Plain English with Derek Thompson - Why the U.S. Could Be Headed For the "Weirdest Recession Ever"

Episode Date: May 17, 2022

Crypto crashes, rate hikes, recession, fears, and inflation prints: The U.S. economy is in a very bizarre place right now, and Derek needs help explaining it. Michael Batnick and Ben Carlson of Ritholz Wealth Management are back on the pod to reconvene the economic roundtable. We play a game of "Finish the Sentence": The single most shocking stock market stat is …? The long-term bull case for crypto is ... ? The worst sign for the US economy is … ? The BEST sign about the US economy is …? If you have questions, observations, or ideas for future episodes, email us at [e-mail]. Host: Derek Thompson Guests: Michael Batnick and Ben Carlson Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

What's up, guys, Rachel Lindsay here, and I am teaming up with your favorite Ringer podcasters to deliver the Bravo drama and news that you've been craving on morally corrupt. It's the show about all things Bravo. From the Housewives to Summer House and everything in between, we'll be mentioning it all every week. Check it out on Spotify and the ringer.com. Today's episode is about a U.S. economy and a stock market and a crypto industry and an inflation reality that all seems to be getting weirder and weirder and weirder

every single week. Today's guests are return guests, Michael Battenek, and Ben Carlson of Ritholt's Wealth Management, co-host of the Animal Spirits Podcast, and in this episode, we play a game of Finish the Sentence. I pick some of the most common sentiments that I'm hearing around the

econ and finance world. Sentiments like, the scariest thing about this market is, dot, dot, dot. The most hopeful thing about the U.S. economy is dot, dot, dot, dot, dot, The bullcase for crypto remains, dot, dot, dot, and they fill in the blank. And then we debate their answers that fill in the blank, and then we debate the debate around the answers.

But I want to start with three simple facts about the U.S. economy, three numbers that should shape our understanding of what's happening right now. The first number is two. Two. The Federal Reserve has a mandate to keep prices stable, and it has targeted an inflation rate of two. The actual inflation rate is 8.3%. 8.3 is a long way from 2. Inflation is, by this, measure, four times higher than it should be. That is why all of this, waves his hands at the stock market, is happening right now.

The Fed is raising rates, and the purpose of raising rates is to raise the price of money. That will reduce investment. Less investment means less demand. So it sounds a bit violent, but the Fed's mandate is to destroy a bit of demand until inflation comes down. And the problem is that there are a lot of numbers between 8.3 and 2. And so the very real worry is that as the Fed is trying to drag inflation down, it will drag growth down with it. The second number is 11.1, 1-1.1.

In China, retail sales in April were down 11.1% from a year ago. That is the biggest drop in Chinese retail sales since March 2020, the month when the global economy went into shock. This is bad. It's bad for all sorts of reasons, but particularly looking at U.S. economic statistics, if domestic demand is being destroyed here in America, that means that America needs overseas growth to make up the difference. But where is this growth supposed to come from? Europe is a basket case. China suffocating its economy for some reason, this COVID-zero policy it's pursuing without MRNA vaccines. So you have rising interest rates in the U.S. combined with the decelerating China, not a great picture for growth.

and brings us to number three. The third number is 2001. In 2001, the U.S. had a brief technical recession following a stock market crash, thing. A decline in investment, thing. And a decline in exports because our trading partners weren't doing so hot. So I am not officially predicting a recession right now or in this episode, but I think if the U.S. economy does have a recession, I'm just telling you, history never repeats, but it rhymes.

I'm Derek Thompson. This is plain English. Michael and Ben, welcome back to the podcast. Great to be here. Great to be here. This is your third time back in the podcast? Is that right? I think you're one of the first three-time visitors.

I feel like every time you come back on the show, the economy's gotten 10 times weirder. Like, you were on the first time, and it was like, oh, this is a... unprecedented supply chain mess. We'll never have something like this again. You come back the second time, inflation is a 40-year-high. Now you're back a third time. We've got a crypto crash. Growth stocks are experiencing their form of Armageddon.

China's lost its goddamn mind with Amicron. Putin's invaded Ukraine, and we still have a supply chain mess and 40 to 35-year-high inflation. So I wonder if we should just like, maybe this should just be like the last time you guys come on and maybe the economy will finally normalize and we'll get back to the only bull market right now is in content. That is right. It's going to get weirder. It's going to get weirder, by the way, Derek.

I think it is going to get weirder, and we're going to talk about exactly how it's going get weirder. So what I wanted to do today is play a game of fill in the blank, basically a game of finance, econ, Madlips. So I'm going to set us up for seven fill in the blanks, and then you guys are going to finish the sentence for me. So to start, my very first sentence is the single most shocking or depressing market statistic right now is what? This is a question for both Michael and Ben. So who wants to take this one first? The single most shocking or depressing market statistic right now is what?

All right. Since I'm bald, I'll go first. There's a theme here, and it's not good. I'll start with this. In October 2021, I think we all remembered this. Zoom, the video company, or the teleconference company, passed Exxon mobile in Market Cap. Right now, Exxon, so what is it? That was October 21. It's, I don't know, not even like a year later. Exxon is 14 times larger. And that is from a combination of Zoom collapsing and Exxon going vertical.

I'll give you two more quickly. More than one in 10 large cap stocks are down more than 6,000. percent from their highs, more than 1 in 10. And lastly, then this is sort of the epicenter of this, is the ARC complex. Now, ARC is a high-beta, high-flying ETF of Tesla and Coinbase and Rob Hood and all of the stay-at-home stock winners from the pandemic. From ARC's inception in late 2014 to their peak in February of 2021, it was up over 700.000. percent from October, from early 2014 through 2021. That's annualized a gazillion percent a year, right? It did phenomenally well. The S&P 500 over the exact same time was up 125 percent. All of that spread has now disappeared. From inception, ARC is now underperforming the S&P 500.

Wow. So there was a period where it was performing six times better than the SP 500, but when you look at the entire story now, it's performing worse. Like that is an incredible reversal of fortune. in two years. And a great microcosm for what we're seeing, which is this shift from narrative-driven companies, growth-driven companies to value-driven companies, profit-driven companies. Like investors have basically said for years and years, we're especially between in 2020 and 2021, we are betting on the future. We're betting on stories. We're betting on the next decade. We're betting on memes. Betting on memes. Yeah. Well, and we had, we had, so I think there was something like 15 million new

brokerage accounts opened in 2020 and 2021. So a little more meat in the bones for Michaels. I got, So the Russell 3,000, if you own an index fund, right? In your 401k, you own an index fund. You own just the whole U.S. stock market. It's down like 16 or 17% right now. That's not fun, but it's also relatively normal every few years. You should expect that to happen. But if you're one of these people that got into,

you opened your Robin Hood app and you decided, I'm going to trade stocks. One out of the very 10 stocks in the Russell 3,000 is down 90% or worse from all-time highs. One out of 10. One out of a five is down 80% or worse. These aren't just like little corrections. These are like you got your face ripped off. Almost half of all stocks are down 50%.

And so this is the darling's Peloton and Robin Hood and Coinbase and Teledoc and Zoom, but also if you own Facebook stock, you're down 50%. Amazon is down 40%. So all of the companies that people really love are getting crushed right now. So if you decided, oh, I'm going to pick some stocks because it sounds easy, I'm going to be the next Warren Buffett. And this is your entrance into the stock market investing. And you had an awesome year in 2020.

Now is the other side of that where you have a hangover and you're just like, what happened here? What am I supposed to do? Because I did not sign up for this. Well, there's this adage, I suppose, in investing that says you should invest in what you know. It's ironic because if you look at the pandemic, you're like, all right, what did people know in 2021? Well, they got up in the morning.

They rode their Peloton. They zoomed for work. And then they watched Netflix. If your portfolio was literally just exclusively, Peloton, Zoom and Netflix, you're down what? 80%. Like, legitimately, I think you might be down 80%. If you invested... Netflix is the worst stock in the S&P 500 this year.

Down like 70%. It's unbelievable. And, you know, the... Peloton has literally... Peloton lost 93% of its value. Six cents, six or seven cents on the dollar. I mean, that's wild. It is crazy.

Do you guys think that just as with the dot-com bubble bursting, you could say at the time, oh, my God, software was way overrated. These kind of companies are not going to make it in a materials economy. They're not going to compete with oil or steel or these, you know, But obviously they did. Like, obviously software did to a certain extent eat the world. By that same token, do you think that in the ashes of the growth stock portfolio,

there are some like little baby phoenixes that will rise in five, ten years from now, some of these companies, who knows which, but some of these companies are going to be absolute rock stars. Like Amazon's a good example from 20 years ago. Amazon got destroyed in 2001. Jeff Bezos basically said, I don't care. I'm still going to pursue my day one strategy. And then he became, you know, the richest man in the world, largest e-commerce company in the world. Do you think something like that is going to happen with some of these growth stocks as well?

Here's the problem. When that happened, when Amazon lost 95% of its value from the peak in the dot-com bubble, I'm guessing it was a billion-dollar market cap. These companies are still massive. Even with the gigantic decline, Peloton still has a $5 billion market cap. So you mentioned these baby Phoenixes. They're not babies. Zoom is still a $25 billion market cap.

Rivian came public at over $100 billion. What was its revenue? Rivians is the electric truck company. Yeah, electric truck company. Go ahead. Its revenue was zero. So why is this happening, particularly with growth stocks? Well, prior to the inflation coming, you know, spiraling out of control.

And when all of, when we had so much free money, when money costs nothing, you could borrow it for free, basically, it didn't matter whether a company was going to pay you back today or whether it was going to pay you back, you know, 10x in the future because money did it take your time, right? And so this was the theme in the last decade was Silicon Valley subsidizing all of our losses. Yeah, draft kings, go, you know, lose $400 million a quarter, whatever it is, all good because we're trying to, you know, it's all about Tam. It's all about growth. Well, we're not in that world anymore. And now, when interest rates are going up, when money costs something, when inflation is what it is,

people are much more sensitive to the promise of profits in 10 years. It's like, no, no, no. You had a decade to figure this out. You had a decade to deliver me some cash flow. And it's over. Those days are gone. So why growth stocks? It's the same thing. It's just their long duration assets. You told me to disagree more with my co-host here. I'm going to take umbrage with this one. All right. Because I think anytime there's innovation, people go too far. So if you're you look back at the tech, the dot-com bubble from 95 to 99, interest rates were 6%. People didn't need low interest rates to go crazy back then. Anytime there's some innovation in the economy, like go back to railroad stocks in the 1800s. So here's why this is the most

unsatisfying answer in the world. The reason that stocks crash sometimes is because they went up so much. If you look from the bottom of the bear market in the great financial crisis in 2009 through the end of 2021, the NASDAQ 100, which is just an index of growth tech stocks, it was up 25% per year, 1,600% in total. So sometimes the reason that stocks get crushed, like obviously the Fed and inflation and interest rates, that was the narrative shift there. But part of the reason stocks get crushed is because they went up so much on the upside and they can't, that can't last forever. So I think that's part of it, too, is just that you had this amazing run in the 2010s where software ate the world and the returns backed it up and now this is the other side of that. Can I agree with both of you?

Like, I don't want to be like marriage counselor here, but I think you're both right. You know, I'm hearing a lot of truth on both sides. Yes, in a part, we are seeing a large crash because valuations went up so much. It sounds like a totology, but I think it is true. At the same time, I totally buy the idea that when money is cheap, then investment is easy and losses feel cheap. And so you're willing, investors are willing to subsidize companies that lose, lose, on a per user basis over time to build a total addressable market of a billion people

and hopefully eventually get a valuation of something like a trillion. You had a lot of investors believing that their companies could conquer the world like Amazon did. And so they put all this money into the Ubers and everything else. I remember I called this a couple years ago

when I write this article. October 2019, I wrote an article called about the millennial urban subsidy. I said, if you wake up on a Casper mattress, remember those, work out with a peloton before breakfast, Uber to your desk at WeWork, order DoorDash for lunch,

take a lift home, and get dinner through Postmates. You've interacted with seven companies that will collectively lose nearly $14 billion this year. That was 2019. That was the peak of the millennial urban subsidy, investors giving money to companies who gave money to consumers who would use those businesses so that the market of those businesses would grow. and the investors would tell themselves, eventually enough people will use these products that will be able to raise prices

such that the unit economics flips from negative to positive and the company will be worth roughly one gazillion dollars. But that calculus doesn't work when you have the Federal Reserve saying interest rates are going up 50 basis points now and 50 basis points later and 50 basis points after that. That's a sign that money's going to get expensive. The millennial urban subsidy can't be indefinite

and all these companies are falling back down to gravity at a speed accelerated by the fact that they went up so high. Is that a fair way to synthesize what you guys were saying? Yeah, but my favorite part of it is that these tech people say, we're changing the world and the Fed raises rates 50 basis points and it's like, okay, the world changing is off. Sorry. Never mind.

Well, Ben is a well-known Fed apologist, and he's not wrong in the sense that people have gotten out of control with speculation when interest rates were 5, 6, 7%. However, the party ended today because of interest rates. Let's make no mistake and be very clear that this was a low interest rate environment, free money, and now we're moving out of that. I want to go to number two on my list of fill in the blank. And here we're switching from negative to positive.

This one is for both of you. The thing that gives me hope about the market right now is what. Ben, start with you. All right. This is normal. Like every correction in history in the stock market has had its own set of reasoning. And it's always bad news that causes it. The stock market wouldn't fall if there wasn't bad news, right?

We've got inflation at 40-year highs. We've got a war going on. We've got food shortages. We've got a pandemic still kind of breathing down our neck with all this stuff. And yet, all that stuff has happened. We've had two crashes in the last 24 months in the stock market. And yet despite that, since the start of 2020, the stock market in the U.S. is up almost 30% in total. Say that again.

Say that again. That's a really, really important stat. Yeah. So from the beginning of 2020, the S&P 500 is up almost 30%. Despite a 34% crash of pandemic, 8% inflation, and the current bear market right now, the stock market in the U.S. economy are incredibly resilient. So anyone trying to, every time we have one of these hiccups, people try to say, this is it.

This is the end of the system. It's going under. And we've lived through so much worse than this. It's just hard that every time you look back in history, it seems like, well, we know how that ended. So I should have just, it was a great buying opportunity. But now, so that's my thing is just I'm constantly optimistic because I think people want to get better. And that's the thing that you can hang your hat.

And I think that it's normal for the stock market to correct every once in a while. Otherwise, you wouldn't get higher returns and other financial assets. The S&P 500 is higher today than it was in early March 2021. That's 13 months ago. That's 13 months and two weeks ago. We're up. I mean, we're not up much. We're up like one point.

But we're up over 13 months and two weeks ago. I think it's important to take the long view here. You don't even have to take the 70-year view, that stocks are always up over a 15- or 20-year horizon. Just take the medium-term view. Stocks are up over the last 13 months and two weeks. Michael, what about you? Yeah, and just to Ben's point about how good things have been.

It's hard to believe that the returns over the last three years. 2019 was up 29%. This is the S&P 500. 2020, the year of the pandemic, the S&P 500 gained 16%. So, okay, 29%, 16%, and then last year we followed up with the 27% return. That cannot continue indefinitely, right? We all know that to be true. It doesn't make the losses feel any easier, but context is absolutely critical.

Okay, so what gives me hope? The S&P 500, I went back to 1950, and I looked at all the periods of time when the S&P 500 500 has been down 20% or more from its size. Actually, I cheated a little bit. I used 19% because we've got, we had a lot of like periods over the last decade where we didn't quite fall 20%. We felled 19%. So whatever, I use 19%. Okay. So on average, over the next 12 months, stocks have gained 13% on average. That compares to a 9% annual average return. Okay. So returns are higher. How often they were positive 86% of the time. And I'm sure

that if I zoomed out even further and said over two year period, three year, that eventually you go to 100% of the time. Yep. The other shot that I got from you guys is that the average bear market takes about 500 to 600 days to get back to break even, right? Which means that after you hit bottom, and I don't know if we're at bottom now or if we'll be at bottom in a month or two months, but after you hit bottom, it takes about a year and a half to come back to where you were before the correction. That's not forever. I understand that there's a lot of people who are in their upper 50s and 60s who are looking to retire soon. I hope they weren't in growth stocks.

I hope they didn't put their entire portfolio into Redfin and Peloton because yikes if they did. But for most people who are in this for the years long game, the decades long game, they won't even have to wait a decade on average for stocks to recover. They have to wait barely a year and a half. So the pain is real. If you're the sort of person who needs to check in on your 401k every hour on the hour, you're going to feel nothing but pain doing that. Don't do that. You have the option to block that page for the next few months. Go do anything else. The world will get better unless, of course, you know, heat death, aliens, et cetera. Ben. But if you're, and if you're saving in your 401k every week, other week, month, whatever it is on your pay period, you're buying stocks at lower prices

and higher dividend yields and lower valuations. If you're a net saver over five plus years ahead of you, that's a good thing. You want to buy stocks when they're down. I was saying this last week, all time highs are the enemy of a young person. You want the ability to buy stocks when they're down and going nowhere because that just sets you up for the next cycle when we do a bull market

and you're buying and you bought when they were lower so when things go higher, you have more shares invested. It's all value. Yep. It's all value. That's a great point. Can I go to the next one or Michael,

do you want to follow up on the hope point? Well, just, all right, fine. One last thing of that. So our friend Colin Roach is a great quote on this. And Ben's right. You should be on your knees praying for lower price. It doesn't feel good. Assuming you're a net saver,

that you're contributing to your 401k every two weeks. Colin Roche said the stock market is the only store where prices fall and customers run out, something like that. You should be doing the opposite. Yeah, it's funny. I hadn't thought about the idea that, yeah, if you are saving for 401K,

especially if you're in a company that matches, that every few weeks now you are buying at these lower valuations that almost certainly, to Michael's point, are going to go up, not just in the next few years, but maybe starting in the next few months. That's a nice, a nice glimmer of hope.

fill in the blank number three this one is for you ben specifically stocks will stop falling if fed chair jerome powell does or says what well i mean the easy one here would be if he if he just lowered rates but i think so much of what goes on to the fed is psychological i wish that i would have replaced every economics book i had in college with a psychology book because it would have helped me a lot more because i read in in college and economics that if you pull this lever and interest rates inflation will do this. And if inflation does this, then this will, and the economy does not work like that, especially the markets. So I think the Fed has really been talking this down, and I think that they got a little nervous that they missed the fact that inflation was going to be way higher than

they thought. Because if you remember, they were the ones saying, we're going to let inflation run hot. They said, we've never done that before. Coming out of the great financial crisis in 2008, it took a lot longer to get back to full employment. So we're going to let inflation run hot. And guess what? It worked from an employment perspective. But now they're saying, whoa, whoa, we need to tap the brakes. We need to pump them hard. We need to stop all of our quantitative easing. We need to raise interest rates. We're going to raise interest rates until things potentially go into recession.

A few of the Fed chairs have said that. So I think what they could do if they wanted to thread the needle, I think they say, listen, we're going to raise rates and we're going to try to slow inflation because that's important to us because price stability is part of our mandate. But we're not going to let the country go into recession if we can help it. Yeah, like the market would believe that. Yeah, the market would say, okay, yeah, sure, no big deal. I'm just saying that if the Fed said we have your back and we're not going as much as

we can, we're not going to let a recession happen. I think the market would breathe a huge cyber relief because they're now saying if we have to send it into a recession, we will. And I think that's the thing that's scaring markets to death right now is that it seems like the Fed is going to follow through on this as much as they can. Michael, why is this Jedi mind trick not sticking for you? Why do you doubt that Jerome Powell could basically get in front of the mic today, tomorrow, and essentially say, look, we are interested in tamming inflation. But the moment we get, get data showing that the U.S. economy is tipping toward a recession, we're going to halt everything and make sure that that doesn't happen? Why wouldn't that give investors confidence?

They have not earned the benefit of the doubt. They were wrong on transitory inflation. So is I. But guess what? I don't want the Federal Reserve. I could be wrong. They were wrong to continue to purchase mortgage bonds as late as they were. So I don't think the market will give them the benefit of the doubt. When Powell said that 75 basic points are off the table, market it screamed higher, but then gave it all back the next day. What they can say to stop this is we're no longer, we're going to pause on the interest rate hikes. But that's not what they should be doing because inflation is out of control. And it's not only a supply chain issue anymore.

It is bleeding over into services. So they can't do anything about the supply chain. It is what it is. But they can cool off demand and they have to. Yeah, right. Exactly. Raising interest rates. They don't have to.

Sorry, go ahead. They could let things run a little hot still and say, you know what, we're going to be happy with 4% inflation rate instead of our target of two because the supply chain stuff really is out of our hands and we're just going to let inflation go a little higher than it has been in the past. People are going to have to get used to that. They could say instead of derailing the economy and sending into recession, we're just going to let things go a little longer and see what happens. We're going to get to macroeconomic analysis in about 10 minutes. But Ben, last follow up for you on this point. GDP in the first quarter of 2022 declined. It declined for a variety of slightly janky reasons. The decline wasn't very strong. Consumer spending is very good.

Exports declined, a little bit of business investment declined as well. Is it possible? Is it possible that we're at the beginning of a recession right now? I mean, two consecutive quarters of negative GDP growth is a technical recession. Now, it might not feel like a recession to most America. But like, that's what the word means. So you say that, you know, the Fed share needs to come out and say, you know, we don't want the U.S. economy entering recession.

By the technical definition, we're halfway there. So should Jerome be out in front of a microphone right now saying we're going to stop interest rate increases because we're too terrified of Q1, 2022 growth? Well, that's a funny thing about it is. I think the Fed is just raising interest rates so they can lower in the future if and when we do go on, if it's now or six months down the line or so I think that's going to happen eventually anyway where they're going to reverse course. And maybe that'll happen if inflation is

higher anyway. But it's like pulling the bows, you can fire the arrow. They don't have any tension in their interest rate games. They got to build it by pulling back the boat. But you're right. If we do go into a technical definition of a recession, and I think people have this connotation of a recession as like the world is coming to an end

and we're crashing because of 2008. You could have a minor recession that people don't really know for six or nine months in the future when the National Bureau of Economic Research actually says, all right, we're calling it. So that certainly is possible that we could be heading into one and a lot of people wouldn't feel it in their pocketbooks right now or feel it in their employment outlook. Yeah, I think it's important to say that while recessions, when you think about them, feel like utter decline all around you.

It sounds like the concept of just like total economic decay, but there are many, many times, not only in the Great Recession, which I think technically started in December 2007, and the 2000 recession or 2001 recession, a lot of times, times you don't know you're in a recession until months and months later and the National Bureau of Economic Research, the NBER, which technically calls these things, looks back and said, oh yeah, six months ago when you thought you were in a growing economy? No, actually, that was the beginning of recession. These things are just a little bit janky. Michael, last point here. You know when people were getting tests for antibodies like back in 2020? And it's like, oh, yeah,

you had COVID. And people are like, oh, I did. I didn't feel like that's what the NBER could be like. You only find that about the recession when it's already over. Michael, this next one is for you. The long-term bullcase for crypto is blank. And I want to set things up here by saying that there's a lot of people, even people in the tech community, they're talking about this moment in crypto as being something like the dot-com bubble but for Web3, but for these cryptocurrencies and all these companies that are working on the blockchain.

So Michael, the long-term bull case for crypto still is what? All right. First of all, I am a long-term crypto bull, but I'm not a laser-eyed person. I'm not a laser-eyed person. I do believe in crypto. So, okay, but by the way, that this could be the dot-com, but Bitcoin's down 56%, which is basically, it's not nothing, but come on, wake me up when it's at $10,000, which certainly not off the table, right?

Why can't Bitcoin go to $10,000? easily could. And just be clear, Bitcoin now is it high 20s? It's a 29,000. Okay. All right. So I never believed the Bitcoin, like the Bitcoin fixes this or Bitcoin as an inflation hedge or store of value.

I think that I think a good analogy that I do believe in is just simply Bitcoin is a digital gold. What is gold? It's based on belief. And I get the jewelry as whatever. But for all intents of purposes, it's a belief. story. And I think that that is why I am long-term bullish on Bitcoin. I don't really think that you need to overcomplicate it. I don't think it's money. I can't envision myself ever paying

for something with Bitcoin. Maybe one day, who knows. But today, it's far too volatile for anybody to either want to pay for things or certainly on the, to accept the payment in Bitcoin sounds crazy right now. There's another part of crypto that I'm bullish on, which is the smart contract platform. Ethereum is the most popular one. just digital assets, digital ownership. These are all regurgitated talk about. I'm not like a crypto expert, but what are people talking about?

So a very simple example of this in NFTs are artists that are able to get repaid every time there is a transaction, right? An artist sells something, a musician sells a CD, whatever. They get paid once. Now inside the contract, you can make it so that there's a perpetual royalty. Things like this. Obviously, utility has been spoken about a lot. One example of people give is.

is like just the exclusivity of, say, a restaurant, the high-end restaurant, right? You've got like season tickets via an NFT. Yeah, I see a couple long-term use cases for NFTs. I think they're kind of interesting. To a certain extent, I think that some of the most interesting use cases for NFTs are kind of like an American Express card.

It's like you buy access to a club that gets you all sorts of points and gets you all sorts of early exclusive deals to certain restaurants and clubs. And that's cool, right? It's like a little bit Soho House, a little bit American Express. But it definitely isn't the,

we're coming to save the world solution that I think a lot of Web3 advocates were promising. It is a neat addition to a consumer economy, not a world-saving solution to the problems of Web 2. One follow-up question about digital gold. You know more about investing than I do,

but typically, if you've got gold in your portfolio, that is a hedge against the sort of equity declines that we are seeing today. Instead, it's supposed to be. I'm not a gold bug myself, but theoretically, the argument for gold is that it's a hedge against the sort of equity declines you see today. Otherwise, why would you invest in it? If it's just another equity, then why not buy more Facebook?

Why not just buy more Amazon? Why allocate that toward a material rather than a stock? But right now, it's pretty clear that Bitcoin is acting like a steroidal tech stock. it's just falling like other tech stocks, except a little bit more, like a little bit more than Amazon, basically the same as meta, not as much as Netflix and Redfin and Peloton, but it's falling in line with these tech stocks, which tells me that it's just acting like a part of the typical tech portfolio. What's the argument against that? It's a risk asset. It's a risk asset. You're 100% right. And this is a cop-out, but I think it's true. I don't want to sit here and

pretend I know what crypto is going to be like in five and 10 years, right? I have no idea what it's going to become, but I think it's going to be a much bigger part of our lives. I think there's so much bullshit, like offensive bullshit in the space. I don't like, but I think it's going to be much bigger in the future than it is today. I can't really say much more beyond that. But as far as like gold being a hedge against inflation, also bullshit. We've had the highest, highest inflation in 40 years and gold over the last year is down 2%. Yeah.

So I think we could put, I think we could put that to bet as well, which we've been, we've been rail against gold is an inflation hedge for a long time, but that's done. I mean, gold's a commodity. Bitcoin's a commodity. Yeah, I guess my feeling is like if gold is gold and Bitcoin is next gold, and that just means that Bitcoin, by syllogism, is the next bullshit. It's digital bullshit. Ben, anything you want to pick up here before we move on to the macro economy?

I mean, the hardest thing to wrap your mind around with crypto is that you have the extremes of supreme charlatans on one side and then really, really smart people building on the other side. And that's the thing that's hard to rack your brain around is that you know that these people that there are charlatans that are selling and pumping and dumping all this stuff, but there's also some really smart tech people who've decided to just throw their whole life into this thing and that's the hard part for me

that I have both of these competing ideas going, wait, wait, these people who are just selling and then they're just pumping and they're just, they're making it like this cult-like thing. I cannot get my head around that, but then, wait, there's this group of smart people over here who are going all in on this thing and following smart people into stuff like this

is typically a good idea. So that's my problem with this. That's my cognitive dissonance here. I have the exact same cognitive dissonance. Have I told you guys my, electricity refrigerator metaphor thing. Have I not done that for you? I don't know if I've done this on the show.

But basically, the way I feel about crypto is that the advocacy scene is divided into these two very confusing camps. You have extremely smart people that can describe to you exactly how the blockchain works. It sounds like kind of scientific magic. And you have other people that sound like anthropomorphized fortune cookies where they just talk about how it's going to solve all the problems of human nature. And it's kind of like how if you were alive in the 1840s and you were, hearing about this new thing called electricity. But there was only two kinds of groups. One group was

telling you exactly how photons move through space. And you were like, oh, that's kind of neat. I can see maybe how that could do some stuff for society. And then another group was like, we're going to steal the light of the gods and spread it throughout the world. And you're like, what does that even mean? Like, just tell me, are you going to build an electric icebox? Let's call it a refrigerator. Like, are you going to build a refrigerator or not? And that's who I feel about crypto right now. It's like, tell me what the fuck it's going to do for me. Do I get a refrigerator or not? Do I get a light bulb or not?

Do I get, I don't know, a radio that I plug into the wall or not? Like, what does electricity actually do for my life? And I understand from the crypto world when they say, oh, it's digital gold. Okay, fine. Maybe it's just, you know, the next generation of a bullshit commodity. I understand, especially when they say things like this is good for capital flight out of countries or capital liquidity out of countries that have totalitarian control over the currency.

Okay, I get that too, but that's not really the U.S. I just want to know, give me my refrigerator illusion. Give me my refrigerator example. If we go another five years after we had all this capital and all this brainpower head flood into this space, if in five years there's still no discernible use case, yeah, if there's nothing like that that the general public can go, oh, this makes sense.

If in five years we don't have that, then I'm willing to change my mind about this and go, okay, it really is all just sales because there's nothing behind it yet. I mean, think about in the early 90s or the mid-90s, we had AOL Instant Messenger was the first thing for the internet that really like light bulb for me. You know, that was, people were building

from 95 to 99. But you got the AOL instant messenger and you're like, oh, I can talk to my friends. I can, like, you had this use case for regular people that they knew it to do something with it. You don't have that you ever crypto. I think that's fair. I'll let Michael finish this off. But like, when the dot-com bubble burst

in 2000, you could see in the ashore, the future of the world. Like Amazon crashed, but it really was the future. Pets.com crashed, but, you know, going online and ordering shit and having it brought to your door, that really was the future. Webvan, online groceries, that crashed. What's the future of groceries? It is, in fact, being delivered.

So, like, in the ashes of the dot-com bubble, you really did have this glimpse of the 2022 economy. And I'm just curious about to what extent does that hold here. Does that, like, in not the ashes of the crypto crash, because it's not nearly as bad as 2000 was for software stocks. But what are the glimmers of the future that we really are already seeing right now, Michael? Well, I'll just say that fortune favors a brave. First of all, I just want to throw that out there.

So important. Derek, first of all, okay, I tried to sell my, here's an example. Like, people talk about, like, permissionless and sensorless and whatever. I tried to sell my Nix tickets on Stubhub. It was like a matinee game. I forgot that I had seats and I tried to sell, let's say they were, and they were playing the Nuggets, like not a bad game. But I couldn't go, first of all, Stubbub takes, I don't know, 25%, a 25% rake seems a bit excessive.

But I couldn't go below a certain dollar amount. If my seats were $150, I couldn't go below $100. So I had to eat the entire loss because Stubbub decided how much I could sell my tickets for. What does that do with crypto? Blockchain fixes this. Earth to Derek. But maybe the downside of that is, why hasn't blockchain fixed this? Like there's layups out there that exist that it seems surprising that it hasn't happened yet.

Title insurance. What do you mean you have to check my county records? Do I have the title or do I not? That's a digitization problem. That's a government digitization problem. I don't know why we need blockchain technology to solve problems that are basically just about digitizing that which currently exists in the physical world and then putting it in some spreadsheet that is, you know, secured by a government password. Like, why do you need distributed technology to solve that problem?

I honestly don't know. I don't know. But all of this stuff, all of these legacy steps since that were built in the 1970s, I think it's just too much to, like, rebuild. You're just building on top of building on top of building. So when I send money from my JP Morgan account to Ben's Lehman Brothers account, they're checking like, okay, Michael has his money. And then just all of the processing time for that, it just seems archaic.

I think that's probably what it's going to be. It would be they want to remake the financial system. And that would be so you can trade quicker. You can figure out loans easier because it's all out there. Right on the distributed ledger, you know, who owns what loans? I think that's the kind of thing that people are hoping for is that it's going to help rework the financial system. And maybe it will. And maybe it will.

I am becoming more doubtful, but I am retaining a sort of kernel of, of, of, moderate crypto optimism within that skepticism. All right, let's move on to the macro economy. This is for both of you. Let's go fast to this question because I got two more. The thing that scares me most about the U.S. economy right now is what? Ben, nine times since the 1940s inflation has spiked above 5%. Every one of those nine times has ended in a recession. That's the only way we've been able to bring inflation under control. So maybe Jerome Powell could say something and thread the needle. I think it's going to be really hard to not slow the economy a little bit to bring inflation down.

So I think that that's something I'm worried about right now, that it's really hard to slow inflation without a slow in demand and output. Right. The Fed is in the job of destroying demand in order to bring inflation down. But this is a consumer economy. If you destroyed a ban too quickly or just too much, then growth turns negative, and that is the definition of a recession. Michael.

We haven't even seen inflation hit the consumer yet. there was a stat today for Bank for America. U.S. luxury spending is up 8% year over year in March and April. Like Hermes handbags and whatever. So we haven't even seen the slowdown yet. We haven't seen layoffs yet, really. I mean, they're starting to take up a little bit.

And Fed funds rates are still super low. They're talking about like seven more hikes. So we haven't even begun to see the effects. And I think that consumer confidence has fallen off cliff. And in many cases, like investing in all of this, like, why did textbooks not work? Because it's not formulaic. It's about investor confidence. And we haven't even seen like pullbacks at all.

So that is part that I think is worse. I totally agree with both of you. This is what I had for the answer to that question, the thing that scares me most about the U.S. economy right now. What you want in a healthy economy, what you want in a growing economy, is, let's say three things. Rising wages, rising wealth, and rising confidence. What's happened to real wages right now? Inflation adjusted wages are declining for the majority of workers. Wages, wage increases happen, you know, maybe once a year. Inflation is increasing constantly every single month, at least the, you know, the second derivative is maybe coming down, but inflation is still

very, very high. Wealth. Equities are getting demolished right now. People certainly aren't feeling the wealth effect at the moment. And then consumer confidence has been very low for a while. That's a little bit tricky because consumer confidence in the last five, ten years has been very partisanly tinged when there's a Republican president. Republicans are very, very confident about the economy, when there's a Democratic president, Democrats more confident about the economy, but right now, consumer confidence in the economy is low. And I just think with this combination of low real wage growth, of negative real wage growth, plus high inflation, plus a decline in equities plus just the beginning of Fed rate increases, my odds of a recession are going up and up

and up. Ben, in a recent podcast episode that you guys did, you said this would be the weirdest recession ever. I want to ask about that. So fill in the blank. This would be the weirdest recession ever because what? Almost 12 million job openings in the U.S. right now. The highest before the pandemic was like 7.5. There's 6 million people that are unemployed right now. So there's double the amount of job openings as people unemployed. That can change a little bit quickly. I'm sure people can take those off if the economy slows, but the labor market is scorching hot right now. Credit card debt in the U.S. is 10% lower than it was pre-pendemic. People paid off their debts during the pandemic. Home equity increased by $7 trillion from the end of 2019 until now, from $19 trillion to almost $27 trillion.

People have a ton of money. So if you own the house and two-thirds of the country does, right, the homeowner's rate is 66% or something. You had 18 months to lock in borrowing at 3% or lower. And so if you're a homeowner in this country, that's the best inflation hedge that you have. Your house prices up, your fixed payment has stayed the same. Inflation is eating to that debt. And so I don't know that the consumer has ever been in better,

in better shape to withstand a recession. And the fact that there's a labor shortage and wages have gone up, so it's easier for people to negotiate a job. Now, like we saw in early 2020, maybe that can change on a dime, but I think it would be a very bizarre recession because really it's not like we're over leveraged like we were in the past going into 2008. We're not, you know, things are pretty good shape for the balance sheet of most consumers. They can probably withstand a slowdown in many ways.

So in 2001, there was a six-month technical recession, even though consumer growth was really strong. Consumer demand was really strong. And we had a six-month technical recession triggered by, in part, the dot-com bubble and maybe a little bit by the shock from 9-11. But it was largely because of two things. Number one, exports declined because some of our trading partners got a little bit poorer. And number two, business investments pulled back maybe as the result of the dot-com bubble bursting. Michael, can you see us having essentially the 2001 microrecession redux where you have a little bit of an equity pullback. That causes business investment to decline. And then you look around the world at our trading partners, China has absolutely lost their minds. Like that economy is having severe

deceleration, in part because their largest cities, Shanghai and Beijing, have basically been shut down. You see all sorts of construction declines, all sorts of other business investment and consumer demand and consumer confidence declines in China. And then you look at Europe. There's a war in Eastern Europe and their energy markets are absolutely disgusting. So could you see declining exports, declining business investment potentially, you know, kicking us into a 2001-style recession this year or early next year? Oh, we're going to get declining exports. I saw that like China smartphone shipments are down 40% year over year. Ooh.

But enough of the negative. What has me optimistic? Is it possible that consumer spending rises in the next recession? I mean, could things get that weird where consumer spending drives the economy? and that rises in a risk. I don't know. But to Ben's point, I was going to say that

not only have consumers never been better position for a potential downturn, but so are corporations. They borrowed so much money at such low rates that, yes, maybe investment will pull back,

maybe layoffs will pick up, but they have never been in a better position to weather a downturn. So we can get a moderate recession. I know everybody's mind goes to the next 2008. That is very different

than what we're experiencing. today. There is not like just inherent leverage in the system that's going to, you know, blow up. Obviously, you know, we don't know where this goes. But I would just maybe end it with this. Okay, so what do you do with all this? Right. It's all very confusing. They're like mixed needles. How do I think about my portfolio? For most people listening who are not in retirement today, the idea is not to make like a good call. So you could like pat yourself on your back to your friends. Like this is a fantasy football. Right. So it's very easy to be like, yeah, I got out of the market. No big deal. No big deal. It's almost impossible to get back in because the market

bottoms way before the bad news does, right? So the market will, the bad news will keep happening and the market will cease to go down. You're like, well, I don't understand. Dow rallies on X bad news. That's always what happens. It's impossible to get back in. So why are you even investing in the first place? It's not for today. It's for five, 10, 10, 15, 20 years from now. So who can't, not who cares. But in the grand scheme of things, we are going to get through this. Do not panic. It might get worse before it gets better, but eventually the pessimism will end. I'm glad that we're ending on an optimistic note because that's where I wanted to end.

Ben, why don't you give your optimistic gloss and I will end with mine? All right. So you use the analogy of 2001 recession. I still think this pandemic thing is analogous to the war. So World War II, this huge spike in inflation. I actually went to 19% annually. We had a minor recession in 1948 and 49. Then the Korean War started in early 1950.

We had another inflation spike, and then another recession in 1953, 1954, and another minor one in the late 1950s. The 1950s is probably one of the best decades ever for the economy, boom times, and it was also the best decade ever for the U.S. stock market. I'm not saying that we're setting up for that. But sometimes having these recessions can be good because it shakes out the excesses in the system. So it doesn't have to be the worst thing in the world. Obviously, it's not a great thing if you lose your job or your business or whatever. But sometimes we need to dust it off a little bit. It's like the NASCAR car going into the pit stop, right?

You need to stop a little bit. Take a breath. Take a break. You don't need to have stocks going up 20% a year every year. So take a little breather, shake things out a little bit. You know, repair yourself and then go about your day and then things are fine. I think that's the way that we look at recessions is they don't always have to be the worst thing in the world. Sometimes we actually need them to slow people down and remind people that with a little slap on the wrist that you can't just take excessive risk all the time.

I'm really glad you brought up World War II again because I remember we were talking about this metaphor the last time you were on the podcast. I think you're totally right that World War II happens. The global economy is completely warped in order to deal with the war effort. The war ends. There's all sorts of supply chain gunks because, say, you know, the Ford factory, which had been making a bunch of tanks now is to make a bunch of sedans. It takes a while to, you know, essentially re-configure the machines. I'm making stuff up now. I have no idea how a machine makes a car. But basically, that's obviously what has to happen. In the next few years, because the supply chain comes on a little bit late, there's a supply chain crunch, inflation goes high, it leads to a recession. But what happens after that?

Now we're in 1949. We're about to enter the 1950s, which everyone thinks of, in retrospect, somewhat accurately, as a golden time for the U.S. economy in terms of job growth and low unemployment and wealth creation. You can have micro-recessions and still be set up quite well for the long run. The last thing I would add all of that is, I want to reiterate the first I said, which is that the average bear market doesn't last, you know, three years. It lasts a year and a half and over 15-year horizon. Stocks are literally always up. And number two, this is a consumer economy. Like, we're not China. We're not some small developing nation that relies on exports to pull up the middle class. We're a big-ass checking account. Like, the U.S. is like a checking

account with a standing army. And people's checking accounts are sensational right now, historically speaking, they made a lot of money, whether they owned a house or whether they hopefully were investing in the last few years and not just in Peloton and Redfin. People have a lot more wealth than they had a year and a half or two years ago. And if we do have a six-month recession, we're in a better place to deal with it than we were, say, in 2011 coming right off the Great Recession, or even 20 years ago when we were all significantly poor in various ways. So for those reasons, I think we are likely to have a recession and it's likely to be short, mild, and hopefully we've got a redux of the 1950s from an economic standpoint coming after us.

Anyway, Michael, Ben, thank you so much for joining me. And I will see you probably again in another two months when the economy is yet again 10 times we're there. And we have even more things to talk about. But thanks for coming on this time. Thanks, Derek. Thank you very much for listening. Plain English is produced by Devin Manzi.

If you have a comment, a concern, a question, an idea for a future show, please email us at plain English at Spotify.com. That's plain, no space, English at Spotify.com.