Podcast Summary: The Compound and Friends Episode: Watching Credit Spreads with Nick and Jessica, "Besant Fever," the Ponzi Sleeve
Release Date: November 27, 2024
Host: Josh Brown & Michael Batnick
Guests: Nick Kolis & Jessica Rabe (DataTrack Research)

Introduction

In this episode of The Compound and Friends, hosts Josh Brown and Michael Batnick welcome their regular guests, Nick Kolis and Jessica Rabe from DataTrack Research. As the final show before the Thanksgiving holidays, the hosts express gratitude towards their community, highlighting the podcast's significant growth in 2024 with millions of downloads and views. They set the stage for an in-depth discussion on corporate credit spreads, market valuations, the potential for a new Minsky moment, regulatory legacies, and emerging economic policies under the incoming Treasury Secretary, Scott Besant.

Notable Quote:
Josh Brown [00:00]: "It's just incredible how far we've come in 2024. It's millions and millions of downloads and views and it's all because you guys are a part of it."

Market Overview

Nick and Jessica kick off the conversation by addressing the current market sentiment. They discuss the possibility of a market "melt up" and whether investor confidence is sustainable or if complacency could pave the way for future downturns.

Notable Quote:
Nick Kolis [03:30]: "The market momentum is a very powerful force. And as we always say @DataTrack, never sell a new high."

Corporate Credit Spreads at Record Lows

A significant portion of the discussion centers on corporate credit spreads, which are currently at their lowest levels in 17 years, dating back to the mid-1990s. Nick explains that both investment-grade and high-yield corporate bond spreads over Treasuries have shrunk dramatically, indicating unprecedented confidence in corporate earnings and the broader economy.

Notable Quote:
Nick Kolis [05:08]: "Corporate bond investors... they're seeing nothing but blue skies ahead for us, corporate profits, profitability, profit margins and the economy. That's really a remarkable level of optimism."

Earnings Multiples and Market Valuations

Jessica presents data on Price-to-Earnings (P/E) ratios, highlighting that the S&P 500 is trading at a 3.9-point premium over its 10-year average. She emphasizes that this premium is driven by investor confidence in sustained economic growth and corporate earnings rather than just interest rate effects. The discussion also touches on sector-specific valuations, with technology leading the pack in multiple expansions.

Notable Quote:
Jessica Rabe [18:55]: "We really think that this is markets discounting stronger US economic growth relative to other regions."

Potential Minsky Moment

The hosts delve into the concept of a Minsky moment—a sudden market collapse driven by speculative activity. Josh Brown references the stages of lending from Minsky's theory and questions whether the current market's high optimism could be setting the stage for such a collapse. Nick and Jessica analyze current credit spreads and market behaviors to assess the likelihood of approaching a new Minsky moment.

Notable Quote:
Josh Brown [11:11]: "Isn't this the most dangerous time to be putting on risk when everyone is calm and comfortable with taking risk and there's a lot of complacency?"

Discussion on Scott Besant and Treasury

Transitioning to fiscal policy, the conversation shifts to Scott Besant, the incoming Treasury Secretary under the Trump administration. Michael Batnick and Josh Brown express optimism about Besant's appointment, citing his extensive experience in macroeconomic trades and his alignment with pro-growth policies. They discuss his potential impact on deregulation, energy independence, and manufacturing revival.

Notable Quote:
Michael Batnick [46:35]: "He seems to be a serious person with serious ideas and I'm optimistic."

Legacy of Gary Gensler

The episode scrutinizes the tenure of outgoing SEC Chairman Gary Gensler. The hosts critique his regulatory approach, particularly concerning cryptocurrency and ETF approvals, suggesting that his stringent enforcement may have hindered innovation and market growth. They debate whether Gensler's policies were well-intentioned but ultimately counterproductive.

Notable Quote:
Josh Brown [85:25]: "There are people that really genuinely think that he, he was like he had personal vendettas against Brian Armstrong."

The "Ponzi Sleeve"

In a candid segment, Josh Brown introduces the idea of a "Ponzi sleeve" in modern portfolios—allocations to assets labeled as Ponzi schemes but held strategically for potential high returns. This provocative concept sparks a discussion on risk management, investor behavior, and the evolving landscape of asset allocation in a volatile market.

Notable Quote:
Josh Brown [72:41]: "Just buy it anyway because what if you're completely wrong? And if it goes to zero, who cares? It's a small sleeve."

Stock Performances: MicroStrategy, Zoom, DocuSign

The conversation shifts to specific stock performances, with a focus on MicroStrategy's dramatic rise due to its Bitcoin investments, Zoom's fluctuating growth post-pandemic, and DocuSign's impressive earnings and stock surge. The hosts analyze these movements in the context of market trends and corporate strategies.

Notable Quote:
Michael Batnick [94:58]: "Docusign's going higher, but I think I would buy Zoom."

Audience Interaction and Memes

Throughout the episode, there are moments of light-hearted interaction, including references to memes and audience comments. While these segments provide entertainment, they also underscore the engaged and dynamic nature of the podcast's community.

Notable Quote:
Josh Brown [97:48]: "If you're not a hardcore into this shit, but you just don't want to completely miss out. That sounds like it's the right mentality."

Conclusion

As the episode wraps up, Josh Brown and Michael Batnick recap the main discussions, emphasizing the bullish signals in the market while cautioning against complacency. They encourage listeners to continue engaging with their content and remain informed about the evolving economic landscape.

Notable Quote:
Josh Brown [98:49]: "Whether it's bitcoin or any other stock or whatever that's appreciated... there's no right. It's personal. Whatever's best for you, that's what you do."

Takeaways

• Record Low Credit Spreads: Indicate heightened corporate confidence but also raise concerns about potential overvaluation.
• High Earnings Multiples: Reflect strong investor confidence in U.S. economic growth and corporate profitability.
• Potential Minsky Moment: While current optimism is strong, the risk of a sudden market downturn due to complacency remains.
• Regulatory Impact: Gary Gensler's stringent policies may have inhibited market innovation, particularly in the cryptocurrency space.
• Strategic Asset Allocation: Introducing high-risk "Ponzi sleeve" assets could diversify portfolios, though it comes with significant risk.
• Stock Dynamics: Companies like MicroStrategy, Zoom, and DocuSign showcase varied responses to current market conditions and strategic decisions.

*For more insights and detailed analysis, visit Ritholtz Wealth Management and follow The Compound and Friends on YouTube.