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Welcome to Animal Spirits with Michael and Ben. Michael, are you a Giants fan?
Long pause. Ben, I know. I know. I know. No, there's... You know what I was about to say? Nobody cares. There's 11 people listening that are going to care, that are going to laugh at what I'm about to say. Yes, I'm a Giants fan. It's been...
I can't... For people who are listening, Michael's just decked out in head-to-toe Giants gear.
It's been over a decade since we were alone in first place. So I committed a cardinal sin. The Arizona Cardinals, pun intended, I suppose. Well, pun intended, actually. The Arizona Cardinals were favored two and a half points against my Giants. Giants are not a good football team, be honest. I thought the Cardinals were going to beat us. They're not good either, but they're competent.
So my biggest bet of the day, Ben, was a five-team teaser. Shame on me. But I teased them all the way up, like all the way up. Very conservative. The five-team teaser was like a plus 130. I said, I think the Cardinals could have beat us, but we're not going to beat them by more than nine and a half points, are we? No way. I mean, and I don't know if anybody saw the end of the Giants game. Guessing most of you didn't. But the Giants were up by three points, whatever it was. The Giants were up by three.
So there was a pick six at the end in that game.
There was a pick six with zero seconds on the clock. Zero seconds. All Deontay Banks had to do was go out of bounds or go down, which normally happens. It would have preserved my biggest bet of the weekend. Shame on me.
Okay. Shame on me for opening up that can of worms there and letting you talk about your bets.
I probably was... I probably was just going to keep it in, but I couldn't help it. My misery needs to breathe.
That's an emotional hedge because your team won, so you can't complain about that. You cancel each other out. You're fine.
All right. From The Economist, the era of speedball capitalism has dawned. I like this. So one of my things that I've been on for a long time now is just everything is getting faster. All right. I want to read you this opening paragraph here because I think this is really good. I read this and I go, 'Oh yeah, every time something big happens, we think it's going to be like a signal of something in the market.' This is it. This is the sign of the top. Everyone wants to... In the past year, American markets have digested the largest ever initial public offering, SpaceX; equity raised by a public company, Google; or foreign firm, SK Hynix.
I'm sorry. The Giants have been so bad for so long. I have all this gear that's been stuck in my closet for three years.
You're like Tom Hanks in Big right now.
Like this nifty starter jacket. All right. Sorry. I'm sorry. Sorry to interrupt the flow of the show. Go on.
No, that's a really great-looking jacket.
Private funding around OpenAI, private debt deal, Broadcom, as well as most of the biggest bond issue in history, Amazon. There was the first $1 trillion exchange-traded fund, Vanguard; record-breaking cash pile, Berkshire Hathaway; stock buyback program, Nvidia; and consummation of the largest ever leveraged buyout deal, Electronic Arts. I didn't realize that was the case. Then there are enormous mergers in railways, utilities, and media, the last of which led this week to the largest ever junk bond offering, beating a record set only last week. New markets have been created out of thin air or become much bigger. Worries about massive corporate scandals and hedge fund blowups, which would have once occupied investors' attention for months, are steamrolled by the relentless, totalizing, and extraordinarily flexible machine that is American finance. Speedball capitalism. I thought this was very well put because every time one of these things happens, someone goes, 'Uh-oh, that's it. Fine. That was... this is a sign of something.'
You've been on this beat for a long time. Credit to you.
This is just the way things are now. Markets are... everything is bigger now. Everything is part of the markets and things move faster. And when there is something to worry about, we just worry about it for one week and then we move on. Think about SpaceX was the biggest story for, I don't know, two or three weeks. When's the last time we've heard anyone talk about SpaceX? Like finally today it round-tripped back to the IPO price. So we had all that worry. I'm so glad you mentioned this. SpaceX wasn't in the doc, but I'm glad you brought it up because...
I put it in here a little bit just before that.
It all price round-tripped.
Yeah, we spoke a lot about it when the price was going down. Oh no, the unlock. Oh no, it's going to blah blah blah blah blah. And now that it's back at 170, I know we're talking about it, but who cares? We only talk about bad things.
So the one... obviously the worry now is just AI is just consuming everything. So this is sort of...
Do you know the Strait of Hormuz is still closed?
Is it? I haven't followed my tracker lately. There was probably one guy who's been tracking the ships by hand from the...
Hold on. I know you're sweeping out the web, but this, like, to your point, this is one of the biggest stories of the decade, and nobody cares.
I know nobody... not nobody cares, but...
Here's the other thing, though. They're like, because this happened, they're going to figure out some sort of pipeline to make this not be a worry anymore in the future. So, like, the fact that this event happened means it won't happen again in the future. It won't be as big of a worry in the future. There's no way they're going to let this little piece of land take the whole global geopolitics hostage again. It's not going to happen.
Hear me out. I'm no energy expert. I'm no scientist or astronaut for that case. Uh, pipelines in space.
All right, let's do it. AI is now 53% of the S&P 500. So they break it out by hyperscalers, semiconductors, hardware, power, and software. And all these stocks are having massive gains, obviously. Okay, the FT is on my corner. Last week I said, listen, the stock market has it... if it wants to take it, it can take higher rates and say, fine, we're going to sell off. So the FT put this into historical... I said every time this has happened historically, that's what it was. Higher rates kind of was the pin in the bubble. So they look at the railways and the utilities in the 1920s, in Japan, and the dot-com bubble, and shale, and they say that stocks roll over first, capex follows. So they say the stock market tends to peak early. The stock market sniffs this stuff out, rolls over, and then a few months later capex eventually slows down.
Can I just... can I rephrase that a little bit or add to it? I think it's a combination of maybe the stock market sniffing it out, but I think it's actually causal. And then the stock market rolls over, forcing these companies to slow down.
Yes, that's a good way to put it. So The New York Times had this piece. They say higher interest rates aren't slowing the AI boom. That's a problem for the Fed. And they're kind of going over what I said last week. I said, 'Well, what if these companies are just so big they don't care about higher rates?' So they quoted a guy from Barclays here. He said the problem for the Fed is that there is usually a built-in correction mechanism in the US economy, which is interest rates rise and at some point the rate-sensitive parts of the economy, led by housing, slow down hard, and then that propagates the rest of the economy. But if a large part of the economy is just less rate-sensitive and that is what is pushing the economy to grow faster, then the Fed unfortunately has to hurt the part of the economy that is more rate-sensitive. So the question is... I feel like this is what people always say. Well, it's too big. The Fed can't do... any interest rates can't touch this sector. But to your point, the markets can. So if the markets tell these companies, 'No, rates are higher. There's a higher hurdle rate. We're going to put our money elsewhere. We're not going to give you the debt anymore at these levels,' then the market can force their hand no matter what the tech CEOs say, right?
Correct. Like, the market... the market is the captain. Now, to say that rates can't slow this, I'd be very careful with that stance. I will throw that stance out and flush it down the toilet. That's insane. They can't? Oh, really? 9% can't, right? That won't change risk appetite? Of course it will.
And we've been saying, like, where is the boogeyman? Where is the pinprick going to come from? And one of the things that we have thrown out as a potential is that investors will walk away from a debt offering, right?
Right. They will just say, 'All right, Meta wants to borrow $30 billion and investors don't show up.' Well, guess what? Paramount just came to market looking for $52 billion in debt. You know how much money showed up? Getting back to my theme that there's just so much money, $150 billion. And guess what, Paramount Warner Brothers? That's... that coincides with the weekend of the biggest box office flop maybe in the history of movies.
We're not going to talk about that.
Oh, we're going to talk about...
We're going to talk about it later in the show. But yeah, the idea that there is not going to be money showing up for these companies... maybe someday, not today.
So the counterpoint would be... I put another one from JPMorgan in here. If you look at the economy, so it's the share of GDP, employment, and then the stock market percentages. And technology makes up 50% of the stock market, and it's not even close to that for the rest of the economy. It's kind of funny. Technology makes up 2% of total employment in the United States and 50% of the S&P 500. So this is the whole... the stock market is not the economy.
That would be the thing, like, it's just so big. But so I think they could extend this for longer than maybe many people think. But I agree that the financial markets... that's the...
That's the stopping point here. That's what could... I don't care what Mark Zuckerberg or any of the other CEOs say, like, 'Hey, we're going to go big. We don't care.' Eventually the markets can slow down if it wants to, but it's up to the market to say it. The market so far hasn't said anything. You're right. There's so much money flowing around.
Ben, you opened the show last week asking me... I can't remember how you phrased it, but it was something about the breadth. Like, can the market... oh, can the market... I think it was, can the market hold in there when so many stocks are going down? And I said emphatically yes, unless interest rates continue to rip higher. Wrong for the right reasons, because interest rates keep going higher. We're recording this Monday afternoon because Ben has something tomorrow, but new cycle highs for the 10-year, for the 20-year, for the 30-year, and yet the S&P is having a great day. It's right near all-time highs. The equal weight is bouncing a little bit. I don't believe it is too strong of a word, but I'm surprised. As somebody who's like... I'm bullish right now. I think that the equal weight will catch up. I'm not worried about the lousy breadth. I'm surprised. I am surprised the market is holding up like this.
The weird thing is if you plot the rates and inflation and all this stuff before the war, right, before the war started was like the bottom in everything. Inflation was only two and a half percent, rates were barely below four percent, and if you plot it to now, it looks like the war caused all of that stuff. And obviously it did a lot of it, right? Because if chart kid maths looked at inflation and inflation ex-energy, and inflation ex-energy is a totally different story. But is it also possible that the initial burst we got of rates and inflation was all that story, it's the war? You said the Strait of Hormuz is still closed, and now it's okay, fine, and AI is taking over now too, and AI is pushing it up, and people are really believing this higher growth story for rates, and that's why the stock market keeps going up even as rates go up too.
It is. It's surprising that the market hasn't said, 'All right, fine. 10% correction. Just take it. Something's got to give.' Sure. I feel like that quote is in a bull market.
All right. You and I recorded a talk... your book today with Victor Haghani. We were talking about high beta versus low beta. This is the high beta decade. High beta and high beta momentum, however you want to phrase it. This decade alone, 2020s, high beta is up 260%. Low volatility... so I'm using S&P Invesco funds here, is up 40% in total. Low volatility has just done nothing, right? Very steady. Not very much returns. It's actually slowing down. So you're just getting like the difference between high beta and low beta. Now, if you were a diversified investor and you got both of them, you probably did okay. Probably like matched the market essentially. But that divergence between the two has got to be about as great as it's been in the last 30 years. This is salt in the wound for, I guess, dividend-focused investors, right?
Because this is the area of the stock market that is extremely vulnerable to higher rates, both in terms of actually like financing the businesses as well as investor preference. Right. Well, a 3% dividend yield just give me... and stock market volatility. I just think bonds, right?
Yes. Yeah, you're right. At this point there's actually competition for those dividend yields, and for years there wasn't. You know, the funny thing is here, so again, high beta is PHB, low volatility is SPLV. SPLV has about seven times the assets the high beta has. Low volatility has way more assets, and it's like 7 billion where the high beta has about... we've talked about this, the fact that no one really owns like momentum-type strategies. That kind of makes sense to me only because high beta is not a good strategy. And I'm not saying low vol is a great strategy, but it kind of makes sense. If you want exposure to juice, high beta is not a great way to do it.
So you just own the Nasdaq 100, you're saying, instead of owning... Yeah. Yeah, I guess that you're right. That's where all the money has gone for that.
Speaking of crazy AUM stuff here, read this stuff from Luca. You put this in here, I think.
All right. So Luke at Sherwood tweeted from JPMorgan. That was horrible podcasting, saying too many names. JPMorgan says that the largest rotation into the long-end treasury ETFs, TLT, on record, and driven mainly by outsized inflows into TLT as yields keep drifting higher. So they show a cumulative retail imbalance, and I have to be honest, I don't know what that means, but it is going up and to the right.
That just means that... I assume that means retail is the ones doing a lot of the buying here.
Sure. Which jives with the chart that Buna shared over at Bloomberg. Basically money just keeps pointing to TLT as it keeps going down. This is surprising because you and I have talked about the fact that there's been... this is the worst bond bear market of all time. This decade has been by far the worst bond bear market that there is. And there was a really simple and easy hedge for it. You go short duration. You go to T-bills, you go to one to three treasuries, whatever it is. You don't have the interest rate volatility.
But before this crash happened, okay? And TLT is still in a 40-some percent drawdown, 45% drawdown. That's including income reinvested. It had, I think, the total assets were 17 or 18 billion in 2022. Then it crashed 40%. Today there's almost 50 billion in assets. So money has been pouring into this asset during a... it's been in a 40% drawdown since November of 2022. And money has continued to pour in and not being taken care of very well either. Okay. 8% again this year.
Not exactly true. So, I'll show you. Torres Slack has a chart that zooms out, and he shows it... the title is 'Households don't like the long end on the treasury curve.' And this chart goes back to September 2024, and money has absolutely gone into the hedge, into ultra short-term treasury ETFs to the tune of 75 freaking billion dollars while $5 billion has come out of TLT. Now, Ben, you see that little bump in the line in that green bar? So, in the last, I don't know, six months, a lot of money has come in. But this is instructive because we're talking about this later. Sometimes you have to zoom out, think a little bit critically, and this is a dangerous posture that like not all numbers are accurate because there's a lot of distrust in society these days. And if you can't trust the numbers, what can you trust? But very often in conversations, numbers are either framed or cherry-picked. They can be misleading. You can...
Context. Okay. You're right. So actually, it shows most of the money went in in 2023 and 2024. You're right. And then it kind of slowed down, but still a ton of money. And obviously people kept getting kicked in the shins and said, 'All right, fine.' But there's still a ton of money in this strategy for what has been a big-time money loser, one of the biggest all decade, right?
But it is also accurate to say that during the rip in rates, as Eric is showing, during the rip in rates, people are definitely running into a burning building, right? And you're getting, I think, 5.7% on a 30-year now. Again, this is not like boom, generational buying opportunity, pound the table, but this is the highest level they've been in 20 years.
Yeah. So I guess I get it. The funny thing, I've been thinking about this. People are saying like, 'Hey, listen.' Especially, this is especially kind of a boomer thing to say, and I don't mean to pick on boomers because we always get emails from people being like, 'Hey, I'm one of the boomers you guys always talk crap about,' in a joking way. But there's a lot of people who say like, 'Listen, 7% mortgages aren't... those are normal. We've had 7% mortgages our whole life.' But there's no such thing as a normal interest rate environment. I plotted the 10-year Treasury. Look at this chart going back to 1940, the start of World War II essentially. This shows a 10-year Treasury. It goes from 2% and during the war it essentially stayed really, really low for a long time. Got up to 15% or so in the 80s, and I got this data from Shiller. Then it's been down ever since and up. There's no such thing as a normal interest rate, right? And in fact, people say, well, I don't... I think if you had to give people a guess, a number, what's a normal interest rate? What would you say? 5%.
Like historically, what's the norm?
Since 1940, I put these into different bands: 0 to 2, 2 to 4, 4 to 6, 6 to 8, and 8 and up. The most normal, quote unquote, is actually 2 to 4%. So actually lower interest rates have been the kind of the norm most of the time. And then the 4 to 6% range that people would call normal has happened one quarter of the time or so. So, but you can't look at this chart and then just draw an average and say, 'Yep, that's normal.' Because interest rates got so high in the 70s and 80s that that skews the average too.
Well, another example of lying with numbers. Yes, factually there is an average. You can calculate it, but it's completely meaningless.
It is kind of funny though that you can also say, you know, the thing was like, hey, there's a whole generation of investors who's never lived through a bear market. That was the thing people would say.
Oh, that was so annoying.
You could, because it was said by old people to like somehow scold young people for making money. I hated that, I still do. By the way, speaking of boomers, it really is true though that there is a whole generation of investors who've never lived through 5% bond yields before.
It's been a long time since we've had this.
So you and I, our inbox has been flooded with people asking questions about bonds because no one ever had to think about bonds for the last 15 years or so because rates were so low, no one cared.
Yeah. All right. My dad returned this book to me. 'Hey, Dad, tell me something I don't know.' A fun and memorable activity and family keepsake. I would agree. So it's just a bunch of like, what is your favorite memory of us? And if I read this, I'll probably cry because I haven't read this yet, but it's awesome. I would encourage anybody who is of mine and Ben's age-ish who has aging parents that aren't going to be around forever and ever. This is great. This is something that I will probably keep with me for the rest of my life and just apply.
Wait, tell me how it works now. So it is... this is where you ask them information and they fill it out for you to share forever, or...
So like, did you have a nickname growing up? I'm just scrolling through. Who was your crush? I mean, just random like as a child, teen, adult. What were your favorite sports and hobbies? How did you come up with my name? Oh, I haven't read that one. I haven't read this all yet. But...
Yeah, it's great for your kids too, obviously.
Yeah, it's awesome. So it's very meaningful and...
That's... I'm glad you said that because I've been thinking about doing something about that with my dad as well.
Yeah, who's fast approaching 80 years old. Okay. Duncan sent us a poll at The Compound. How do you feel about the current state of the economy? 30% say the economy is strong. 47% said the economy is okay. And about a quarter of people said the economy is weak. And obviously, I think when people ask this question, they don't think about what the actual economy is doing. They think about their personal economy. And I think about this a lot because we are part of a podcast, a finance podcast. And if we talk about different income groups, people... ever since we do this podcast, people say, 'You guys are so out of touch. You don't understand A, B, or C.' And you don't understand people in this group or that group. My thing is literally everyone is out of touch when it comes to the economy. Because if you're one of these people who've been saying for years, this economy stinks, that, you know, inflation and it's only the... like, if you've been saying that, then you're out of touch. But if you also say, 'Listen, all my friends are doing great because they're rich,' then you're out of... like, my take is everyone is out of touch. Okay, is that fair enough to say?
I think it's such a great point. In some ways, everyone about the economy is completely out of touch with reality. And that's the way it's probably always been, but we just have more data now. Speaking of which, this is from... Meb Faber shared this. This is from BCG Group. They say the kids are all right. The timeless angst over young people and money. And you talked to Ed Elson about a lot of this the other day, and so I thought this was kind of a good fit for the take you guys did. So exposure to the markets, this is corporate equities and mutual funds as a percentage of assets at age 34. Baby boomers had 7%. Gen X had 11%. Millennials, it's 19%. So young people are getting into the markets earlier. Great news. They also look what happened to millennials in terms of how long did it take them to overtake previous generations in income, wealth, and home ownership. Income happened in the 20s, wealth happened in the 30s, and home ownership didn't happen until the 40s for the generation ahead of them, Gen X. And the whole point is younger people now are waiting to do these things much longer, right? How many people do you know that are getting married right out of high school or college anymore? That rarely happens, but it's still happening. It's just taking a while. Jeremy Horbital has this one where he shows the average age for millennials and Gen Z much greater than where Gen X was at the same age. Can I say one thing? Sorry to cut you off.
Okay. I think Ed Elson is terrific. He's an incredibly impressive speaker, writer, person, like huge fan.
Sneaky tall. He's one of those guys that you see him, pretty sneaky tall guy. So one of his beats is how tough young people have it these days.
And I'm not here to say that he's wrong about everything he's saying, or in fact that he's wrong about most of what he's saying. That's not the point that I'm going to make. There's like two different spectrums of this. One is everything is terrible. One is everything is amazing. Who is the... there was like a social scientist that passed away recently that... it wasn't Steven Pinker. We spoke... it was another guy that just all of the ways that the world has improved, right? Just like objectively. All right. So, but nobody wants to hear how great things are.
Hans Rosling, his book was...
Hans Rosling. Amazing. Okay. The audience wants to hear negativity, right?
Of course. If there was a podcast that just described how great everything was, nobody would listen to it because it's super boring, right? Like...
I would listen to it. But yes, you're right. Most people wouldn't. But I feel like with stuff like... specifically to what we're talking about, everything is viewed as a problem. Oh, young people aren't getting married anymore. So that must be bad. Really? Because my parents got married when they were way too young. And like many of our parents got divorced because they were kids having kids and couldn't handle the responsibilities of bringing kids up, which a lot of people my age... like dealing with divorced parents is not the easiest thing.
A lot of this is preferences, not just, hey, the world is falling apart.
Yeah. So I don't view this data point as, hey, why aren't people having... and there is some negativity wrapped up in there. Obviously, right? Obviously. Another... so I've been thinking about this the past week after Ed's podcast, but also after reading Derek wrote a post. Sorry to... should we... I'm jumping all over the place, but Derek Thompson wrote a post about like people don't throw parties anymore.
Yeah. People don't throw parties anymore. And I'm not saying Derek said this, but my first thought was, well, so what? What? Dinner parties are so awesome. And everything that we used to do that we don't do, it's not all bad. Yeah, there's a ton of bad in the world. Income inequality. We don't need to get into... there's all sorts of horrific... but...
Matter of fact, I rewatched The Invite with Robin finally. Not finally, it just came out. Did you see that movie? Loved it.
That was a great movie. I rewatched it already. I watched it twice.
I really liked it. And there's another movie where people have people over called...
You know my take about why we're having fewer dinner parties. Restaurants are so much better and nicer now. People had dinner parties in the past because restaurants sucked. Today restaurants are so much nicer. Why would you want to have people over to your house when you can go to a nice restaurant?
So Derek... exactly. So Derek wrote, 'The death of the host is the story of lonely unmarried people and harried married dual-earner households, anxious parents spending more time with their children and less time with friends.'
That part is true. Like kids take way more bandwidth.
But this to me is like 70% of it. And the typical home becoming such a riot of diverting comfort that people no longer have to invite human beings to interrupt their boredom.
Right. Yeah. Being at home is awesome. We've said this in the past. Back in the day, I remember staring out my window, like I remember that visceral feeling of boredom. Now, have we overdone it? Is there no boredom? Is boredom maybe good? Is TikTok too much? You're...
Right. It's give and take.
It's a give and take. And I'm saying there's just too much giving and none of the taking.
So I have one more point on the young person too. The thing is, it's great that we have young people with voices now. Ed Elson, Kyle Harrison, these people who are young and also speaking for the generation.
Here's the thing, though. In the past, young people did not have a microphone. No one ever listened to what young people said. Young people couldn't complain because no one would listen to them. They didn't get the chance to share their plight. So if you would have given people in the '90s, like, guess what? We got a bunch of movies about disaffected young people who were pissed off. So it's just now we have social media and podcasts and young people can now complain. They didn't have that opportunity in the past. So it feels like, oh my gosh, young... you just never heard from them in the past. You hear from them today because there's a microphone. Now, here's the thing.
Be true. Yes. Last thing. It's hard to be a young person today. It's always been hard to be a young person. Doesn't mean that you're not taking their struggle seriously. They're going to grow up and they're going to be fine.
Yes. Every older generation has always thumbed their nose at younger generations saying, 'You had it easier than me. Grow up. You're going to be fine. You'll be fine in the future.' That's true. And it's also true that young people have got dealt a bad hand in some ways. As always, this is one of the things that despite all those graphs that I just shared, this is why people are really angry. From The Wall Street Journal, they talk about the 0.1%. So it's not talking about just the top 10% anymore or the top 1%. It's the top 0.1%. 137 households control $28 trillion or 15% of total household net worth. So people say, 'I don't care how much better things have got for this group or that group or this group. The top 0.1% having this much money, and I guess their wealth has doubled this decade.' People go, that's just... I'm just going to be pissed off. Okay, that's going to make me mad.
It's out of control. The wealth inequality only goes one way. Unfortunately...
Speaking of which, I never heard of this one. This one I missed a couple weeks ago from Bloomberg. This is really funny to me. This shows how much progress we have made. Tech's new rich are suffering from sudden wealth syndrome. A growing post-exit ecosystem is helping founders deal with the unexpected difficulties of becoming extremely wealthy. So they're talking about...
