Everyone Back in the Boat (EP. 460)

Episode Summary

Executive Summary: Michael Batnick and Ben Carlson span tax season, IRS enforcement, market resilience, AI’s impact on software and labor, housing, and generational wealth. The episode mixes practical firm growth commentary with macro takeaways: taxes are a controllable source of alpha, markets are discounting geopolitical shocks, and AI may be reshaping software, entry-level work, and venture capital faster than public data shows.

Main Topics: Tax season and Ritholtz’s tax team (Priority: 5/5): They discuss April 15, tax complexity, and why in-house tax expertise improves after-tax outcomes. IRS enforcement and compliance trends (Priority: 5/5): They examine falling IRS staffing and audits, arguing enforcement may be too weak for a complex code. Market resilience amid geopolitics and AI (Priority: 5/5): They note stocks recovered after the invasion shock and argue AI, not war, may be the bigger bull-market risk. Software, semiconductors, and stock rotation (Priority: 5/5): They highlight software’s collapse relative to semis and debate whether this is a trade or a structural change. Labor market uncertainty for young workers (Priority: 5/5): They question whether AI is hurting entry-level hiring and whether headline data understates discouragement. Housing, demographics, and generational comparisons (Priority: 4/5): They discuss boomer/millennial affordability, housing bifurcation, and how aging cohorts may affect demand. Venture capital and AI concentration (Priority: 4/5): They cover record VC fundraising driven by AI mega-rounds and the extreme efficiency of AI startups.

Key Arguments: Tax alpha matters more than market alpha because investors can control taxes directly. IRS understaffing plus complexity may reduce compliance more than it saves in spending. The market was right to discount the invasion shock; stocks recovered and oil never spiked enough. AI may be the main future disruption, especially for software, consulting, and entry-level jobs. Software’s collapse versus semis suggests a major sector re-rating, not just normal volatility. Young workers may be discouraged rather than officially unemployed, which can hide labor weakness. Housing is highly regional; the sunbelt is weaker while some Midwest/Northeast markets remain tight. AI is attracting massive venture dollars and could produce extreme winner-take-all outcomes.

Data Points: IRS audits of people with at least $10 million in income: dropped 9% last year - Cited from the Wall Street Journal on IRS enforcement trends IRS audits of people with at least $10 million in income: on track to decline another 39% this year - Cited from the Wall Street Journal on IRS enforcement trends IRS workforce: 90,000 employees - They compare IRS staffing levels across years IRS workforce: 70,000 people - Current approximate IRS staffing level mentioned in the discussion Federal spending cut from IRS workforce reduction: $46 billion over the next decade - Estimated savings from a smaller IRS workforce Lost tax revenue from reduced IRS enforcement: $643 billion - Estimated revenue loss mentioned alongside the staffing cuts Tax compliance rate: 85% of what they owe - IRS estimate of taxpayers paying on filing S&P 500 performance: up 1% on the year or so - Market context during the discussion Emerging markets performance: up 12% or 13% - Year-to-date performance cited EFA performance: up almost 8% - Year-to-date performance cited Software sector weight in tech: 25% - Current share of the technology sector Software sector weight in tech: 54% in January 2020 - Historical comparison showing re-rating Snowflake price move: $280 to $120 in six months - Example of extreme software-name volatility IGV 5-year return: 6% - Used to show weak software ETF performance over five years SMH 5-year return: up about 260% - Used to contrast semiconductors versus software Energy sector weight in the S&P 500: about 4% - Current low weighting in the index Energy sector weight in the S&P 500: close to 30% in 1980 - Historical peak referenced from Carlisle Technology and energy weight in 1996: both about 9% - Used to show long-term sector rotation Walmart CFO consumer view: probably more constructive on the consumer than what one would glean from reading the headlines - Quoted transcript excerpt on consumer resilience Consumer spending via Bank of America cards: up 4.3% year over year - Strongest growth since early 2023 University of Michigan consumer sentiment: hit an all time low - Survey reading discussed as weakened by low response rates Average applications per entry-level job: way higher than historically - Discussed as a sign of labor-market competition for young workers Q1 2026 venture capital fundraising: $242 billion - Described as the largest venture quarter ever by a lot Q1 2024 venture capital fundraising: $16 billion - Used as comparison to show AI-driven surge Cursor AR per full-time employee: $6.1 million - Example of AI startup efficiency Lovable AR per full-time employee: $3.4 million - Example of AI startup efficiency OpenAI AR per full-time employee: $1.5 million - Example of AI startup efficiency Anthropic AR per full-time employee: $1.2 million - Example of AI startup efficiency Salesforce AR per full-time employee: $540 grand - Compared with AI-native software companies Datadog AR per full-time employee: $510 grand - Compared with AI-native software companies SK Telecom stake in Anthropic: a hundred million dollars - 2023 investment cited as an AI winner example Latest value of SK Telecom Anthropic stake: over two billion dollars - Shows magnitude of AI-related gains Nickel and dime effect on housing affordability: median new-home affordability chart showed boomers had it harder in parts of the 1970s-1990s - Transcript discusses affordability comparison between generations

Pivotal Quotes: "The market was right. The market was right and we sided with the market." — Michael Batnick: On the invasion shock and market recovery "I think the behavior has improved for the better." — Ben Carlson: On how investor behavior has changed over the past decade "I want to give you some respect." — Michael Batnick: Humorous acknowledgement of Ben’s writing output and consistency

Implications: Investors should watch whether AI pressure shows up in labor data and software fundamentals before assuming the recent rotations are temporary.