A Bear Market in Housing (EP.286)

Episode Summary

Executive Summary: The episode centers on the surprisingly resilient U.S. labor market and its implications for inflation, Fed policy, wages, and markets. The hosts debate whether strong employment and sticky wage growth are good news for workers but bad news for inflation, while also covering housing, ETFs, private real estate liquidity, crypto fallout, and the emergence of AI tools like ChatGPT.

Main Topics: Labor market strength and inflation (Priority: 5/5): The hosts unpack strong job growth, high openings relative to unemployed workers, and flat quits, arguing that the labor market remains tight even as some market participants start to look through the Fed's hawkish messaging. Fed policy, wages, and market reactions (Priority: 5/5): They debate whether strong wage data and persistent labor tightness imply higher-for-longer rates, while noting that markets are increasingly shrugging off bad inflation news compared with earlier in the year. Housing slowdown and possible price declines (Priority: 4/5): The conversation shifts to a potential housing bear market, with discussion of mortgage rates, builder pricing, new-vs-existing home dynamics, and how much home prices might fall without severely changing consumer behavior. Passive investing and ETF flows (Priority: 4/5): They discuss the continued shift from active to passive products, highlighting ETF inflows, the changing market share of active management across asset classes, and several top ETF tickers drawing large assets. Private real estate, REIT marks, and liquidity (Priority: 4/5): The hosts cover Blackstone's BREIT redemption issues, the gap between public and private real estate returns, and what redemption limits reveal about liquidity mismatches in private products. Crypto collapse and Sam Bankman-Fried (Priority: 3/5): They revisit FTX/Alameda fallout, SBF media appearances, and broader lessons about leverage, fraud, and the dangers of celebrity-like status in finance and tech. AI and ChatGPT as an emerging tool (Priority: 4/5): The episode closes with a discussion of ChatGPT/OpenAI, its impressive ability to generate useful text, and skepticism about whether it is truly transformative or just the latest hype cycle.

Key Arguments: A strong labor market is beneficial for workers and can coexist with falling inflation, which would resemble a soft landing rather than a policy failure. Higher-than-expected wage growth is the main reason economists worry the labor market report is inflationary rather than benign. The market has become less reactive to hawkish Fed messaging and increasingly expects an eventual policy inflection. Housing may see meaningful price declines if mortgage rates stay above 6%, but the impact will depend on builder behavior and limited transaction volume. The continued migration from active to passive investing is reshaping fund flows across asset classes, especially U.S. equities. Private real estate products can deliver smoother marks than public REITs, but redemption limits expose liquidity constraints and valuation differences. Investing based on politics is usually a mistake; macro forces like rates, inflation, and liquidity matter far more than election rhetoric. ChatGPT is useful and impressive, but it may be overhyped relative to prior technology waves that were expected to transform everything immediately.

Data Points: U.S. jobs gained this year: 3.9 million - The hosts cite BLS data to emphasize labor market strength despite recession fears. Job openings per unemployed person: 1.7 - Based on October data discussed from Sam Ro's chart, showing a very tight labor market. Total job openings: 10.3 million - U.S. employers had this many openings in October. Total unemployed people: 6 million - Used to calculate the openings-to-unemployed ratio. Leisure and hospitality jobs added: 88,000 - Part of the strongest labor market subcomponents. Leisure and hospitality jobs recovered: 88% - This sector recovered 88% of the 8.2 million jobs lost at the start of the pandemic. Leisure and hospitality jobs lost in March-April 2020: 8.2 million - Provides context for the recovery in that sector. Construction employment vs. pre-pandemic: 126,000 above - Construction employment is now above its pre-pandemic level. ETF inflows in 2022: Over $750 billion - Used to show 2022 is on track to be one of the strongest years ever for ETF inflows. Active share of U.S. equity funds 20 years ago: 83% active - Compared with today to illustrate the shift toward passive investing. Active share of U.S. equity funds today: 43% active - Shows the migration toward passive products. Commodity funds/ETFs active share 20 years ago: 100% active - Historical comparison for commodity investment vehicles. Commodity funds/ETFs active share today: 30% active - Shows passive/alternative approaches gaining ground. Vanguard SPY-like ETF flow leaders: VOO, VTI, IVV - Top ETF inflow leaders mentioned by ticker. TLT year-to-date return: Down 27% - Surprising because TLT still ranked high among inflow leaders. WisdomTree floating-rate treasury fund (USFR) return: Up 1.5% - Mentioned as a beneficiary of higher rates. Blackstone BREIT redemption fulfillment: 43% of requests met - Illustrates liquidity restrictions in private real estate. BREIT monthly/quarterly redemption limits: 2% monthly / 5% quarterly - Maximum withdrawal thresholds for the product. Public real estate vs. commercial real estate share: 8% - Blackstone's argument about why public REITs may diverge from private valuations. First-time homebuyer expected tenure: 18 years now vs. 7 years in 2007 - NAR survey result showing buyers expect to stay in homes longer. Homes with no mortgage: 42% as of Q2 2022 - Highlighted as a surprisingly large share of owner-occupied homes. Gas prices in Houston: $2.80 per gallon - Used in a discussion about falling inflation and consumer perception. FTX-related potential customer-trade loss: Up to $1 billion - Referenced in reporting about Alameda stepping in to cover losses. Top Gun Maverick domestic box office: $717 million - Highest-grossing film of 2022 discussed in the recommendations segment. Streaming cancellation rate: Close to 6% of all customers in September - Used to show rising churn across streaming services. Netflix share of most watched streaming programs: 75% - Used to underscore Netflix's dominance in streaming viewership.

Pivotal Quotes: "as much as Chair Powell is trying to contain investors' animal spirits, markets are rejecting that message." — Nick Colas (quoted by hosts): Used to describe the market's resistance to the Fed's hawkish tone. "I think if the labor market remains strong and inflation is falling, that seems like a good thing to me." — Michael Batnick: Core argument that a strong job market need not be negative if inflation cools. "The marginal seller is going to be builders who own land and have to sell houses." — Rick Palacios (as summarized): Explains the housing bear-case mechanism if mortgage rates stay elevated.

Implications: Listeners should expect continued debate over whether the economy can achieve a soft landing. Strong labor data supports workers and spending, but persistent wage pressure may keep the Fed restrictive, affecting stocks, housing, and risk assets.