Animal Spirits Podcast - Episode 402 Summary: "Is a Recession Coming?"

Released on March 5, 2025

Hosts: Michael Batnick and Ben Carlson
Podcast: Animal Spirits Podcast by The Compound
Description: Animal Spirits delves into markets, life, and investing, featuring discussions on current readings, writings, listens, and views by Michael Batnick and Ben Carlson. New episodes are released every Wednesday morning.

1. Current Economic Sentiment: Rising Recession Fears

Timeframe: 03:04 - 04:45

Michael Batnick and Ben Carlson kick off the episode by addressing the prevailing bearish sentiment in the market, highlighting an increased belief among analysts and investors that a recession is imminent.

Ben Carlson emphasizes the heightened risk:

"I don't think it's hyperbolic to say that the risk of a recession and/or stagflation or a bear market is much higher now than it was a month ago. [...] If we continue down the path of government austerity and 25% tariffs on all of our trading partners, then the risk of recession is way higher now than it was before."
— [03:19]

Michael Batnick adds context on market multiples:

"... if we do get a recession from elevated multiples, not crazy, but elevated multiples, the 24 times forward earnings, 26 times, whatever it was, that was all well and good in the world, that might not exist anymore. And if earnings are not going to deliver the growth that was being priced into that multiple, it can get ugly in a hurry."
— [04:35]

2. Tariffs and Their Impact on GDP and Market Sentiment

Timeframe: 04:45 - 07:25

The discussion shifts to the implementation of new tariffs and their immediate effects on GDP predictions and corporate earnings.

Ben Carlson references the GDP Now model:

"Last week, this thing crashed to show, well, the first quarter looks like it's going to be a negative GDP print. And then it went down even more this week, and now it's showing, I don't know, a negative 2.8% or something."
— [04:58]

Michael Batnick addresses the broader economic implications:

"...tariffs are causing this. But the point was like, well, this could be more of a calculation kind of thing with the way imports and exports are calculated, that it's not necessarily all of a sudden economic activity is falling off a cliff."
— [05:59]

Daryl Fairweather, Chief Economist at Redfin, weighs in via tweet:

"...unless we all wake up from this collective tariff nightmare, the reality is recession, recession with inflation, which is called stagflation. It's the worst kind of recession because people lose their jobs and prices stay high, along with interest rates."
— [05:27]

3. Market Reactions and Corporate Earnings Pressures

Timeframe: 07:25 - 11:34

The hosts analyze how tariffs and economic uncertainty are affecting stock valuations and corporate earnings, citing specific company reports.

Ben Carlson observes:

"The tax is such a dominant piece of the conversation that Nvidia fell 10% yesterday and it seemed like nobody. It was like an afterthought."
— [07:25]

Michael Batnick cites Target's earnings outlook:

"...in light of ongoing consumer uncertainty and a small decline in February net sales combined with tariff uncertainty, the company expects to see meaningful year-over-year profit pressure in its Q1 relative to the remainder of the year."
— [07:53]

4. Ray Dalio's Recession Predictions and Bridgewater's Strategy

Timeframe: 12:56 - 15:11

The conversation turns to renowned investor Ray Dalio's persistent predictions of economic downturns and how Bridgewater Associates navigates these forecasts.

Ben Carlson critiques Dalio:

"...if you're a legendary investor, you want to kind of ride off into the sunset. [...] He predicted a depression in the early 1980s right before we set off on the biggest bull market in history in the United States. So I think the most interesting thing about Dalio is the fact that he is constantly predicting a financial crisis, but that doesn't really translate into his returns of his fund because I think so much of the fund that he invests in at Bridgewater is quantitatively based and model driven."
— [12:56]

Michael Batnick summarizes Dalio's current stance:

"He's not in charge anymore."
— [14:10]

5. International Markets and Potential European Outperformance

Timeframe: 16:12 - 19:48

Exploring beyond the U.S., the hosts discuss the potential for European markets to outperform, supported by insights from Stripe's annual report.

Ben Carlson notes a significant market divergence:

"The year-to-date returns for the Europe Vanguard European stock index were 13% on a year-to-date basis. And the S&P was up 1% or so."
— [16:12]

Michael Batnick references Stripe's analysis:

"The revenue that businesses process on Stripe is growing seven times faster than that of all companies in the S&P 500."
— [17:50]

They discuss structural advantages in Europe, such as diversified financing solutions, which might contribute to sustained growth amidst global economic challenges.

6. Cryptocurrency and Government Reserve Proposals

Timeframe: 25:03 - 29:15

A contentious segment where the hosts dissect former President Trump's proposal to create a cryptocurrency reserve, triggering mixed reactions from the crypto community.

Ben Carlson expresses skepticism:

"It doesn't make any sense to me. [...] Because if we're going broke. [...] And if they owned all that crypto and then they went to sell it to pay off the debt, guess what happens to the price of crypto? It crashes."
— [28:11]

Michael Batnik criticizes the logic behind the proposal:

"I don't understand the logic behind the bitcoin reserve. I think he's doing it because he said he was going to do it. But I don't like him one bit."
— [29:01]

They further discuss the implications of government involvement in cryptocurrency markets and the potential for market manipulation and instability.

7. Housing Market as a Potential Recession Hedge

Timeframe: 30:07 - 34:04

The hosts shift focus to the housing market, suggesting it could serve as a stabilizing force during a recession.

Ben Carlson proposes:

"I think the housing market has been in a recession for the past, I don't know, 18, 24 months. [...] the best hedge in the next recession will be housing."
— [31:18]

Michael Batnik agrees, noting the role of banks:

"As long as banks don't pull back."
— [31:21]

They discuss how lower mortgage rates and pent-up demand could drive housing market activity, despite broader economic challenges.

8. Household Income Statistics

Timeframe: 35:51 - 37:27

The conversation touches on recent data released by the Federal Reserve regarding household incomes.

Ben Carlson presents the figures:

"The mean personal family income for household level is around $136,000 or so."
— [36:44]

Michael Batnik reflects on the implications:

"But why? I don't know. Two incomes, right? Is that what that's saying or not necessarily."
— [36:29]

They analyze how higher household incomes might provide resilience against economic downturns, although Ben suggests that if a recession occurs, it would likely be mild due to these financial buffers.

9. Miscellaneous Topics

Timeframe: 38:07 - 60:09

Beyond economics and markets, the hosts engage in light-hearted discussions covering topics such as:

• Streaming Services and Ad Rates:
  Analyzing how Amazon Prime's introduction of an ad-supported tier has influenced the broader video on demand landscape, leading to suppressed ad prices across platforms.
  — [38:07]

• Personal Anecdotes and Recommendations:
  Sharing experiences with movies like "Anora," discussing personal activities such as playing in a local basketball league despite back pain, and exchanging thoughts on TV shows like "Severance," "White Lotus," and "The Pit."

• Old Guy Phrases Bracket Challenge:
  A humorous segment where the hosts compete in selecting the best old guy phrases, illustrating generational differences in communication styles.
  — [53:24]

• NFL Combine Observations:
  A curious inquiry about the measurement of vertical jumps during the NFL Combine, sparking a brief technical discussion.
  — [40:30]

10. Closing Remarks and Market Outlook

Timeframe: 59:54 - 60:09

As the episode wraps up, the hosts reflect on the unpredictability of current economic indicators and reiterate the fluidity of the situation, emphasizing that future developments could swiftly alter current perceptions and predictions.

Michael Batnik concludes:

"The news flow is happening so quickly that who knows, a lot of things that we said today might look very foolish, even tomorrow."
— [59:29]

Ben Carlson adds a note of caution against relying on Wall Street's narratives, hinting at their own skepticism regarding institutional forecasts.

"So anything they say, I don't trust it. I don't think you can trust anyone in this that tries to handicap this right now."
— [60:00]

Finally, they invite listeners to stay tuned for future discussions and updates, signing off with their usual sign-off.

Key Takeaways

• Recession Risks: The risk of a recession has increased due to government austerity measures and tariffs, potentially leading to stagflation.

• Tariffs' Impact: New tariffs have significantly affected GDP predictions and corporate earnings, particularly in sectors reliant on imports.

• Market Sentiment: Elevated stock market multiples may not hold if earnings growth falters, risking a swift market downturn.

• International Outlook: European markets show potential for outperformance, supported by faster revenue growth rates in sectors like payment processing (e.g., Stripe).

• Cryptocurrency Concerns: Proposals for government crypto reserves are met with skepticism, highlighting fears of market manipulation and instability.

• Housing as a Hedge: The housing market may provide stability during economic downturns, supported by lower mortgage rates and continued demand.

• Household Income Resilience: Higher average household incomes could buffer against severe economic shocks, suggesting a potentially mild recession if one occurs.

Notable Quotes:

• Ben Carlson:
  "If we continue down the path of government austerity and 25% tariffs on all of our trading partners, then the risk of recession is way higher now than it was before."
  — [03:19]

• Michael Batnik:
  "... if we do get a recession from elevated multiples... it can get ugly in a hurry."
  — [04:35]

• Ben Carlson:
  "I don't think you can trust anyone in this that tries to handicap this right now."
  — [60:00]

Conclusion

In this episode of Animal Spirits, Michael Batnick and Ben Carlson provide an in-depth analysis of the growing fears surrounding a potential recession, the impact of new tariffs on the economy and stock market, the skepticism towards prominent economic forecasts, and the promising outlook for international markets, particularly in Europe. They also delve into the controversial topic of cryptocurrency reserves proposed by political figures and explore the housing market's role as a possible stabilizer in uncertain economic times. Throughout the discussion, the hosts intersperse their dialogue with personal anecdotes and lighter segments, maintaining an engaging and informative discourse for listeners navigating the complexities of current market dynamics.