Animal Spirits Podcast – The Dumbest Trade War (EP.398) Summary

Release Date: February 5, 2025
Host/Authors: Michael Batnick and Ben Carlson
Podcast Description: Animal Spirits is a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they discuss what they're reading, writing, listening to, and watching. New episodes are released every Wednesday morning.

1. Debunking Investment Myths with Y Charts

[00:00 - 01:26]

Michael Batnick opens the episode by addressing common investment myths, specifically the misconception that fallen stocks will always rebound. Citing examples from Y Charts, he points out that significant declines in major companies like AIG, Citigroup, and Walgreens have not led to full recoveries, challenging the belief that all stocks will eventually bounce back.

Michael Batnick [00:38]: "If there was an ETF of stocks making new 52-week lows, it would be the worst performer 8 out of 10 years."

Ben Carlson echoes this sentiment, emphasizing the importance of myth-busting in investment strategies.

2. Tariffs and the Ongoing Trade War

[04:07 - 16:46]

The core discussion revolves around the U.S. trade policies under the current administration, focusing on tariffs imposed on major trade partners—Canada, Mexico, and China. Ben Carlson labels himself a "big tariff guy," expressing concerns over the economic ramifications of these tariffs.

Impact on U.S. Economy:

• Imports Dependency: Products from Canada, Mexico, and China account for 43% of U.S. imports, directly impacting 5% of the U.S. GDP.
• Specific Sectors Affected:
  • Fresh Vegetables: 90% from Canada or Mexico
  • Beer (e.g., Modelo): 84%
  • Lumber Products: 73% from China

Michael Batnick [05:09]: "What are we doing? I don't get it. Tariffs are a tax on businesses, but they ultimately get passed to consumers."

The hosts discuss the short-term suspension of tariffs and speculate on future political maneuvers, considering tariffs as a tool for negotiation rather than a strategic long-term policy.

Economic and Market Reactions:

• Initial market reactions were muted, with the S&P opening down 2% and the Nasdaq down 3%.
• Jeffrey Patak’s Analysis: Leveraged ETFs saw significant growth, but actual gains for investors lagged behind reported returns, highlighting a behavior gap.

Potential Long-term Effects:

• Economic Impact vs. Stock Market: Even if the stock market remains resilient, the broader economy could suffer more lasting damage.
• AI as a Counterbalance: Michael speculates that advancements in AI might offset some negative impacts on the stock market, but the real economy could still face challenges.

3. AI's Dominance and Market Stability

[10:21 - 15:34]

The conversation shifts to the role of Artificial Intelligence (AI) in shaping the future of the stock market. The hosts discuss how AI advancements, particularly those driven by companies like Nvidia, could become the primary drivers of market performance, potentially overshadowing traditional economic indicators.

Ben Carlson [14:58]: "Ultimately, the tariffs are like the dog on a leash, and AI earnings are the person walking the dog."

They ponder whether AI innovations might provide enough momentum to sustain the stock market despite ongoing tariff-related volatility.

4. Leveraged ETFs: Risks and Rewards

[25:03 - 28:30]

Ben Carlson delves into the surge in leveraged ETFs, highlighting their rapid revenue growth and the potential risks associated with their high volatility.

Key Points:

• Revenue Growth: Leveraged ETFs generated approximately $940 million in revenue in 2024, a 37% increase.
• Investor Behavior: While some sophisticated investors use these ETFs for portfolio diversification, many individual investors lack the understanding to utilize them responsibly.
• Performance Analysis: Jeffrey Patak from Morningstar points out that despite high fees, leveraged ETFs delivered substantial returns, but the actual investor gains lagged behind.

Michael Batnick [27:30]: "Leveraged ETFs netted around $940 million in revenue in 2024. That's a record 37% jump."

The hosts caution listeners to remain vigilant and understand the complexities of leveraged ETFs before investing.

5. Vanguard’s Capital Market Assumptions

[19:15 - 20:29]

Vanguard released a 10-year forecast for capital market assumptions, projecting bond returns to surpass U.S. stocks with estimates of 5% for bonds and 4% for U.S. stocks.

Ben Carlson [19:33]: "Vanguard just announced this week they're slashing expense ratios on hundreds of mutual funds and ETFs, amounting to what the firm said is the largest cost cut in history at over $350 million in investor savings per year."

Michael challenges the accuracy of these forecasts, referencing past predictions and emphasizing the unpredictability of market returns.

6. Home Renovation Trends Amid an Aging Housing Stock

[35:12 - 43:21]

The hosts discuss the implications of an aging housing stock in the U.S., noting that over 60% of houses are at least 35 years old, with nearly 12% built before 1939. This trend is expected to spur a massive home renovation boom, driven by young homeowners' desire to modernize older homes.

Points Discussed:

• Renovation Costs: Rising costs of materials and labor are making renovations more expensive.
• Investment Opportunities: Both Michael and Ben share personal experiences with home renovations, highlighting the challenges of finding reliable contractors and managing budgets.

Michael Batnick [38:07]: "The cost is going to rise more than the rate of inflation is what I'm saying. Home renovators are going to have so much leverage because they're going to be so busy that they can offer you obscene estimates."

7. Cryptocurrency as a Market Sentiment Indicator

[30:48 - 32:12]

The hosts explore the role of cryptocurrency as a barometer for market sentiment, especially over weekends when traditional markets are closed.

Key Points:

• Market Reactions: Crypto experienced significant volatility, reflecting broader market anxieties about tariffs and economic policies.
• Investment Strategies: Michael emphasizes that crypto is a risk asset and not a reliable hedge against tariffs or other economic factors.

Ben Carlson [31:00]: "It's a risk asset on steroids. The original and with leverage, there was $2 billion of leverage wiped out. It was the biggest wipeout ever."

8. College Savings in Bitcoin: A Risky Endeavor

[32:41 - 35:25]

A contentious topic arises with the discussion of using Bitcoin as a vehicle for college savings. They critique an article featuring a financial planner advocating for allocating a significant portion of college funds to Bitcoin, deeming it excessively risky despite its potential for high returns.

Ben Carlson [35:12]: "I would not have expected that coming from a financial advisor. It seems a little risky to me in issuing the 529 plan to put your kid's college fund into Bitcoin."

The hosts agree that while Bitcoin has a place in diversified portfolios, relying heavily on it for essential savings goals like college is precarious.

9. Aging Housing Stock and Market Implications

[35:31 - 40:53]

Building on earlier discussions, Ben highlights a Fortune Financial article by Lawrence Hamptil, which examines the aging housing stock in the U.S. and its broader economic implications.

Michael Batnick [36:16]: "More than 60% of houses in the US are at least 35 years old. This is going to be a massive story because I just don't think young people are going to put up with an aging housing stock."

They discuss how an older housing stock necessitates extensive renovations and how this trend presents both challenges and opportunities for the real estate and construction sectors.

10. Pop Culture, Personal Anecdotes, and Light-hearted Banter

[41:07 - End]

The latter part of the episode shifts to lighter topics, including:

• Skiing Anecdotes: Both hosts share personal stories about skiing, reflecting on generational differences and personal preferences.

  Ben Carlson [47:00]: "I've tried it, but I feel like you either grow up skiing and then you're a skier or you're not."

• Movie Recommendations: Discussions about recent movies related to Saturday Night Live, with mixed reviews.

• Remote Work Survey: They touch on a National Bureau of Economic Research survey about employee preferences for remote work and the pay cuts employees are willing to accept for such flexibility.

• Listener Emails: Highlighting diverse listener backgrounds, including a private chef's perspective on the evolving role of private chefs amidst wealth disparities.

• Humorous Scenarios: Debates over hypothetical scenarios, such as choosing between perpetual hiccups or sneezes, showcasing the hosts' camaraderie and humor.

Concluding Thoughts

Michael and Ben wrap up the episode by reflecting on the rapid pace of crises and market reactions in recent times, from Silicon Valley Bank issues to AI advancements and trade tensions. They emphasize the importance of staying informed yet not overreacting, encouraging listeners to maintain a balanced perspective amidst ongoing market and economic fluctuations.

Michael Batnick [60:18]: "Probably not. I think this is just life these days, the 2000s. This whole decade has been like that."

They bid farewell to listeners, hinting at future discussions and inviting audiences to join them for upcoming episodes.

Notable Quotes:

• Michael Batnick [00:38]: "If there was an ETF of stocks making new 52-week lows, it would be the worst performer 8 out of 10 years."

• Ben Carlson [14:58]: "Ultimately, the tariffs are like the dog on a leash, and AI earnings are the person walking the dog."

• Ben Carlson [31:00]: "It's a risk asset on steroids. The original and with leverage, there was $2 billion of leverage wiped out. It was the biggest wipeout ever."

• Michael Batnick [38:07]: "The cost is going to rise more than the rate of inflation is what I'm saying. Home renovators are going to have so much leverage because they're going to be so busy that they can offer you obscene estimates."

This comprehensive summary encapsulates the key discussions, insights, and personal anecdotes shared by Michael Batnick and Ben Carlson in "The Dumbest Trade War" episode of the Animal Spirits Podcast. Whether you're an avid listener or new to the show, this summary provides a clear overview of the episode's content and the hosts' perspectives on various economic and market-related topics.