Animal Spirits Podcast – EP.390: The Bears Capitulate
Release Date: December 11, 2024
Hosts: Michael Batnick and Ben Carlson

Introduction: Las Vegas Musings

Timestamp: [03:26]
Michael Batnick and Ben Carlson kick off the episode from Las Vegas, sharing their love-hate relationship with the city. Ben expresses his fondness for the city's gritty charm, stating, "I love the grime, I love the people, I love the cigarette smoke. I love the depression. I love it all." Meanwhile, Michael marvels at the opulence of the Fontainebleau hotel, pondering its profitability and attributing its success to "all the extra up fees that they charge you."

Ben's Audi Q7 Saga

Timestamp: [05:08 - 14:40]
Ben Carlson delves into a personal anecdote about his tumultuous experience with his 2019 Audi Q7. Faced with persistent engine leaks and unresolved issues, Ben narrates his frustration with Audi's customer service and warranty limitations. At one point, he shares, "The transmission blew, so the Warranty covered that $12,000." However, when the engine issues resurfaced, Audi declined full coverage due to warranty limits, leaving Ben with mounting repair costs and negative equity on his loan.

Ben recounts the difficult decision to either absorb the additional costs or roll his problematic vehicle into a new lease, ultimately choosing the latter despite the continued issues. He reflects on the mishandling of the situation, saying, "Did you try to negotiate at all and say, hey, for the trouble you've given me, give me 20 for this thing?" The ordeal leaves Ben disillusioned with German automotive reliability, though he humorously notes, "I'll never be buying a German car ever again."

Market Performance and CAPE Ratio Analysis

Timestamp: [14:40 - 24:25]
Shifting focus to the financial markets, Michael highlights the impressive performance of the S&P 500, noting, "The S&P 500 is up 29%. Worst peak to trough drawdown this year was 8%... one out of every four trading days this year has been a new all-time high." He emphasizes the market's stability and low volatility, which he describes as "the kind of stock market you want to see as an investor."

Ben and Michael then dissect the Cyclically Adjusted Price-to-Earnings (CAPE) ratio, particularly addressing criticisms from renowned bearish analyst David Rosenberg. Ben shares his personal connection to Rosenberg, recounting how Rosenberg influenced his early investment journey. However, he criticizes Rosenberg's persistent bearish stance, stating, "Dave Rosenberg has been incredibly bearish and incredibly vocal and incredibly wrong and incredibly stubborn."

Michael and Ben argue that traditional metrics like the CAPE ratio may not fully account for the modern market landscape, where the concentration of market capitalization has shifted dramatically toward tech giants. Michael underscores, "Context matters here... the companies, the fundamentals, the metrics of the markets of the inputs that they were looking at had changed."

Surge in Leveraged ETFs

Timestamp: [24:25 - 32:40]
The hosts examine the exponential growth of single-stock leveraged ETFs, showcasing charts from Jeffrey Patak that illustrate a twelvefold increase in net assets over the past year. Michael points out that dominant players like Nvidia, MicroStrategy, and Tesla now constitute 85% of these leveraged long ETFs. Ben speculates on the platforms facilitating these trades, humorously suggesting, "I'm guessing that they're definitely punching above their weight class in terms of total AUM on the platform versus total AUM in leverage stuff."

Inflow of Foreign Investments into US Equities

Timestamp: [32:40 - 35:17]
Michael brings attention to a Financial Times report highlighting unprecedented foreign private purchases of US stocks, reaching an all-time high in September. He grapples with understanding the source of this surge, pondering, "Where is the money coming from?" Ben attributes part of this influx to global wealth distribution improvements, noting, "Jew all our luck here." Michael adds, "Somebody tell me." They acknowledge the complexity of tracking this capital flow but agree that it signals continued investor confidence in US equities.

Small Business Optimism and Consumer Sentiments

Timestamp: [35:17 - 39:10]
The conversation shifts to economic sentiment indicators, referencing a chart from Chart Kit that juxtaposes the Small Business Optimism Index against the Small Business Uncertainty Index. Michael observes, "The small business optimism just roaring." Ben emphasizes the impact of consumer sentiment on economic activity, stating, "Sentiment matters for how people feel and how people spend." They discuss how positive outlooks among small businesses can drive increased investment and consumption, reinforcing market strength.

Bitcoin and Cryptocurrency Insights

Timestamp: [39:10 - 51:23]
Ben and Michael transition to discussing cryptocurrencies, particularly Bitcoin's resurgence. Michael shares his favorite Bitcoin narrative centered on supply and demand dynamics, highlighting that "70% of individuals own Bitcoin." They examine the role of institutional investors, with Ben noting, "BlackRock, Fidelity, MicroStrategy, and the US government among the top 10." Michael praises Bitcoin's price resilience, remarking, "It's impressive. I don't know if everything predicted is wrong, but... the price keeps going up."

However, they also address criticisms regarding Bitcoin's original decentralized ethos being compromised by concentrated ownership and institutional dominance. Jack Rains from Bluesky is cited for his viewpoint that Bitcoin's narrative has shifted to "digital gold," rendering some of its foundational principles obsolete.

Ben reflects on Bitcoin's ability to generate wealth irrespective of the underlying story, concluding, "Everything bitcoin people have ever predicted has been wrong, except the price going up." They debate the potential for future deregulation in crypto and its implications, ultimately expressing cautious optimism about its role in diversified investment portfolios.

Inflation: Causes and Hedging Strategies

Timestamp: [51:23 - 47:48]
Michael and Ben tackle the persistent topic of inflation, discussing its inherent causes and the challenges it poses to the economy. Ben simplifies the concept, stating, "There's no arguing that the surge in the S&P 500 these past years has been nothing short of extraordinary." They debate what could potentially curb inflation, with Michael asserting, "Prices in most areas will not, unless the economy does really crappy." Ben elaborates, "Inflation exists and why it will never go away... the best way to protect yourself from inflation is to own assets."

Michael suggests practical hedges against inflation:

1. A Good Job: Ensures wages can rise over time.
2. 30-Year Fixed-Rate Mortgage: Locks in housing costs.
3. Stocks: Offer long-term growth potential.

Ben adds humorously, "Pizza's pretty good too. Little Caesar is still $5.55 for a hot and ready." They agree that while inflation can erode purchasing power, stable prices without volatility are preferable for economic planning and growth.

Way Back Machine: Reflecting on Historical Market Data

Timestamp: [42:21 - 44:00]
Introducing a new segment called "Way Back Machine," Ben and Michael explore historical market charts from previous episodes. Michael references a chart from Ned Davis illustrating the disproportionate weight of top-performing stocks in the S&P 500, noting, "By 2018, the top five stocks were equal to the bottom 50% of stocks in the market." Ben humorously remarks, "What do you think this chart looks like today? The top five stocks are probably equal to the bottom 65% of stocks."

They reflect on the increasing concentration of market capitalization among a few tech giants, emphasizing how this trend challenges traditional valuation metrics and investment strategies. The hosts agree that historical comparisons must account for the evolving market landscape to provide meaningful insights.

Personal Anecdotes: Navigating Customer Service and Travel Hurdles

Timestamp: [55:00 - 66:08]
Ben shares a frustrating experience of missing his flight due to unforeseen delays and restrictive airline policies. Narrating his attempt to catch a 7:30 AM flight, Ben recounts being denied additional boarding assistance despite a hectic morning: "The check engine light came on three weeks later... we're back in a Q7." Michael empathizes with Ben's plight, discussing similar experiences of dealing with rigid customer service responses.

The hosts commiserate over the impersonal nature of customer service interactions, highlighting the emotional toll of such encounters. They stress the importance of empathy in service roles, with Ben articulating his disappointment: "I want you to just board with zone four. I've been here for five hours. Do you mind if I just board with zone four?"

Recommendations: TV Shows and Movies

Timestamp: [66:08 - 74:54]
In a light-hearted segment, Michael and Ben recommend TV shows and movies that resonate with their interests:

• "Black Doves": A British spy show praised for its high production quality and compelling narrative.
• "Slow Horses": Another spy series noted for its sophisticated plot and strong performances.
• "The Agency": Featuring Jeffrey Wright and Richard Gere, described as a "movie quality" show that demands full attention.
• "Succession" and "Homeland": Highly recommended for their intricate storylines and character development.
• "Interstellar": Michael expresses admiration for the film's technological implications and visionary storytelling.
• "Home Alone": Lauded as the greatest family movie of all time, a perennial favorite for both hosts and their families.

Ben adds his own picks, mentioning "Blink Twice" and "Skincare" as notable airplane-themed movies, while both share their mixed feelings about Ryan Reynolds' portrayal in "Deadpool vs. Wolverine."

Conclusion: Reflections and Final Thoughts

Timestamp: [74:54 - End]
Ben and Michael wrap up the episode by reflecting on the blend of financial insights and personal stories shared. They acknowledge the episode's length and the engaging content driven by Michael's storytelling. Michael humorously reminds listeners of their customer service backgrounds: "I'm in customer service. You're in customer service."

The hosts express gratitude towards their listeners and production team, signing off with a promise to continue delivering in-depth discussions and relatable anecdotes in future episodes.

Notable Quotes:

• Ben Carlson [05:25]: "All right, so for those of you who are unfamiliar with my trials and tribulations with Audi..."
• Michael Batnick [14:40]: "The S&P 500 is up 29%. Worst peak to trough drawdown this year was 8%... one out of every four trading days this year has been a new all-time high."
• Ben Carlson [19:53]: "Dave Rosenberg has been incredibly bearish and incredibly vocal and incredibly wrong and incredibly stubborn."
• Michael Batnick [23:22]: "Once we revert to a backdrop where investors shorten their timelines to what has been the norm of the past, which will mark the end of this technology super cycle, the gig will be up."
• Ben Carlson [41:55]: "The sentiment matters for how people feel and how people spend. I definitely do."
• Michael Batnick [52:07]: "Short of the supply and demand thing is if you find a financial asset with a religious fervor behind it, buy it. Don't ask questions."
• Ben Carlson [66:08]: "That's what you want to see. You don't want to see the huge spikes we had and then come back in and then go up. Like you want to see more stability in prices. This is what you want to see."

Key Takeaways:

1. Market Resilience: The S&P 500 has exhibited exceptional performance with low volatility, challenging traditional bearish predictions.
2. CAPE Ratio Re-evaluation: Traditional valuation metrics like the CAPE ratio may not fully capture the complexities of the modern market dominated by tech giants.
3. Leveraged ETFs Growth: Significant growth in single-stock leveraged ETFs indicates increased speculative trading concentrated in major tech stocks.
4. Foreign Investment Inflows: Unprecedented foreign investments into US equities reflect sustained global confidence despite uncertainties.
5. Bitcoin’s Institutional Embrace: Bitcoin continues to gain traction among institutional investors, reshaping its role from decentralized currency to digital gold.
6. Inflation Dynamics: Persistent inflation underscores the importance of asset ownership as a hedge and highlights the challenges in curbing price increases.
7. Historical Context Matters: Reflecting on historical market data reveals evolving trends that necessitate contextual analysis over static metrics.
8. Customer Service Realities: Personal stories emphasize the frustrations and emotional impacts of rigid customer service systems.
9. Cultural Recommendations: A diverse range of TV shows and movies enriches the podcast's engagement, offering listeners varied entertainment suggestions.

This episode of Animal Spirits Podcast masterfully blends insightful financial analysis with personal narratives, offering listeners a comprehensive view of current market dynamics, investment strategies, and relatable life experiences. Whether you're a seasoned investor or someone navigating daily challenges, Michael Batnick and Ben Carlson provide valuable perspectives that resonate across diverse audiences.