Boomflation or a Recession? (EP.244)

Episode Summary

Executive Summary: The episode centered on inflation, Fed policy, consumer resilience, and market reactions across bonds, crypto, housing, and consumer stocks. The hosts argued that inflation is broadening beyond supply-chain bottlenecks, consumers are still absorbing higher prices, and the Fed is playing catch-up. They also discussed BlockFi’s SEC settlement, Disney’s travel rebound, Chipotle’s pricing power, rising mortgage rates, and why many stocks may already reflect bad news.

Main Topics: Inflation broadening beyond supply-chain effects (Priority: 5/5): The hosts reviewed CPI data and argued inflation has moved from pandemic-specific categories into a wide range of goods and services, with most components now above the Fed’s target. Fed policy and the soft-landing debate (Priority: 5/5): They questioned whether the Fed can tame inflation without causing a recession, debated whether earlier rate hikes would have mattered, and suggested markets may already be doing some of the Fed’s work. Consumers absorbing higher prices (Priority: 4/5): Using income-versus-CPI charts and examples like Chipotle and Disney, they argued households still have enough balance-sheet strength to tolerate price increases, though sentiment is deteriorating. Bonds, yields, and the meaning of rising rates (Priority: 4/5): They contrasted the dramatic rise in yields with the relatively modest price damage to short-duration bonds, emphasizing that inflation is the bigger hit to real returns. Crypto, BlockFi, and SEC enforcement (Priority: 5/5): They criticized the SEC’s $100 million settlement with BlockFi as disproportionate and inconsistent, arguing the regulator is punishing innovation rather than clarifying rules. Company-specific earnings and pricing power (Priority: 4/5): They discussed Chipotle, Disney, Zillow, Affirm, and home builders as case studies in pricing power, consumer demand, and the market’s changing expectations. Personal recommendations and media picks (Priority: 2/5): The episode closed with book, movie, podcast, and TV recommendations, plus a discussion of the 2022 Best Picture nominees and betting markets.

Key Arguments: Inflation is no longer just a supply-chain story; price pressures are now widespread across the economy. The Fed may be behind the curve, but it is unclear how much earlier hikes would have actually reduced inflation given strong consumer demand. Consumers’ real balance-sheet strength explains why companies can continue raising prices without immediate demand destruction. Short-term bond investors are still getting hurt by inflation even if nominal price declines look small. The SEC’s BlockFi action was presented as more about regulatory posture than investor harm, because customers were paid and the issue was disclosure, not fraud. Disney’s parks and travel demand suggest a major vacation boom is underway, while its legacy TV businesses remain challenged. Housing-related stocks may not fully reflect current market strength because rising mortgage rates and pulled-forward returns matter more than headline housing demand. Buy-now-pay-later economics look weak, with Affirm showing large losses and stock-based compensation concerns.

Data Points: U.S. inflation rate: 7.5% - Mentioned as the current CPI level while the hosts discussed inflation staying elevated. Fed target inflation: 2% - Referenced repeatedly as the official target that inflation remains far above. Two-year Treasury yield: 1.6% - Compared with inflation to show how far rates lag price growth. Inflation vs. interest rates gap: Largest ever (by eyeballing the chart) - The hosts said inflation has never been this far ahead of interest rates. Beef prices: +16% - Used as examples of broad-based price increases in the CPI discussion. Chicken prices: +10% - Cited as part of consumer-facing food inflation. Gasoline prices: +40% - Highlighted as a major driver of inflation seen by consumers. Furniture and bedding: +17% - Listed among categories experiencing sharp price increases. Apparel: +5% - Included in the list of inflation-affected categories. CPI categories above target: Over 90% - Matt Klein’s analysis showing inflation breadth beyond pandemic-sensitive categories. Chipotle price increases in 2022: 6% - CEO Brian Niccol said the company had already raised prices by this amount and saw room for more. Short-term bond ETF SHY total return: Down 2% - Used to show that nominal bond losses were modest despite a rapid rise in yields. Real return after inflation on SHY: Down 10% - The hosts noted inflation made the loss much worse in real terms. EV share of all car sales: Almost 9% - Shown as evidence that electric vehicles are becoming mainstream. Used car prices: Flattening - They noted relief in the used-car market after extreme inflation. Homebuilder multiples: KB Home ~7x earnings; DR Horton ~7x; Pulte ~8x; M/I Homes ~4x - Used to question why builders weren’t priced even higher given strong housing demand. Disney park revenue: +100% year over year - Cited as evidence of a strong rebound in travel and park demand. ESPN and ABC revenue: -13% - Highlighted as the weaker side of Disney’s business. Affirm operating loss: $196 million - Compared with $26 million in the prior-year quarter to show deterioration. Affirm stock-based compensation: $82 million - Used to underscore dilution and cost issues. Sports betting handle expected on Super Bowl: $7.6 billion - Barron’s estimate showing rapid growth in legal sports gambling. 30-year fixed mortgage rate: 3.7% - Freddie Mac data showing mortgage rates rising from much lower levels. 15-year fixed mortgage rate: Almost 3% - Also from Freddie Mac, illustrating tightening housing conditions. Real income growth per adult in 2021: 7.6% - Gabriel Zucman’s chart showing overall strong income growth. Middle 40% real income growth: 5.1% - Used to argue the middle class is lagging relative to other income groups. BlockFi penalty: $100 million - Total SEC/state settlement amount that the hosts criticized as excessive. BlockFi institutional loans over-collateralized in 2019: 24% of loans - SEC claim contrasted with the company’s public framing. BlockFi actual over-collateralized figure mentioned in settlement: 16% - Used to illustrate the disclosure dispute. Zillow losses on homes: $881 million - Reported losses from its home-flipping operation. Average Zillow loss per home: $25,000 - The hosts used this to show how difficult the iBuying model was. Housing-related transaction fees TAM: $300 billion - From Zillow’s report to illustrate the scale of the real estate market. Retail roundup contribution ranking: Top 1% - A listener said they were in the top 1% of Chipotle roundup donors. Super Bowl betting growth: +80% vs. previous year - Showed the boom in legal sports betting.

Pivotal Quotes: "I think the boomflation of keeping nominal growth higher and wages higher and dealing with a little bit higher inflation probably is the better alternative." — Ben Carlson: Debating whether the U.S. should accept higher inflation rather than force a recession to hit 2%. "These products matter to people." — Hester Peirce: Quoted from her SEC dissent criticizing the BlockFi settlement and warning against shutting retail users out of crypto yield products. "If inflation 12 months from now, that means we won. I would be stoked." — Michael Batnick: Reflecting on earlier comments that a year of elevated inflation would imply a stronger recovery than feared.

Implications: Listeners should expect continued inflation volatility, more Fed tightening, and a market that is already repricing quickly. Companies with pricing power may hold up, while regulators, crypto firms, and highly leveraged consumer-business models face more scrutiny and stress.