Animal Spirits Podcast – Episode 392: All In on US Stocks

Released on December 25, 2024

Hosts: Michael Batnick and Ben Carlson
Description: Animal Spirits explores the intersections of markets, life, and investing. Hosted by Michael Batnick and Ben Carlson, the show delves into what they're reading, writing, listening to, and watching, providing insightful discussions every Wednesday morning.

1. Correction from Previous Episode [02:25 – 04:14]

Michael and Ben begin the episode by addressing a mistake from their last show. Michael states:

"We took a stroll down my memory lane and told my story with David Rosenberg. And one of the things that we said on the podcast was... the quote was untrue."

They clarify that their previous statement about Ben potentially losing 60% of his money based on a shared chart was misinterpreted. The hosts emphasize the importance of accurately conveying information and introduce an upcoming podcast episode with David Rosenberg to set the record straight.

2. Market Dynamics and Federal Reserve Policies [04:14 – 12:26]

The discussion shifts to recent market shifts and Federal Reserve (Fed) policies. Michael reflects on the complexity of interpreting analysts' actions versus their public statements:

"There is a big difference between what you see people say... and what their actual strategy is."

Ben adds:

"The big worry is the Fed is not going to cut as many times in 2025 as people would have assumed... Every time that's happened during this cycle, that's been a good thing because... the economy remains strong."

They analyze the implications of the Fed's stance on interest rates, with Ben arguing that a reluctance to cut rates indicates economic strength. Michael counters by noting the recent downturn after the Fed's latest press conference, highlighting market volatility.

3. Diversification vs. Concentration in US Stocks [12:26 – 24:31]

Ben shares insights from Torsten Slack of Apollo, who expresses concern over the potential for the Fed to raise rates in 2025 amidst factors like lower taxes and immigration restrictions. He draws parallels to the 2022 market environment, emphasizing the importance of diversification:

"Global diversification worked, right? If you didn't go to extremes, you got almost 6% after inflation."

However, Michael points out the persistent outperformance of US stocks over the past decade, questioning the effectiveness of global diversification in the current market:

"I started 12 years ago and I've seen nothing but US outperformance. Why would I not put all my money here?"

Ben agrees but maintains a balanced approach:

"I'm still a diversified investor because I think the one true thing about all market environments forever is that they're always in forever cyclical."

4. Retail Investor Behavior and Market Addiction [26:06 – 28:36]

Michael highlights a concerning trend reported by the Wall Street Journal about increasing addiction to stock trading, likening it to crack cocaine:

"At Gamblers Anonymous... one man called options a crack cocaine of the stock market."

Ben concurs, discussing the cultural factors exacerbated by the internet and social isolation:

"With the Internet age, there's going to be a way to do this somehow, some way."

They contemplate potential solutions, such as brokerage-imposed trading limits, but recognize the challenges in addressing this issue:

"What happens when the Internet in your house is down... There's no way to stop this."

5. Technological Innovations and Their Impact [48:30 – 49:05]

The hosts discuss the advancements in self-driving technology, citing a statistic about Waymo vehicles:

"After 25.3 million autonomous miles driven, Waymo vehicles have an 88% reduction in property damage claims and a 92% reduction in bodily injury claims compared to human drivers per mile driven."

Michael marvels at the safety improvements, while Ben expresses skepticism about widespread acceptance:

"I still think in America, we're going to fight it."

6. Housing Market Concerns [40:40 – 42:02]

Ben presents a chart illustrating the aging of US housing stocks, pointing out that many homes are becoming outdated and require significant renovations:

"The average age of US Housing units has been in negative territory for six consecutive quarters... falling prices SAP profitability."

Michael adds that this trend will burden younger generations with higher housing costs and the necessity of costly renovations to meet modern standards.

7. Private Credit and Investment Fees [42:02 – 44:32]

Jason Zweig's comparison of private credit to corporate bonds and high-yield investments sparks a discussion on the sustainability of high fees in private credit funds. Ben questions the viability:

"How do you get 12% returns when you're paying 4% in fees and the company is paying 16% to borrow money?"

Michael concurs, expressing skepticism about the long-term success of such investment vehicles due to high fees and opacity.

8. Retirement Strategies and Investment Philosophy [44:32 – 46:49]

The conversation shifts to personal retirement plans. Michael shares his strategy of maintaining a healthy mix of index funds and minimizing active trading:

"I just don't see it... I just don't see it."

Ben emphasizes simplicity in his portfolio, favoring a mix of stocks, fixed income, and liquid cash reserves. They agree on the importance of diversification and caution against overconfidence in any single investment strategy.

9. Listener Interactions: Automotive Advice and Parenting [46:49 – 51:05]

Emails from listeners prompt a debate on whether to give young drivers new or used cars. Ben argues for new vehicles equipped with advanced safety features:

"New cars have safety features that are crucial to young drivers... So it's counterintuitive."

Michael counters by sharing his experience of learning conservative driving with older cars lacking modern safety aids. They acknowledge the balance between safety and fostering responsible driving habits.

10. Holiday Greetings and Pop Culture Tidbits [51:05 – End]

Wrapping up, the hosts share personal anecdotes about holiday movie preferences, technological frustrations with smart devices, and family activities. They conclude with heartfelt holiday wishes:

"We know you have a lot of options to listen to, right?... From Ben and I and Duncan and the whole team, thank you."

"Merry Christmas. Happy holidays. See you next time."

Notable Quotes:

• [03:27] Michael: "We took a stroll down my memory lane and told my story with David Rosenberg... the quote was untrue."

• [04:16] Ben: "The big worry is the Fed is not going to cut as many times in 2025... because the economy remains strong."

• [07:05] Ben: "The big worry is the Fed is not going to cut as many times in 2025 as people would have assumed."

• [12:08] Michael: "How high inflation would have to be for the Fed to start to raise rates again."

• [26:06] Ben: "At Gamblers Anonymous... one man called options a crack cocaine of the stock market."

• [48:30] Ben: "I still think in America, we're going to fight it."

• [51:05] Ben: "New cars have safety features that are crucial to young drivers."

Conclusion:

In this episode of Animal Spirits, Michael Batnick and Ben Carlson delve deep into the nuances of US stock market concentration, the evolving landscape of investment strategies, the troubling rise of market addiction, and the implications of technological advancements on everyday life. Balancing humor with insightful analysis, the hosts provide listeners with a comprehensive overview of the current financial environment and its broader societal impacts.