Animal Spirits Podcast – Episode 388: The Leverage Mania

Release Date: November 27, 2024

Hosts: 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. Market Tops and Stock Concentration

Discussion Highlights:

• Technology Sector Dominance:
  The hosts delve into the extraordinary performance of the technology sector, highlighting that since 2014, technology stocks have surged nearly 800%, with consumer discretionary up by 271%. This has led to a significant concentration in the S&P 500 market capitalization.

• Record High Concentration:
  Bank of America reports that the top 10 companies now account for 36% of the S&P 500's total market cap, compared to 27% during the 2000 dot-com bubble. The top companies include Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Berkshire Hathaway, Eli Lilly, JP Morgan, and Broadcom.

• Implications of High Concentration:
  The hosts discuss concerns regarding market concentration, questioning whether this signifies a market top. Ben Carlson remarks, "There's going to be something too early," expressing skepticism about dismissing concerns prematurely.

Notable Quotes:

• Michael Batnick at [06:11]: "I don't know that extreme concentration is a good thing."
• Ben Carlson at [07:36]: "It's got to be playing huge mind games of you at this point."

2. Innovation and Bubbles

Discussion Highlights:

• Book Review – "Bubbles in the End of Stagnation" by Bernd Hobart and Tobias Hubert:
  Ben Carlson provides an insightful review of the book, which argues that while technological innovation continues, physical progress has stagnated since the era of the Manhattan Project and Apollo program. The authors advocate for fostering more "innovation bubbles" to drive significant advancements.

• Silicon Valley's Role in Government Projects:
  The discussion shifts to Silicon Valley's increasing influence in government initiatives. Ben Carlson notes, "Silicon Valley has so much money in power now," highlighting the potential impact and challenges of tech giants entering governmental roles.

Notable Quotes:

• Ben Carlson at [08:42]: "We need to just let stuff happen and stop being so risk averse."
• Michael Batnick at [10:32]: "People are generally risk averse. It's so easy to win the electorate by scaring people."

3. Market Efficiency and Leveraged ETFs

Discussion Highlights:

• Market Efficiency Debate:
  The hosts reference a conversation with Cliff Asness about market efficiency, particularly in the context of a Toronto blockchain company whose stock soared by 1,800% due to investor confusion. Michael Batnick emphasizes the challenges of exploiting market inefficiencies.

• Rise of Leveraged ETFs:
  Ben Carlson discusses the surge of leveraged ETFs, using examples like a "2x microstrategy ETF" with a 1.29% expense ratio, which has amassed nearly twice the Assets Under Management (AUM) of his firm. He highlights the appeal of such products to investors seeking amplified returns.

Notable Quotes:

• Michael Batnick at [07:29]: "That's common sense, but people consider it an outlandish take."
• Ben Carlson at [18:43]: "This stuff is here to stay."

4. Economic Policies and Tariffs

Discussion Highlights:

• Trump's Proposed Tariffs:
  The hosts analyze former President Trump's proposal to impose a 25% tariff on imports from Mexico and Canada in response to immigration and drug issues. They observe that the market's muted reaction suggests confidence in Scott Bessant, the new Treasury Secretary, who has a Wall Street background.

• Historical Context:
  Michael Batnick references past tariff implementations during Trump's first term, noting that while inflation in tariff-impacted categories rose, core goods remained unaffected. This historical perspective provides a framework for assessing current policy impacts.

• Corporate Preparations:
  Companies are proactively stocking up on imported goods ahead of potential tariffs, mirroring strategies from previous administrations. The discussion includes the uncertainty surrounding the implementation and effectiveness of these tariffs.

Notable Quotes:

• Ben Carlson at [21:21]: "They think he's gonna rein him in or this is just a negotiating employee."
• Michael Batnick at [23:27]: "Last time it didn't, which is encouraging."

5. Home Equity and Consumer Spending

Discussion Highlights:

• HELOC Utilization:
  The conversation shifts to the increasing use of Home Equity Lines of Credit (HELOCs) by homeowners to finance consumer spending. With home equity in the U.S. reaching $35 trillion, many are leveraging their property gains to support consumption.

• First-Time Home Buyers' Challenges:
  Michael Batnick and Ben Carlson discuss the declining percentage of first-time home buyers (from around 40% in previous decades to approximately 24%), attributing this decline to skyrocketing house prices and rising mortgage rates. They highlight the systemic disadvantages faced by new entrants into the real estate market.

• Impact on the Economy:
  The hosts ponder whether increased HELOC usage will provide a buffer in economic downturns or simply fuel continued consumer spending without addressing underlying inflation concerns.

Notable Quotes:

• Ben Carlson at [38:16]: "First time home buyers have gone from... and now it's at 20 below 25."
• Michael Batnick at [37:46]: "This is one of the biggest themes... we're continuing to spur the economy."

6. Cryptocurrency Strategies

Discussion Highlights:

• Ben Carlson's Bitcoin Rebalancing:
  Ben shares his decision to sell 25% of his Bitcoin holdings upon reaching a price of $99, citing regret minimization and portfolio management as his primary motivations. He explains his approach to balancing his crypto exposure to mitigate potential drawdowns.

• Market Sentiment and Reactions:
  The hosts touch upon the polarized opinions surrounding cryptocurrency, with skeptics labeling it a scam and enthusiasts touting its potential. Ben mentions receiving both supportive and critical feedback from the crypto community following his transaction.

• MicroStrategy's Bitcoin Strategy:
  A detailed exploration of MicroStrategy's aggressive Bitcoin investment strategy is discussed. Michael Batnick describes it as "one of the greatest financial engineering schemes" and examines its potential risks and rewards.

Notable Quotes:

• Ben Carlson at [27:26]: "I'm practicing regret minimization."
• Michael Batnick at [32:50]: "It really is the greatest spectacle like I've ever seen in my career."

7. Wealth Inequality

Discussion Highlights:

• Visible Wealth Disparities:
  Ben Carlson observes a shift in societal attitudes towards wealth inequality, noting that affluent individuals increasingly display their wealth openly. He cites examples from college sports recruiting, where monetary incentives are now prominently used to attract top talent.

• Impact of Capitalist Practices:
  The hosts reflect on the inherent inequalities fostered by capitalism, acknowledging its role in lifting many out of poverty while simultaneously exacerbating wealth disparities.

• Future Outlook:
  Ben expresses pessimism about the trajectory of wealth inequality, suggesting that without significant policy changes, disparities will continue to widen.

Notable Quotes:

• Ben Carlson at [44:32]: "Nike guy, Phil Knight basically told Oregon Open checkbook how much ever one you want."
• Michael Batnick at [45:19]: "Capitalism has lifted so much of the world out of poverty... And unfortunately, this is one of what comes along with it is wealth inequality."

8. Travel Anecdotes and Personal Stories

Discussion Highlights:

• Vacationing in Punta Cana:
  Ben Carlson shares various experiences from his family vacation in Punta Cana, including humorous anecdotes about managing young children, enjoying amenities like lazy rivers, and observing local infrastructure challenges related to low property taxes.

• Cultural Observations:
  The hosts discuss the juxtaposition of wealth and happiness among local populations, noting that despite low median incomes, residents report minimal stress and high levels of happiness.

• Service Quality Comparisons:
  Ben contrasts the exceptional service quality in Caribbean resorts and establishments like Chick-fil-A with typical service experiences in the United States, praising the attentive and joyful demeanor of staff abroad.

Notable Quotes:

• Ben Carlson at [47:14]: "Everyone's always happy. The service is top notch."
• Michael Batnick at [53:43]: "The quality's not that great, but it's... It's fun enough entertainment."

9. Sports Betting Trends

Discussion Highlights:

• Growth in New York and New Jersey:
  The hosts highlight a report indicating that New York and New Jersey are leading in sports betting revenues, with New York alone reaching $2.33 billion in wagers for the year.

• Potential Societal Impacts:
  Michael Batnick muses on the future implications of widespread sports betting, including potential regulatory challenges and the normalization of gambling behaviors across different demographics.

Notable Quotes:

• Michael Batnick at [54:15]: "A difficult element in tracking this economic cycle is that soft data..."
• Ben Carlson at [55:30]: "Maybe regulation comes back in a way, and the idea of regulation coming in sounds like laughable now, but is this going to eventually become a problem."

10. Entertainment and Recommendations

Discussion Highlights:

• TV Shows and Movies:
  The hosts exchange thoughts on various entertainment offerings, including the Netflix show "Man on the Inside," the "Deadpool vs. Wolverine" movie, and Taylor Sheridan's series "Landman." They discuss personal preferences and audience reception, providing recommendations to listeners.

• Reading Habits:
  Michael Batnick shares his experience reading "Extra Life: A Short History of Living Longer" by Steven Johnson, while Ben Carlson contemplates creating a publishing company for concise, 100-page books to accommodate his busy schedule.

Notable Quotes:

• Ben Carlson at [56:53]: "I think for a book, you have to go all the way through."
• Michael Batnick at [61:44]: "The quality's not that great, but it's... It's fun enough entertainment."

Conclusion

In this episode of Animal Spirits Podcast, Michael Batnick and Ben Carlson navigate a diverse array of topics, from the implications of heightened market concentration and innovative bubbles to the nuances of cryptocurrency strategies and the persistent challenge of wealth inequality. Their candid discussions on personal experiences during vacation add a relatable touch, while their analytical insights provide valuable perspectives for investors and enthusiasts alike. The episode underscores the complex interplay between market dynamics, economic policies, and societal trends, offering listeners a comprehensive overview of current financial landscapes.

For more insights and detailed discussions, listeners are encouraged to tune into Animal Spirits Podcast every Wednesday morning.