Flash Crash or Recession? (EP.372)

Episode Summary

Executive Summary: The episode centers on the abrupt market selloff tied to Japan’s rate hike and an unwinding yen carry trade, with Michael and Ben debating whether it’s a true crisis or mostly a leveraged flash crash. They also criticize the Fed for missing a chance to cut early, discuss inflation, labor softness, housing, demographics, AI/job displacement, and mix in lighter lifestyle and media recommendations.

Main Topics: Market selloff and the Japan carry trade unwind (Priority: 5/5): They frame the recent volatility as a dramatic but likely leverage-driven event, not necessarily a full economic meltdown, citing the Nikkei plunge, VIX spike, and subsequent rebound. Fed timing and Jerome Powell’s “legacy game” (Priority: 5/5): A major theme is that the Fed missed its chance to cut before weaker labor data, with Powell portrayed as late and now forced into a reactive posture. Labor market cooling vs. soft landing (Priority: 4/5): They debate whether rising unemployment and weaker jobs data signal a recession or a normal slowdown from historically tight labor conditions, with some evidence still pointing to a soft landing. Inflation, pricing power, and consumer limits (Priority: 4/5): They argue inflation has eased enough that consumers are pushing back on higher prices, using restaurant and delivery fees as examples of the limits to pricing power. Housing, demographics, and long-run asset returns (Priority: 3/5): They discuss predictions that housing may underperform over the next decade, while noting demographics and supply constraints could keep housing prices supported. AI, automation, and job displacement (Priority: 3/5): They note that many current jobs didn’t exist in 1940 and suggest AI, robotics, and autonomous delivery/transport will displace some work but also create new occupations. Culture, media, and everyday-life tangents (Priority: 2/5): The conversation includes Olympics streaming, DoorDash fees, saunas, weather forecasts, movies, and TV recommendations, keeping the episode’s conversational style intact.

Key Arguments: The selloff looked severe because leverage amplified it, especially through a yen carry trade unwind, but that makes it closer to a flash crash than a confirmed macro collapse. The Fed should have cut earlier; waiting until labor weakness became obvious made Powell look late rather than proactive. An emergency cut right after a weak jobs report might have panicked markets, so the missed opportunity was the prior meeting, not necessarily yesterday. The current economy still looks more like a soft landing than a recession because many hard-data indicators remain solid. Inflation has cooled enough that consumers are resisting further price hikes, which is why restaurants and consumer companies are hitting a ceiling on pricing power. Housing may deliver low returns from here, but demographics and low supply could keep the market stronger than pessimists expect. AI/robotics will eventually displace many service and driving jobs, but the economy historically creates new occupations to replace old ones. Market volatility is normal in-year even if it feels extreme; a 10% drawdown is common, and panic at the bottom is nearly impossible to time correctly.

Data Points: Nikkei move: Down 13% in one session, then up about 10% the next day - Used to illustrate the severity and speed of the Japan-driven market unwind VIX: Spiked to the 60s intraday; around 32 on Tuesday morning - Compared to past crisis-like spikes and questioned against credit spreads S&P 500 drawdown: Down 8.5% from highs - Recorded as still not in official correction territory at the time Intra-year drawdowns: 64% of the time markets see a 10%+ drawdown - Cited to argue that drawdowns themselves are normal even if the trigger is unusual Fed funds rate: About 5.5% - Used to argue the Fed is behind the curve relative to inflation and bond yields 10-year Treasury yield: About 3.7%-3.8% - Mentioned as evidence that the bond market has already moved lower Inflation: About 3% - Contrasted with the higher policy rate to show a disconnect Real weekly restaurant wages: Rose about 40% since 2015 - Used to explain persistent restaurant price increases and labor cost pressure Households owning mutual funds: 68.7 million - From the ICI Factbook, noted as a rise from 58.7 million in 2020 Households owning ETFs: 15.2 million - Compared with mutual fund ownership to show broader asset ownership still skews to mutual funds U.S. births: 4+ million per year from 1990 to 2010 - Used in the housing/demographics discussion as a tailwind for household formation Probability of rain example: 30% chance of rain - Explained as probability for any point in the area, not a guarantee for the whole region Divorce rates: 43% of first marriages; 60% of second; 73% of third - From a Forbes piece mentioned during listener email discussion Broad labor-stat observation: Four consecutive monthly unemployment-rate increases without recession had never happened since 1936 - Used to frame recession concerns around the labor market Occupations: 60% of today’s workers are in jobs that didn’t exist in 1940 - Cited as evidence that labor markets adapt over time

Pivotal Quotes: "I think Jerome Powell choked." — Michael Batnick: Critiquing the Fed for missing the chance to cut before labor data weakened further "This is a legacy game for Powell." — Michael Batnick: Framing Jackson Hole and the next Fed move as a defining moment for Powell’s credibility "The type of sell-off we got yesterday is way better than, oh shit, Apple missed, Google missed, Microsoft missed, recession, corporate profits are waning." — Michael Batnick: Explaining why a leverage-driven selloff is preferable to an earnings/recession-driven downturn

Implications: Listeners should expect continued volatility, but not assume every sharp drop is a recession signal. The Fed’s credibility and timing now matter more, while housing, labor, and AI remain medium-term themes shaping markets and work.