes, right? Because millennials,

in their household formation years. So kind of been getting screwed here. Yes. I mean, obviously the hope is you're going to be able to refine it. Boomer's had to pay way higher mortgage rates in the 80s, too. They refinanced the whole way down. That's the hope. The good news is that people that are in a home,

they're having no problem paying their mortgage payments. The share of U.S. borrowers, this is from calculated risk, the share of U.S. borrowers who are in serious mortgage delinquency, so that's 90 days or more, dropped to 0.9% in August. That's the lowest recorded since January 1999. Wow. So thank God, at least people that are in a home

are having no problem paying for it. Yes, and it's hard to see that changing in a drastic way anytime soon with how many people have low rates locked in. Maybe in the future, but not for a while. Here's an interesting chart from Bank of America. Over half of 65-year-olds and older have not moved this century.

Man. that is that is pretty insane boomer i feel like again that's a for young people that's going to be different i feel like unless they're just all locked in what do you mean people are more more apt like i feel like baby boomers were way more patient with sitting in their houses than young people are here's another one uh home equity accounts for almost half of median

net worth of homeowners 60 and older per vanguard the ever retirement savings meanwhile was $223,000 so how like this goes back to my point i don't think people feel, I don't think people feel net worth when all of it is locked up in housing. Okay, so here's, so a lot of people said this. Sure, my house price went up, but I don't feel wealthy because higher rates make it so I can't access that wealth. You know what? I think that's a good thing. If people were able to easily access the wealth in their house, they would blow through it. Housing is a, like the fact that it's illiquid and it's hard to access, I think for most people, the fact that that's why it makes up half of their median net worth

because it's not easy to access. And I'm sure, again, there's going to be companies, that figure out how to tap it in the coming years, probably. But I think for most people, that helps them build wealth. It forces them to have a longer-term asset. I don't disagree at all. I'm just saying that's why I don't think the median net worth numbers really have any bearing on how happy people are or should be. All right, let's do some quarter stuff.

So, Visa, here's a quote from Visa CFO. I feel like the credit card CEOs and CFO say the same thing every quarter for the best three years. like, everything's fine for our customers. It is weird. Companies are fine, but people are pissed off. Yes. At least Fortune 100 companies. Corporations, yes.

The big, the S&P 500 companies seem to be fine. All right, so Visa CFO, as we said consistently, we're not economic forecasters. And so at a macro level, we are assuming no recession in our outlook. Consumer spend across all segments from high to low spenders remain stable since March. Our data did not indicate any behavior change across consumer segments. Uh, here's, here's Amex. By the way, I rely on the transcript, uh, for a lot of this. I mean, uh, I do listen to a lot of calls on the, on the quarter app.

They're very good at pulling the best stuff. I did not listen to Visa or Amex. So that's, uh, the transcript. They have a great substack. But this, this is also why like the personal interest payment stuff is rising because people are still spending with their credit card. And if they're not paying them off, guess what? Those rates are higher.

So here's Amex. If you look at our delinquency rates, they're fairly flat. If you squint a little bit, you're going to see a couple of basis points increase. All right. not much there. Net charge-offs of $931 million increased $62 million from the second quarter. Again, that's not really much. The increase is driven by credit card losses,

higher late-stage delinquencies flow through to charge-offs for context. The credit card net charge-off rate rose 12 basis points in Q3 and remains below the pre-pandemic rate in the fourth quarter of 2019. Net charge-offs are below where they were in 2019. How about this for a hot take? I've been thinking about this. Would it actually be better for the consumer in the long run if we just go into a minor recession sooner?

Obviously, recessions are bad. People lose their jobs. But I feel like the longer this boomflation, whatever, continues, the more people are going to tap into credit sources, the more they're going to spend down their savings. It's almost like if you've got a recession, people would hunker down a little bit and it would maybe change their behavior, whereas if we keep this growth going,

people are just going to get into a, dig themselves a bigger hole. Does that make sense, or am I looking at it two things the same way? Yeah, and I hear what you're trying to say. I don't know. I would have no way of proving or just proving, but it seems reasonable. All right, Bucco Capital tweeted, any good reading out there on why all fintech is trading like it's going to zero? What's an example?

Square. Like a firm, square. Yeah, I did see that. PayPal. Joe Wisenthel tweeted something the other day that Square bought a company for like $29,000. Robin Hood. And they're worth $24 billion now. Yeah.

So Mark Rubinstein, another great substack. There are so many substacks, by the way, and I feel like they keep coming. And I feel like I pay for almost all of them because I like to support these people. But it's becoming a lot. Yeah, there are. It's hard to keep up with them. We got a rebuttal. Okay.

Put it all. Netflix, substack, all that together, right? Rebubble. So this is an interesting thing that I haven't considered. Well, I mean, obviously the easy is like a firm in those companies that were based on 0% rates, not lasting forever. Like that, those business models never make sense. And then payments getting disrupted by like just Apple coming in and just be like, you know what? We're going to do this too.

Right. And like, there's Google pay. I think even Facebook has it pay. I think Shopify has it pay. You can pay with anything. Amazon pay. All right. So Mark Rubenstein wrote subprimary.

risk is now held by fintech, not big banks, which is interesting and not a minor detail. Oh, and then here's a quote from the CEO of Equifax. Again, getting back to the subprime thing. So subprime has been challenged for a year. And by the way, subprime is risk is now held by financials. Like there's a whole, I'm not going to read the whole article, but that was a big part of Mark Rubenstein substack. Okay, back to Equifax.

It's not like it was in 2007 or whatever. subprime has been challenged for a year. That's generally subprime businesses with the fintechs. Most of the big banks don't do subprime business, and that's been challenged for a year. As I mentioned, earlier, starting to comp against fairly low levels. I would expect subprime to stay high as we go through 2024 because those consumers are really more challenged, not around being unemployed, but around inflation is still pressuring them. So a firm is down 90% from the highs, but this is still a $5 billion company.

How is that possible? What am I missing? Maybe there's something I don't know about them, but just from the surface. Are people still just doing those, I'm going to pay $20 a month for four months for this $80 shirt or whatever? You ever find your $200 shirt? No. Still didn't find it, huh? Not happy about it.

Okay. I don't know why or what's gotten into me, but I've noticed myself, I found myself wearing Cologne for the first time since high school maybe. No, I probably since... Yeah. You don't seem like a Cologne guy to me. I haven't been for 25 years. I don't know what's gotten into me. Okay.

All of a sudden, I'm doing a little bit of spreads. I just, just won. Seinfeld has a good bit on Cologne. What's the bit? I just like, you're trying to smell better for yourself? Like, who is it for? Yeah, I don't know. I don't know.

I do like smelling. I, I, I wore Cologne in high school and college. But yeah, I think after college, like, you didn't want to be the Cologne guy at work. Like, in the office. Like, if you walked out of the bathroom and you smelled Cologne, you're like, who's the, who's a jerk who's wearing Cologne and leaving it everywhere he goes? That's a good point.

I don't know if I were it to the office. I don't think I wear it to the office. But I wear it when we got to dinner. Okay. Yeah. I was a Cologne guy before. I gave up on it when I was like 25, like a normal person. It's middle age thing, middle age thing?

Okay. All right. So we kept this episode relatively short because it's Halloween and I have to run to Kobe's parade. All right. So are you watching the fall of Hasha Oshar? On my list. What do you think? I'm on episode four.

I'm having trouble finding time to watch it with Robin. You're going to have to show cheat on her? No, I don't do that. I'm not a cheater. But I don't know. We've just been having trouble coordinating schedules. So should I watch it?

Yeah, it's good. Okay. So Kobe, like, found a, He has like a giant squid stuffed animal that he got from the aquarium. And all of a sudden like resurface, I'm like, oh, where did you get this? So he's like the aquarium. So he's asking me to show him like, he wants to see pictures of giant squid. So I'm Googling it.

And of course, because giant squids are like so rare and they're so hard to find, there's just not a lot on the internet. So I'm like, I have an idea. I'm going to show him the scene in King Kong Skull Island of King Kong eating the giant octopus. Okay. And he was super into it. And so the next day, we watched Kong versus Guy. would get along. That's exactly the kind of stuff George likes to watch.

Well, Kobe loves the, I mentioned this a few episodes ago, like the animal, like the spider versus tarantula book, the crocodile versus lion, the shark versus this, whatever. They're like these little books in the library that he likes to read, who would, who would kill who. And so maybe not kill is too strong a word. Who would win in a fight, right? He doesn't know about, well, actually he does. So we're watching Kong versus Godzilla, King Kong versus at Godzilla. And at the end, Godzilla's beating up King Kong. Logan turns to me, goes, is King Kong crying? It was very sweet. And then Kobe goes, is King Kong dying? And Logan goes to me, what does dying mean? And as I'm thinking about what to say, like, I'm literally saying like, it's when you're not alive.

And as I'm saying that, Kobe talks over me. And he goes, it's when you're dead. Everybody knows that. I like Logan's eye like Logan's eyes just like darted to the left and to the right like and then he just like moved on okay like trying to process what the hell that meant my my son George came home with a Star Wars book last week and so we were reading Star Wars and I'm telling you about it and he wanted to watch the part where Darth Vader's flights Luke Skywalker at the end so we watched that last thing just the last 20 minutes of the final Star Wars return of the Jedi classic which just which is too bad because I'm not a Star Wars guy but I guess do you appreciate that scene yes Anything else for you? No, it's been a light week. All right. So in the past, there used to be theater movies and then straight to DVD movies, right? I mean, there was TV movies in the past, but...

Straight to DVD. Yep. So now there's theater movies and streaming movies, and especially Netflix. So I watched Pain Hustlers, new Netflix movie with Emily Blunt. I got awful reviews, right? Just, it tried to be like the Wolf of Wall Street, but it was Emily Blunt, Chris Evans, and Andy Garcia. So it was like a really good cast. It was loosely based on a true story, which I used, but it just, it was so over the top and just, there's something about Netflix movies that still just feel like they, like, if you would see it in the theater, you would have been so disappointed.

But it was on Netflix. It's like, it was kind of entertaining, but it was about the pharmaceutical sales industry. And it still just kind of boggles my mind. That's how we get new drugs into the pipeline of like these people who have no medical experience at all, who just happen to be, like, attractive and young, go into a doctor's office and give them stuff. to try to get them to push. It's crazy to me that that's how it works. So I would say skip that one. On Friday night, when I do some writing emails,

that's sort of my computer at the end of the night, I'm winding down. I like to have a movie on in the background. And on Friday night, I put fools rush in on Matthew Perry and Selma Hayek. And the next day, he passed away. And I got a text message from one of my college friends. I was a big friend.

Obviously, like, he kind of tailed off at the end. That was our generation It really was But I think the first like four seasons of friends Chandler Bing is probably like One of the greatest sitcom characters of all time Like easily the most The best sarcastic actor

I've ever seen When Joey and Rachel got together The show fell apart for me I hated it Yeah that was that was bad But I forgot I got a text message From a old college roommate When we were in college

Everyone had the futons you know And we were like Why would we get a futon So everyone can come hang out in our room We got the matching Joey and Chandler Leather chairs I did leather from Costco and the recliners.

And that was in our room in college. I totally forgot. So, yeah, I was, and Fool's Russian, I'm a big 90s rom-com. They just don't make them like that anymore. That was always like an underrated one for me. I always kind of like that one. Yeah. All right.

Animal Spirits at the compound news.com. Thank you for listening. We will see you next time. You always have to pause there because you almost. Still getting used to it. Still getting used to it. We'll see you next time. Oh, good.