Are Bonds Competition For Stocks (EP.297)

Episode Summary

Executive Summary: The episode blends a personal 10-year blogging milestone with a wide-ranging market discussion centered on a surprisingly resilient economy, sticky inflation, strong labor data, and housing distortions from high mortgage rates. The hosts argue that the economy may be too strong to easily return inflation to 2%, while also highlighting how fixed-rate debt, rising homebuilder activity, and consumer willingness to spend are reshaping markets and behavior.

Main Topics: Ben’s 10-year blogging anniversary and communication philosophy (Priority: 5/5): The hosts reflect on Ben’s decade of blogging, how the site started, and the core lesson that finance should be explained in plain English for a broad audience. Inflation, the Fed, and the 'too strong economy' paradox (Priority: 5/5): They discuss how the narrative shifted from soft landing to no landing and now to concern that persistent economic strength may force the Fed to stay restrictive longer or overshoot. Rates, yields, and the stock-vs-bond debate (Priority: 4/5): The conversation compares T-bill yields, earnings yields, and real yields, arguing that inflation and real rates matter more than nominal yields when assessing asset allocation. Housing market distortion and homebuilder strength (Priority: 5/5): They examine why existing home sales remain depressed, why new construction is thriving, and how builders are offering mortgage incentives to move inventory. Consumer spending resilience and inflation pass-through (Priority: 4/5): Examples from Disney, restaurants, gambling, and travel show that consumers keep spending despite higher prices, suggesting behavior is changing less than expected. Market internals, retail investors, and speculation (Priority: 3/5): The hosts discuss rally quality, retail trading persistence, and the surprising durability of post-pandemic speculative participation even after 2022 losses. Pop culture and personal updates from Disney (Priority: 2/5): A long personal segment covers a family trip to Disney, operational details, pricing, and entertainment recommendations, illustrating the hosts' lifestyle-and-markets format.

Key Arguments: The economy is so strong that it may prevent inflation from falling back to 2% without a recession. Higher nominal short-term rates are less important than inflation/real rates in determining how attractive stocks are relative to bonds. Consumers have not meaningfully changed spending habits in response to inflation; restaurants, travel, and entertainment remain packed. High mortgage rates have frozen existing-home sales, but they are benefiting homebuilders and renovation activity. The market rally is still partly a junk-stock/speculative rally typical of bear-market rebounds. Fixed-rate debt cushions households and corporations from immediate rate hikes, muting the transmission of Fed tightening. The Fed’s 2% inflation target may be politically/credibility constrained even if 3%-4% would be a more realistic compromise. Retail investors may not have capitulated because modern gambling/trading behavior tends to persist once established.

Data Points: Case-Shiller National Home Price Index drawdown from peak: 2.7% off the highs - National housing prices through December, showing only a modest decline from peak levels. Case-Shiller year-over-year home price change: Up 5.8% last year - Annual home price growth remained solid despite higher mortgage rates. Implied probability of a 50 bps Fed hike: 0.3% one month ago; 18% one week ago; 27% now - CMA FedWatch market expectations shifted toward a larger rate hike. Six-month surge in bars and restaurants spending: 7% increase - Matt Klein example cited as evidence that consumer spending remains strong despite inflation. Magic Kingdom line time for Avatar: 215 minute wait - Disney anecdote used to illustrate strong demand and willingness to pay. Magic Kingdom capacity: 65,000 people - Used to compare park capacity with the number of ride seats available at one time. Available ride seats at Magic Kingdom at one time: 2,200 riders - Shows the bottleneck that makes premium skip-the-line services valuable. Disney guide cost: $200/hour via third party; Disney guides $600-$700/hour with 8-hour minimum - Family used a guide to navigate crowds and optimize park time. Bottle of water at Disney: $3.75 - Example of park pricing and inflation tolerance. Balega socks: $20 for four pairs - A practical recommendation from a friend for long Disney walking days. Retail investor daily net inflows: Quadrupled during the pandemic - Paul Gondrowski chart referenced to show persistent elevated retail participation. Three-month T-bill yields below 5%: 70% of the time since 1934 - Historical context for current short-term rates. Three-month T-bill yields below 4%: 61% of the time since 1934 - Shows current short-term yields are high relative to history. Average S&P 500 return when T-bill yields average 5%+: 11% per year - Historical analysis showing high short rates do not automatically imply poor stock returns. Home price sales decline above $1 million: Down 40% year over year - Existing home sales by price bucket show the high-end market weakening sharply. Natural gas price decline over 6 months: Down 79% - Bespoke chart cited as an unprecedented collapse in energy prices. Apartment rents: Down 3.5% over six months - ApartmentList/WSJ data showing rents falling as new supply comes online. New apartments coming online: Nearly 500,000 units - Record supply expected to continue pressuring rents lower. Average corporate bond maturity for S&P 500 issuers: 11 years - Shows companies locked in cheap financing for a long time. Outstanding debt of S&P 500 that is long-term fixed: 78% - Explains why higher rates have not hit corporations as hard as expected. Fidelity hiring: 4,000 new roles - One of the few positive labor market headlines discussed. Realtor count: 1.6 million down to 1.5 million - First decline in a decade, but only a modest drop overall. Typical realtor profile: 8 years of experience, 35 hours/week, $54,321 gross income - National Association of Realtors data used to show the profession is harder and more uneven than assumed. Coinbase survey on crypto ownership: More than 50 million Americans, 20% of adults - Hosts questioned the plausibility of the survey estimate. Subprime auto loans 30+ days delinquent: 9.3% - Highest share since 2010 among low-credit borrowers. Commercial casino and online betting revenue: More than $60 billion - Gambling revenue reached a record high last year. Slots losses: $34 billion - Illustrates scale of gambling losses by consumers. Sports betting handle: More than $93 billion - A record year for legal sports betting activity.

Pivotal Quotes: "The economy is too strong to avoid a recession." — Ben Carlson: Core thesis framing the episode's macro discussion. "People are still spending. And I don't know that anyone would have said a year ago, the problem in February or March of 2023 is the economy is going to be too strong." — Michael Batnick: Explaining why the Fed may remain under pressure even as inflation eases. "Who knew that all you had to do was send out $6 trillion. That'll do it." — Michael Batnick: Commentary on fiscal policy's outsized role in driving inflation.

Implications: Investors should expect more volatility in inflation and policy expectations, with resilient demand, locked-in debt, and housing supply constraints making the economy harder to slow. Housing, homebuilders, and real-rate-sensitive asset allocation remain key watchpoints.