Summary of "End of an Empire (EP.188)" – The Compound and Friends

Podcast Information:

• Title: The Compound and Friends
• Host/Author: The Compound
• Description: Join Downtown Josh Brown, Michael Batnick, and a rotation of their friends every Tuesday and Friday for expert insight and hot takes on the latest in business and investing.
• Episode: End of an Empire (EP.188)
• Release Date: April 18, 2025

1. Introduction

The episode begins with a brief sponsorship message from Apex Fintech Solutions, emphasizing the importance of adapting to attract next-generation clients. Following the sponsorship, Michael Batnick provides a standard disclaimer about the podcast's opinions being sole to the hosts and not reflective of Ritholtz Wealth Management.

2. Guest Introduction: Warren Pies of 314 Research (00:00 - 02:00)

Warren Pies joins the conversation remotely in this special edition. Warren introduces himself and his role as the founder of 314 Research, an institutional global macro research firm. Michael Batnick appreciates Warren’s cautious and forward-thinking outlook, noting that 314 Research was one of the most prudent macro teams among those they've engaged with.

• Notable Quote:
  • Warren Pies [01:51]: "Give us a little self intro for those who haven't heard you on the show yet."

3. Market Overview and Current Concerns (02:00 - 06:00)

The hosts discuss the current market deterioration, highlighting Warren's accurate predictions regarding market downturns. Michael Batnick mentions that 314 Research had a bullish outlook but anticipated a 10% correction earlier in the year. However, the situation has worsened beyond expectations, aligning with their cautious stance.

• Notable Quotes:
  • Warren Pies [02:14]: "The last time we had you on the show, were you with Fernando?"
  • Michael Batnick [03:25]: "We de-risked our equity holdings on February 3rd, actually, just for the record."

4. Discussion on Possible Recession and Investor Sentiment (06:00 - 12:00)

The conversation shifts to the likelihood of a recession and the fading notion of American exceptionalism. The rapid market decline and the unusual simultaneous sell-off in stocks, bonds, and the dollar signal deeper systemic issues rather than typical recession indicators.

• Notable Quotes:
  • Warren Pies [05:20]: "Is this the end of American exceptionalism?"
  • Michael Batnick [06:53]: "You are letting some new fintech win a generation of loyal customers around you."

5. Analysis of Market Indicators and Trends (12:00 - 20:00)

Michael Batnick presents various market indicators, such as the rise in US 10-year yields and the decline in the US dollar index, comparing current data with historical occurrences. These indicators suggest unprecedented market behavior reminiscent of the Global Financial Crisis (GFC).

• Notable Quotes:
  • Michael Batnick [06:53]: "When you look back at that S&P 500 long term chart..."
  • Warren Pies [09:20]: "The S&P 500 down alongside the dollar being down and alongside bonds being down."

6. Investor Behavior and Leveraged ETFs (20:00 - 40:00)

The hosts delve into investor behaviors, focusing on leveraged and inverse ETFs. They discuss the surge in these financial instruments, analyzing whether they serve as reliable indicators of market sentiment. While some view these ETFs as a sign of extreme bearishness, there's debate about their effectiveness as contrarian signals given their complex usage by institutional investors.

• Notable Quotes:
  • Warren Pies [38:24]: "When you have exposure to inverse ETFs might enable a hedge fund to be even longer in their long book..."
  • Michael Batnick [39:34]: "We look at some other things too. I think Michael show."

7. Foreign Capital Flows and Deficit Issues (40:00 - 60:00)

The discussion moves to the significant foreign holdings of US equities and treasuries, totaling approximately $30 trillion. The potential cessation of these flows, implied by policy shifts, could undermine the US's financial stability. Additionally, they examine the unprecedented fiscal deficit of around 7% of GDP, a level never before seen at the onset of a recession, raising concerns about economic resilience.

• Notable Quotes:
  • Michael Batnick [47:22]: "Foreign holdings of U.S. stocks... about $16 trillion."
  • Warren Pies [58:56]: "The economy has never entered a recession with deficits this high."

8. Economic Indicators: Job Growth, U.S. Deficit, etc. (60:00 - 66:00)

The hosts review critical economic indicators, including payroll growth excluding government and healthcare sectors, which have fallen to recessionary levels. They highlight the spike in credit card delinquencies and the problematic rise in government layoffs, signaling underlying economic distress. Additionally, they explore the impact of high household net worth tied to volatile stock markets, exacerbating economic vulnerabilities.

• Notable Quotes:
  • Warren Pies [52:57]: "Only 57% of all industries... have job growth."
  • Michael Batnick [60:26]: "43% of U.S. Household net worth is held in the stock market."

9. Silver Linings and Optimistic Views (66:00 - End)

Despite the grim outlook, the guests discuss potential silver linings. They suggest that if inflation continues to decrease and if the Federal Reserve acts to ease financial conditions, there might be a bottoming process in the markets. Additionally, sentiment indicators are extremely low, possibly setting the stage for a market rebound once technical confirmations emerge.

• Notable Quotes:
  • Warren Pies [65:14]: "Rates will come down and that will ease some of the tightness in financial conditions."
  • Michael Batnick [65:34]: "I'm looking for a bottom to buy. I'm not looking to de-risk anymore down here."

Conclusion

The episode concludes with optimism for a potential market recovery, albeit cautiously. The hosts emphasize the intertwined nature of the stock market and the broader economy, urging listeners to consider both technical indicators and macroeconomic fundamentals when navigating current market uncertainties.

• Final Notable Quotes:
  • Josh Brown [62:14]: "Spending will be supported by people having jobs."
  • Warren Pies [66:30]: "The stock market gains of 2023 bailed out the economy."

Notable Quotes with Timestamps:

• Josh Brown [04:10]: "Most economists do not know the stock market nearly as well as you do."
• Warren Pies [09:20]: "It's just the first whiff of that."
• Michael Batnick [12:02]: "I don't think it's the end of the empire."
• Josh Brown [20:13]: "I'd have chosen the latter because I think it's much more dangerous..."
• Warren Pies [37:38]: "Strategists take the elevator up and the escalator down."
• Michael Batnick [43:27]: "You need the technical confirmation."

This episode provides a comprehensive analysis of the current economic landscape, blending macroeconomic indicators with investor sentiment and market behavior. Warren Pies' insights from 314 Research offer a sobering perspective on potential economic downturns, while Michael Batnick and Josh Brown navigate the complexities of investor behavior and market indicators to outline possible futures for the US economy and stock market.