Transcript

Michael Batnik (0:00)

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Today's show is brought to you by Invesco. Now might be a good time for some stability. Invesco's fixed income solutions are designed to help you find some with the Fed's policy shifts creating both challenges and opportunities across the yield curve, having experienced fixed income managers in your corner has never been more important. Invesco's team of 182 fixed income investment professionals manage $518 billion in assets, giving them the scale and expertise to navigate any market conditions.

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Whether you're looking to add investment grade bonds or municipal bonds to your portfolio, Invesco's fixed income strategies are designed to help find the stability you may need. Visit Invesco.com to learn more about their comprehensive fixed income solutions and how they can help strengthen your portfolio's foundation. Invesco let's Rethink Possibility welcome to Animal Spirits, a show about markets, life and invest. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching.

Michael Batnik (1:34)

All opinions expressed by Michael and Ben are solely their own opinion and do.

Ben Carlson (1:38)

Not reflect the opinion of Ritholtz Wealth Management.

Michael Batnik (1:41)

This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

Ben Carlson (1:55)

Welcome to Animal Spirits with Michael and Ben. Michael, one of my all time favorite stock charts. I think JP Morgan is the first one that did this. It shows the annual stock market returns along with the intra year drawdown to get there and it typically shows even when there's gains there is a drawdown on the way there. This year is a perfect encapsulation of that. This isn't just the drawdown, this is the year to date returns. As of April 8, 2025 the S&P was down 15%. Nasdaq was down 19, Russell 2000 was down 20. This is year to date Returns okay. Efo is down 4 and the emerging markets were down 8. Holy.

Summary

Animal Spirits Podcast – Never Pay Off Your Mortgage (EP. 436)

Date: October 29, 2025
Hosts: Michael Batnick & Ben Carlson
Podcast: Animal Spirits by The Compound

Main Theme:

This episode explores the evolving fortunes of markets in 2025, debates bubbles and market breadth, scrutinizes the AI capex boom, and takes a hotly debated stance on personal finance: the wisdom (or folly) of paying off a low-rate mortgage. The hosts also touch on economic trends, labor disruptions due to AI, inflation’s impact on consumer behavior, and recent shifts in private assets and credit ratings, all while keeping the tone lively and self-reflective.

Key Discussion Points & Insights

1. Market Rollercoaster: From Losses to Major Gains

Review of Historic Swings | 01:55–06:34
- S&P 500 in April was down 15% but rebounded to +18%; NASDAQ went from -19% to +23%; similar reversals in Russell 2000, EFA, and emerging markets.
- Quote (Ben): “Staying the course worked again.” (02:48)
Market Drift & Breadth
- Discussion of "breadth thrust" signals, historic six-month returns, and the importance of recognizing when market indicators turn positive.
- Quote (Michael): “This is the technical analysis that I'm a fan of because this is quantitatively measuring human behavior.” (04:03)

2. Market Bubbles: How Do We Know?

Defining a Bubble | 09:54–16:58
- The hosts debate what constitutes a bubble: Is it an 80% drop with a multi-decade recovery? Or something less?
- Comparison of historic crashes (dot-com, 2008 financials, Japanese stocks).
- Quote (Michael): “To me, a bubble is an 80% decline with no recovery.” (14:15)
- Quote (Ben): “Bubbles can and will happen. And this probably... This is probably a bubble.” (12:26)
Human Behavior & Skepticism
- Media and individual reluctance to call bubbles, fear of looking “oblivious.”

3. Active vs. Passive Investing & Market Leadership

Stock Picking and Indexing | 06:40–09:36
- Fewer stocks are beating the index; echoes of late '90s narrow leadership.
- Quote (Ben): “More active managers should outperform in a given year than do.” (08:17)
Survivorship Bias & Opportunity
- There’s alpha when cycles create deep drawdowns—if you don’t simply "buy and hold forever."

4. AI Capex Boom: Bubble or Paradigm Shift?

Capex Explosion in Mag 7 | 26:04–31:43
- Review of Kai Wu’s research showing heavy AI/buildout spending is reminiscent of railroads & dot-com eras, but Mag 7 firms exhibit extraordinary returns on invested capital.
- Depreciation-adjusted capex stands out for data centers versus old-economy infrastructure.
- Quote (Michael): “These are literally the best companies that we've ever seen ever.” (28:08)
Risks & “Capex Bubble” Hedge
- Even if fundamentals like sales grow (e.g., telecom post-2000), contracting multiples can flatten returns.
- Current multiples not as “insane” as 2000, yet overbuilding risk stands.

5. AI’s Impact on Jobs and Economic Growth

Layoffs & Labor Market Tightening | 18:45–20:58
- AI cited as a justification for layoffs, but some firms will swing too far and need to rehire; cycles of overreaction expected.
- Quote (Ben): “AI is going to disrupt many jobs and many of them we don't even know right now.” (19:52)
AI and GDP Growth
- Recap of Andrej Karpathy interview: AI will increase automation but likely won’t supercharge GDP or break from 2% long-term trend.
- Quote (Ben, quoting Karpathy): “AI isn’t going to supercharge GDP growth. It’ll just keep us on the same trajectory.” (34:53)
- Skepticism from Michael: “I don’t really... I don’t believe him. We already have self-driving cars, the robots are coming...” (34:54)

6. Inflation, Consumer Spending, and Behavioral Change

Eating Out vs. Eating In | 22:04–23:56
- Americans now spend more eating out than at home despite higher costs; convenience trumps cost resistance.
- Inflation hasn't fundamentally changed consumer behavior (yet), but a deep recession might.
- Quote (Ben): “I don’t think we have the ability to change our behavior as consumers. I just don’t think we have it in us.” (23:09)

7. Tariffs and Economic Policy

Tariff Impacts | 24:12–25:35
- Most costs fall on businesses and small firms, not directly on consumers as once thought.
- Tariff rollbacks expected as likely recessionary stimulus tool.

8. Crypto Integration on Wall Street

Institutional Adoption | 38:34–41:33
- JP Morgan and Morgan Stanley are easing access to crypto, but prior cycles’ leverage is a cautionary tale.
- Quote (Michael): “Vanguard is coming to—there’s some whispers that Vanguard’s going to allow it on the platform. We’ll see.” (40:12)
Speculative Manias & Company Transformations
- “ETHZilla” and MicroStrategy updates underscore the risks of firms repositioning as crypto proxies.

9. Housing: Mortgage Rates, Prices, and Activity

Frozen Housing Market | 41:33–43:51
- Despite mortgage rates dropping from 8% to 6%, homebuyer activity hasn’t spiked.
- Small price drops (“correction for ants,” down 3–6% in some cities) don’t move the needle.
- Quote (Ben): “I honestly think we need lower housing prices. I think that's the thing that's going to be more meaningful than lower mortgage rates.” (42:34)

10. Private Assets in Retirement Accounts

401ks & Private Credit | 43:51–48:18
- Asset managers aggressively push private credit into 401ks, but actual investor demand—at least among regular folks and independent advisors—is tepid.
- Quote (Michael): “I think that part of the good thing about them coming into this sacred world… is more transparency and it's going to bring down fees.” (47:31)

11. Risk in Private Credit & Insurer Holdings

Explosive Growth in Privately Rated Bonds | 49:05–53:53
- Explains the risk of insurance companies' exposure to private credit classified as “investment grade” but not rated by major agencies; regulatory and systemic risks are flagged by IMF and FT articles.
- Quote (Michael): “There’s smoke here. Now, I’m not saying there’s a fire, but this definitely makes you go like, wait a minute.” (51:54)

12. Personal Finance: The Mortgage Payoff Debate

Hot Topic: Should You Ever Pay Off a 2.6% Mortgage? | 61:45–64:59
- Viral tweet sparks back and forth:
  - Ben: “This is black or white. This is an insane decision… The inflation rate is 3% right now. You can get 4% in Treasuries. ... Never pay off. Never.” (63:07)
  - Michael: “It’s not insane. It is a bad mathematical financial decision. But the psychological hurdle or benefit sometimes... (can be worth it for some people).” (63:16 / 63:39)
- Behavioral finance versus math; respect for psychological comfort.

Notable Quotes & Memorable Moments

On rapid market recoveries:
“It's a good thing that Liberation Day, the deliberate disruption, happened in the stock market.” – Michael (06:01)
On the AI capex bubble:
“It is a capex bubble.” – Michael, agreeing after reviewing Kai Wu’s charts (26:58–27:08)
On active management:
“If they just bought and held... they’d have a better chance of outperforming than they currently do.” – Ben (08:18)
On AI and economic impact:
“This is going to be the dominant economic story of the next couple of years. This is going to be all we talk about, unfortunately.” – Michael (20:41)
On consumer inflation psychology:
"Who’s like, yeah, salad with grilled chicken cost 24. And I’m cool with it." – Michael (21:14)
On ETF speculation and risk:
“55% of leveraged ETFs that have launched have closed already. Of the couple hundred that have launched, 17% have lost 98% of their value.” – Ben (17:06)
Home stretch on horror movies:
“Horror is polarizing. You either love it or you hate it.” – Michael (57:09)
On coupon and credit card ‘games’:
“For people who do this, go down this rabbit hole for them. It’s more the game within the game than it is like...it'll probably be $500.” – Ben (61:24)

Timestamps for Key Segments

[01:55] – Market drawdown & comeback stats
[06:34] – Breadth and narrow leadership, stock picking
[09:54] – Market bubbles: definitions and debate
[18:45] – AI, layoffs & future of work
[22:04] – Inflation, $20 lunches, consumer habits
[24:12] – Tariffs and their real impact
[26:04] – AI Capex: Is this the new tech bubble?
[34:53] – AI and GDP growth: Karpathy interview discussion
[38:34] – Crypto on Wall Street / institutional products
[41:33] – Housing market: rates, activity, prices
[43:51] – Private credit in 401ks, demand skepticism
[49:05] – Private credit ratings and insurance risk
[61:45] – The “never pay off your mortgage” debate

Tone & Language

Conversation is informal, humorous, and occasionally self-deprecating, yet firmly grounded in data analysis and historical context. The hosts frequently challenge each other, switch positions for debate, and weave in references from both finance and pop culture.

For First-Time Listeners

You’ll walk away with perspective on how wild 2025’s markets have been, the nuance in defining financial “bubbles,” evolving risks in AI and private credit, and why personal finance isn’t always just about the numbers. Plus, you’ll hear a lively defense of why you (almost) never want to pay off a sub-3% mortgage early—even if the math isn't the only thing that matters.

For more, check out the full Animal Spirits catalogue.