Animal Spirits Podcast - Yolo Spenders (EP.328)

Episode Date: October 4, 2023

On episode 328 of Animal Spirits, Michael Batnick and Ben Carlson discuss: crazy moves in US Treasuries, how prepared the consumer is for a recession, more positive data on inflation, Michael Lewis and the SBF situation, dark meat chicken, the best 80s movies, and much more! Nuveen has provided investment excellence for 125 years. Visit https://www.nuveen.com to learn more. The CFA Program is very difficult, but Kaplan Schweser can help you prepare. Visit https://www.schweser.com/ to learn more. 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

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Investing involves risk, loss of principle is possible. Today's Animal Spirits is brought to you by Kaplan Schweizer. CFA program. Very difficult. We both took it. The very first CFA exam I took, level one, I used just the CFA books, and that was a huge mistake because those CFA books are so dense and big, and they don't summarize anything. And it was, I made it way harder than it had to be. So for the second level, I used Kaplan's books. And it saved me a ton of time because it took these huge two inch thick CFA books and it shrunk them down at about a quarter of an inch and summarized in bullet point. And then they also had at the end of each chapter a test that you could take

that would help you understand it better. Here's a little tip for aspiring CFA charter holders. Don't master the material. Master the questions. And the best way to mass the questions is to take a million of them. Actually, not only did I use the books. I took the online course. Did you? I don't know if they had an online course when I took it. Ooh, not to brag. I think I I probably did this in like 2000, I took the first one in 2000. I wasn't even in the industry. I had no idea what I was doing. I passed level one.

I'm pretty sure I'm the only person. I got to be like on the short list of people that took CFA level two with zero industry experience. Yeah, I took it. I think I finished the test in 2009. Did you finish? Did you, did you pass all the, all three in the first try? Level two, I failed once.

I did level one in December and level two in June. So that's my, that's my excuse. Also, my brother's bachelor party is the weekend before, which I blame him for not passing. No excuses. Play like a champion. What rule is that? Will number something to do? So listen to the pass rates for the most recent. Level one recent pass rate was 36%. I know. So May 2020 through 39%. I'm sorry. That's too low. What is this? Harvard? Like, come on. Three is 48%. Well, that's why you have to get the study guides. So we have a link in our show notes to check out these materials. I found them very helpful. I'm sure they still are today. So check out Kaplan,

Shweiser for more. 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. A quick housekeeping note. Is that the right way to lead the show off? Is this housekeeping? Where does that phrase come from? I don't know.

Probably housekeeping, but anyhow, Riddholt's wealth management is going on the road in the first week, first full week, I should say, of November. The date is we're going to be in Charlotte, North Carolina, on November, starting Monday, November 6th. I will be flying there straight from Las Vegas, going to see the Giants, which I don't even know if I should go to the game at this point. God, what a debacle.

That's going to be a fun flight because you're going to lose a bunch of money and the Giants are going to lose and you're going to be hung over. That should be fun. Two of those three things are true. So we're going to be in Charlotte, North Carolina. We have an office there with three incredible financial planners. We're going to be there seeing clients, prospective clients, financial advisors in the area. If you would like to learn about joining the team, we would love to talk to you.

We've got a great venue picked out, but we're going to save something. We're going to tease it. We're not releasing the venue just yet. We're doing a live, and when I said the venue, what do I mean? We're doing a live, the compound and friends. So that's Josh, myself, and we've got two very special guests, again, not going to make the reveal just yet. But if you would like to learn more, reach out to us, ask the compound show at gmail.com.

That's ask the compound show at gmail.com. And then the subject, throw whatever you want. Just kidding. Subject, Charlotte. Subject, mudroom. That works too. Okay. I want to talk about an unexplained phenomenon going on in the markets right now.

this is from Jim Bianco, 30-year treasury yield rose to 4.85% today. All these yields are now the highest since 2007. He said the long bond yield is up 55 basis points in 13 days. TLT on a total return basis from the highs is now down 46%. I think we have to close the bond market until we can figure out what the hell is going on. Look at the yield curve I put in here. I just finished this this morning. This is from the end of June until now.

So you can see the short-term rates haven't budged at all. three months, one year, two years up a little bit, five years up a lot, ten years up a lot, ten years up almost one percent since the end of June. The 30-year treasury is up one percent since the end of June in three months. There has been nothing that has changed. The Fed is saying the same stuff. Economic data is about what it has been. The Fed hasn't really changed their estimates all that much. I've heard a lot of very smart people say, I have no idea what's going on here. Like for for months and months and months during this inflationary episode, we asked why, why aren't bond yields rising? Inflation was way, way higher than bond yields. You had this big

alligator. Remember the alligator tooth chart of inflation being way higher than rates? I've never heard it called alligator tooth. I've heard it refer to only as draws. Draws? I like it. Tooth. I like it. Thank you. So now we have this, it's, it's gone the other way. And now rates are higher than inflation. And I mean, The only explanation we can get is that it would have to be economic growth is going to be higher or inflation is going to stay higher for longer or the Fed's going to keep rates higher. What is it? I don't know.

I have nothing on this. I have no idea. Positioning? I mean, it feels like what's the higher probability here? If you had to put probabilities on it and don't say 40%. This is a blow off top in yields for positioning. Listen, you, sir, you Grand Rapids, Hedge. I do not.

What's a question? Higher probability. This is like a blowoff top in yields from positioning and people finally saying, all right, you know what? My TLT is down 50 percent. Get me out of here. I'm selling or the Fed screwed it up or this is a new trend and rates are going to be higher for longer. Both?

How's that? Well, that's a Long Island hedge. Wait, could both things be true? Could we have just experienced a blow off top of yields, but also yields are going to stay higher? Yeah. I just, by the way, I tried to catch the test. I bought the triple levered 30-year long bond. Geez.

Yeah. How much is that down now? No, no, no. I closed it. I mean, credit to me, I know how these things work. I closed it out in like three days. I was in and out. Was not planning to stay around.

So here's why I want to look at the bad side of this thing because, remember, inverted yield curves are bad because they signal lower economic growth. But a steepening of the yield curve is also bad because it means potentially high inflation. right? So everything is always bad. Just remember that. You know, I don't like when you do this. I think you poke the bears too often. Those things are not, those things are not mutually exclusive. Both of those things can be true. An inverted yield curve is not indicative of a healthy functioning economy, number one. Number two, the 30 year going vertical is also not healthy.

Please, tell me what part of this is not bad. I'd love to hear it. The fact that investors can now lock in almost 5% on their government treasuries for 30 years, or the fact that you can now get two and a half percent real rates on tips. This is an amazing deal for fixed income investors. If you're a pension fund, an insurance fund or a retiree, you're being gifted way higher yields right now. How is that not a good thing? I'm not saying it's all bad, but I didn't know we were focused on pension fund investors right now. Is that who the audience is for the show?

It's pension fund investors? If you're an investor and you can look beyond the fact that rates may rise a little further in the short term, like this, you're... If you could look beyond the fact that the economy... the economy might absolutely break. Yeah, this is all great. What are you talking about? I'm sorry. Okay. Well, here's a thing because the economy might break because yields were too low, but now they're going to break because they're too high. So which one is it? Who's saying, who who's saying the economy's going to break because yields are too low? I don't know. You're trying to, you're trying to, I don't like the spin zone.

No, for years. You're being complacent again. You're in no position to poke the bears right now. I'm not being complacent. I'm just saying everything is always bad. I'm saying there's good and bad no one ever looks at the bright side of things. You know the scene in 7 where Morgan Freeman says he's got the upper hand and he's like running back to Brad Pitt? Yes. That's me with the Bears and you're Brad Pitt with the box.

Okay. Here's an interesting part of this. So Robert, someone shared this last week and this is an old piece from Robert Schiller and he said, and I think my whole take here is the bond market is way dumber than people think. I've been saying this for like the last two years and people always said, no, the bond market is a smart money. So Robert Schiller said, one might think,

long-term rates tend to be high when there is evidence that there will be higher inflation over the life of a bond to compensate investors for the expected decline in the dollar's purchasing power. Going back to 1913, that's when CPI started, 1913, we find that there's almost no correlation between long-term rates and the 10-year inflation rates over succeeding decades. While positive, the correlation between one decade's total inflation and the next decade's total inflation is 2%. This is the coup de grace in your terms. But bond markets act as if they think inflation can be extrapolated. Long-term rates tend to be high when last decade's inflation was high. U.S. long-term bond yields such as 10-year treasury yield are positively correlated with

previous 10 years inflation rate, but the correlation between treasury yield and the inflation over the next 10 years is 28%. So what if it's just the bond market has recency bias? And it's extrapolating what's just happened for the past 18 to 24 months. And it's going, yeah, I guess inflation is here to stay. And the bond market is wrong. Yeah, that could totally be. That could totally be. But with mortgage rates pushing up, like, towards 8%, and every, all major purchases is becoming, like, completely unaffordable, I don't think that this is great. But that's, but you're arguing against yourself because you, then rates can't be higher for longer. If this is going to break the economy, then rates can't stay higher for longer because

they're breaking the economy. Great. Wonderful. So the economy's going to break, but pension fund investors locked in long rates. This is wonderful. You're right. I'm just saying this, this is why I think the Fed is pushing too hard here because if they keep pushing and they let rates go crazy and get away from themselves when we have 8% mortgage rates, I think the Fed is to blame for this and we could have had a soft landing and they're going to ruin it. They're ruining our soft landing. I don't know. I don't like seeing interest rates behave the way that they're behaving. Again, back to the point from a couple weeks ago that Americans love borrowing money, I think sentiment is going to get worse and worse from here with seeing rates so high and seeing

10% auto loans and 8% mortgage rates and that this is, it's not great for consumer sentiment. Even though people have been spending through it, this is not a good thing. I wanted to look at the higher for longer thing, like if that is a thing. So I looked at starting inflation rates and starting interest rates on the stock market since 1926 and the forward 1, 5, 10, and 20 year returns. So you see how we broke these down here? All right, starting inflation. Yep, go ahead.

The interesting thing is the returns tend to be best when starting interest rates are really low or really high. So zero to two percent or eight percent or higher. But when they're in the middle, like where they are now, four to six percent, that's the worst starting spot, which is kind of interesting because that's the average, right? The long-term average 10-year yield going back to 1926 is like 4 percent, call it. But when rates are really high, returns have been awesome. When rates are really low, four returns have been awesome. I think that's probably because those are the times when you have just had a crisis or you're in a crisis. Also, you're in a crisis. Also, the only time rates have been higher were the 70s, and then you had the 80s and 90s

afterwards. But look at the same thing with inflation. Would you think that starting inflation at 8% or higher would lead to the best returns over 20 years? Look at that. Obviously. Yeah, but this is just 1980 to 2000. Yeah, so there's some caveats here.

But the funny thing is, some caveats. The same thing with inflation, though, starting inflation in like the 2% to 6% range is actually your worst spot. And I guess maybe that's because it happens most often. like that these other ones are kind of outliers, but I just thought this was interesting that like the quote-unquote normal market for rates and inflation

is actually your worst starting point. That is interesting. Meanwhile, the S&P is still up 13% year-to-date, which is kind of hilarious, even after the pullback. It doesn't feel like it. The NASDAX still up 35%.

NASDAQ is still up 35%. Even though I'm worried by these long-term rates acting like game stock circuit 2021, I'm bullish for the rest of the year. There, I said it. So another unexplained phenomenon, and I've talked about this ad nauseum, but long-term rates are up 55 basis points in 13 days, and the NASDAQ 100 is up 36% this year. Please explain this to me when the only thing that matters for tech stocks is low rates.

Now, I can't explain it. I can't explain it. However, I had Nick Majuli create a chart yesterday that is a wonderful chart. Let me throw this in the docs so the viewers can enjoy it. we're looking, I had Nick make a chart of the S&P 500, I'm sorry, they're also 1,000 broken down by decile from the time the Fed started raising rates to today. And I had them use price to sales and forward PE and they tell the same story, which is that the stocks that were highly valued compared to the rest of the market have gotten destroyed compared to cheaper

stocks. So look at this chart that I just put in there. So again, it's a Russell 1,000 broken down by decile. So each, there's 10 different buckets of 100 stocks. And the median return for the most expensive bucket is like negative 17 or 18 percent. And then the median return for the cheapest bucket. As of, so looking back at valuations in March 22 to today, the cheapest bucket in March 22 is actually, the median stock is actually up. So even though a lot of tech stocks have recovered this year, they got smashed so bad last year. They're still down. Yeah, also like this this label that we're putting on these giant tech stocks, Apple, Microsoft, Google, there's so much more than just tech. Yes. Right. Yes. And the ones that got killed the most were these,

they were much more highly speculative than the big magnificent seven order we're calling it now. Yeah. So to conclude, I don't think that high rates are all bad, as you mentioned, for certain segments of the population, it's very good. But for people that need to borrow money, which is basically all of us, and some more than others, it's pretty brutal. So I put out, I'm skipping ahead here a little bit, but I put out a thing last week saying mortgage rates are almost at 8%. You are so unlucky and it feels so unfair if you're a first time home buy right now. Because it does. Houses went up 50%. And I could, listen, the Twitter mob is not real life. But I do think that there's some sentiment you can gauge from them. I can't believe the number of people in my

mentions who said, sorry, life is unfair. My first mortgage was 8% or 12% or 6%. Come on. Don't be a jerk. My thing is like, it's okay to admit that you lucked out with timing, right? Because my first mortgage was 6.5% and I didn't bat an eye because it didn't matter back then because prices were so much lower. It's, yes, if prices were still $80,000 like they were in 1980 and mortgage rates were so much higher, then it's a little easier to stomach. But I couldn't believe the amount of people saying my rate was high when I did it. So these people should be, they should be just fine. Come on. It's, yes. I'm just saying it's okay every once in a while. I think people who have time something right, not of their own accord and just

got lucky, have a hard time admitting that they were lucky. You and I have both said, the timing of us buying our houses had more to do with family and having kids. And, than anything. Like if we would have just been born seven years later or whatever, however long, 10 years later, we could have been, we would be in the same position. We would be so mad. Listen, it all evens out. Some people have, listen, I'm bald. And, and I graduated college right into the teeth of the great financial crisis. So I'll take my low mortgage rates. And the thing is, yes, everyone has had challenges in their time, but I think you can still have some empathy for young people. Remember we were at Future Proof, sipping on Miami Vices in the hot tub.

And we were talking to a couple of young gentlemen from Toronto. And they were like, listen, we live an hour away from Toronto. And it's even being an hour away, the median home price in our city is like 800 grand. They're like, and these guys were, I don't know, mid-20s maybe. They're like, we can't afford to buy a house at those prices. It's ridiculous. And I think it's okay to say, like, I feel for people in that situation. Of course.

So here's a tweet. Paul Krugman tweeted, still no recession, but Core PCE down to 2.2. percent on a three-month basis, team long-term transitory for the wind. Long-term transitory is a, that's, I don't know if he was trying to be funny. I don't know, but that, that is hilarious. But it is weird, like, rates are going vertical. Is inflationary data not going in the right direction? It is going in the right direction.

Alligator tooth. No, this is the Meg tooth, Megteeth. By the way, I saw the Meg two over the weekend. I'll talk about it. later. How, wait, how bad is it? Because my son wants to watch it so bad. Okay. All right, fine. Is he going to get nightmares from it? No, no, no. Well, I don't know. He's, he's a young boy. So the Meg one was like bad, but enjoyable. I mean, relatively enjoyable. It was entertaining, I guess. Right. Obviously, not a good movie. The Meg two was

none of those things. It was bad and not entertaining. Uh, sounds about right. But you know what's you know what's kind of lousy? Most sequels are not entertaining. It did. Yeah, we saw the shark. We get it. It did $400 million worldwide. 82 domestic 311. So I guess foreigners love giant sharks. I mean, who doesn't love a giant shark? My son is a big Megalodon fan. Who doesn't love the Megalodon? But, but now is there to be a Megh3? Probably. Did 400 million dollars. It will definitely be a Meg three. How about this? I'm out. I hope so. I will not see the Megl three. All right. So you accuse me of being too. Oh, this is great. A research team encounters multiple threats while exploring the depths

the ocean, including a malevolent mining operation. It's so dumb. It was so, so, so dumb. I mean, right in your wheelhouse, though, let's be honest. Yeah. Okay, so this is from Bloomberg Economists. They're the ones who last year said there was 100% chance of a recession. They say, here's the headline, why a recession is still likely and coming soon. Here's our six things. There's always a soft landing call before a recession, which is kind of true, like, if you want to be. Monetary policy acts on a lag. True. The Enber economic measures that they have like those six measures that Ember looks at for saying its recession, those are always slowing. They also say strikes, student loan payments coming back on, oil prices, higher for longer rates. Five excess

savings are gone. Put a pin on that one, as I say in the podcast world. And six credit is getting tighter at bank. So looking at all that, like it sure does seem like we should have a slowdown. I hate being pessimistic, but listen, I'm a realist. You play the field as it lies, as Schroeder McGavin said. Okay, I would like to say, I want to go on record as saying, I still think that the consumer is in such good position that I think we can, if we have a slowdown, we can weather it. So Bloomberg had this piece on excess savings being depleted for the bottom 80% of homes. For the bottom 80% of households by income bank deposits and other liquid assets were lower in June than they were in March 2020 after adjustment for inflation.

So my problem is this is excess savings over and above the trend of savings that was already in place. Now, the FT had a piece this morning basically saying a lot of assumptions are baked into excess savings. And if you made an assumption here or there and pulled another lever, maybe there was less excess savings before and more now. Or anyway, it's harder. But the point is, it's excess savings that are gone. So here's the thing. We didn't need excess savings in the 2010s. Yeah. Right? Like, so in the other thing is, it's like, go ahead. Go ahead. Do you really think people are going to get rid of their excess savings and then go, okay, I'm done. That's it. I'm out. Like, walking away from a blackjack hand.

Like, all right. I'll see you later. Like, no one leaves. You go back to the ATM and you get more money and you play more blackjack, right? At 27% interest rates. So here's where I think consumers are still kind of ready. All right. And maybe, so look at the money market ones we've talked about, almost $6 trillion in money markets. That's basically doubled in the last two or three years. Money market funds. Look at household checkable deposits and currency. That number is still way higher. That people have money in the bank. Home equity, $31,32 trillion, right? That's more than doubled since before the pandemic. The net worth is up 33% since before the pandemic. And I updated this chart about the growth in net worth by percentiles, bottom 50% through the second quarter is now

74% in net worth. All households are up 33%. here's another one. U.S. CPI. No one ever talks about this with inflation. Guess what? Wages are up to. See my CPI versus average hourly earnings? I do. It's basic earnings have tracked inflation. Now, it hasn't for everyone, obviously, but on aggregate, earnings have tracked inflation. So it's not like you can say, well, sure, net worth is up, but so are prices. Wages are up to. That's part of it. Okay? So I still think if there is a slowdown and consumers are 70% of the economy, I think people still have a decent margin of safety built in if they want to tap some other parts of their budget and keep spending. And I really don't think people

are going to stop spending. Did you read this Wall Street Journal article? Not yet. Okay. Americans are still spending like there's no tomorrow. And what is my favorite thing about the Wall Street Journal? When they quote random people. Yes. All right. So they said Americans spent 5.8% more in August than a year earlier while stripping 4% inflation. Delta Airlines record revenue, ticket master sold over 295 million event tickets in the first six months of 18% year over year. People are still spending. So they asked this guy, let's see, he says if he were to buy at current rates, he'd be spending $5,000 a month for his mortgage. Instead, he's renting for $3,000. And instead of saving for a down payment, he's going crazy.

He went on Taylor Swift Erez tour. He went to a $3,500 bachelor party in Abiza. He said, I might as well enjoy it now. Here's another one. Lindsay and Daryl Bradshaw went into credit card debt to finance a vacation to Maui this past spring. We did not have the money and we were like, let's just do it anyway. So they credit card debt going to Maui, not a big fan of that. I think this is actually a good one. Rather than funnel all their spare chains into a house or retirement account, Candice and Jasmine started a bucket list fund after attending back-to-back funerals for a few months ago. The couple added a few hundred bucks on their paycheck each month into the fund, which they have used to try fancy restaurant tasting menus and buy a dream designer handbag. So instead of waiting to have fun

where they retire, they are trying to do the opposite and have fun now. As long as they're saving something for retirement, I'm actually okay with this last one. The fact that they're like budgeting a fun guilt-free spending thing. But obviously these are the usual Wall Street Journal people telling on themselves. But I think this is going to happen to a lot of people. And eventually people will run out. But I think all that's going to happen is people are going to take a home equity lines of credit and people are going to spend credit card debt. And I think, I think, like, the excess savings is not just going to go back to zero and stop. I think people are just going to go deeper into debt to finance their spending.

You can't turn that spigot off unless people start losing their jobs. Of course you can. How? You don't think people like this are like, no, we're not putting Maui on a credit card if we're in a recession. What are you out of your mind? No, that's what I'm saying. It's going to take a recession.

to stop this. And it will. It absolutely will. But I think, honestly, like, if we go into recession, the first two months are going to be people not believing and still spending, like, they're spending their faces off. Part of me agrees with you that people were, you know, we said this a lot in 2020. I'm basing this up, yeah, nothing besides human nature and, like, telling people, nope, you have to stop spending after I just been spending for two or three years.

Like, you're nuts. I'm still spending. No. You think people are going to Taylor Swift concerts if unemployment goes up to five percent people are spending whatever they were spending previously no obviously not that group but i'm just saying i think the consumer is in it's still a pretty good place to like have they are they are they are but in a recession people's behavior changes on a dime i don't think it's i don't think it's that i don't think it's that gradual if you lose your job you're spending changes overnight

sure but a lot of it depends on what is the response to the next recession because that that didn't happen in the covid recession that was a maybe an outlier one-off, but I think a lot of what happens during the next recession is going to be dependent on what the government's response is. Are we getting a recession in 2024? Yes. It's a much higher likelihood than 2023. The funny thing is, remember, it felt like going on a limb in January and saying no recession

in 2023. It did. Credit to us. 2024 has a way higher probability. I mean, you're right, 8% mortgage rates. I still can't believe that there hasn't been more things broken. in the economy or even in the fund world, like leveraged up treasuries or something that hasn't gotten blown up from TLT being down 50% or whatever. I'm really surprised there hasn't

been more things that have broken yet. Aren't you? Yes. Yeah, I am. I can't believe more. Maybe it's just to just wait for it, but I don't think this is even a lag thing because the barring rates are getting worse. It's not like rates just stayed where they were and then we'll see what happens. You're right. Rates are getting worse. Rates are getting worse. worse. And yes, I'd say higher, higher than 50% chance of a recession in the next 18 months. And I would have said way lower in 2023. You know what is breaking? Utilities, of which, unfortunately, I'm an honor of. There, I said it. I own utilities. How much am I down? So you've really been going for the rate reversal short-term play here?

No, I bought this a couple of weeks ago. I'm dead. down 13% on my purchase. It is just straight up liquidation. It feels like panic selling. Well, doesn't this make sense, though? Because of course it does. It absolutely makes sense. So utilities are down 20% from the highs this year? Josh and I are going to go deep on this, on what are your thoughts tonight? So when do you expect dividend stocks and utilities and preferred stocks and convertibles, all these. They are. All these fixed income alternatives of the past few years people have been piling into, they have to getting crushed. PFF is. I don't want to say, crashing is a bit too strong of a word, but PFF is getting hammered.

Hammered. CLPF is only down 8% though. That's not that bad. I would have expected it worse. Oh, you, you noob. What? You nooby, well, what do you mean it's only down 8%? Look at it the last three days or the last two days.

It's just going straight down. Okay. Oh, okay, there is. Yeah, it's bad. It's bad. Let's talk about speaking of active investment decisions. Last week we spoke about, I was trying to, defend active mutual funds through the lens of, well, actually, if investors are, have

confident, if investors are confident in their assertions that they're selecting the right managers, then maybe they're more likely to stick with them. And actually, I wasn't that far off. So Jeffrey Patak shared us the average annual return for various categories over the last decade. And he compared them with investor returns. And often there's a gap, obviously, as we know. So the gap between passive returns and investor returns is negative 1.43% a year.

So over the last decade, and I don't know if this is the rose of 1,000 or S&P 500, it doesn't really matter. But that did 12.1% a year. The average investor in those funds did 10.7. Now, a lot of this is also timing of money coming in and out, which could be no, that could just be dollar cost. Average. For example, doesn't necessarily have to mean bad behavior. So these things are really sort of complicated to unpack. So forget about the passive.

But the fact is that the average investor in U.S. active equity funds did 11.2% versus 11.5% for the category. It's pretty damn good. I have to assume timing is the really big. Because if money has been coming out of active funds going into passive, I'm guessing that explains this difference. Because it does look like the behavior gap is bigger and passive. and that makes zero sense to me. Well, Jeffrey did say that that was sort of driving the wedge and the behavior of passive.

But forget about that for a sec. The performance of the average investor in active funds relative to what they could have gotten if they just stayed put is effectively zero. Right? They basically earned every return that the managers earned. So credit to them. Kudos to them.

That is interesting. All right. This is also interesting. Wait, back to your confidence, confident in your assertions thing. I can say like I look for the positive side of most things. I have zero idea what's going to happen going forward from here. Like all the stuff coming together, the fiscal stuff running off,

the SAC savings stuff running off, and consumer balance sheets and all this stuff, I would not be pounding the table on anything right now in terms of like this is what's going to happen next. I have zero clue where we, and anyone who says they have an idea, like how many people predicted what would happen now? No one, literally no one.

Also, what about the regional bank failures? What are these interest rates do to their balance sheets? That's the thing. It's like, that was like a three-day crisis and it felt bad at the time. Then we moved on and then it's like, okay, I guess everything's fine now. But yeah, you're right. I don't, that's a good question. I wouldn't be shocked if over the next week, if things continue to get gnarly that somebody says something to try and calm shit down.

I don't know if that's going to go well or if that would happen. Here's my other question, though, like, who owns all the mortgage bonds that were that were put out there for three percent and another eight? Michael Burry. Who owns? though. Someone's getting crushed on these mortgage bonds. And I guess you say, well, they hold them to maturity and they'll be fine. But maybe that's the point. I mean, maybe that's the point is like there's no market losses. But right, how many 3% mortgages were put out there from refinancing people buying? And then now rates are 7.5%. Yeah, listen, I'm definitely not

trying to sound hysterical. But, you know, this is where are some stuff. I think so. The thing is the Fed has probably wanted rates to go higher for a while. There's no way that they wanted him to go this high, this fast, especially when it seems like they've got inflation under control a little bit, right? Yeah. Credit to Ackman. He came out a couple of probably a month ago or so. Talking about buying 30-year on this break. I don't know.

A lot of people were dunking. Credit to him. Great trade. Freaking nailed it. All right. First weekly outflow for U.S. fixed income in 39. weeks. And it's kind of interesting.

People find this saying, you know it? This hurts. Don't like it. Which is kind of funny now that rates are so high. But yeah, if you're looking at the past performance of bonds, you've gotten crushed. All right. So getting back to inflation going the right way, this alligator tooth. You know why I thought it was funny that you said tooth?

Because, I mean, if anything, it's teeth, right? It's definitely plural. There's many. But let's stick with the tooth. I like that. Jason Furman tweeted the inflation data from PCE, which is what the Fed focuses on. We're much better for August than the CPI data. We now have three unambiguously good months in a row for core PCE.

Annual rates at one month is 1.8%. For three months, it's 2.2%. For six months, it's 3%. This is good. This is good. This is why the bond stuff is so interesting to me, though. Forever, it's like, why aren't bond yields budging at all? The longer term, inflation is so high.

and now inflation actually is coming down to trend and bond yields are taking off. I don't know. I honestly still can't explain it. All right, this is an interesting one. Jeremy Herpidol, which I think we've mentioned two weeks in a row so I had to follow this guy. If I mentioned your tweets twice, I've got to follow you.

I'll do the same. I don't know. What does this person tweet about? He is total an economic myth buster kind of guy. So someone said, look at how much stuff is up over the last year. and all the numbers were wrong. And he said, no, here's the actual changes

through August 2023 for all the... And some of the stuff is actually falling. Gas is down 3%. Airline tickets are down 13%. Used cars are down 7%. Suites are down 5%. Bacon down 6%. Orange juice down 4%.

Milk down 4%. Eggs are down 18%. Some stuff is up still too. Dry cleaning is up 6%. Baby food is up baby fruit. But some stuff is actually reversing inflation-wise. Like, not just going up at a solar rate,

it's actually going down. good to see i guess great to say um okay my puts on michael lewis are up 10x in the last three weeks if i call for calling the michael lewis bear market i read a few of the reviews here's the one thing i can say for sure i'll probably read the book i'm not going to see the movie for sure definitely not going to see the san banker and freed movie i think that guy's a psychopath He is a modern day Charles Ponzi. I'm not giving that guy my time of day. Did you watch any of the 60 Minutes interview?

Yes. Thoughts. I'm a big Michael Lewis fan, as I think a lot of people are. I want to defend him a little bit. So all of the clips that people saw, I understand the outrage. I think it came off as bad as it possible. could have. That being said, he could have spent 10 hours with that crew, right? Like, and I'm not saying that it was taken out of context and therefore it's forgiven,

but he could have spent legitimately 10 hours with them or more. Who the hell knows? In other words, I don't think that was not an edited interview. If that was not an edited interview holy holy holy holy moly but i don't know i read a couple of reviews of the book this morning and the reviews of the book kind of make it out to seem like he got duped and here's my take i i'm a huge michael lewis fan as well i think what's what's happening to michael lewis is what happened to comedians become too famous this is my theory when is the what's the last funny thing will feral or adam stanler or jim carey is done like those were three of the funniest people of the last 30 or 40 years probably and then they become so famous and then they stopped doing

really funny stuff, right? They can transition a little bit, or they go to family movies or serious stuff, but they, they can't do the funny stuff anymore. Michael Lewis got so big with the blind side and the big short, because I thought the wheels started coming off a little bit with Flash Boys. Yeah, Flash, I don't like Flash Boys. But some of the stuff he was saying about Sam Bankman Fried, I think he got roped into this guy and wanted there to be a narrative and a story that just wasn't there. I think he wanted it so badly that he came a little blinded to it. And I think he's going to regret writing this book. I mean, the quote that there is still a Sam Bankman-Fried-shaped hole in the world

that now needs filling. That's pretty rough. I mean, and he's saying there actually was a business there. It was a run on the bank. Like, no, this was fraud. This is out-and-out fraud. It was taking these two firms and he was trading client money in his own personal hedge fund and losing it. Or I don't know.

I just, I don't think he's going to. whatever. The book's probably going to make a ton of money. They're going to make a movie about this. And he's going to be fine either way. But I think reputationalally, he's not, he's going to regret writing this book. I think so. Yeah. Again, I fully understand why people are up in arms. I really do. I just, I hope that it was heavily edited because if, whatever, it's not good. It's not good. All right. Let's talk about real estate. The 30 year is 7.6%. Will it hit 8? I don't know. Why not? Yeah, 7.6 as of, I think it got 7.8 less. So Jeff Tucker put outstanding mortgage debt by interest rate. And he's showing that it peaked the 4% or less peaked at 77% call it in 2022.

And now it's going down and the 4 to 5%, 5 to 6% and 6% or more is starting to move up and take more. So it's like slowly chipping away as people. That's the thing. I know it seems like quote unquote, no one is buying a house right now. But I think there's still, what, 400,000 houses selling every month. It's lower than it was in the past, but there's still turnover happening. There will be.

No, there's not. There's no turnover happening. U.S. pending home sales has now fallen 44% from its peak. But if you look at existing home sales, there's nothing happening. All of the difference, so there was an article, Zilla did an article, this is just wild. Total residential housing market value by Metro. So it's $52 trillion.

The home real estate is at a record high. They said the total value of U.S. housing market is 49% higher than before the pandemic. The total value of the U.S. housing market surged by more than $2.6 trillion over the past year, and here's where it's coming from. While a small chunk of this growth can be attributed to a 1.3% rise in the average value of a U.S. home over the past year, the powerhouse behind this search has been new construction. Builders have chipped away at the housing deficit as a steady flow of new homes have hit the market this spring and summer. Kind of interesting, right? It's like when a market, it's like if a market caps gets bigger by just issuing more shares. Without the price going down. Anecdotally, there's not a ton of land around where I live in the suburbs of Grand Rapids, but they're squeezing in new houses anywhere they can, like taking down woods and tearing down a farm. Like, they're squeezing in new residential places anywhere they can.

This is kind of hilarious. Sky high interest rates brought housing supply to the market finally. New houses? Yeah, it is. They're kind of the only game. But there are existing homes being sold, though. It's like 30% new homes, but it's still, Mike Simons said there was 340 single family homes in contract pending stage around the country as of last week, which is again, way lower,

but there's still some turnover happening. Goldman Sachs, Lance Lambert tweeted this. Goldman Sachs reaffirms its U.S. home price outlook. They expect highest prices to rise 1.8% in 20203 and 3.5% in 2024. Last we were talking about, like, there was a quote from the Fortune article, I guess an economist was saying how, like, if there is any relief in interest rates, watch out, right? Activity is going to just go vertical. One thing that we didn't, we didn't take this a step further.

Josh did. He slacked us. I'm with you guys, and I will take it a step further. Not only would home prices dropping 20% not lead to a financial crisis, I actually think would serve as an economic stimulus. Nothing creates more activity in local markets like a house turning over. A drop of 20% nationally, which is very unlikely, would lead to massive turn. and over. Gen Y family starting households and the tens of millions would create a boom

and shopping, renovation, et cetera. They'd be ripping at a million miles worth of boomer carpeting. And that was a very good take. That is the funny thing about like the, what do you call it? Like the decision tree. Like if you go this way, you go this way, like all the different paths right now, well, if rates fell, but why are rates falling? Is it because of a recession? It's like all these paths you could take for what's going to happen in the economy and these things. Like I could I could totally see a boom in demand and activity from falling house prices. but I don't know what what causes those rates to fall though I don't know that that's like that's what you have to square it with so you know it's you know it's uh just going I want to say

what's the opposite of going vertical but I don't want to use a crashing word because that's really not it's really hyperbolic so let's just say that these these prices are dropping like a like a lead rock like a lead rock like a stone like a rod let balloon let balloon remember the like a rock commercial. Was that Chevy? Yeah. Bob Seeger. Great commercial. All right. So here's what's dropping like a rock. XHB. Lowe's in Home Depot. Oh, my God. These look so bad. Regional banks. Like the things that are tied to utilities, as I mentioned, the things that are tied to interest rates. So a lot of these things that we're doing well are now finally getting hit. A hit is an is an understatement, but yes, they are.

So here's why like the recession part of the thing matters. So someone sent this to me a look at home prices. And I said, if you would have given me truth serum and said rates are going from 3% to 7.5% and home prices just rose 50%. I would have said, I don't care what historical data you showed me. Home prices are coming down 10% or so. That would have been like if you would have at gunpoint, I would have guessed that's what would happen. It hasn't. And I know all the reasons because we've been.

talking about them forever. But this collateral analytics looked at, like, the thing that matters most to housing is not interest rates, it's not the economy, it's employment. So over a 20-year period, they find that, like, there's other factors that drive it, but mostly if people have jobs, housing is going to do fine. And I think that's the one thing. And maybe that's why people were so surprised that the labor market was so strong. And if you want the biggest reason why housing prices have stayed strong and not falling off a cliff, it's because people still have jobs and they still have money to spend. Yeah, so what happens if jobs start going away a little bit?

I guess it depends how many jobs go away and how bad a economic slowdown would be. That's the, I don't know, if unemployment rate increases 1%, is that really going to impact the housing market? I just feel like you're not ready to see the Dow at 14,000. Here's the thing, though. Counterintuitively, could we see like a correction

if we get a recession, but then rates fall in the Fed's steps in and the markets take off. Of course. And people would be so mad. But that's, all right, one more thing on our UK and Canada housing prices we talked about last week. A lot of Canadians wrote in and said, I see what you're saying. It is wicked, unaffordable up here. But we're letting in so many immigrants to the country and we didn't build enough houses just like the U.S. That immigration is the thing that's keeping housing prices up and housing prices in Canada are not going to fall. Thoughts. Their immigration, policies are much less strict than here. They're letting people in. I don't know anything about

I have no thoughts. I wouldn't even pretend to muster a thought. I heard that from half a dozen people in Canada. So I'll I'll leave that to them. But I can see that, I guess. The question is what is going to cause companies to start laying off employees? I mean, it all comes back to consumer spending, right? If people are still spending and still buying, I mean, this is very circular logic, but I don't know. It's hard. All right, let's talk about Disney for a second. Alex Morris, who has a wonderful substack, wrote a post on Disney, which I still own.

Disney Global Parks Data. So, he has attendance versus per capita guest spending. Attendance is more or less flatline. I'm just going to assume that they have capacity. They have a certain capacity, and they hit it, right? Epcot has 10,000 people a day, whatever the number is. that's it. So unless they're building more parks,

it's hard to have more guests. I'm surprised that it's still a little low. I guess there was still pandemic stuff going on, but it's still a little lower than it was pre-pendemic. A little bit. But anyhow, global capital per guest spending is growing rapidly. So Disney hotels,

just as an example, Disney hotels, it was $234, I guess, a night in 2010. and it just goes up a little bit every year. And then in 2022, it really went up. And there's been a lot of pushback for becoming sort of unaffordable. And Disney is committed to spending a lot of money on doing more in parks.

That was their strategy. They wanted people who were spending more to come to the parks, even if it was fewer people overall. Yeah. It's a premium service. All right, survey of the week from Coinbase. New survey of 2,000 American adults suggest 20% percent. own crypto. Okay, I think that's high, but whatever. And the vast majority see an urgent need to update the financial system. Come on. The vast majority, can that be? I mean, honestly,

if you ask everyday citizens, they probably most of them would say yes. I actually, I don't agree with the 20% crypto thing. If you ask people, do we need a new financial system? I think most people would say yes. Yeah, you know, that's standing. Actually, as I'm, as I'm thinking this, that I actually think you might be right. I think people would just because like I don't like the way things are going. So I think we need to change it all without understanding like what that entails. Yeah, I could be. I think people would say yes.

Could be. You think 20% of people own crypto? That sounds very high. No way. I think I feel like people have been making up this data for years. I feel like the number is all over the place and it's never as high as they say it is. Again, I making it up 1 in 20. Does that sound reasonable?

5%. Sure. That's fair. What's the crypto market cap these days? I don't know. Is it $1.5 trillion? Callie Cox with a heck of a tweet. A little more than $1 trillion for global crypto market.

I think it was three at the peak. She has a chart showing the consumer debt to asset ratio for Americans under 40. And she tweeted, you, send me colon. Millennials are going to crash his economy. They spent all their student loan money on Taylor Swift tickets. Me, semi-colon. Nah, they're in the best position to pay off their dead in over a decade. I don't think people realize...

Data doesn't lie. Numbers don't lie. I don't think people realize how old millennials are getting, right? I'm approaching my mid-40s. I'm a millennial. Most millennials are, like, getting into their mid-to-late 30s, early 40s, a certain, like, Gen Z. Millennials are not the young people anymore. It's Gen Z are the young people.

Not only they're not young. I have multiple doctor appointments in the next couple of weeks. My body is, my body is entering a different phase. Yes, I have a doctor's appointment on Friday for an old man ailment. Yeah, it's not great. But millennials are getting older. This is the thing. They're not young people who live in their parents' basement anymore.

All right, Ben, what's this? What's this? Okay, so I mentioned a couple weeks ago last week, maybe we had our first broken bone, and I forgot to mention, I didn't realize cast technology has improved so much. I don't know if you had this with Kobe when he broke his leg, but Libby, her arm cast, is waterproof. They want her to go in the water and get it wet and go in the bath and then she just has to wrap a towel around it. And whatever the cast technology is and helps with the smell, they like, they said like, eh, try to keep it out of lakes maybe.

But if she wants to take a shower or bath every night and get the cast wet, she can't. Huh. That's why. Cast technology has improved. It's pretty interesting. I did not know this. Did you see the Mark Zuckerberg, Lex Friedman, Metaverse video? Yes. Pretty cool.

Yeah, they've, they've figured. some stuff out. They've come a long way since the cartoons with no legs. I guess the metaverse is still going to be a thing. For those who don't know what we're talking about, Lex Friedman did a thing with Mark Zuckerberg where they put on the goggles. And it's not just like they're like zooming with each other like Ben and I are doing right now. They're effectively face-to-face. It's remarkable. Old guy here, I still can't see myself wanting to use that very much. I can for a phone call over anything these days, but I, I hate for how it could be used. He doesn't think, you prefer a Zoom to a phone call. I do. I'm much bigger phone call guy than

Zoom. Yeah. All right. Um, all right, Ben, there's like a question, like, what did you, what did you change your mind on? What's it? What's one idea that you killed? And I always struggled to come up with an answer. Like, I don't know. I feel like I don't have like, I mean, I have, I have, I have, I opinions, but I don't know. I don't know. And then it occurred to me. The biggest thing that I've changed my mind on over the years, dark meat chicken. Growing up, growing up, I was strictly a white meat guy. I think that's because I was averse to maybe the aesthetic. Like, I don't like, I don't eat bananas with bruises. I think, like, dark meat chicken just doesn't, it just, as a six-year-old, that just looks a little bit suspicious. Same thing with turkey, I assume? Same thing with turkey.

For Thanksgiving, okay? But objectively, dark meat taste better than white meat, at least objectively to my taste buds. Would you agree? I'm a dark meat guy, yes. Yeah. So you've changed your mind on this, okay? That's the biggest thing I was universal. Okay.

Because I always thought white meat was dry and just never did it for me. It's dry. It's dry. It's dry. It's dry. It's dry. It's only good if you had a bunch of salt on it. I saw, I was in a parking.

I'm glad you kept an open mind about chicken. Yes. I was in a parking lot the other day, and I saw the long wagoneer. And at first, I wasn't short, I thought it was like a special one. I thought it was like a limousine-sized one. Like I didn't think it was a one that you could purchase because it looks so big that I genuinely thought it was like a one-off extra trans. I don't know what I thought.

But then I saw another one. And I'm like, holy shit, these really exist. The wagoneer with the extra space, I wish I had a measuring tape. It looks like it's 26 feet long. I'm looking at a picture right now. It does look really elongated. Actually, I'm just, yeah. Length.

How big is this thing? Let's say. And these are the people who take up two parking spots at the grocery store and the soccer games, and I can never get in and out because of them. So it's the Waggonier L. It's $11,000 starting MSRP. Let's see.

Dimensions, length. Why are they giving it an inches? All right. I can do the math. It's 19 feet. It's literally a boat. It's too big. I think you could fit a mattress in the trunk.

For 111,000, you better. Unbelievable. People have fewer kids now in bigger houses and bigger cars. And we wonder why people complain about not having enough money. Wagoneers are going to cause a recession. That's what's going to do, Penn. I said this like two years ago I saw a movie

I don't know maybe it was like Friday night I was looking for something to do board flipping what service was it on I can't remember probably Netflix it's called the foreigner

you ever hear of this movie Netflix one maybe it's not a Netflix one but it was on Netflix is with Jackie Chan and Pierce Brosnan and Pierce Brosnan is an Irish sort of quasi government employee that sounds like a straight to DVD movie

if I've ever heard of one Yeah. And Jackie Chan's daughter dies from a bomb. And it's a revenge. It's a revenge type of movie. Pretty basic. Pretty basic stuff. But I mentioned this only to say that not that you should watch it, it was fine. But did you know that Pierce Brosnan is Irish in real life? Never thought about it. I guess I would have assumed British because he's James Bond. So he plays an Irishman, as I mentioned, but I googled it. I was like, wait, is he, is he Irish? He sounds like a pretty damn good accent. He's actually Irish. I always assumed he was British from, you know, James Bond and how great is Mrs. Dadfire.

I want something new every day. I do like that movie. What a movie. I wanted to see, I really want to see the creator, even though it got like sort of of so-so reviews. Might see it this week. I also, it's been a while since I went to the theaters, you know what I might say? And I'm not, I'm not a fan of this particular type of horror.

Critters has 7.2 on IMDB. That sounds pretty good. That's not bad, yeah. Might say it tonight. Saw 10. Now, I don't, I'm not like a torture porn type of guy. 10 of these? Listen, I saw, I definitely saw one.

I mean, obviously I saw one. Once a classic. I actually watched probably the first three of them. So the first saw is legitimately incredible movie. It might even be a film. And then I probably saw, I don't really remember, actually, I remember two. I don't know if I remember three and I probably bailed after three. I probably saw the first three in the theater.

Okay. So the, so saw 10 was out of my radar, had no interest in seeing it. But until it got really good reviews. Like, this is not like the other nonsensical ones. Like, I might say it. Might go to the theaters. This is why people are worried about AI taking over Hollywood, though. Why?

Because they're just, they're regurgitating the same stuff. You could put all the first nine saw movies into it AI and say, make it like this, but different. Write it for me. All right. I've been on an 80s movie kick lately. They had the big chill on the rewatchables last week. Yeah, I need to see that. I mentioned it probably two years ago that I finally saw it and I really liked it.

And I decided to watch it again after listening to it. And I think it's one of the most high-quality 80s movies there is because the 80s, there aren't there any high-quality movies in the 80s because they're also. 80s. I mean, stand by. Yeah, they're so 80s. They're not very self-aware. They're cheesy, corny. That's part of the, part of the reason I like a lot of them. But this is like a very high quality. What's the best movie? What's the best movie from the 80s? Raiders of the Lost Arc. No, that's the qualities. No, it's like 81. That's 80s? Yeah. Glenn Guy. Glenn Ross. This is one of them. I hated that movie.

Really? This is one of them. Yeah, I thought it was terrible. Great acting. Terrible movie. I don't like watching plays that have turned into movies. Oh, the Shining. Okay, that could be it. But there's not that many high quality ones, right? And this one is moving up my list of one of the more high quality ones that I've seen. I really liked it. I don't want you to see it. It's a coming of age. You don't like coming of age movies. What do you want to say it? I want to say it. You're not going to like it. Okay, watch it. You're probably right. You're kind of movie. All right. So I have a list of the

best movies from the 80s. Empire Strikes Back. I would agree. Raging Ball, I'm sorry. Maybe any, I don't, Raging Ball is time. That's a film, not a movie. Blade Runner, Shining, When Harry Met Sally. When Harry Met Sally is probably my favorite. Die Hard. Cinema Paradiso? Never heard of it.

Oh, aliens. Aliens is my favorite movie from the 80s. That's it. I thought that was 70s. Okay. All right. Princess Bride. All right, some good movies here.

Hey, are you watching Yellowstone? I feel like I haven't seen anybody talk about it. I'm out. No, I watched it. Yellowstone, didn't the new season come out? No, they're replaying the old season on CBS. Oh, that's why I haven't seen anybody talk about it. Okay.

They didn't finish. Kevin Costner walked off the set. I watched it. It got bad. Wait, he walked off the set? Or no, he left the show. He said he's done. Good for him.

It turned to shit. I agree. Yeah. So he knows stuff. All right. Glad to have Duncan back today producing. Welcome back, Duncan. Yep.

Germany. Well, yeah, thank you, Duncan for coming. coming back and producing the show, as always. Thank you for listening. Animal Spiritspod at gmail.com. Also, listen to Talk Your Book on Monday. We talked about investing in the music industry. Very interesting podcast. See you next time.