Home Buyer's Remorse (EP. 458)

Episode Summary

Executive Summary: The episode argues that the recent market selloff looks more like a normal correction than a recession, with earnings still positive and many sectors/companies showing resilience despite war, oil shocks, and AI-related valuation compression. The hosts also discuss wealth inequality, private markets, housing costs, AI’s labor impact, and several personal/media recommendations.

Main Topics: Market correction vs. recession (Priority: 5/5): The hosts contend the selloff is orderly and not yet evidence of a true recession. They emphasize that inflation, rates, and especially earnings—not headlines—will determine whether the decline becomes something worse. Earnings remain solid despite stock declines (Priority: 5/5): They cite company commentary and sector data showing positive earnings growth even as valuations compress, especially in tech/software where stocks are falling despite strong fundamentals. Oil, geopolitics, and inflation risk (Priority: 4/5): The conversation weighs whether the Middle East conflict and oil spikes will meaningfully damage the economy. They argue the U.S. is more energy-independent than Europe and that short-term oil spikes may be less damaging than feared. AI, concentration, and valuation compression (Priority: 4/5): The hosts discuss how AI spending is making big tech more asset-heavy and potentially lowering returns on capital, which could justify lower multiples even if earnings keep growing. Wealth inequality, social mood, and politics (Priority: 4/5): They highlight the rapid growth in ultra-high-net-worth households and debate whether AI and asset concentration could intensify inequality and political backlash. Housing affordability and the cost of ownership (Priority: 3/5): A listener story illustrates how homeownership can become a series of expensive repairs, reinforcing the point that housing is not a simple or cheap asset for younger buyers. Private markets, crypto, and alternative assets (Priority: 3/5): They criticize private credit liquidity risks, question the push to put alternatives into 401(k)s, and note that crypto’s total market cap has stagnated despite years of innovation and funding.

Key Arguments: The market is down, but not in a panic; the VIX has not spiked and there has been no major capitulation day. A recession is not yet supported by the evidence; several business CEOs report stable or positive activity. Corrections are normal and often create long-term buying opportunities if earnings stay intact. Tech stocks can fall even with strong earnings because AI-related capex is compressing multiples and changing terminal value assumptions. Oil shocks matter, but the U.S. is better insulated than Europe due to domestic energy production. Wealth concentration is rising sharply, which may fuel political and social backlash over time. AI may widen inequality, but it could also extend the productivity of lower-skill workers by giving them better tools. Private credit and interval funds face liquidity and valuation risks that are not well understood by many investors. Crypto has not delivered the broad transformation many expected; stablecoins may be the main durable use case. Most active managers still underperform over long horizons, reinforcing the case for indexing.

Data Points: S&P 500 drawdown: Down 9% - Used to characterize the market as a normal correction rather than a bear market. Russell 2000 drawdown: Down 11% - Shows small caps are weaker than large caps but still within correction territory. MSCI EAFE drawdown: Down 11% - International developed equities also under pressure. Emerging markets drawdown: Down 13% - Broader global weakness cited. Nasdaq 100 drawdown: Down 12% - Tech-heavy index underperforming amid valuation compression. Gold drawdown: Down 16% - Even defensive assets were weak in the selloff. Software drawdown: Down 34% - Illustrates severe compression in high-multiple software names. Silver drawdown: Down 40% - Commodity weakness noted alongside broader risk-off moves. Bitcoin drawdown: Almost 50% - Crypto volatility highlighted as part of the risk-off environment. Ethereum drawdown: Almost 60% - Shows deeper crypto weakness than Bitcoin. Micron DRAM revenue growth: 207% year over year - Example of a company with explosive earnings growth whose stock still fell sharply. Technology sector earnings growth: 18% - Duality Research chart cited to show tech fundamentals remain strong despite stock declines. Technology sector multiple compression: 25% - Explains why tech stocks are down even with rising earnings. S&P earnings growth: 5% - ChartKidMatt/Exhibit A cited to show fundamentals are still positive. S&P P/E contraction: 10% - Valuation compression identified as the main driver of the decline. Top 20 VC deals share of enterprise software funding: 44% in 2025 - Shows extreme concentration of venture capital in a few AI companies. U.S. households worth $30M+: 430,000 households - Wall Street Journal/Fed data cited to show rapid growth in ultra-wealthy households. U.S. households worth $100M+: 74,000 households - Illustrates the scale of extreme wealth accumulation. Top 0.1% wealth growth: More than 13-fold over 50 years, inflation-adjusted - Used to support the inequality argument. Down calendar years since 2009: 2 years - 2018 (-4%) and 2022 (-18%) were the only down years mentioned. Average annual drawdown: 14% to 16% - Referenced as the typical intra-year decline investors should expect. Private credit/BDC pricing gap: About 25% discount - Used to illustrate why NAV-based redemptions can be problematic. European households using natural gas for heating: Roughly 40% - Explains why European energy prices are more vulnerable to geopolitical shocks. Total crypto market cap: Flat over the past five years - Despite new protocols and inflation from existing ones, the market has not grown materially. Delta bookings: Up 25% year over year - Evidence that premium travel demand remains strong. Delta top sales days: 8 of top 10 sales days in company history - Supports the claim that the premium consumer is healthy. Mortgage payment stability: Remarkably stable from Jan. 2000 to Jan. 2020 - Used to show why the post-2020 housing affordability shock feels exceptional.

Pivotal Quotes: "The burden of proof is on you." — Michael Batnick: He argues that claims of an imminent bear market or recession need stronger evidence than the current orderly selloff. "No signs of recession in any of our data or indicators." — Paychex CEO: Cited as evidence that small and mid-sized business activity remains stable. "The market is sniffing something out that doesn't smell too good." — Ben Carlson: He acknowledges that valuation compression may reflect real concerns about future business models, especially in tech/software.

Implications: Listeners should expect continued volatility, but not assume a recession without stronger evidence. The episode suggests long-term opportunities may emerge in beaten-down quality stocks, while warning that AI, private credit, and housing affordability could reshape markets and politics.