Eye On The Market: “The Year of Living Dangerously” – Detailed Summary

Podcast Information:

• Title: Eye On The Market
• Host/Author: Michael Cembalest (Transcript indicates Michael Semblist)
• Description: Join Michael Cembalest as he explores a wide variety of investment topics, including the economy, policy, and markets.
• Episode: The Year of Living Dangerously
• Release Date: December 10, 2024

Introduction & Episode Overview

In the December 2024 episode titled “The Year of Living Dangerously,” host Michael Semblist reflects on the tumultuous events that shaped the year and outlines key themes that influenced the markets. As the final podcast of the year, Semblist previews upcoming topics, including an outlook for 2025, Trumpism’s impact on the Federal Reserve and markets, advancements in AI, the resurgence of nuclear technology, updates on cryptocurrency, and a comprehensive review of last year's predictions versus actual outcomes.

Highlights of 2024: Key Events and Market Performance

Semblist begins by noting the notable bookends of 2024 involving Supreme Court Justice Neil Gorsuch. The year started with Gorsuch leading a pivotal policy debate on Chevron deference—the principle of deferring to government agencies in interpreting legislation—and concluded with his remarks about Peanut the Squirrel, an incident highlighting environmental policy tensions.

A key market highlight for 2024 was the S&P 500's remarkable performance, marking the second consecutive year with over 20% gains. Semblist emphasizes that such performance is rare, having only occurred four times since 1871, primarily during the late 1990s bull market. He remarks, “We’re on track for two consecutive 20% plus years for the S&P 500. That's only happened four times since 1871” ([03:45]).

The Six Ghosts: Symbolic Investment Insights

Using the metaphor of six ghosts, Semblist conveys critical investment lessons and warnings gleaned from the past year.

1. Ghost of Predictions: The Perils of Forecasting

The first ghost cautions against making investment predictions, highlighting the historically poor accuracy of forecasts. Semblist shares, “The Fed has had less than a 25% accuracy rate of professional forecasters since its inception in 2012” ([05:10]). He reviews his own predictions, noting successes in areas like the US dollar, Department of Justice antitrust cases, and Biden’s policies, while acknowledging misses such as electricity outages due to outdated grid infrastructure.

2. Ghost of MAG7 Stocks: The Importance of Key Large Caps

The second ghost warns about underweighting MAG7 stocks—Apple, Microsoft, Google, Amazon, Facebook, Tesla, and Netflix. Semblist concurs, stating, “Within the average large cap portfolio, it’s been very difficult to outperform the S&P unless you at least over-weight the MAG7 stocks” ([07:25]). He presents data showing that nearly all managers in the Morningstar universe struggled to surpass the benchmark without strategic weighting in these major tech giants.

3. Ghost of Private Credit: Risks in Pay-in-Kind Income

The third ghost highlights dangers in private credit, specifically the rise of Pay-in-Kind (PIK) income, which represents income that isn’t immediately cash-based. Semblist explains, “Private credit markets have tripled in size over the last five years and are now almost 70% of the entire banking sector’s commercial and industrial loan volumes” ([09:50]). He references a JP Morgan report showing increasing PIK income shares, signaling stress in the private credit space and urging investors to monitor the real cash coverage of dividends in Business Development Companies (BDCs).

4. Ghost of Controversial Topics: Navigating Sensitivity

The fifth ghost (as outlined in the transcript) warns against addressing potentially offensive topics in investment discussions. Semblist reveals a curated list of sensitive subjects he chose to omit from his analysis to avoid controversy, including geopolitical tensions, political endorsements, and social issues. He notes, “We’re at the highest rate of people being easily offended, or at least talking about it, since the early 1800s” ([12:15]). However, he provides links for interested listeners to explore these topics independently.

5. Ghost of Self-Care: Prioritizing Personal Well-being

The sixth ghost advises Semblist to take better care of his health. He shares a personal anecdote about undergoing a cardiac ablation procedure due to arrhythmia, underscoring the importance of self-care amidst a demanding career. Semblist recounts a challenging night in the hospital, emphasizing, “I hadn’t been taking care of myself as much as I should have” ([14:50]). This story serves as a reminder of the balance between professional responsibilities and personal health.

Personal Stories and Anecdotes

Semblist intertwines personal narratives to illustrate broader themes. He reflects on his meeting with his spouse, Rachel, in the early 1990s, highlighting the shift from traditional in-person connections to online interactions over the decades. This personal story underscores changes in societal behaviors and technological advancements.

He also delves into his experiences during the cardiac ablation procedure, sharing the emotional and physical challenges he faced. This vulnerability adds a human element to the podcast, making the discussion relatable and engaging.

Conclusion and Looking Forward

As the episode concludes, Semblist expresses gratitude for the year’s progress, particularly noting the anticipated soft economic landing that aligned with his predictions. He looks ahead to the “Eye on the Market Outlook” podcast scheduled for January 1st, promising insights into the New Year’s economic forecast.

Closing with a reflective tone, he shares a picture from the previous year’s Outlook cover featuring falling bears, symbolizing market volatility. Semblist reassures listeners, “I’m thankful for the fact that, at least so far, we’ve had the kind of soft economic landing that we had predicted a year ago” ([15:10]).

Notable Quotes

• On Market Performance: “We’re on track for two consecutive 20% plus years for the S&P 500. That's only happened four times since 1871” ([03:45]).
• On Predictions: “The Fed has had less than a 25% accuracy rate of professional forecasters since its inception in 2012” ([05:10]).
• On MAG7 Stocks: “Within the average large cap portfolio, it’s been very difficult to outperform the S&P unless you at least over-weight the MAG7 stocks” ([07:25]).
• On Private Credit Risks: “Private credit markets have tripled in size over the last five years and are now almost 70% of the entire banking sector’s commercial and industrial loan volumes” ([09:50]).
• On Sensitivity to Topics: “We’re at the highest rate of people being easily offended, or at least talking about it, since the early 1800s” ([12:15]).
• On Personal Health: “I hadn’t been taking care of myself as much as I should have” ([14:50]).
• On Economic Outlook: “I’m thankful for the fact that, at least so far, we’ve had the kind of soft economic landing that we had predicted a year ago” ([15:10]).

Final Thoughts

Michael Semblist's “The Year of Living Dangerously” offers a comprehensive review of 2024’s economic and market dynamics through the innovative lens of six metaphorical ghosts. By blending data-driven analysis with personal stories, Semblist provides listeners with a nuanced understanding of past trends and future expectations. This episode serves as both a reflection on a challenging year and a bridge to the insights anticipated in the New Year’s outlook.

For those who haven’t listened, this summary encapsulates the essence of the episode, highlighting key discussions on market performance, investment strategies, and personal well-being, all while maintaining an engaging and informative narrative.