The Compound and Friends Podcast Summary
Episode: Downside Surprises With Callie Cox, Buffett’s New Letter, Bitcoin Crashes
Release Date: February 26, 2025
Hosts: Downtown Josh Brown, Michael Batnik
Guest: Callie Cox, Chief Strategist at Ritholtz Wealth Management
Duration: Approximately 87 minutes

1. Introduction and Overview

Downtown Josh Brown kicks off the episode by expressing gratitude towards their live audience in Naples, recounting the success of their live show at the Alamo Drafthouse and the subsequent festivities at The Blue Martini. He introduces the episode's key topics: economic downturn surprises with Callie Cox, insights from Warren Buffett’s latest letter, and the recent Bitcoin crash. He outlines the structure of the show, promising in-depth discussions on economic data, federal job layoffs, global equity opportunities, Berkshire Hathaway's annual report, and Bitcoin's market movements.

2. Economic Downside Surprises with Callie Cox ([03:13] - [35:12])

2.1 Inflation Concerns and Market Reactions

Callie Cox expresses a “nervous concern” about the recent economic data showing a slowdown in growth accompanied by stubbornly high inflation. She differentiates her concern from panic, emphasizing the complexity of the current economic landscape.

• Josh Brown notes the shift from 2024’s positive economic surprises to the current trend of downside surprises, referencing the "stagflation" fears now morphing into "slogflation."

Notable Quote:
“Every time he's spoken publicly that the job market isn't quite the source of inflationary growth at the moment...”
— Callie Cox [10:23]

2.2 Federal Job Layoffs and Market Implications

Cox highlights the significant federal government layoffs, totaling approximately 75,000 through buyouts and 200,000 probationary terminations. She emphasizes the potential impact on the job market and overall economic health.

• The discussion delves into how these layoffs could signal broader economic weaknesses, particularly in the job market, affecting consumer spending which constitutes 70% of the U.S. economy.

Notable Quote:
“There is a worry around inflation and to a certain extent it is self-fulfilling...”
— Callie Cox [07:37]

2.3 Economic Surprise Index and Growth Scares

Using the Citi US Economic Surprise Index, Cox explains the trends indicating that economic data is not meeting Wall Street’s higher expectations, potentially leading to a growth scare. She warns of the challenges posed by simultaneous risks across all economic pillars: consumer spending, business investment, housing, government expenditures, and trade.

• Josh Brown references a historical perspective, noting that 2023 and 2024 saw economic surprises to the upside, but current indicators suggest a downturn.

Notable Quote:
“If you have a name that doubled last year, there's a very high likelihood that it's in a 20% drawdown right now.”
— Callie Cox [30:16]

2.4 Portfolio Management and Crash Plans

Cox advises investors to balance their portfolios by taking gains in overperforming sectors, particularly tech and growth stocks, to mitigate risks from potential market downturns. She underscores the importance of having a crash plan, outlining strategies for different levels of portfolio declines:

• 5% Decline: Stay put.
• 10% Decline: Deploy some cash.
• 20% Decline: Consider more significant adjustments like converting to a Roth IRA or engaging in tax loss harvesting.

Notable Quote:
“If your portfolio declines 5%, then maybe I stay put. If my portfolio declines 10%, I'm still not worried, but maybe it's time to deploy some cash.”
— Callie Cox [32:25]

3. Market Analysis and Growth Scares ([35:12] - [50:36])

3.1 Tony Pascarello's Insights on US vs. International Equities

Josh Brown discusses Tony Pascarello’s recent market notes from Goldman Sachs, focusing on the trailing earnings growth of the U.S. versus international markets. The charts revealed that U.S. equities have significantly outperformed, but there's debate on whether this gap will converge.

• Michael Batnik concurs, noting that the market is appropriately pricing stocks based on their earnings growth, questioning whether the current international outperformance is sustainable.

Notable Quote:
“Will there be a convergence? Has it gotten too far? And it's very early in the year.”
— Michael Batnik [42:29]

3.2 Market Sell-Offs and Momentum Stocks

The hosts examine recent sell-offs in momentum stocks, highlighting how previous high-performing stocks like Super Micro and Palantir have entered significant drawdowns. They attribute this to a retail-driven flush similar to recent trends in Robinhood stocks.

• Josh Brown emphasizes the principle of "live by the gun, die by the gun," indicating that concentrated gains may lead to sharper losses during downturns.

Notable Quote:
“You have to think about the pros and cons of the economic outlook at the moment.”
— Callie Cox [22:11]

3.3 CEO Confidence vs. Investor Sentiment

Cox points out the discrepancy between CEO confidence and everyday investor sentiment. While CEOs remain optimistic, investor sentiment surveys like the AAII Investor Survey show a decrease in bullishness and an increase in pessimism.

Notable Quote:
“If we're expecting what's a little bit more in line with reality and with the economic conditions we're living in right now, then we're not, we're not surprised if something goes wrong.”
— Callie Cox [25:56]

4. Warren Buffett’s New Letter and Berkshire Hathaway Insights ([50:36] - [58:23])

4.1 Conciseness of Buffett’s Letters

The hosts discuss the increasing brevity of Warren Buffett's annual letters to Berkshire Hathaway shareholders. Historically average at 21 pages since 1977, recent letters have become significantly shorter, prompting reflections on Buffett’s communication style.

Notable Quote:
“Berkshire Hathaway over the weekend... the average shareholder length since 1977 is 21 pages.”
— Michael Batnik [51:11]

4.2 Mistakes and Successes in Berkshire’s Portfolio

Buffett’s candid acknowledgment of mistakes, using the term "mistake" 16 times between 2019-2023, contrasts with Berkshire’s consistent performance in core sectors like insurance, railroads, and utilities. Cox and Batnik highlight how Berkshire’s strong performance in these areas overshadows the underperformance in minor businesses.

Notable Quote:
“And the stuff that we've gotten right, it keeps getting better.”
— Josh Brown [54:30]

4.3 Berkshire’s Cash Position and Strategic Investments

The discussion turns to Berkshire’s substantial cash reserves, currently at $305 billion, and their strategic stockpile of companies like American Express and Apple. The hosts analyze Buffett’s strategy of maintaining large positions in companies that engage in share buybacks, effectively increasing Berkshire’s ownership stake over time.

Notable Quote:
“He is excited about stocks, just not us. Large caps right now and that.”
— Josh Brown [61:21]

4.4 Future Outlook and Succession Planning

Batnik speculates on Buffett’s forward-thinking approach, suggesting that the cash reserves are a strategic gift to his heir, Greg Abel, positioning Berkshire for future acquisitions and stability post-Buffett. He underscores Buffett’s cautious approach amid high stock valuations.

Notable Quote:
“I think stock being expensive is part of that, but I think it's all three of those things.”
— Josh Brown [61:38]

5. AI Impact on Monetary Policy ([58:23] - [68:14])

5.1 Governor Jefferson’s Speech on AI and Asset Prices

Josh Brown and Michael Batnik discuss a speech by Governor Jefferson, who asserts that artificial intelligence is accelerating the speed at which information about monetary policy is incorporated into asset prices. This rapid integration could either enhance the transmission of monetary policy or lead to prioritizing speed over accuracy, potentially undermining long-term economic stability.

Notable Quote:
“Research shows it has affected how quickly information about policy is incorporated into asset prices.”
— Governor Jefferson [66:00]

5.2 Implications for Investors and Policymakers

The hosts debate the implications of AI’s role, likening it to the earlier impact of the internet on market reactions. They agree that with AI's acceleration, traditional economic signals lose their relevance almost instantly, complicating investors’ ability to utilize economic data effectively for long-term planning.

6. Bitcoin Crashes and ETF Concerns ([68:14] - [85:01])

6.1 Recent Bitcoin Market Movements

Michael Batnik highlights significant outflows from Bitcoin ETFs, including the iShares Bitcoin Trust ETF and Fidelity Wise Origin Bitcoin Fund, noting that February saw the worst month on record for spot Bitcoin ETF outflows. The decline in premium above NAV (Net Asset Value) for MicroStrategy is also discussed, illustrating the heightened volatility and retail-driven sell-offs in crypto-related stocks.

Notable Quote:
“At this point, it probably hit tech and growth stocks the hardest.”
— Callie Cox [30:16]

6.2 MicroStrategy’s Drawdowns and Investor Behavior

Josh Brown and Batnik examine MicroStrategy's substantial drawdown, contrasting it with the company's flat performance relative to leveraged long and short positions. They caution against the dangers of leveraged crypto investments, emphasizing how rapid price movements can lead to significant losses.

Notable Quote:
“They're acting like we talked about the retail puke just 15 minutes ago with all of the Robinhood stocks.”
— Josh Brown [74:10]

6.3 Michael Saylor’s Bitcoin Reserve Proposal

The discussion turns to Michael Saylor's proposal for the U.S. government to stockpile 20% of Bitcoin’s total supply as a strategic reserve. Josh Brown critiques the practicality of this idea, noting the enormous financial implications and skepticism within legislative bodies, as evidenced by failed state-level Bitcoin reserve bills.

Notable Quote:
“This was not a bullish catalyst. They came in on Monday and they liquidated bitcoin just like they're doing with other momentum stocks.”
— Josh Brown [72:05]

7. Portfolio Management and Investment Strategies ([85:01] - [87:31])

7.1 Risk Management and Diversification

The hosts emphasize the importance of having a diversified portfolio to withstand market volatility. They advocate for maintaining a balance between high-growth and defensive stocks, using stop-loss orders to manage risk without succumbing to panic selling.

Notable Quote:
“You need to think about that. There's a little bit of balance that's going to happen here, but it's not necessarily a given.”
— Callie Cox [22:11]

7.2 Personal Investment Examples

Josh Brown shares his personal investment experiences, highlighting the effectiveness of disciplined selling and rebalancing strategies. He recounts instances where setting stop-loss orders protected his portfolio from significant downturns, reinforcing the importance of a pre-defined investment plan.

Notable Quote:
“I limited my risk substantially. And then I didn't take that ride down to 360.”
— Josh Brown [83:44]

7.3 Final Advice and Preparation for Market Volatility

As the episode concludes, Batnik encourages listeners to "tighten up" their portfolios by eliminating underperforming assets and positioning themselves to capitalize on opportunities during market corrections. The hosts reiterate the necessity of having a crash plan and maintaining flexibility to adapt to changing market conditions.

Notable Quote:
“Give yourself options and don't make friends with people who brag about stocks and nothing else.”
— Callie Cox [34:37]

8. Closing Remarks

Josh Brown and Michael Batnik wrap up the episode by thanking their audience and crew, acknowledging live viewers, and teasing upcoming shows, including "Animal Spirits" with Michael and Ben. They reinforce the value of strategic financial planning and encourage listeners to engage with Ritholtz Wealth Management for personalized investment solutions.

Key Takeaways

• Economic Indicators: Current economic data signals a slowdown with persistent inflation, raising concerns about potential stagflation or slogflation.

• Job Market: Significant federal layoffs could exacerbate economic weakness, impacting consumer spending and overall economic health.

• Investment Strategy: Diversification and having a crash plan are crucial for navigating market volatility. Taking disciplined actions can protect portfolios during downturns.

• Berkshire Hathaway Insights: Warren Buffett’s strategic accumulation of key stocks through share buybacks and maintaining substantial cash reserves positions Berkshire for future opportunities.

• Bitcoin Market: Recent sell-offs in Bitcoin ETFs and leveraged crypto stocks highlight the volatile nature of crypto investments. Skepticism surrounds proposals to incorporate Bitcoin into national reserves.

• AI and Monetary Policy: Artificial intelligence accelerates the integration of policy information into asset prices, complicating traditional economic signal analysis for investors.

• Risk Management: Utilizing stop-loss orders and maintaining a balanced portfolio can mitigate risks associated with sudden market downturns.

Notable Quotes with Timestamps

• Callie Cox on Inflation and Self-Fulfilling Worries:
  “The real danger around it is when people start expecting inflation and they start pulling their spending forward and then you get inflation off the back of that.”
  [10:23]

• Josh Brown on Wachstum Scares:
  “With this growth scare turns into something more, you will have options.”
  [34:30]

• Callie Cox on Portfolio Balance:
  “You can hold a little bit of that, you can take risks. But just understand that as market environments change, you need to be really agile with your positions.”
  [31:11]

• Michael Batnik on Berkshire’s Cash Strategy:
  “I think he is starting to see the horizon on his time making decisions.”
  [60:44]

• Josh Brown on Warren Buffett’s Investment Strategy:
  “Warren Buffett is not buying green bananas right now.”
  [51:13]

• Callie Cox on Investor Sentiment:
  “If we're expecting what's a little bit more in line with reality and with the economic conditions we're living in right now, then we're not, we're not surprised if something goes wrong.”
  [25:56]

Conclusion

This episode of "The Compound and Friends" provides a comprehensive analysis of the current economic landscape, highlighting concerns over inflation and job market stability, examining strategic investment approaches inspired by Warren Buffett, and delving into the volatile nature of the Bitcoin market. The hosts emphasize the importance of diversification, disciplined risk management, and maintaining a balanced portfolio to navigate potential market downturns effectively. Listeners are encouraged to stay informed, prepare strategic crash plans, and engage with financial advisors to optimize their investment strategies in uncertain times.