Podcast Summary: The Compound and Friends – Something's Going to Break, We Don't Know What

Episode Details:

• Title: Something's Going to Break, We Don't Know What
• Release Date: November 19, 2024
• Hosts/Guests: Downtown Josh Brown, Michael Batnik, Michael Semblist

Introduction

In this special edition of The Compound and Friends, hosts Downtown Josh Brown and Michael Batnik are joined by fan favorite Michael Semblist to delve into the aftermath of the recent election, its impact on the markets, and prospects moving into 2025. The conversation spans a wide range of topics, including economic policies, inflation, housing affordability, deregulation, immigration, energy bills, AI investments, and market predictions.

Election Aftermath and Market Reaction

Assessing the Election Outcome: The discussion opens with an analysis of the election results, emphasizing the economic factors that influenced voters more than political issues. Michael Batnik highlights, “[...] voters care way more about economic issues than they do about just about anything else” (04:05).

Market Response: Josh Brown outlines various economic indicators that remained strong despite the election, such as high labor force participation and significant equity gains. Michael Semblist adds, “The S&P is up 3%. Financials are up 8%. Energy is up 6%” (44:15), indicating a positive market reaction to the election outcome, especially favoring sectors like financials and energy.

Economic Analysis

Inflation and Monetary Policy

Inflation Surge: The panel discusses the substantial rise in inflation during Biden's term, noting a “20% aggregate rise in prices” compared to Trump’s "8%" (28:29). Michael Batnik criticizes the Inflation Reduction Act, labeling it “the most Orwellianly named bill in the history of Congress” (27:41), asserting it has exacerbated inflationary pressures.

Federal Reserve’s Role: Discussion shifts to the Federal Reserve's response, with Michael Batnik emphasizing the importance of its independence: “The Fed is supposed to be making decisions independent of its consequence for progressivity and regressivity on cash balances” (25:29). Concerns are raised about potential political interference and the Fed having to navigate conflicting pressures from the administration’s policies.

Housing Affordability

Regulatory Impact: Michael Batnik presents data showing a dramatic decline in starter home construction from 40% to 8% over four decades, attributing this to increased zoning regulations. “[...] More zoning regulations, less affordable housing, period” (15:40).

Supply-Side Solutions: The conversation underscores the need for supply-side solutions to address housing affordability, criticizing the administration for not focusing enough on increasing housing supply. Michael Semblist notes, “They have to tackle some of these zoning issues” (20:38).

Policies Impacting the Economy

Inflation Reduction Act and Energy Bills

Inflation Reduction Act: Michael Batnik argues that the Inflation Reduction Act has been counterproductive, increasing inflation instead of curbing it. He states, “[...] it is a very inflationary bill” (27:41).

Energy Investments: The panel discusses the energy bill, noting that “75% of the spending from the energy bill actually went to GOP districts” (05:10). Batnik highlights the benefits of deregulation and its positive impact on small and medium-sized businesses, suggesting that the current administration's regulatory approach may hinder economic growth.

Federal Reserve and Monetary Policy

Michael Batnik expresses concern over the Federal Reserve’s ability to manage inflation without political interference. He recalls historical instances where lack of Fed independence led to economic instability, referencing Arthur Burns in the 1970s: “He overruled other members of his staff. He supported the wage and price controls” (31:51).

Immigration Policies and Impact

Policy Shifts: The discussion critiques the Biden administration’s handling of immigration, particularly the surge in asylum seekers and its fiscal impact on cities like New York. Batnik notes, “They didn’t get as much political credit for that bill as they wanted to” (40:39).

Economic Consequences: Josh Brown emphasizes the tangible negative effects on local economies and schools, stating, “They’re voting their own survival” (42:27). The panel debates the logistical challenges and economic repercussions of mass deportations, with Batnik warning of potential labor shortages and their inflationary impact.

Energy and Deregulation

Deregulation Benefits: Michael Batnik advocates for deregulation, citing historical precedents where deregulation led to significant economic benefits. He asserts, “A broad, effective deregulatory agenda aimed at small and medium sized businesses can have a huge payoff” (34:05).

Energy Sector Challenges: The panel discusses the complexities of the energy sector, including the slow progress of small modular reactors and the high power expenditures associated with data centers. Batnik remarks, “They can’t recommission a nuclear plant that’s already in the process of being decommissioned” (74:19).

AI Investments and Market Impacts

AI Adoption Rates: The conversation shifts to AI investments, with Batnik expressing skepticism about the immediate return on massive GPU infrastructure spending by hyperscalers. He questions, “Are we going to start seeing the killer apps that make JP Morgan fill in part of that 400 billion?” (67:24).

Market Risks: Josh Brown points out, “The day that Microsoft put out its initial copilot numbers, the stock got hammered” (68:38). Batnik warns of a potential market correction if AI adoption fails to meet expectations, predicting a possible “12 to 15% correction” in 2025 (61:11).

Predictions for 2025

Economic Outlook: Michael Batnik forecasts a turbulent economic landscape for 2025, anticipating market corrections and disruptions stemming from deregulation efforts, immigration policies, and AI investment uncertainties. He states, “I'm expecting from Vivek and the Doge department with Elon is lots of fanfare and cork popping and a very small amount of dollars are going to cut” (65:22).

Market Stability: Despite potential setbacks, Batnik remains cautiously optimistic about long-term market resilience, emphasizing the need for productivity shocks and effective policy implementations to sustain economic growth.

Speaker Insights and Personal Notes

Michael Batnik’s Personal Experience: Batnik shares a personal health scare, undergoing a cardiac ablation procedure, which he credits with reinvigorating his commitment to his work. “[...] it made me appreciate and kind of reinvigorate me for…” (77:06).

Final Thoughts: The episode concludes with Batnik urging listeners to prepare for potential economic disruptions and emphasizing the importance of understanding the intricate interplay between government policies and market dynamics.

Notable Quotes

• Michael Batnik (04:05): “Voters care way more about economic issues than they do about just about anything else.”

• Michael Batnik (27:41): “Inflation Reduction Act is the most Orwellianly named bill in the history of Congress.”

• Josh Brown (15:40): “More zoning regulations, less affordable housing, period.”

• Michael Batnik (61:11): “I'm expecting from Vivek and the Doge department with Elon is lots of fanfare and cork popping and a very small amount of dollars are going to cut.”

Conclusion

In this insightful episode, The Compound and Friends provide a comprehensive analysis of the current economic landscape, influenced by recent election outcomes and policy decisions. The discussion underscores the critical impact of deregulation, immigration policies, energy investments, and AI advancements on the future of the U.S. economy. With predictions pointing towards potential market corrections and economic disruptions, the hosts emphasize the importance of strategic preparation and informed decision-making for investors and stakeholders.

For more in-depth analysis, listeners are encouraged to follow Michael Semblist on LinkedIn and stay tuned for Michael Batnik's 2025 outlook, set to release on January 1st.

This summary captures the essence of the podcast episode, providing a structured and detailed overview for those who haven’t listened. For full insights and nuanced discussions, tuning into the original episode is recommended.