Animal Spirits Podcast: "Small Caps Are Back" (EP. 448)

Date: January 21, 2026
Hosts: Michael Batnick & Ben Carlson

Overview

In this episode, Michael and Ben dive into the recent surge in small-cap stocks and the evolving dynamics within the markets, reflecting on macroeconomic themes, geopolitical tensions, financial history, and personal investing philosophies. As market volatility ticks up—spurred by political events and shifting yields—the hosts weigh the implications for different equity sectors, the durability of U.S. market leadership, and the ongoing narrative shifts around crypto, AI, wealth transfer, and consumer strength. They interweave their trademark humor and down-to-earth life anecdotes throughout, making complex market topics highly approachable.

Key Discussion Points & Insights

1. Market Volatility & Geopolitical Tensions

• Denmark/Greenland Drama: The hosts riff on the President’s (satirical) attempt to annex Greenland from Denmark and the resultant market indigestion (02:25–04:23).

  • “Annexing is to, like, add a—yeah, kind of.” —Michael (03:01)
  • Tariff threats over the proposal (“10%, increasing to 25% on June 1st”) add to equity volatility.
  • Historical parallels drawn between U.S. world power today and pre-WWI Europe (“It always seems like the world order today is set...but I just don’t think we should abuse that power.” —Michael, 06:41).

• Financial Markets as a Check on Politics: Ben and Michael agree that markets act as a referee on extreme political actions through movements in bonds, yields, and asset prices. The recent bond market selloff is viewed as a brake on overreach (07:11).

2. Bond Yields & Macro Uncertainty

• Japan & U.S. Yields: Japan’s 30-year yields “going vertical” prompts a discussion on whether rising yields are healthy or a red flag (08:24–10:15).

  • “Government bond yield going vertical is never good.” —Ben (09:43)

• U.S. Yields: Michael insists that until U.S. yields spike “in a meaningful way,” he won’t worry, citing a long history of rangebound movement (10:15).

• Political Instability as a Driver: Recent yield behavior attributed to international politics more than domestic fundamentals (11:25).

3. Gold, Silver, and Bitcoin—Divergent Responses

• Gold and silver’s rallying in response to political drama while Bitcoin lags, contradicts past “anti-system” narratives for crypto (11:42–12:23).
  • “Don’t you think this is just another one of the narrative violations of bitcoin?” —Michael (12:12)
  • Bitcoin acting as “risk-on/risk-off,” not as a geopolitical hedge.

4. Market Leadership Shifts & Small Cap Resurgence

• Market Concentration: Discussion of S&P 500 concentration, with Mega-Caps (Nvidia, Apple, Microsoft, Amazon, Google) comprising 30% (14:10–14:46).
• Rotation to Small Caps:
  • Russell 2000 outperforms S&P 500 and Nasdaq in 2026, up 53% since “Liberation Day” (April 8, 2025).
  • “Small caps of 2026, the international stocks of 2025.” —Michael (15:15)
  • Rally led by negative earnings companies in small caps, counterintuitive to conventional “quality” selection (17:31–18:23).
  • Yet, long-term underperformance noted—since Nov 2021, S&P up 57% vs. Russell up 16% (18:38).

[TIMESTAMP 15:15–19:43]

Key Segment: The Case for Small Caps

• Discussion of small cap underperformance, recent outperformance, and possible catalysts.
• “Year of small caps. Mark it down.” —Michael (17:26)
• Analysis of quality vs. negative earnings dynamics in the Russell 2000.

5. Macro Backdrop: Hot Economy & Investor Expectations

• Fiscal, monetary, and credit policy now “coordinated” to run the economy hot (20:24–21:57).

  • “GDP now is like 5% for this quarter.” —Michael (20:25)

• Market optimism is high but not “silly season;” hosts stress it’s not yet overextended exuberance (21:28).

• Household Balance Sheets: Consumer assets far outpacing liabilities, best shape “since ever” (23:21–24:15). Praise for Bank of America as “the source of truth” on U.S. consumers (22:30).

  • “Consumers are in a much better place now than they were back then [1999].” —Michael (24:15)

6. Housing, Real Estate, and Wealth Transfer

• Real Estate Delinquencies: Clarification that current multifamily delinquencies reflect property owner stress, not renter nonpayment—owners overextended in the low-rate era now struggle with falling rents (26:07–27:39).

• Wealth Transfer: Next decade will see massive generational transfer ($17.3T among Americans with $5M+ net worth), mostly in real estate (40:42–41:20).

  • Impact expected to be gradual, “a slower tide coming in and out, not a giant tidal wave.” —Michael (41:20)
  • Unlikely to trigger major asset sales or fix the housing shortage; the “rich get richer” dynamic likely perpetuated (41:31–42:10).

• Estate Planning: Critical importance of having paperwork, passwords, and plans in order before aging parents pass away (43:04–44:11).

7. Demographics, Inequality, and Financial Participation

• Citadel’s research highlights outsized percentage gains (since 2012) in wealth and equity ownership among the bottom 50% and under-40 cohort, even as headline inequality persists (44:43–46:11).

  • “Still a tiny amount, but I think this is one of the best outcomes of the 2020s...” —Michael (45:56)

• Robin Hood’s evolving role: from villain to “right place, right time” platform for new retail investors (46:11–46:29).

8. AI, Tech, and Crypto

• AI’s Limitations: Michael likens AI’s performance to “Rain Man”—brilliant at hard tasks but fails at simple ones:

  • “That’s AI because every time I ask it to do something simple, it can’t do it.” (32:57)

• Coinbase & Crypto: Both hosts admit they have not kept up with the latest on Coinbase’s regulatory issues (35:31–36:03).

• NYSE Digital Platform: New on-chain tokenized securities platform to offer 24/7, instant settlement—hosts note the appeal, especially compared to current slow settlement in traditional finance (37:08–38:45).

Notable Quotes & Memorable Moments

• On Cyclicality & Returns:
  "Every time [yields] go up, people really worry something wrong is going to happen. And I’m always poo-pooing this unless they really spike..." —Michael (10:15)
• On Bitcoin’s Role:
  "It was supposed to be the anti-system play and it’s not acting like that." —Michael (12:23)
• On Small Cap Rally:
  "Companies with negative earnings per share have beaten the crap out of companies with positive earnings per share in the index." —Ben (17:31)
• Macro Caution:
  "At the extremes, fine. When everybody’s jumping over themselves to raise price targets...then I would say, alright, guys, this is silly season. It’s not silly season." —Ben (21:28)
• Estate Planning:
  "If something should happen to me and your mother’s by herself...you need to know where everything is." —Michael (43:04)
• On Wealth Accumulation:
  "By far the biggest relative gainer is the bottom 50%, who’ve seen their wealth rise by almost 1,200% [since 2012]." —Michael (44:43)
• AI Humor:
  "It’s Rain Man...Every time I ask it to do something simple, it can’t do it." —Michael (32:57)
• On Streaming Movies:
  “This was a B-minus action flick… They’re still like, their acting was good in it, but it was…It sucked.” —Michael (51:15)
• On Wrestling with Kids:
  "I didn’t know if I was proud of him or…should I be worried that he just wants to see people actually get hurt?" —Michael (57:26)

Important Timestamps

• 03:05–07:11: Geopolitics, history, and U.S. world order
• 10:15–12:23: Bond yields, inflation, gold/silver/crypto disconnect
• 15:15–19:43: Small cap rally, quality vs. negative earnings
• 23:21–24:56: Consumer household finances, assets/liabilities
• 26:07–27:39: Clarification on real estate delinquencies
• 40:42–44:11: Wealth transfer, estate planning, demographic shifts
• 44:43–46:29: Inequality, bottom 50% participation, Robin Hood’s changing image
• 32:57: AI performance analogy (Rain Man)
• 51:15–52:25: Streaming action movies—criticisms and industry trends

Tone & Approach

The episode maintains a friendly, humorous, and highly approachable tone. Michael and Ben blend data-driven market commentary with lived experience, pop culture references, and everyday life, offering listeners both actionable insight and relatable context. Their open, sometimes self-deprecating style demystifies complex market topics without sacrificing analytical depth.

Conclusion

Michael and Ben deliver a wide-ranging, practical, and entertaining episode, arguing that while market volatility may persist—driven by geopolitics and shifting leadership—underlying economic fundamentals, robust consumer balance sheets, and new dynamics in small caps, tech, retail trading, and demographics continue to set the table for ongoing evolution in markets and investing. Their nuanced, skepticism-tinged optimism and lived humility offer both reassurance and perspective for listeners navigating the rapidly changing financial landscape.