Is the Housing Correction Over? (EP.315)

Episode Summary

Executive Summary: Michael and Ben cover a wide-ranging market and life discussion centered on the post-bear-market rally, the breakdown of old aphorisms like “don’t fight the Fed,” and how the pandemic distorted growth, valuations, and inflation. They also dig into ETF flows, investor behavior, housing’s resilience, commercial real estate stress, media/streaming economics, and several personal-life tangents that reinforce the episode’s theme: expectations, discipline, and reality often matter more than narratives.

Main Topics: Market aphorisms and the rally’s lesson (Priority: 5/5): The hosts revisit familiar market sayings and argue that rules like “don’t fight the Fed” are not ironclad. They emphasize that contrarian instincts often fail, especially when trend, liquidity, and earnings momentum dominate. Apple, trillion-dollar market caps, and buybacks (Priority: 4/5): Apple is used as a case study in how market cap growth and investor returns can diverge because of buybacks and dividends. The discussion underscores why big winners can keep compounding even after people declare them overvalued. Post-pandemic tech valuation reset (Priority: 5/5): They discuss how pandemic-era demand pulled forward growth for software and internet names, creating unrealistic comps and later a rational collapse in valuations. The market now prefers profitable growth over loss-making expansion. ETF flows and passive investing dominance (Priority: 4/5): First-half ETF inflows show continued massive demand for broad index funds, with a few notable exceptions like TLT and JEPI. The hosts argue that passive investing is entrenched and unlikely to reverse anytime soon. Housing resilience and the odds of recession (Priority: 4/5): The conversation focuses on housing supply constraints, elevated mortgage rates, and why a sharp housing crash appears unlikely. They suggest any future recession may be milder because housing balance sheets are stronger than in past cycles. Commercial real estate and media industry stress (Priority: 3/5): They contrast struggling office real estate with the decline in traditional entertainment company profits, noting that some old media and CRE narratives are still working through long-term structural damage. Everyday finance, trust, and consumer behavior (Priority: 3/5): A Betterment survey and a personal anecdote show that most people rely on advisors, friends, or intuition without much financial literacy. The hosts stress how hard it is for ordinary investors to know who to trust or what to do.

Key Arguments: Old market sayings can be useful shorthand, but they are not universal rules; 2023 is evidence that the Fed can tighten and risk assets can still rally. Buffett’s success is often misread as pure contrarianism; in practice, he often rides strong businesses and trends rather than fighting them. Apple illustrates that market cap growth and shareholder returns are not the same thing because buybacks and dividends materially boost total return. The pandemic accelerated demand for software and internet businesses, causing fundamentals to look artificially strong and then artificially weak; the market’s drawdown was a rational repricing. Investors now reward profitable growth and punish loss-making companies, showing that “free money” and endless runway are gone. Broad index funds continue to dominate ETF flows, implying passive investing remains the default choice for most capital allocators. Housing is constrained by high mortgage rates and low inventory, making a severe housing-led recession less likely than many bears expect. Commercial office real estate is under the most pressure, but distress is concentrated in offices rather than the entire CRE market. Many retail investors and everyday savers still operate with limited financial knowledge, making trusted advice and simple automation valuable. The U.S. appears to have outperformed other developed countries on both growth and inflation, though the hosts note war-related distortions may have affected the comparison.

Data Points: Future Proof conference dates: September 10th–13th - Annual financial festival in Huntington Beach, California Apple market cap milestone: Crossed $1 trillion in August 2018; exceeded $3 trillion in 2023 - Used to illustrate compounding and buybacks Apple investor return since $1T: Up 300% - Host notes investor return exceeds market cap growth because of buybacks/dividends Apple market cap growth since $1T: Up 200% - Compared with investor return Bear market duration: About 15 months / roughly 250 days discussed - Referenced as longer than many people realized NASDAQ first-half performance: Third-best first half on record - Bespoke tweet cited during market discussion Midterm-election-year market pattern: Stocks up about 15% from midterms in cited dataset - Used to support seasonality discussion AI/cloud index net new ARR growth: ~20% from 2017-2019; ~50% during pandemic; lowest since 2017 recently - KOTU presentation on software growth trends Money-losing internet companies cumulative return: Down 58% - KOTU U.S. internet universe since 2022 Low PE internet companies cumulative return: Down 30% - Compared with high PE and money-losing peers High PE internet companies cumulative return: Down 44% - Compared with low PE and money-losing peers Low PE internet recovery from trough: Up 33% - Rebound from lows to present High PE internet recovery from trough: Up 28% - Rebound from lows to present Money-losing internet recovery from trough: Up 11% - Shows weakest rebound among cohorts Top ETF inflow: VLO/VOO (Vanguard S&P 500) - First-half 2023 ETF inflows discussion Second-largest ETF inflow: TLT - Surprising duration bet among investors JePI ETF inflow rank: #3 - Covered-call strategy remained popular Betterment survey trust in financial advisors: 67% ranked in top three - Most trusted source of financial advice in the survey Betterment survey trust in social media influencers: 22% ranked in top three - Least trusted source of financial advice in the survey Core goods inflation (3-month annualized): 3.2% vs 2.1% in April - Powell/Fed-focused inflation basket update Housing inflation (3-month annualized): 6.4% vs 7.2% in April - Core inflation basket update Core services ex-housing (3-month annualized): 3.9% vs 4.4% in April - Core inflation basket update Core PCE (3-month annualized): 4.1% vs 4.2% in April - Fed inflation update Corn prices: Lowest since October 2021 - Commodity disinflation example Soybean prices: Lowest since December 2021 - Commodity disinflation example U.S. inflation vs peers: Lowest among cited developed countries - Compared with Italy, U.K., Germany, France, Canada U.S. GDP growth vs peers: Highest among cited developed countries - Compared with same set of countries May durable goods orders: Up 1.7% vs -1.0% expected - Economic surprise to the upside May new home sales: 763,000 vs 675,000 expected - Housing data stronger than expected Case-Shiller home price index: Up 0.5% in April; drawdown improved from 2.85% to 1.78% - Home prices recovered for the third straight month Annual U.S. pedestrian fatalities: About 8,000 - At the highest level since 1980 after declining for decades Pedestrian fatalities increase: +19% in three years - Road safety concern Working hours over a lifetime (Britain, 1865): 124,000 hours - Historical labor comparison Working hours over a lifetime (U.S./Japan, 1980): 69,000 hours - Shows rise in leisure over time Reduction in lifetime work time since then: 6% - Historical labor comparison Average life spent working: 50% then vs 20% now - Used to illustrate increased leisure and comfort Airbnb revenue claim: Down 50% in cities like Phoenix and Austin (viral claim) - Claim was discussed and questioned as likely overstated Commercial real estate foreclosures: Office far higher than apartments; office near 30 vs apartments around 6 - Financial Times report on CRE distress SL Green stock performance: Up about 50% from lows - Example of bad news + rising stock in distressed real estate Netflix relative stock performance: Flat over the last five years - Illustrates expectations vs reality despite winning streaming Movie output/streaming era profit trend: Large entertainment company net income down more than 60% over a decade - Luc Shaw/Bloomberg chart on media companies Ride-share/car rental service used: Turo - Personal anecdote during California trip

Pivotal Quotes: "Nobody knows anything." — Ben Carlson: Core investing lesson: forecasts and narratives are unreliable "You cannot talk about late cycle dynamics with housing turning up and inventory is likely to follow. There will be no recession in the next six months." — Renaissance macro research / Neil Dutta cited by Ben: Support for the view that housing strength argues against an imminent recession "The market is demanding profitable growth." — Ben Carlson: Explains the rotation away from money-losing growth names toward quality and earnings

Implications: Investors should expect markets to keep rewarding quality, profitability, and discipline rather than narratives or simple rules. Housing and passive flows remain powerful stabilizers, while office CRE and legacy media still face structural pressure.