Fallen Angels (EP.145)

Episode Summary

Executive Summary: The episode examines why virus headlines don’t map cleanly onto market performance, using South Korea versus the U.S. as an example, and argues that currency, sector mix, and forward-looking pricing matter more than simple headline comparisons. The hosts also discuss Fed intervention in credit markets, airline distress, layoffs across travel and tech, changing consumer behavior, Social Security, PPP loans, and which pandemic winners may be durable.

Main Topics: South Korea vs. U.S. market performance: The hosts compare virus outcomes and stock returns, showing that South Korea’s better health response has not translated into obvious equity outperformance once currency effects and market composition are considered. Fed support for corporate credit and moral hazard: They debate the Fed’s purchase of corporate debt and ETFs, whether it distorts capital allocation, and how much it really helps distressed issuers refinance. Airlines, travel, and the viability of bailouts: The conversation focuses on catastrophic airline losses, low passenger counts, and whether repeated government support can or should keep airlines afloat. Pandemic winners and business model stress tests: They discuss companies like Disney, Peloton, Airbnb, Uber, DoorDash, and Instacart to separate temporary behavior changes from lasting structural shifts. Labor market impacts and layoffs moving up the income ladder: The hosts note layoffs expanding from lower-income workers into white-collar roles, including Airbnb and NBCUniversal, suggesting the crisis is broadening economically. Government spending, debt, and Social Security: They argue that massive fiscal stimulus and debt do not necessarily spell doom for Social Security, which is politically protected and likely to persist in some form. Everyday life changes: homeschooling, standing desks, and streaming: The episode closes with lighter personal commentary on homeschooling, screen time, Peloton, standing desks, TV recommendations, and quarantine routines.

Key Arguments: Virus success does not mechanically translate into stock market outperformance; markets reflect currencies, sector mix, and global trade exposure. The U.S. dollar’s strength explains a meaningful portion of the apparent underperformance of foreign equities when viewed in U.S. dollars. The Fed is now an enduring market participant, and investors must adapt to a world where central bank actions affect spreads and refinancing conditions. Buying ETFs in secondary markets may not directly fund companies, but Fed announcements still materially lower yields and improve financing conditions. Airlines face a fundamentally challenged business model during and after the pandemic because passenger demand collapsed and business travel may never fully recover. Many so-called permanent behavior changes may instead be temporary, with consumers likely to revert once a vaccine or reopening normalization arrives. Stock winners often appear obvious only in hindsight; the crisis briefly created entry points in sectors like biotech, tech, and digital services. Social Security is politically difficult to cut and should remain available in some form, even if benefits or funding formulas change. PPP and relief programs were designed as emergency bridges, but confusion and weak business economics may reduce uptake or make follow-on support necessary. The pandemic’s economic damage is spreading beyond low-wage jobs into management and other white-collar segments.

Data Points: South Korea daily virus occurrences: ~12 per day - Used to illustrate South Korea’s relative success in controlling the outbreak. SPY vs EWY YTD performance: S&P 500 outperformed South Korea ETF by over 10% - Comparison of U.S. and South Korean equity returns in U.S. dollars. Local currency Korea vs S&P 500: S&P 500 outperforming by roughly 3.5% - After removing dollar effects using MSCI Korea local currency index. Dollar impact on returns: About 5% to 6% - Estimated portion of the return gap attributable to currency strength. Germany year-to-date return: Down 20% - Compared with the S&P 500 down about 8% to 9%. South Korea year-to-date return: Down 12% - Shown as better than some peers but still below the U.S. on a dollar basis. Airline industry losses: $350 million to $400 million per day - Collective daily losses for major airlines. Passengers per flight: 23 - Average number of passengers per flight during the downturn. Air traffic decline: 94% - Shows the collapse in airline demand. Southwest daily losses: $30 million to $35 million - Estimated daily losses for Southwest. American Airlines daily losses: $50 million - Estimated daily losses for American. Delta cash and equivalents: $6 billion - Used to estimate runway under severe losses. Delta runway at current loss rate: Just over 100 days - Simple division of cash by daily losses, before considering debt and other factors. Instacart fees: $4 delivery fee + $15 service fee + 10% tip - Example of high delivery costs for grocery shopping. DoorDash added cost: 35% to 40% more - Estimated premium versus ordering directly from the restaurant. Airbnb workforce reduction: Nearly 1,900 laid off out of 7,500 - Roughly 25% of the company. Airbnb occupancy rate: 17.5% - 90-day booking occupancy rate reached on May 8. Airbnb occupancy weekly gain: 7% week over week - Shows rebound from a depressed base. Airbnb occupancy vs 2019: Still down 38% - Despite the rebound, activity remained well below prior-year levels. Uber layoffs: 3,700 employees - Company-wide job cuts amid collapsing ride demand. Uber global gross bookings: Down 80% - Highlights the severity of demand decline. Uber stock performance: Up 8% year to date - Example of a stock rising despite weak fundamentals. Lime valuation change: $510 million vs prior $500 million; 80% below previous valuation - Illustrates steep markdowns in adjacent mobility businesses. Peloton digital user growth: 1.1 million users added - Evidence of strong pandemic demand for home fitness. Peloton quarterly sales: $524 million - Compared with estimates of $488 million. NASDAQ 100 peak-to-trough decline: 29% - Used to note that even tech darlings were hit hard initially. U.S. Treasury expected borrowing: $4.5 trillion in fiscal year - Highlights the scale of fiscal response. Emergency spending compared to 08-09: $3.6 trillion in six weeks vs about the prior five years’ spending - Shows the extraordinary speed and scale of stimulus. U.S. tax receipts: About $2 trillion per year - Used in a discussion of MMT and fiscal capacity. Social Security spending in 2019: $1 trillion - About 23% of the annual budget. Social Security reliance among seniors: 50%+ of retirement income for half of seniors; 90% for about 25% - Shows why politically it is hard to cut. Social Security trust fund timing: 2034 - Projected point when payroll taxes no longer fully cover benefits. Social Security coverage after depletion: About 80% - Benefits still largely funded even if the trust fund runs down. Long-run Social Security coverage: 73% by 2094 - Illustrates that payroll taxes would still fund most benefits decades later. PPP additional funding: $310 billion - Second-round relief discussed alongside remaining unused funds. PPP remaining available: More than 40% - Surprisingly large amount of money still unclaimed after two weeks. Beef production decline: 35% - Due to temporary meatpacking plant closures. Restaurants surveyed: 185 - Analysis showing menu changes from beef shortages. Men claiming they do most homeschooling: 45% - Survey finding on home schooling responsibilities. Women agreeing spouse does most homeschooling: 3% - Large gender perception gap in the survey. Interactive Brokers oil trading loss exposure: $9 million owed by a customer - Example of negative oil prices breaking brokerage systems. Interactive Brokers software mistake: $113 million - Cost of the pricing bug triggered by negative oil prices. MTUM assets: $9 billion - Momentum ETF discussed in the context of strategy assets. Russell World 1000 Value ETF assets: $34 billion - Used to compare popularity of value versus momentum products.

Pivotal Quotes: "Markets exist to allocate capital. Anything the Fed does to distort that process creates moral hazard." — Barron’s quoted manager at Osterweiss Strategic Income: Critique of the Fed’s intervention in credit markets and corporate debt. "When your farm is burning, you don't worry if you have enough water to make it through the next three crop seasons. You put out the fire and then you worry about it later." — Mark Golden, quoted in the discussion: Used to justify massive emergency fiscal spending despite long-term debt concerns. "I want a moratorium on the use of V-shaped recovery." — Ben Carlson: Rejecting simplistic rebound narratives for Airbnb and broader economic reopening.

Implications: Investors should avoid overreading headlines and instead focus on valuation, currencies, market structure, and policy backstops. The crisis is accelerating structural winners, exposing weak business models, and reinforcing that government and Fed support will shape markets for years.