Business Optimism Crashes (EP.307)

Episode Summary

Executive Summary: The episode covers markets through a mix of humor and data: regional bank stress versus 2008, the Fed’s ongoing rate hikes amid banking turmoil, labor-market and inflation resilience, the case for international diversification, and several company/consumer themes from Zillow and Apple to Coinbase and Airbnb. The hosts argue the economy remains stronger than recession fears suggest, but policy tradeoffs and uneven sector outcomes make diversification and patience essential.

Main Topics: Regional bank failures and why this is not 2008 (Priority: 5/5): They compare 2023 regional-bank failures to the 2008 crisis, emphasizing that the causes, leverage, and systemic risks are very different even if the asset totals look similar. Fed policy, inflation, and the 'blunt tool' debate (Priority: 5/5): A long debate centers on whether the Fed should keep hiking while banks are failing, whether it is prioritizing credibility, and whether rates are actually helping or merely creating unnecessary risk. Labor market strength versus recession fears (Priority: 4/5): They discuss strong payrolls, prime-age participation, and wage growth, arguing the hard data still looks better than the gloomy sentiment and recession predictions. Diversification and the case for international stocks (Priority: 4/5): An AQR piece is used to support the argument that international diversification still matters, especially when U.S. valuation leadership is unusually rich. Company-specific takeaways: Apple, Coinbase, Zillow, Airbnb (Priority: 3/5): They comment on earnings and business models, noting Apple’s scale, Coinbase’s fee pressure, Zillow’s real-estate dominance, and Airbnb’s efforts to improve the user experience. Housing, moving costs, and homeowner equity (Priority: 4/5): They argue the housing market is highly local and slow-moving, with high moving costs and significant home equity creating a gradual thaw rather than a crash. Consumer pricing, margins, and corporate adaptability (Priority: 3/5): They discuss price increases at consumer companies and suggest corporations are skilled at preserving margins via pricing power and productivity gains.

Key Arguments: Regional bank failures are serious but not comparable to 2008 because today’s problem is concentrated deposits/geography, not a system-wide leverage collapse. The Fed may be taking an unnecessary risk by raising rates while banks are failing; pausing would have been the safer move. Inflation may be falling despite the Fed rather than because of it, while the labor market remains resilient. A true recession is not visible in current hard data; soft data and sentiment can be gloomy without immediately changing economic outcomes. International diversification remains justified because U.S. outperformance since 1990 is largely valuation-driven, not entirely fundamental. The U.S. stock market can be fine even if one sector or region underperforms for a decade or more. Housing is local and sticky; high equity and life events will eventually loosen the low-mortgage-rate lock-in effect. Corporate America is highly effective at preserving margins through pricing and productivity, making mean reversion less reliable than in the past.

Data Points: YCharts scenario example final value: about $600,000 - $5,000 invested in SPY in 1998 plus $500/month through April 2023 Total invested in YCharts example: about $157,000 - Same long-term SPY contribution scenario Value during March 2009 in example: $50,000 market value on $72,000 contributed - Illustrates being underwater for more than a decade KRE total return since inception: up 17% - Regional banking ETF total return since 2006 S&P 500 total return since KRE inception: up 355% - Comparison versus regional banks AGG total return since KRE inception: up 68% - Bond market comparison Combined assets of 2023 failed banks: $532 billion - Signature, SVB, and First Republic combined assets 2008 failed-bank asset total (inflation-adjusted): $526 billion - 25 bank failures during the GFC at the height of the crisis KRE vs S&P from 2010 to most of 2018: both up 170% - Shows that sectors can underperform or diverge later while markets still move similarly for long stretches Current Fed funds target probability: 88% for 500-525 bps - Market-implied probability for June rate decision 10-year Treasury yield: 3.5% - Used in discussion of yield curve and bond market expectations 3-month T-bill yield: 5.2% - Highlighted inversion versus longer-term yields Average hourly earnings growth: 4.4% y/y in April - NYT-reported wage growth versus prior 4.3% AQR U.S. outperformance since 1990: 4.6% per year - Versus MSCI international index before valuation adjustment AQR adjusted U.S. outperformance: 1.2% per year - After controlling for valuation changes Apple and Microsoft index weight: almost 14% combined - Top holdings concentration in the S&P 500 Top 10 S&P 500 weight: 29% - Highest concentration since roughly the 1960s/70s Buzz ETF assets: down 90% from peak to $50 million - VanEck Social Sentiment ETF since launch Buzz ETF performance: down 50% - Performance since launch in March 2021 Prime-age employment recovery: V-shaped - 25-54 employment rate recovered strongly after the pandemic Prime-age participation and full-time employment: near 2000 highs - Labor force participation and full-time employment-population discussion Consumer concern about banks: 48% concerned - Pew/Gallup-style polling on worries about bank safety Very concerned about banks: 19% - Subset of adults very concerned about bank safety Bank accounts above FDIC cap: less than 1% - Apollo stat on balances over $250k Age when people notice aging: 42 - Poll on physical signs of aging Apple category revenue: nearly $7 billion per quarter for iPad alone - Illustrates scale of Apple’s product lines Coinbase consumer trading volume: $20 billion - Most recent quarter discussed Coinbase institutional trading volume: $124 billion - Institutions traded roughly 6x consumer volume Coinbase consumer transaction revenue: $350 million - Consumer side versus institutional side Coinbase institutional transaction revenue: $22 million - Shows consumer fees are much higher than institutional fees Homeowners with paid off home or >50% equity: 67% - Housing equity supports reduced forced selling Homeowners with paid off home outright: 39% - Part of the same equity chart Homeowners with >50% equity but not paid off: 29% - Part of the same equity chart Cost to move: $26,000 to $40,000 - Estimated transaction and relocation costs Zillow direct traffic share: over 80% - Most visits are direct, indicating strong brand recognition Home buyers using Zillow: 67% - Stated usage metric for housing search Zillow app share among housing apps: 63% - Compared with Realtor.com and Redfin Realtor.com app share: 20% - Housing-search app market share Redfin app share: 13% - Housing-search app market share Zillow revenue target: $5 billion by 2025 - Management financial target Zillow adjusted EBITDA target: 45% by 2025 - Management financial target Apple revenue trend: two consecutive quarters of y/y declines mentioned - Discussed as evidence it may no longer be a classic growth company Small business optimism index: lowest since April 2013 - Used as a recession-warning soft-data indicator Regional job losses in the South: third straight month in April - ADP state-level labor data Kraft pricing versus volume: prices up 13%, volumes down 6.5% - Example of consumer packaged goods price pass-through AI mentions in earnings calls: significant increase from near zero - Bloomberg/earnings-transcript trend

Pivotal Quotes: "Why don’t they just chill out a little bit and let things settle a little bit." — Michael: Critique of the Fed continuing to hike rates during regional-bank stress "A diversified portfolio that you hold today might look completely sensible. Tomorrow, it will look full of mistakes." — Michael (quoting AQR/Cliff Asness theme): On why diversification is emotionally difficult even when it is prudent "I got to the top of the mountain, and there was nothing to see." — Jason Karp (as recounted): On why wealth alone does not guarantee happiness

Implications: Listeners should expect continued policy/economic volatility but not assume a systemic banking or immediate recession crisis. The episode reinforces staying diversified, accepting local housing/sector differences, and focusing on fundamentals rather than headlines.