Animal Spirits Podcast Summary: "The Tariff Tantrum" (EP.403)
Host: Michael Batnik & Ben Carlson
Release Date: March 12, 2025

1. Market Correction and Comparison to 2020

Overview:
Michael Batnik and Ben Carlson delve into the recent significant downturn in the stock market, analyzing its implications and comparing it to previous market behaviors, particularly the 2020 correction triggered by the COVID-19 pandemic.

Key Points:

• Current Market Downturn:
  The S&P 500 fell by 9%, Nasdaq 100 by nearly 13%, and Russell 2000 by almost 17%, signaling a bear market. Michael interprets this as a "glass half full" scenario, viewing the correction as part of a secular bull market rather than an impending recession.

• Comparison to 2020:
  Ben Carlson draws parallels between the current correction and the rapid decline seen in February 2020. Both instances exhibited swift market drops over a short period, suggesting a pattern in how corrections unfold during high valuation periods.

Notable Quotes:

• Michael Batnik [01:59]: “I view this as a correction in a secular bull market. A healthy reintroduction of respect for risk.”
• Ben Carlson [04:04]: “If this looks like the initial falling off of the cliff there, like the Wile E. Coyote in midair...”

2. Bonds, Diversification, and Market Sentiment

Overview:
The discussion shifts to the performance of bonds amidst the market correction, highlighting their role in diversification and as a hedge against stock market volatility.

Key Points:

• Bonds' Strong Performance:
  Bonds, particularly the Aggregate Bond Index (AG), had their best day relative to the S&P 500 in 25 years, with a spread of approximately 3.5%. This resurgence underscores bonds' importance in diversified portfolios.

• Diversification Benefits:
  Ben emphasizes that bonds are a crucial hedge, especially after a disappointing 2022, reaffirming their value in mitigating losses during equity downturns.

Notable Quotes:

• Michael Batnik [05:54]: “Bonds are giving you diversification.”
• Ben Carlson [05:04]: “... bonds do well and international stocks do well, financial advisors are going to be celebrating...”

3. Recession Predictions and Political Influences

Overview:
The hosts explore the mounting speculation about a potential recession, influenced by political uncertainties and policy changes under the Trump administration.

Key Points:

• Political Uncertainty:
  Michael attributes the nervousness in the markets to political sentiments, particularly the impact of tariffs and Trump's economic policies, which diverge from previous administrations.

• Recession Speculation:
  Multiple sources, including the Financial Times and Wall Street Journal, forecast a potential recession, linking it to tariff-induced uncertainty and reduced consumer confidence.

• Government's Stance:
  Trump’s unexpected acknowledgment of a possible recession contradicts his typical projections of a booming economy, adding to market uncertainty.

Notable Quotes:

• Ben Carlson [08:11]: “This is the reason always feels unique. It always happens."
• Michael Batnik [09:02]: “He didn't want Biden's economy... he can say, starting from now, this is my economy.”

4. Retail vs. Professional Investors Performance

Overview:
The conversation highlights the stark contrast between retail investors and professional money managers, especially in the current market environment.

Key Points:

• Performance Gap:
  Over the past 15 years, a significant majority (85-90%) of professional funds have underperformed their benchmarks, whereas retail investors, particularly those concentrated in growth stocks, have outperformed.

• Historical Anomaly:
  This period is viewed as anomalous, benefiting retail investors who sought high-growth, well-known companies, a strategy not consistently effective across different market cycles.

Notable Quotes:

• Ben Carlson [20:50]: “85 to 90% of professional money managers underperform their benchmark.”
• Michael Batnik [22:00]: “It's the benefit of private markets... not going to change.”

5. Labor Market Dynamics and Economic Perceptions

Overview:
Addressing listener feedback, the hosts discuss the evolving labor market, emphasizing the shift in power dynamics between employers and employees and its broader economic implications.

Key Points:

• Shifting Labor Power:
  Ben explains that the labor market has transitioned from being employee-driven to employer-controlled, citing challenges faced by recent graduates and increased layoffs in various sectors.

• Economic Indicators vs. Personal Experiences:
  A listener's email highlights a disconnect between positive economic data and the grim reality experienced by job seekers, prompting a discussion on how personal anecdotes can differ from macroeconomic trends.

• Consumer Confidence:
  With consumer confidence waning, there's an expected slowdown in spending, reaffirming concerns about a potential recession.

Notable Quotes:

• Ben Carlson [24:51]: “The labor market is not the control anymore and the company is back in control.”
• Michael Batnik [22:37]: “How tight is the economy and this person experienced to the stock market? That’s a big question.”

6. Artificial Intelligence (AI) and Future Economic Impacts

Overview:
The hosts speculate on the role of AI in shaping future economic landscapes, contemplating its dual potential to drive growth or exacerbate economic downturns.

Key Points:

• AI as a Game-Changer:
  Discussions revolve around experts predicting the advent of Artificial General Intelligence (AGI) and its transformative effects on the labor market and economic structures.

• Potential Risks:
  Michael and Ben consider scenarios where AI could either fail to deliver anticipated benefits, leading to economic stagnation, or drastically disrupt employment, contributing to recessions.

Notable Quotes:

• Ben Carlson [37:18]: “There’s a good chance that when we look back at this era, AI will have been the thing that matters.”
• Michael Batnik [38:04]: “A downturn because AI is so effective that it’s really impacting the labor market and putting people out of work.”

7. Government’s Strategic Bitcoin Reserve and Crypto Discussion

Overview:
Ben Carlson covers recent developments regarding the U.S. government's establishment of a Bitcoin reserve, sparking debates about the role of cryptocurrencies in national strategy.

Key Points:

• Executive Order on Bitcoin Reserve:
  President Trump signed an order to create a strategic Bitcoin reserve using government-owned Bitcoin from asset forfeitures, aiming to establish a "digital Fort Knox" without taxpayer costs.

• Criticism and Skepticism:
  The initiative is met with ridicule from the hosts, viewing it as a symbolic gesture lacking substantive action. Cliff Asness criticizes the move as misguided and competitive against the U.S. dollar’s dominance.

• Crypto Market Timing:
  Ben shares his own cautious engagement with crypto trading, contrasting with the hosts’ overall skepticism about government intervention in the crypto space.

Notable Quotes:

• Ben Carlson [40:42]: “Cliff Asness actually wrote... the new crypto Fort Knox is as dumb as it sounds.”
• Michael Batnik [42:13]: “I don’t see it that way. It’s the bag.”

8. Private Equity vs. Public Markets Performance

Overview:
The hosts analyze the contrasting performance between private equity markets and their public counterparts, emphasizing the stability and benefits of private market investments.

Key Points:

• Private Equity Stability:
  While public markets are experiencing significant declines, private equity valuations remain flat, offering a buffer against public volatility.

• Public Market Slaughter:
  Companies like KKR, Blackstone, Carlisle, Apollo, Aries, and Brookfield are facing severe market valuations drops, whereas their private market marks are unaffected, highlighting the resilience of private investments.

Notable Quotes:

• Michael Batnik [43:44]: “But it shows private market marks just straight flat.”
• Ben Carlson [44:18]: “What really sells it is the plus 0%.”

9. Personal Reflections and Emotional Insights

Overview:
Towards the end of the episode, Michael and Ben share personal anecdotes and reflections, providing a human touch to their financial discussions.

Key Points:

• Personal Loss and Support:
  Ben recounts attending his brother’s funeral, emphasizing the importance of community and support during difficult times. This segment highlights the emotional resilience required in both personal and financial spheres.

• Podcast Recommendations and Personal Growth:
  Michael discusses his newfound appreciation for podcasts like Neil Brennan’s "Blocks," which delve into personal struggles and emotional growth, illustrating the intersection of personal well-being and professional life.

Notable Quotes:

• Ben Carlson [53:07]: “The only way to make it through life is the ability to have difficult conversations.”
• Michael Batnik [54:02]: “It's such a great reminder of how great we have it.”

10. Final Thoughts and Predictions

Overview:
In their closing remarks, Michael and Ben offer predictions about future market movements and express their anticipation for upcoming events.

Key Points:

• Market Predictions:
  The hosts predict that the market will inevitably experience sharp drops ("face-rippers") during corrections but remain hopeful for eventual stabilization.

• Upcoming Events:
  Ben mentions their upcoming live session at Future Proof Citywide in Miami, expressing excitement about engaging with the community despite ongoing market volatility.

Notable Quotes:

• Ben Carlson [55:28]: “We are going to have one face ripper along the way.”
• Michael Batnik [62:22]: “If it’s a 10% correction scares you that bad and you're 90% in equities, dial it back to 80 or 70. But don't go all in or all out.”

Conclusion

In "The Tariff Tantrum," Michael Batnik and Ben Carlson provide a comprehensive analysis of the current market correction, drawing historical parallels and exploring the multifaceted impacts of political decisions, labor market shifts, and emerging technologies like AI. They emphasize the importance of diversification, caution against panic selling, and highlight the resilience of private equity markets. Personal reflections add depth to their financial discourse, underscoring the human element inherent in economic conversations. The episode serves as a valuable resource for investors seeking to navigate turbulent markets with informed perspectives and balanced strategies.