Animal Spirits Podcast - The Consumer is Slowing Down (EP.363)

Episode Date: June 5, 2024

On episode 363 of Animal Spirits, Michael Batnick and Ben Carlson discuss: what happens if the AI bubble bursts, 200 years of stock market concentration, how to find lower insurance premiums, the bottom 50%, the fentanyl of private markets, assets & debt across generations, middle age conversation starters, and more! This episode is sponsored by YCharts and CME Group. Get 20% off your initial YCharts Professional subscription when you start your free YCharts trial through Animal Spirits (new customers only). Sign up at: https://go.ycharts.com/animal-spirits Access CME Group's valuable educational materials and trading tools and learn more about what adding futures can do for you at cmegroup.com/animalspirits Sign up for The Compound newsletter and never miss out: thecompoundnews.com/subscribe Find complete show notes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   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. The Compound Media, Incorporated, 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 show is brought to you by our friends at Y charts. Ben, back in the day, let's call it, I don't know, 12, even 13, we had clients come to us and a lot of their portfolio was still in cash, scars from the great financial crisis. This lasted, you know, it declined over time. But now, that game is over. It's exceedingly rare, unless there are life events that we get a portfolio that has a large percentage in cash. Right now, people are invested, as they should be.

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This communication is not a recommendation or offer to buy, sell, or retain any specific investment or service. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick 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.

I was walking home from the office today. And guys in big trucks, there's like a type, right? And I don't just mean like a Tahoe. I mean like an oversized truck. Giant wheels, giant everything. So I'm walking past the street. And I'm thinking like, huh, big truck. And then I walked past him.

He went behind me, honked at somebody. and it was a horn like I've never heard before. It was not, I don't even know, I don't know how to describe it. My eardrums rang. And as I turn around, I see on the guy's bumper. In giant letters, fuck around and find out. Okay. Oh, that is true.

The per capita of bumper stickers on trucks is very high. Yeah, there's like, there's a type. It's definitely, there's definitely a type. Yeah, I can see that. it's also the type that backs into parking spots. Well, literally, you can't, this person has no choice. It's just geometry.

True. Okay, so you and Josh talk about. Nice shirt, by the way. Oh, thank you. You know what I got this one? For my clothing broker. Yeah, that's nice. Oh, speaking of brokers.

Wait, wait, I was in the, I was in this. You need a broker. For what? Insurance. Okay. All right, let's start with there. I tweeted this out, and I, my home insurance, came in again for renewal, so I renewed it annually, and it was 50% higher than last year.

Last year I said, they were trying to triple my home insurance, so I shopped around a little bit. I went from Progressive to Geico, and Geico gave me a way better deal, and this year, Geico comes in a lot higher. And what I've learned from a lot of people telling me is, well, there's a reason for this. It's because when you sign up as a new customer somewhere, they give you a discount. Sure. And they want to have you come in, and then they'll raise it on you in the future. So, listen, I'm, I'm a negotiator at heart. I'm willing to shop around a little bit. You are a no negotiator. Give me a break. Who's kidding? I know you. You know insurance and cable. I negotiate. So I did, wait, hold on. So you're shopping around. Do you know what you're shopping for?

Like, do you know what you're looking at? Do you know, do you know the ends and the outs? I mean, this is not one size fits all. There, there are certain things you got to know. I just take what I had before and I input the same thing into a new place online. So I did it online. I went back. Do you know that you're fully covered? I hope so. I went back to Progressive, and they said, yeah, sure, we'll give you a better deal. And they gave me lower than I was already paying. So it was not only, I was, I'm not going to get the 50% bump. I was going to save money. But then they said, whoa, whoa, your home value is too high. Not to brag. But, no, but. Modern farmhouse. Check this guy's rates up. But it's funny. If they say that to me, they must be saying that to a lot because it's like home values are up a lot. So, of course, they're like, oh, your home value is too high for us to appraise. We're going to give you to this place. And that place says, no, no, no, no, no, we can't do it either. We're going to give to that place. So they actually sent me down the rabbit hole of sending me to a local insurance broker.

Ben, and they handled it. You're too busy. You're too busy for rabbit holes. Outsource that. It was a half hour. It took me a half hour. And lo and behold, what happened is this local insurance broker found me a better deal. And I'm actually paying 20% lower than I was paying last year. Wait, what did you just say? A local who? Insurance broker. All right, rest my case. And also, they wanted me to bring my auto over there as well, so I'll probably have them

price that out. But yes, maybe I do have an insurance broker now. It's about time. Speaking of this shirt, though, that you said you liked so much. I do like it. I went in the store today to pick up some stuff on my way to work just from stuff from my old fridge here in the office. And some guy walking by goes, hey, man, nice shirt.

See? Out of the blue. This is what Rob doesn't understand. about shirts like this, statement shirts, Tropical bro shirts. Their conversation start is in a good way. Not that I want to start a conversation, but if nothing else,

it immediately ingratiates you with their purse. Oh, cool shirt. Yeah, I know. Thank you. Yeah, nice people. The funny thing is that the compliments always come from men, of course. That's true.

All right, I've got a thought exercise for you. We've been, I feel like you and Josh have been talking a lot about the AI stuff and how what happens if AI spending decreases. And I think I'm in the camp that, like, there's a 99% chance that, AI turns into a bubble if it's as big as everyone says it. Like, it just has to.

That's just the way that these technological innovations work. If AI is as big as everyone says it's going to be, it's going to be a bubble and that bubble is going to pop at some point, even if AI comes through, right? Sure. You can kind of agree on that? Okay, so let's say the AI spending bubble bursts. What happens then?

What does the, what happens? Who outperforms then? Because we know the tech stocks that would get hammered in that situation. So what sector outperforming? Because you could say, if the AI spending bubble that people think it's been propping up the market

and maybe it has to some degree if that slowed wouldn't you assume that that would be the case where interest rates start falling? Would that be enough to have interest rates kind of fall? I don't know. Earnings fall, interest rates fall?

Would that be like housing stocks and energy stocks and financials end up doing well? I don't know. Bonds maybe? There's too many ifs, I don't know. But what I do know is that XII Elon's AI company just raised six

billion, not at a $6 billion valuation, because that would have make sense, right? He's got to keep some of the company. At an $18 billion valuation, I think it was $18 billion. I don't know that's pre or post-border money. But either way, either way, a lot of that money is being used and it's going to turn right around and buy GPUs from Nvidia, likely, right? So with that said, if you had to handicap, I know you're not the better than I am, but what would you say that this is most likely?

a 20-25 story, 2027. What do you think? Oh, I have no idea on that because I don't know how... Of course, we're guessing. I'm asking you to guess. Assuming we don't go into recession before then?

I'd say that's like 2026, 2027. First half or second half? It's a second half story always. No one ever says this is a first half story. That's true. So I reject the premise of what sectors would do well

if AI spending slows out, I don't know. Okay. I'm thinking that's the, yeah, you're right. There's a million variables. But I think that's the case where for like, okay, interest rates fall, bonds and home builders and those kind of things actually do well. Financials, I don't know. Thought exercise.

All right. You're getting too cute. Okay. That's the point of a podcast. Torses Locke. The bottom line is that there's still a lot of money on the sidelines with $6 trillion in money market funds that can be used to purchase public and private credit and public and private equity. So he's showing the $6 trillion in money market funds we've been

talking about for a while. I think you've been pounding the drum on this one for a while. Pounding the drum, banging the table, something like that. Speaking of pounding the drum, did you see a friend of mine sent me this last night, Metallica in Germany playing Masters of Puppets in the pouring rain. Did you see that video going around? That's an old one, isn't it? No, this was a week ago. It's wild. So Lars is pounding on the drums. And you see like, you see the water splashing off. It's wild. It's wild. wild. Okay. Pretty cool. So I feel like you were the first one to say you reject the premise that this is cash in the sidelines that could go back into other risk assets. And this is money

from that. So I think I'm kind of coming around to your line of thinking. Like, why would this, if rates went back down to whatever point people decide, that's not worth it anymore. Is this money really going into risk assets? No. And furthermore. So yeah, give myself a little bit of credit here. I was, I think I was, I was right on this, that money is, going to stay there for longer than people think, despite a stock market rally. And I do think that people don't think about their cash as investable. Now, can some of it come into the market? Certainly. But people aren't going to say, all right, I was getting 5%. Now I'm only getting 3%. I don't like what I'm getting there. I'm going to invest this in risk assets.

It's cash. It's money that came over predominantly from checking accounts. So I don't view this as like more powder for an equity rally or anything like that. I just don't. I think it's separate buckets. It is interesting that it hasn't reversed at all, but U.S. stock market was up 25, 26% last year. It's up 10 or 11% this year. And that money, I mean, it's come down a little bit, not much.

I think so. And also with the 5% rates, of course it's going to stay there. It's very attractive. It's been decades. The 5% rate thing is something that people can hang their hat on and going, I don't care what the stock market is doing. I'm earning 5%. I'm just fine with that.

I've given myself as an example. I've got plenty of money in the stock market, but I'm thrilled to death. If the market goes up 30% am I mad? No. Getting 5% risk free. It's phenomenal. Yeah, not bad.

So Mike from Global Financial Data sent me this. They have some really good stuff that goes, like, way, way back. Who's Mike? Does Mike have a last name? Mike is a viewer of the show. He works at Global Financial Data. Got it. Okay.

And they did this piece called 200 years of market concentration. Just came out in the last week or so. And they have this chart that shows, it's kind of funny because at the beginning of the stock market, essentially, it was all financials. I don't want to get to, like, 2 a.m. dorm room discussion here, but I was thinking the other day, if the stock market didn't exist and someone came to the table today and said, this is what we're going to do, you would look at them like they're an idiot. How can you explain this? It doesn't make any sense if you were to literally start it on day one and the stock market didn't exist. It's a bizarre thing to think about.

There'd be a lot of questions. Well, how? How are we going to do that? Yes. How are we going to get people to just make up values for these companies? Yeah. And they're going to change. Where are you going to trade? How? Speaking of that, did you see Berkshire Hathaway? There was some sort of fat thing on the New York Stockton? I don't know what happened, but went down 99%. Yes. I wanted to make the joke that they're down 99% but Buffett's still outperforming since 1965. Because it's probably true, right? By the way, that is a fact. I think so, what's his name? Somebody tweeted about this a couple of years ago. Oh, man, I can't remember how. I think it's a true, it's a true number. I don't know if it's 99%. I don't know if it's 50%. Whatever, it's a high number. It's a crazy number that Berkshire could fall by maybe 90%.

That sounds crazy, but maybe it is true and still have outperformed. I thought Buffett just lost his fastball. So they show the concentration here. It shows by sector, which is a cool graph. But this next one shows the top 10 companies as a percentage of market cap. And this goes back to like the 1800s or something. And you can see it go up and down and up and down. And here's the coup de grace to steal from you of the piece.

Based upon our analysis the past 150 years, there seems no reason to believe that an increased concentration of the past 10 years is a harbender of a major bear market. Increased concentration is the sign of a bull market, and bare markets reduce concentration. So they're saying, look at the, and they go through all these examples of this. Every time there was a bull market, concentration increased. Yeah.

Bare market, a decrease. And I guess you could say maybe the reason it didn't really decrease too bad on the bear market we had is that it was pretty short-lived. And so this kind of makes sense to me. This stuff is cyclical like everything else. Yeah. Fair or no? Yeah.

No, yeah, yeah. I think analogs, we've spoken about this in the past. Analogs are dangerous. I think a lot of money has been lost when people start making comparisons, well, the last time. Well, speaking of which, the Wall Street Journal had a piece about the yield curve, which we've talked about a ton on here. Wall Street's favorite recession indicators in a slump of its own. So I didn't realize this, that it's now the longest stretch ever for it.

inverted yield curve. Longest ever. Longest ever. 400 sessions. You know that line, those who don't learn history are doomed to repeat it or something like that? Yes. But I think a lot of market practitioners take it too far. They think by learning everything about what happened in the past that it gives some sort of an edge, I think it's the opposite. Yes. And the thing is, the longer this has gone on, the more some people have dug their heels in and said, ha ha, it's coming. I told you. No, no, no. It's the uninversion. It's when an uninverts. That's when the clock starts. So even Cam Harvey, who who came up with the yield curve as a signal

an inverted yield curve as a signal said it is naive to think that you can just forecast a complex U.S. economy with a single measure from the bond market.

And I think this is where one we can give animal spirits a point here too because we said like this deserves context this time because the reason it's inverted

is because the Fed is jacking up rates. It wasn't like this was the economy moving the rates around for the Fed. It was literally the Fed doing it. Yeah.

And they weren't, yeah. So that's the point here is that any single variable just requires a heaping load of context with it. All right. I have a bone to pick with finance people. Okay.

Something that I just want to get something on my chest that annoys me. One of Ben's pet peeves. I know you don't have any pet peeves, you say. No, it's so funny you mentioned that. I was thinking about it this morning about, you know what? I think I do have some pet peeves. I just, I haven't ridden them down. And I thought about one this morning.

Oh, I thought of a pet peeve this morning. But you know what? It's not my turn to cook. It's yours. So go ahead. All right. So one of the things that really irks me about finance people. And part of this, maybe it actually makes them respect people, just because I feel like some people in finance have no shame whatsoever is the hindsight bias of, and the one that's going on now is, well, of course the stock market is at all time highs and the economy has rolled over.

Have you seen the fiscal deficit and the government spending? But these are the same people who've been pounding the table for the past four years saying that stock market is going to roll over and it's going to go into a recession. and I think it's okay every once in a while, I'll just go, man, I totally miss that one. Or like, I can't believe that the housing market is still so strong with 7% mortgage rates. But the point of this is, sometimes you look for these, like, of course it was this. Sometimes you look for those type of signals, and you're still wrong. So Jesse Livermore, who at one time had the smartest financial blog and all of the finance Twitter. Yeah, he's running some absolute bangers.

Yeah, and just hung it up early, walked away. you know, in his prime. Yep. He said when people, he posted us on Twitter the day. When people ask why U.S. is outgrown Europe in Japan and this year since COVID, pumperes will often try to point to the large U.S. fiscal deficit as a reason. This lazy claim is easily refuted by the example of the U.K. The U.K. ran a cumulative fiscal deficit that was almost as large as what the U.S. ran,

yet the U.K. has barely grown at all over the period. So he shows these charts that show the deficits of the two countries and then the growth. And the deficits are exactly the same. and the growth is way slower in the UK. And he's saying, if economic growth really as simple as being nice to yourself, printing up a large amount of your currency and spending it, every country on earth would have figured this out by now and be wealthy beyond belief. Reality obviously said it's a lot of the past.

You've said this in the past. Like, did politicians are in the playbook, just spend more money? Yeah, as if it's that easy. Of course it doesn't work that way. Right. But that's the thing that people have tried to latch on to in the U.S. is like, well, of course, that's the only reason things are going well. But yeah, you're right.

If politicians knew this, they would pull that lover all the time. That's all they would be doing. No more bad news ever again. We're just going to spend money. Yeah, exactly. Yes, the economy is over complicated. And you're right. It is funny when people play the hindsight bias or, yeah.

And I do really think we were a couple weeks ago, we were trying to get to the reason. Why is the U.S. growing so much more than that? And part of it is we're a more dynamic economy. And part of it is we're just, we are consumers at heart. I think a lot of other countries don't have that same inclination. You know why I don't have a lot of pet peeves? I'm just a pretty easy-going guy. Not a lot of things ark me that much. I just don't. Right? I don't have a top-10 pet peeve Michael list. I just don't. $86 tequila's? Well, that pisses me off. Yeah. Although here is a pet peeve that I thought of this morning.

Finance professionals on the internet who have money telling people how to spend their money and to pinch pennies. Like, that's pet peeve. What, like ultra-rich people saying don't buy that latte? Yes, exactly. of thing. Brown bag, your lunch. I can see that. Yes. I always say never take personal finance advice from a billionaire. How about you have so much money, stop lecturing people on how to spend and save? Fair. See, you are in touch with a little guy, aren't you? Yep. All right. One of the things that we had spoken about over the last couple of years is when is the consumer going to start

standing up for themselves, start making choices? Start negotiating. Start negotiating. Start negotiating. like Ben Carlson. Yeah, yeah. And it's happening. It's happening. Amazon is slashing prices on 4,000 grocery items. We spoke about Target and Walmart doing the same. The price cuts include meat, seafood, frozen food, dairy, and cheese, beverages, et cetera.

So, yeah. Is that for Whole Foods or what? It said Amazon Fresh. I don't know if Whole Foods is in there. I don't believe it is, but fact check me. I just don't know. So, yeah. Josh and I were speaking with Stephanie Lincoln, TCAF, about the consumer and retailers.

And the distribution in returns year-to-date of different retailers is a mile wide. It's pretty wild. For every Coles and other McDonald's and Starbucks and Nike, there are a dozen others that are doing phenomenally well. Oh, so you're saying the ones that have gotten hit, and because they're saying consumer slowing, there's other ones that are offsetting those. Yes, exactly right. So what's an example of one doing well? Chipotle. Okay.

Despite you pulling back there. Dix, foot locker. Okay. Wide range of returns. So speaking of pet peeves, I was at Whole Foods the whole foods the other day because I'm a middle-aged guy and I'm trying to eat healthier. And unprompted, the checkout person says to me, we weren't even talking, didn't have a conversation going, just goes, can you believe it's going to be June on Saturday? June! You know, I really can't.

I know that this is how people fill conversations, weather and dates, but I've decided as a middle-aged person, I'm not going to fall into the trap of saying, can you believe that the time is passing? The passage of time to me is not that interesting. I'm not going to say, can you believe how quickly summer went? Can you believe it's summer already? Well, then what are you going to say? You're not a small talk guy.

You've got to lean on the crud. It's a good crutch. I just, the passage of time is undefeated. So I guess it's constantly going to, but I'm just. I've decided I'm not going to fall into that trap of using that as a conversation filler. That's true, but I am also, I'm one of those simpletons who was always stunned by how quick the time is going. Can you believe? I can't believe it. I'm just going to start asking people what their price target is for the S&P for the year end. Yeah. I'll keep a running tally.

All right, a couple weeks ago, you talked about the usually in an inflationary period like this, the people on the lower end are the ones who get left behind. And this is a crazy situation because it is, it's flipped. And a few people send us some charts and I filled in some gaps here, some other stuff of this. So Sonubargeese from Carson Group had this, it's kind of interesting, they break out hourly earnings by managers and non-managers, right? So the lowly workers and then the suits up top. And it's a crazy divergence between manager wage growth and non-managers. And it's way, way higher for non-managers. Ever since, pretty much since the start of the pandemic. and it's it's gone the other way, which is interesting.

I think this chart explains a lot of the discontent, a lot of the vibe stuff that we're talking about. It's been tougher middle income earners. It's like upper middle class, I guess you would say. Yeah, that has, which is interesting, because as you said, this is not how it usually works in this type of situation. So the next one is kind of a similar thing.

It shows the bottom 10%. And then, you know, we think we mentioned this step before, two-fifths of the rise in wage inequality of the past four decades has been done. That's a pretty good one. So wealth by the bottom 50% is up basically 2x since the pandemic. We've never had a period like this where it increased that much for the bottom 50%, which was really, really low following the great financial crisis. Well, and think about furthermore, furthermore, think about maybe a step above manager. Think about small business owners who have to employ the non-managers and are seeing minimum wage.

go up a lot for people that were used. They might not have the pricing power that big corporations have to raise prices. Yeah, they're getting squeezed. It's a fact. In this one I've used before, but this one shocks me still, the checkable deposits for people in the bottom 50%, which Fred breaks out for us, is up 4x since pre-pandemic levels. So for the bottom 50%, they have four times as much money sitting in the bank than they did before the pandemic, which is essentially on par with the whole everyone. So it's not just like the everyone, the fat cats at the top are, are doing well and everyone else is getting rolled over here.

It's interesting that on aggregate, the low end has had a pretty sizable jump in a lot of this data for the past three or four years. Yeah. Which probably would surprise a lot of people. And then of course, I mean, there's a lot of yeah, but their rent is going up 40% and yeah, but I mean, but yes, it's interesting.

Right. Yeah, it would be something you'd expect. And I think that we live in an age of yeah, but, of course. Sure. Because part of the reason that if you can look at break data down to this degree, like you never could have in the past, you can always pick something out and say, well, yeah, look at this though. Well, yeah, look at that.

That's shit. Yeah. With data, like, you're right, nobody ever has the last word. Yeah, you can constantly... Nobody's ever been like, ah, bruh, that's the... Yeah, you got me. Shit. I have no retort. Yeah. And my, yeah, butts just happened to be glass.

that fall. I'm sorry if that makes people angry. I bet, which is the Black Rock crypto ETF. Look at this chart from Boutunis. Prior to this reaching $20 billion, it's the fastest ETF to ever get to $20 billion. The previous record is JEPI, a product that we've spoken about in the past, the JP Morgan covered call strategy. It took them 985 days to get to $20 billion in assets. I bet 137 days. Can I actually give a contrarian take here? I'm actually more impressed with the Jeppie thing than the Bitcoin one here because it didn't have any fanfare whatsoever

and it's an income strategy. That's almost more impressive. But yes, these are both very impressive numbers. Fair point. Ben, we had the bankless guys on the podcast. Bankless is one of the more popular crypto podcasts out there. We had David and Ryan on, I think we'll release that. Saturday, right?

This Saturday, next Saturday, it's a Saturday release. thoughts? I thought it was a really fun conversation. It was kind of like NBA jam for podcast hosts, right? Because NBA Jam was 2N2. So it was podcast host team versus podcast host team. It's good. And yeah, it was a lot of fun.

And we asked them a bunch of questions about crypto. They asked us some questions about the stock market. And they said that they've been told they are the animal spirits is the bankless for stocks or something like that, right? Okay. Yeah, I thought it was a great conversation. It was a lot of fun. I think we're going to try to put that up in video form, too.

Okay. Lance Lambert from Rezi Club has mortgage rate by generation. So, like, who has the... Oh, good one. This is interesting. And the young people are getting kind of screwed. 80% of millennials have a rate under 5%. So most millennials got in before the dinner bell rang.

Only 52% of Gen Z borrowers can say the same thing. So Gen Z did not make it in. to the low rate environment. So they're going to learn about refinancing the years ahead. They're going to have to. So he breaks it down by every, you know, less than 3% to 4, 4 to 5. And it looks like, you know, the majority of Gen Z is, you know, half of them are over 5%. I got to turn my AC up.

Hold on a sec. Can you believe it's true already? I mean, got my AC pumping? You sweating? Last week, I said. we have all this equity sitting in homes. And a lot of people came back to me and said, in our email inbox and said, it's illiquid and no one's going to tap that with rates so high.

And even if rates fall, it's not going to be as big of a wave as you think. And that's fair. That's possible. But some people also sent me this thing saying government-backed mortgage securitizer, Freddie Mac, is considering whether to broaden out his portfolio from first-time mortgages to become a purchaser of home equity loans, a move that could offer borrowers more favorable terms, than those of private credit markets. So they're saying this new rule would allow them to,

and I don't exactly get how it works. They're going to package these helocks up together and sell them as a bond or something, but it would allow them to use this interbank interest rate, which currently sits at like 5%, and make lower rate helac loans. Which makes sense to me. Like, why should those rates be so hot?

Why should they be market-based? Like, it's so high when you have such an asset with so much liquidity or equity sitting there. Shouldn't rates be lower on those? At all about this space. That's got to be like pretty risky debt, no? I don't know. If I'm buying a HELOC bond for 10,000 people

who have a loan to value ratio of 50% in their house or something, and they have a 3% mortgage, I'm feeling pretty good about that. Wouldn't you? Well, I mean, it depends on the rate. Yeah. Yeah, the rate matters, but I don't know. I think I...

Yes, no, I mean, the loan to value point is obviously important, but just the people that are, in general, tapping their house for equity. Now, listen, people use it for home improvements, people use it for all sorts of things, but they're using it because they don't have... Because it's a better source of financing for them. Yeah, I just think it's such a good piece of collateral

that those rates should be lower. Like the spread you get between the 10-year and mortgage rates is ridiculous right now. I think the HELOC would be able to have that be a much narrower spread. I'm speaking from someone who wants to use their home equity. I don't want to just sitting there. I'm going to do something with it.

And I know that it seems dumb because you still have to pay it back because not you get it for free. Yeah. But that's what I want. Give me an equity for free, please. Someone. St. Louis Fed. did a post on the commercial real estate market.

So lending by U.S. banks has grown substantially over the past decade. This is for commercial real estate, rising from about $1.2 trillion in the first quarter of 2014 to roughly $3 trillion at the end of 2023. A disproportionate share of this growth has occurred at regional and community banks. This is a good data point. Roughly two-thirds of all commercial real estate loans held by banks with under $100 billion in assets. That's interesting. So those are like local construction loans are giving out, huh?

And the thing is that roughly 30% of outstanding debt is expected to mature between 2024 and 2026. Now, if you want to scare people on CNBC, you say we have a maturity debt wall coming up. Yes, we do. But there's some legitimate things to be worried about. They have a chart shown growth in net operating income. They break it down by apartments, industrials, office, and retail.

and everything is growing, but office, not surprisingly, has had, I don't know, 10 straight quarters of lower net operating income than the previous year. And if you look at the next chart, the vacancy rates for commercial real estate properties, this is pretty ugly. The office space is at like 19% highest. This chart goes back to 2005, so highest since. So these regional banks are going to, they don't want to have these buildings be written down and slashed in price.

So they're going to have to restructs. for these loans. So this is going to be bad for regional banks. Well, the loans, the maturity is coming. So they have to refinance anyhow. The problem is not only you got to refinance with higher debt, right, money costs more than it used to, but the value of these properties has, in most cases, gone down. So it's a double whammy. As of the first quarter of 2024, the co-star evaluated commercial property price index for the office sector was down 34% from its peak. Now, that's not like, so the Bloomberg read office property index, for example,

fell 52%. So those are different things. The publicly traded reads are down 52% whereas the commercial property price index, which I guess is just tracking the price, is down 34%. I guess the question is, is that enough, obviously, don't know, we'll say. But I feel like whenever, whenever you talk about this sort of stuff, and I'm not like hand-waving it away, but everybody knows. And if you look at, like, the equity and the bonds, the prices have adjusted.

I don't know if they've adjusted enough, but it's not going to, nobody's going to catch anybody off guard. So we're going to start talking about private markets after this, about private credit and private equity. And I think one of the things people miss when they think about this stuff and predicting a calamity, even when things are bad, like the private real estate market, in private markets, it's way harder for there to be a panic. So it's rarely ever a car crash scenario.

Yeah, sides can negotiate. Yeah, where it happens immediately. They can. With illiquid assets, if it was public, people would have been freaking out about this stuff and it would have been down 60, 70%. But because it's private, you don't get those marked down. So it just happens, it's more death by 1,000 cuts than a car crash situation. Yeah.

All right. So this is along the same vein here. This article was from January 2020 before the pandemic. And for some reason, it resurfaced recently. Well, not for some reason. We'll get into why. This is from Greg Obrin-Shane and Dan Rasmussen from Verdad. The title is, high yield was Oxy.

Private credit is fentanyl. Now, again, January 2020, I think we spoke in a bunch of about private credit, but for people who are not in the know, I think these first few paragraphs gives a really good introduction as to what it is. So forgive me for a second. I'm just going to read the first three paragraphs. Private equity assets have increased seven folds in 2002, with the annual average deal activity now averaging well over $500 billion per year.

year, the average leveraged buyout is 65% debt financed, creating a massive increase in demand for corporate debt financing. Yet, just as private equity fueled a massive increase in demand for corporate debt, banks sharply limited their exposure to the riskier parts of the corporate credit market. Not only the banks found this type of lending to be unprofitable, but government regulators were warning that it posed a systemic risk to the economy. The rise of private equity and limits to banks lending created a gaping hole in the market. Private credit funds have stepped in to fill the gap. This had asset class grew from $37 billion in dry powder in 2004 to $109 billion to 2010 to a whopping $261 billion in 2019. There are currently 436 private credit funds raising

money up from 261 only five years ago. The majority of this capital is allocated to private credit funds specializing in direct lending and mezzanine debt, which focus almost exclusively on lending to private equity buyouts. Now, I wish I updated the numbers for you all from what it looks like when they wrote it to today, but I'm guessing it's doubled since then. It's a lot bigger. Right. It's certainly ramped up since then. And so the FT had an article over the weekend talking about private markets, how much cash has come in, how much has been distributed.

And they got a quote from the global head of advisory, JPMorgan, who said, the lower rate of distributions. So the article was saying that private equity, I think, for eight straight years or something like that, has called, has called in more money than it's distributed. And even when you consider, like, obviously, there's a lag. You don't take money and give it back the same year. It's still pretty bad. So the lower rate of distributions from private equity, private debt and venture funds is having a knock on effect, leading some allocators to pause on new investments into illiquid funds and reduce new investments in more liquid hedge funds. So now here's Robin Wigglesworth. Because their allocations are topped out now if you're an endowment fund or a pension or whatever. So they're relying

on cash coming back to fund all sorts of other projects. Here's Robin Wigglesworth of the FTA. capital firms have taken more money in from investors than they've distributed back to them in gains for six straight years for a total gap of $1.56 trillion over that period. And this isn't just about the recent glut of capital raised, lag returns of private equity blockages either. Even if you include the big returns of 2013 to 2017, private capital funds have now called in $821 billion more than they've returned over the 14 years that Prequins data series stretches over. So we had Chartkid, turned this table into a chart. And yeah, it doesn't look great. So you not only had a huge

influx into private capital because rates were so low, then the IPO window has kind of closed for a while. And you're right. And so all these places topped off. And now they're not getting as much money back as they would have assumed. The point that you just made a second ago about if this was public, you would see, you would have seen panic probably a year or two ago. In the article by the guys at Verda, they made the point that a lot of these private funds will make the case that their default rate is so much lower than public markets. But it's kind of bullshit because there's tons of restructurings where the original terms of the deal are not met and they don't consider that a default. Right. You know, it seems like it should be a default.

So certainly some shenanigans. And the reason why we're talking about this today is because a private credit firm called Nine Point Partners has determined this from Bloomberg that the Beth passed forward to preserve liquidity and balance the long-term goals of these three affected funds is to redirect future distributions into additional units rather than cash distributions. Yikes. Basically, they're not making distributions. That's not good, especially when the pitch is either monthly or quarterly distributions. That's like the whole thing. So my new rule of thumb is if the fund has a number in it, it's probably going to be a problem, right? Three arrows, capital, nine point.

That's just a new rule of thumb of mine. That's just two examples. We got at least one more. Small sample size. Now, in fairness, in fairness, so the fund's largest exposure is to the sustainability sector comprising about 45% with the energy sector making up 31%. So it seems like this is perhaps not indicative of the entire industry. In fact, I would say it's probably certainly not. They've got some things that they're working through.

But the question is, like, are we going to start to see more of these stories over the years? And the weird thing is you're going to see, like, these individual things maybe blow up or have issues. But the problem for the investors is you're getting back to the car crash analogy. It takes like 10 to 12 years to know if your private equity fund actually worked or not. And so I was the one who was kind of pounding the table six or seven years ago saying these pension funds are going head over heels into private equities, going to end well. Well, not private credit. Private credit's different.

Yes, private credit is different. But I'm just talking about private as a whole. I need this in liquid stuff. If it's a private equity or venture fund, it takes so long to understand if the fund is working out or not that since you don't have those markdowns immediately in a crash situation, a lot of times the investors themselves have no idea whether what they're investing in is doing well or not. Especially if those distributions are slowing.

Then they have no clue. Right. So I've made the point, just thinking through this, like even if there is some you have all of this restructuring, you have so much dry powder out there, just desperate. There are funds that are already starting to snap up these deals before there is even real distress. So I've made the case that like maybe the downside is probably higher than some of like the real naysayers think it is.

On the other hand, the knock on effect, like the liquidity, the dry powder that I'm describing, who knows if it's really going to be excited to deploy when there is actually stress, right? A lot of the liquidity disappears when people need it. Is the easiest prediction to make that private credit is going to have some really bad events during the next recession? Well, that's, but yes, of course. Yes, of course that's what people are going to say.

Now, the other point that I had maybe just refuted is that, well, what if there's already money lining up? I feel like this is the Princess Bride. You never fight a landowner in Asia. To step in to buy at a discount or, yeah. There's going to be private credit fund of funds that are saying, we're buying secondary at a discount or whatever. I could see that.

All right, let's do a survey. One more survey. We'll get this off our chest about surveys are bullshit. Nearly 80% of Americans say fast food is now a luxury because it's become so expensive. This is from Lending Tree. The funny thing is, is they say almost 80% say it's luxury, but three and four Americans typically eat fast food at least once a week. 67% of Americans agree fast food should be cheaper than eating at home.

75% say this isn't the case. Furthermore, nearly half of people say fast food restaurants cost similarly to their local sit-down restaurants while 22% say fast food is more expensive, when asked about their go-to for an easy and expensive meal, 56% site-making food at home. This is such a nonsense. Give me a break. Yes, that's an outrage click. This was interesting, to me, there was a story about Ramit Sati in Politico, asking

about his views on inflation, and he says, I have a rule which is never trust someone's self-report about grocery costs. And I know this because I've spoken to thousands, actually tens of thousands of people, and they often say inflation is crazy. impossible before groceries anymore. And I'll say, is that right? And they'll say, well, I'm paying triple what I paid three years ago. And I say, really. And he says, as we dig into it, of course, people don't track how much they actually spend. Almost nobody comparison shops at grocery stores. And this isn't to like poo-poo the inflation thing. But I totally agree with them.

How many people do you know that actually budget line item stuff to know what they spend on certain categories? Because people's habits have changed over time. And I don't really think that many people were checking to understand three or four years ago how much they're actually paying that know what the differences are. Yeah, no. I totally, how many people do you know that, like, actually have a budget? 5% of people, 10% of people, maybe? You know, that should be your new opening question.

Instead of, can you believe how fast the time is gone, say, hey, you have a budget? No, why do you ask? No one, everyone has small talk will be. That's perfect. Yeah, a podcaster. Yeah, no, this is nonsense. There was actually a really, really good podcast with Joe and Tracy at Oddlots about how corporate operations price their products.

And they spoke a lot about the fast food industry. It was really, really fascinating. Highly recommend. All right. Another one from the St. Louis Fed, man, they're on fire. They have a chart, opposed assets and debt across generation. So they stopped it in 2019. They said to avoid the pandemic period,

which was characterized by a lot of atypical financial conditions that may not reflect long-term trends or underlying economic fundamentals. Okay, whatever. A lot of those assets would be much higher, obviously. Yeah. So they show the average value of key household assets held at age 30. They look at baby boomers, Gen X, and Millennials. And in last place, believe it or not, was baby boomers.

135K, of course, it's all inflation adjusted. Then next, coming up the rear, millennials, 190K. Gen X, 200K, 2001. Captain generation, did all right. Not bad. Now, okay, fine. Well, what was the debt? Baby boomers only had $46,000 worth of debt.

Next Gen X, next millennials. And I guess education was a key component to this, of course. So it was mortgages. So then netting it all out, what was the net worth at age 30? Baby boomers, 89K. Millennials, 100K. Gen X, 114. So all this complaining that people do about Gen X and, I mean, baby boomers have it, it's not fair, and blah, blah, blah, well, the data says otherwise.

That's surprising because you think about how many more young people these days are going to school a lot longer, to college or to post-grad, whatever, that you would have assumed just by age 30 that baby boomers would have been further ahead. This is surprising. I guess let's compare, let's see what happens at 50. Well, at 50, we're going to be so much richer. because we're going to have all their assets. That's true. I think there is something to be said for the fact that the barriers to entry is so much lower in the stock market now, too, for young people. Technology just makes it easier than ever to invest.

All right. Here's another one. Mike Zucardi. Let's update it from 2019 on. This is from Ed Yardinney. At your Denny Research. Millennials net worth was $5 trillion in early 2020, $13.5 trillion today. I mean, millennials are going to be the boomer generation.

The young generations are going to hate millennials. just as much as our generation hates the boomers. Like, complaints. Tell us old as time. Yes, it's going to happen. Millennials will be the richest generation. Get ready for it. It's going to be a while, but it's going to happen.

All right. So here's what's happening. According to Bloomer, key engines of U.S. consumer spending are losing steam all at once. We just talked about consumers choosing. Matt Klein at the overshoot. Something similar is consumer spending slowing. So this is a bit wonky.

But the Federal Reserve looks at, PCE. That's like their preferred measure of inflation. And people use it as an offhanded way to look at consumer spending. That's what the personal consumption expenditures is. So we're going to try and make this in plain English stuff. But let's just go to Matt first. So he says the composition of this spending, again, we're talking about PCE, has been shifting over the past year or so with an increasingly large growth contribution coming from categories where spending is imputed. So instead of based in actual transactions and observed prices, you strip that out, and nominal spending seems to have been slowing.

So what is he talking about here? Again, here's Matt. PCE is often generalized as, quote, consumer spending, but that is not quite the same as actual out-of-pocket spending by households. This is usually an improvement. PCE includes all spending on health care, including spending covered by insurance, which would not be captured properly by measuraries that only look at direct. expenses. PC also includes net spending by non-profits on behalf of households. So it's important.

It's spending that's done on behalf of consumers, but it's not necessarily the things that you're paying out of pocket. So it's important to strip that out. So when you do that, the market prices, the actual out-of-pocket spending, it's slowing down. So potentially good for inflation, bad for the economy? Well, you would think. But then he says inflation, so you would think, right? But the problem is inflation is not falling as much as you might think, given the moderated spending. He has another chart that shows the title of this fake spending question mark. He says, while aggregate consumer spending has been growing around 6% a year since mid-2020,

much of the growth since mid-20203 has come from imputed categories rather than actual cash transactions. So, you know, the narrative might start to shift. And it might start to shift pretty quickly on- So now people are going to be calling for cuts, then. right? Yeah. It does seem to be like the handoff going from...

But the thing, but here's the thing. What if consumer spending is slowing and inflation is not catching down, so consumer spending is slowing, but rate cuts are still on pause? That doesn't sound like a great setup for the economy or the stock market. No, but eventually you'd think inflation would have to catch up, though. But, well, yeah, you would. And interestingly, the two-year has made a really... really big move in the last four sessions from

this doesn't sound big but it is it's decent size on the chart from 5% down to 42 so yeah that's pretty tiny I feel like we've been in a range though for a while from yields correct yeah I mean in the whatever the T-bills are still all above 5%

from 12 months down which is kind of remarkable but you know a quickly narrative shift so be prepared potentially okay so again if you're a glass Saff full person, you're going to say, yay, this is good for inflation, potentially. And if you're a glass-saf-empty person, you're going to say, ah, the economy's slowing.

Yeah. Right? And both people can- Choose your fighter. I still think it's bizarre that we're potentially going to see Fed rate cuts with stocks at all-time highs. That seems wild to me. I'm just so used to what happening in the midst of a panic situation. Well, but they're not pricing any more rate cuts for the rest of the year. You don't know where stocks are going to be when they finally do start to cut.

What if they're 20% lower? which is, you know, historically. Right. Although, what did we say to history? The stock market could get ahead of them. Yeah, that's fair. All right, Ben. Recommendations.

What do you got? All right. Two thumbs up on Godzilla minus one for my son, George. Dude, it's so good. Did you watch it? I did. I thought it was just okay. I just...

I mean, what do you expect? It's a Godzilla movie, first of all. Second of all, even stipulating that it's a Godzilla movie. It was fucking good. It had a, it had a, the action was phenomenal. Godzilla actually looked real in the beginning. The story was great.

What more do you want? What more do you want? It's just the gods. I'm just not a big fan of those kind of movies. Do you want like a coming of age? Like, when was Godzilla born? Like, did he have any friends? Like, what did they do over the summer?

No, it, so it, again, it was, the thing is it felt like a move, like a throwback movie. The way they made it felt like it was a movie from like another time almost, which I thought was really. interesting and cool anyway credit to netflix they just dropped it they're like oh we have godzilla minus one now yeah because i couldn't find it anywhere else either yeah so yeah my my son especially he just he couldn't get over the fact how does godzilla turn himself into a nuke like so that you know it's funny i i showed kobe one scene the scene in the rain where the guy's in the airplane and he's going to shoot him but then he doesn't so that scene where godzilla comes out it was so sick so i'm showing it to

Kobe, he goes, that's not the real Godzilla. That's not Godzilla. Like the fake Santa Claus. I'm, I'm really, I've been waiting for you to tell me that it would have been what better if I thought saw it in the theater. I mean, well, it's good. It goes without saying. And not to brag. I saw it in the theater before it was cool. I was like an opening night guy, I think. Okay. People did like that one. All right. Next one, Dark Matter on Apple TV Plus. Apparently I'm the only who watches shows on Apple, but this was. We're getting a lot of wrecks for that. Okay. So this. I'm three episodes in. And so this was a book that I read. And so this was a book that I read. I probably gave the book as a recommendation on the show

because someone emailed us and said, Ben, you just need to read these. The guy's name is Blake Crouch, I believe. He writes a bunch of sci-fi novels, and this is his best book that I read, and it's mind-bending. And one of the great things I love about seeing a book turned into a movie or TV show

is when your vision of the book in your head matches what they put on screen, and it matches it totally. So I'm like, oh, this is what I was picturing. There was something very satisfying about that. That's a good point. And it's Joel Edgerton and it's Jennifer Connolly. And it's this kind of time travel thing between different paths.

Like, what if you made this decision instead of that decision? But each of you lives this separate life between the decisions. And what if you could hop between those lives? It's very existential and sci-fi. And I'm curiously where they take it because the end of the book got really, really crazy. But I'm giving that two thumbs up. That's a very good one. So Logan got a Darth Vader toy where you press something and Darth Vader talks.

So I guess Logan is learning about the dark side because he asked when did Darth Vader go to the dark side? Yeah. And so I showed him. So I said, well, let's go to the canon. So we watched Phantom Menace, which I know this is not breaking news, but really, really unbelievably bad. And George Lucas directed it. I don't even understand. How did that even happen?

Well, he did all the prequels, didn't he? Yeah. I can't believe I can't believe I bet it was. We finished Attack of the Clones this morning as we were eating waffles. Much better. I know you're not a Star Wars guy, but Attack of Clones was fun. It's watchable. Now, I forget, what's the guy's name that played Anakin?

Just the worst actor of Hayden Christensen, right? Stunningly bad. stunningly bad actor but but attack the clones fun movie that's my hat take about the original star wars besides harrison ford they're all really bad actors yeah yeah yeah that's fair mark mark hamill is a sorry he's not great yeah he's really bad that's how good the movie is though that it the movie worked despite him uh all right i watched the holdovers i thought you'd seen it before no i never saw it never saw it okay and well remind me what you you thought of it. You loved it, right?

I really liked it. I thought Paul Giamatti should have won an Oscar if Opposheimer didn't exist. Okay. What do you think I thought of it? You probably got bored. Too slow. Yeah. Too long. Yeah. Clearly a good, clearly a good film. Well done. Well written, well acted. I thought the guy who plays the teenage boy with the crew of hair. He was good. He was good. I thought he was amazing. Yeah. It was a Ben movie.

Yeah, it's a Ben movie. Listen, the fourths 44 minutes, I was like, I was like, all right, where is this going? Then I, you know, just didn't really go anywhere. I lost interest. I lost interest, but I watched it. I thought it was a good ending, too, though. Yeah, it was a good.

I thought there was a payoff. Okay. Yeah. But it's a good movie. That's just not, it's just not for me. All right. I don't know why I press play on this one, because I'm not, as much as I love horror,

I don't necessarily love, like, the Antichrist genre. Thought the Exorcist is wildly overrated. Even you have a line in sand, apparently. Yeah, listen, I, I'm like the consumer. I'm choosing. between my horror movies. But I watched the first Omen, which is on Hulu slash Disney.

How, by the way, how's your Hulu Disney integration going? I don't know. They'll cut all the streaming services kind of run together for me at this point. But like when you open Disney, sometimes it looks like it's a Disney Hulu app and other times it doesn't.

It's not, it's weird. It's disappointing. Yeah. There's certainly more options now. Yeah. So, anyhow, so I saw the first Omen streaming on Disney, Hulu. So I said, check it out. nothing else to do.

Remind me how old this movie is. No, the first element is new. The first one came out in 2024. The original omen, the one with Damien, I never saw that, 1976. But the first omen, which is a prequel to the one in 1976, I got to say, pretty good movie.

Okay. Pretty good movie. We had a friend in college who, his nickname was Damien. I feel like that, that movie just, hey, kind of looked up. But I feel like that,

that name, just completely went away after that movie, correct? Like, you can't name your son, that anti-grace anymore. No, no. So, but anyway, but the original Omen is also on Disney, so I am going to watch it. I'll report back next week.

Okay. You and I are going to Charleston, and I'm excited to watch, maybe, what's that movie that you recommend? Shack Shed? Shed Shed Shed Shack? Shake, Shack. No.

The movie is called Shake Shack? No. Snack Shack. Snack. That's it. Is that going to be on the airplane, you think? What do you think? that's possible

I guess it could be it's a newish movie so it just came out so I don't know I think you like that better than a holdover how's that? Okay

that's the most you can expect All right All right We good Animal Spirits at the compound news.com See you next time Go.