Is a Soft Landing Inflationary? (EP.292)

Episode Summary

Executive Summary: The hosts argued that the post-2022 backdrop has made both bonds and stocks look more attractive, but investor psychology still favors risk-taking and FOMO over obvious alternatives. They highlighted the surprising strength of international stocks, the resilience of consumer spending and housing, the debate over whether the soft landing is inflationary, and major business/market shifts in ETFs, tech, crypto, and retail.

Main Topics: Bonds regain relevance in portfolios (Priority: 5/5): The show opens with a discussion of short-duration fixed income finally offering meaningful yields, making cash and bond allocations competitive again versus stocks, especially for conservative and retiree investors. Stocks vs. bonds and investor psychology (Priority: 5/5): They argue that even when T-bills yield 4.5%+, many investors will still chase equities because short bursts of stock gains and FOMO are hard to resist, especially after a volatile bear market in both stocks and bonds. International stocks and the dollar reversal (Priority: 5/5): The hosts note that international equities have sharply outperformed U.S. stocks over a short window, partly due to dollar weakness and the fact that global markets were previously considered uninvestable. The 60/40 portfolio and diversification debate (Priority: 4/5): BlackRock’s critique of traditional 60/40 is contrasted with Goldman’s defense. The hosts argue last year was unusually bad, but diversification is not dead and bonds remain useful alongside equities. Inflation is cooling, but services remain sticky (Priority: 4/5): They review CPI components showing goods and energy easing while services ex-food and energy remain the main inflation problem. Used cars fell sharply, while eggs, travel, and restaurants remain notable pressure points. Housing market thaw and affordability mechanics (Priority: 4/5): Mortgage rates, low debt-service ratios, and concessions are bringing buyers back. The hosts emphasize that lower monthly payments matter more than rising home prices for household spending behavior. Crypto, fintech, and platform durability (Priority: 3/5): They discuss Bitcoin, Coinbase, GBTC discount compression, and tokenization. The main theme is that bottom-fishing is difficult and activity can rebound fast if crypto prices recover.

Key Arguments: Higher short-term yields do create competition for stocks, but human behavior and FOMO make it unlikely that investors will broadly flee equities just because cash yields are attractive. Rising rates reduce the present value of future cash flows, making stocks relatively less attractive in theory, but actual portfolio shifts are driven by emotion and recent performance. The 2022 stock/bond drawdown was extreme but not enough to kill diversification; the 60/40 portfolio still matters because both asset classes are now more reasonably valued than they were 18–24 months ago. International stocks deserve attention because they were deeply out of favor, and their sharp relative outperformance is partly a mean-reversion story plus dollar weakness. Soft landing may not be inflationary if households and firms have already retrenched; if inflation returns to target without recession, it would challenge the idea that mass unemployment was necessary. Lower mortgage payments, not just higher home prices, are a major driver of consumer resilience because refinancing and locked-in low-rate debt increase long-term spending power. Used car prices, goods inflation, and energy inflation are easing, but services inflation remains the key sticking point and will likely determine the pace of disinflation. Crypto trading and Coinbase revenues are highly tied to market activity and sentiment; volume can recover quickly if Bitcoin continues to rise. Big tech and innovation investing remain difficult at the stock-picking level, but index funds still capture winners as they become larger over time.

Data Points: S&P 500 year-to-date return (as mentioned): up more than 4% - Used to show how stocks can outperform T-bill yields quickly in short bursts. Nasdaq 100 (Qs) year-to-date return: up more than 5% - Supports the argument that equities can beat cash rapidly. Russell 2000 year-to-date return: up over 7% - Small caps were also strong in the latest rally window. T-bill yield: around 4.5% - Used to frame the new competition between cash and equities. 10-year Treasury yield in 1987: 9.9% - Illustrated how even very high bond yields did not fully pull investors out of stocks during major equity volatility. MSCI World ex-US outperformance: 14 percentage points on a rolling 50-day basis - Highlighted the sudden and large relative move in international stocks. International stock return since market bottom: up more than 27% - From roughly mid-October to the time of discussion. S&P 500 return since market bottom: up 12% - Compared against international equities. Global central bank balance sheets vs. FANG+: same-chart comparison criticized as misleading - The hosts called out a chart crime involving dual axes rather than a numeric statistic. S&P 500 dividends in 2022: up 11% - Dividend growth outpaced inflation despite the equity drawdown. S&P 500 dividends per share: from a little over $60 to almost $67 - Specific per-share dividend increase during 2022. Digital disruptors cited by Andreessen analysis: 17 discussed; more than one-third declined in market value - Shows how hard it is to pick winners in technology. Groupon market value decline: down 98% - Example of a failed digital disruptor. Zoom revenue growth: roughly 4x increase during the pandemic era - Explained why the stock rerated dramatically before collapsing. Zoom stock decline from froth: down 85% to 90% - Illustrates how far valuation overshot fundamentals. Empire State Manufacturing Survey: lowest level since May 2020 - A weak hard-data release that contrasted with soft-landing optimism. Core CPI ex-shelter: negative month over month for the third consecutive month; up 4.4% year over year - A key disinflation measure discussed after the CPI release. Used car prices: down 14.9% year over year - Evidence that goods inflation is rolling over sharply. BTC price: back above $20,000 - Used to illustrate how hard it is to time bottoms. GBTC discount: narrowed from about -49% to -36% - A large move in the grayscale trust discount. Coinbase December volume: $34 billion - Bank of America argued consensus 2023 revenue estimates may be too high. BlackRock iShares inflows: $123 billion - Strong bond ETF inflows reported on the earnings call. ETFs as share of the bond market: 2.3% - BlackRock emphasized how early ETF adoption still is in fixed income. JPMorgan net interest income: $20 billion - Shown as a major benefit from higher rates. JPMorgan investment banking revenue: down 57% - Offsetting weakness in capital markets activity. JPMorgan banking fees: down 58% - More evidence of slowdown in advisory/financing activity. New York City median household income: about $70,000 - Used to highlight how expensive the city is relative to typical incomes. Pew two-parent household income with both spouses working: a little over $100,000 - Compared with one-earner households. Pew two-parent household income with one earner and one stay-at-home parent: about $55,000 - Illustrates the trade-off between income and time. Sacramento County sales with concessions: 51.5% - Shows seller bargaining power has shifted back toward buyers. Mortgage debt service ratio: near record lows - A key reason consumers may remain resilient despite higher prices. Mortgage refinance volume with cash-out: almost 90% of refinance volume in Q3 2022 - Indicates refinancers are mostly extracting equity rather than rate-shopping.

Pivotal Quotes: "Bonds over stocks. How about that? The new 60-40 portfolio." — Michael Batnick: Opening discussion on how short-duration bonds now compete with equities. "Guess where there is more risk? It is in the benchmarks, because the traditional world order is going to be disrupted and disintermediated here." — Cathie Wood (quoted by hosts): Used to discuss the tension between active innovation bets and index investing. "A single percentage point decline in rates has the same impact on affordability as an 11% decline in house prices." — Mike Simonson (quoted by hosts): Explained why mortgage rates matter so much for housing demand.

Implications: Investors may finally have credible alternatives to equities in cash and bonds, but psychology still drives allocation. If inflation keeps easing and housing/consumer demand stays firm, the Fed may hold rates higher for longer, while the biggest opportunities may be in re-priced out-of-favor assets like bonds, internationals, and select housing-linked areas.