Is a Recession Bullish? (EP.275)

Episode Summary

Executive Summary: Michael and Ben recap their successful Future Proof live event, then shift to markets: they argue inflation matters more than rising rates for stocks, expect the Fed to push too far, and see signs inflation may be peaking as supply chains ease and housing cools. They also discuss gold’s failure as an inflation hedge, the dislocation in housing and mortgages, and several personal/life reflections on family, travel, and happiness.

Main Topics: Future Proof live show and event recap (Priority: 5/5): They reflect on their first live podcast performance, audience energy, outdoor venue benefits, networking, food trucks, concerts, and plans to make Future Proof bigger next year. Inflation, rates, and market direction (Priority: 5/5): A central debate is whether inflation or interest-rate increases matter more for equities. They conclude inflation falling is more bullish than rates falling, and they become cautiously constructive on stocks despite recession risk. Fed policy, recession risk, and yield curve (Priority: 5/5): They discuss expectations for aggressive Fed hikes, the chance the Fed overshoots and causes recession, and the signal from short-term yields rising faster than long-term yields. Inflation data, shelter, and peaking price pressure (Priority: 5/5): They analyze CPI components, especially shelter and food, note lagged rent measurement, and argue inflation may have peaked even though it will remain sticky for a while. Housing market stress and iBuying failures (Priority: 4/5): They use Opendoor and Zillow as examples of housing turning down, note falling listings and likely recessionary implications, and discuss how high rates hurt buyers while insulating existing homeowners. Gold, commodities, and inflation hedges (Priority: 4/5): They reject gold and bitcoin as reliable inflation hedges this cycle while pointing to broad commodities as the more credible hedge. Personal life, happiness, and work culture (Priority: 3/5): The episode closes with discussion of family, children’s sports, health, quiet quitting, movie recommendations, and the idea that family and health matter more to happiness than income or leisure.

Key Arguments: Inflation is a more important driver of stock market performance than the level of nominal interest rates; falling inflation can be bullish even if the Fed is still hiking. The Fed is likely to overtighten because it is behind inflation and wants to reassert credibility, increasing recession odds. A recession may already be partly priced in, so markets could bottom as bad news becomes more visible rather than when the recession is formally avoided. Gold is not behaving like an inflation hedge in this cycle; commodities are the asset class showing more direct inflation protection. Housing is the key transmission mechanism for Fed policy, and weakness in new home sales and prices could be an early recession signal. The typical investor and consumer experience is highly uneven: homeowners with low fixed-rate mortgages and rising wages are in a stronger position than younger renters facing higher rents and home prices. Conference/event design matters: outdoor venues, flexible food options, and social space improve attendee experience and energy. Family, health, and relationships are stronger predictors of happiness than income or leisure time.

Data Points: Big Tech Momentum backtest annualized return: almost 30% per year - Composer symphony using 20-day momentum among large tech stocks Big Tech Momentum drawdown: about 50% - Strategy mentioned as being in a large drawdown despite strong long-run returns Average age of advisor at Future Proof: 35 - A stat repeated at the conference, highlighting a younger advisor audience Inflation rate in August: 8.3% - Used to argue inflation may have peaked but is still very elevated Food at home inflation: 13.5% - August CPI component, highest since February 1979 University of Michigan 1-year expected inflation: 4.6% - Lowest reading since last September One-year Treasury yield: 4.0% - Up from 0.07% a year earlier One-year Treasury yield a year ago: 7 basis points - Illustrates the speed of rate increases 10-year Treasury yield: below 3.5% - Used to argue long-end yields are not confirming short-end spike U.S. investment grade bond yield: 5.1% - Highest since 2009 Global government bond annual loss: worst since 1949 - Used to explain why allocators may not rebalance aggressively into bonds China’s share of outstanding U.S. Treasuries: 4% - Down from 40% ten years earlier; China is no longer the marginal buyer Global supply chain pressure index: hard peak / declining - Cited as evidence inflation pressures may be easing Opendoor stock performance: down 73% year to date - Used as a housing/iBuying cautionary example Zillow stock performance: down 48% year to date - Referenced alongside Opendoor and Zillow’s iBuying retreat Pandemic housing units vs households: 2.5 million units vs 4.7 million households - Evidence that household formation outpaced housing supply Quiet quitters: at least 50% of the U.S. workforce - Gallup survey discussed as largely unchanged over time New unicorns at peak vs recent quarter: 147 vs 18 - Signals a sharp slowdown in venture creation Patagonia founder’s company transfer: gave up company control - Mentioned as news prompting book recommendation rather than numeric data

Pivotal Quotes: "I think the great thing about Composer is you can look at these backtests now and see how they're performing in real time in a bad market." — Michael: Ad read turned into a point about why live backtests are useful during drawdowns "It's all about inflation." — Ben: The core thesis of the market discussion: inflation matters more than rates for equity returns "I think we're going to overdo it." — Ben: His view that the Fed may tighten too aggressively and trigger recession

Implications: Listeners should watch inflation and housing more than headline rate hikes. If inflation cools, stocks could recover even amid Fed tightening; if the Fed overdoes it, recession risk rises. Housing and labor market trends remain key signals.