A Confusing Year (EP.284)

Episode Summary

Executive Summary: The episode ranges from year-end market reflection to a broad debate about what really drove the tech/venture boom, arguing that low rates mattered but weren’t the sole cause—technological change, the iPhone, and the pandemic also fueled excess. They discuss Fed tightening, consumer resilience, crypto contagion, housing weakness, retail dispersion, streaming layoffs, and the ongoing FTX/Genesis/DCG fallout, while also noting deflationary signs in gas, shipping, and food.

Main Topics: Market breadth and year-end reset (Priority: 5/5): They open with YCharts data showing how unusually wide the dispersion has been in U.S. stocks this year, setting up a broader year-end mental reset around what the market and economy have learned in 2022. Were low rates the main cause of the tech/venture boom? (Priority: 5/5): A long back-and-forth argues that low rates enabled excess, but the boom was also driven by technological change, the smartphone ecosystem, the pandemic, and investor psychology—not rates alone. Fed policy, rates, and inflation expectations (Priority: 5/5): They discuss how markets reacted to talk of a 7% Fed funds rate, but reject that outcome as unrealistic. They focus on the power of Fed communication and the likelihood that inflation is easing as growth stabilizes. Consumer health, savings, and inflation relief (Priority: 4/5): The hosts examine retail sales, excess savings, credit card debt, delinquencies, and household debt service, arguing the consumer is not yet broken and may actually benefit as inflation falls. Crypto contagion and the FTX/DCG/Genesis crisis (Priority: 5/5): They unpack the interconnected crypto blowups—FTX, Genesis, BlockFi, GBTC, and DCG—emphasizing leverage, trust failures, and the lack of systemic risk to the broader financial system. Housing, remote work, and home improvement (Priority: 4/5): The conversation covers weak homebuying conditions, mortgage-rate spreads, remote work’s potential long-run effects on rents, and the continued renovation cycle for aging U.S. housing stock. Streaming, layoffs, and entertainment fatigue (Priority: 3/5): They note that tech layoffs and streaming losses are a small macro issue but a big company-level issue, and discuss how content platforms may need consolidation and less overproduction.

Key Arguments: Low interest rates were an important fuel for the tech/venture boom, but not the only driver; technological change and the post-iPhone ecosystem created many new business models regardless of rates. Venture capital is not simply leverage-driven borrowing, so rate policy affects valuations and behavior more than it mechanically determines startup formation. The market has already responded to hawkish Fed rhetoric, but a 6%-7% Fed funds rate is viewed as extremely unlikely absent a major re-acceleration in inflation. The consumer still looks relatively healthy because delinquencies, foreclosures, and debt-service burdens remain manageable even as savings rates fall. The fall in gas prices, shipping costs, and some food prices suggests meaningful disinflation is underway, which could ease pressure on households. Crypto is suffering severe micro-level damage, but the episode argues it has not become a systemic macro problem. Crypto company valuations have collapsed far more than crypto itself, showing that operating businesses tied to the space may be riskier than holding the assets directly. The retail sector is highly bifurcated: staples-oriented, trade-down names like Walmart are holding up much better than discretionary names like Target. Remote work may ultimately reduce long-run rent inflation by shifting demand away from expensive central business districts. The streaming model is under strain; the market may reward consolidation and discipline rather than endless content spending.

Data Points: Russell 3000 year-to-date return: -16% - Used to frame how weak the broad U.S. stock market has been this year. U.S. stocks down 50% or worse: 1 in 6 stocks - Share of U.S. market stocks that have fallen at least 50% year-to-date. U.S. stocks down 40% or worse: 1 in 4 stocks - Shows breadth of losses across the market. U.S. stocks positive on the year: 25% - Only one-quarter of stocks were up year-to-date. U.S. stocks down on the year: 75% - Three-quarters of stocks were negative year-to-date. U.S. stocks down 60% or worse: ~10% of stocks - Illustrates extreme dispersion and drawdowns in individual names. Inflation-era Fed funds speculation: 7% - Bullard talk about a potential 7% Fed funds rate triggered a market reaction. 10-year Treasury yield: 3.8% - Referenced when discussing the curve and the plausibility of much higher short rates. SP 500 earnings mix: More than 60% goods / less than 40% services - Used to explain why the stock market and economy can feel out of sync. U.S. economy mix: ~30% goods / ~60% services / 9% other - Contrasted with the earnings composition of the stock market. U.S. retail gas price: ~$3.60/gal nationally - Gas prices were cited as having fallen sharply from their peak. Gas price peak: Above $5/gal nationally - Peak national average cited during the inflation surge. Consumer spending increase: 1.3% month-over-month - Retail sales increase cited as evidence of resilient consumer demand. Excess household savings estimate: $1.7 trillion - Used to argue consumers may still have spending room for 9-12 months. Personal savings rate before pandemic: 8.8% - Baseline household savings rate prior to COVID. Personal savings rate in 2020: 16.8% - Highest rate ever, reflecting pandemic-induced saving. Personal savings rate in 2022: 3% - Shows how much savings have normalized and been depleted. Auto sales contribution to GDP: 3% of GDP - Connor Sen’s estimate of how much a rebound in auto sales can add to quarterly growth. Atlanta Fed GDPNow: 4.4% real GDP estimate - Forecast suggesting accelerating growth in the next quarter. Container shipping costs: Down nearly 80% YoY - Example of major disinflation in goods logistics. Crypto market cap drawdown: $2.2 trillion wiped out from a $3 trillion peak - Illustrates the scale of the crypto crash. U.S. stock market capitalization: $43 trillion - Used to show crypto is not large enough to drive the whole market. Global equities market cap: $96 trillion - Provides context for crypto’s relative size. Robinhood and Coinbase drawdowns: Down ~88% from highs - Shows how crypto-related stocks have been crushed. Coinbase bonds yield: 17% yield to maturity - Signals severe stress in crypto-linked credit. Target vs. Walmart YTD performance: Target down ~30-32%; Walmart up ~5% - Illustrates divergence between discretionary and trade-down retailers. Average age of U.S. homes: Over 40 years - Supports the argument that remodeling demand remains strong. Homes entering remodeling wave: ~3 million more by 2025 - Mid-2000s housing-boom homes reaching renovation age. Bird private funding raised: $2.1 billion - Private capital raised before public-market collapse. Bird valuation after crash: 24 cents/share; ~3% of VC funding raised - Shows how far the scooter company collapsed from prior expectations. HBO loss / content spend: $3 billion loss on $7 billion content spend - Illustrates streaming economics and pressure for consolidation.

Pivotal Quotes: "One out of every six stocks in the U.S. stock market is down 50% or worse this year." — Michael Batnick: Opening discussion of market breadth and the extreme dispersion in 2022. "I think that the iPhone was the really big thing here." — Ben Carlson: Used in the debate over whether low rates alone caused the tech boom. "Tech layoffs are not a sign of an impending recession." — Unnamed source cited by hosts: Referenced while discussing Meta, Amazon, and Twitter cuts as a small macro drag.

Implications: Listeners should expect continued disinflation in goods, ongoing pressure in crypto/streaming/discretionary tech, and more differentiation across sectors. The consumer and economy may be weaker than 2021 but not yet broken, while Fed policy remains the key macro variable.