Live From Future Proof (EP.274)

Episode Summary

Executive Summary: Live from Huntington Beach, the hosts argued that despite a brutal year for stocks and bonds, markets may have already priced in a lot of bad news. They focused on recession odds, the bond selloff, dollar strength, consumer sentiment, housing rigidity, venture valuations, and surprisingly resilient earnings, concluding that higher rates and inflation are compressing valuations more than collapsing fundamentals.

Main Topics: 2022 Market Selloff and Recession Debate (Priority: 5/5): The hosts contrasted Deutsche Bank’s recession-bottom thesis with the view that much of the damage is already reflected in prices. They noted the unusual simultaneity of weak stocks, weak bonds, and crypto losses as evidence this cycle is unlike prior downturns. Interest Rates, Bonds, and the End of Zero Yield (Priority: 5/5): A major theme was the dramatic rise in short- and long-term yields, especially the two-year Treasury, and the implications for savers and portfolio construction after a decade of near-zero rates. U.S. Dollar Strength and International Underperformance (Priority: 4/5): They discussed the dollar’s multi-year strength and how it has hurt both foreign stocks from a U.S. investor perspective and the overseas revenue of large U.S. companies, especially tech. Earnings Season Remains Resilient (Priority: 5/5): The hosts argued that Q2 earnings were better than feared, with broad revenue growth, high beat rates, and limited negative price reactions, suggesting inflation and margins are still supporting corporate earnings. Housing Market Lock-In and Mortgage Rate Shock (Priority: 4/5): They focused on how rapidly higher mortgage rates have frozen the housing market, with existing homeowners reluctant to give up ultra-low fixed rates, making affordability a major problem for buyers. Consumer Sentiment, Gas Prices, and Macro Psychology (Priority: 3/5): The show emphasized that gasoline prices are a major driver of consumer mood and that falling gas prices have helped sentiment recover even while broader macro conditions remain tense. Speculation, Venture Capital, and Robinhood’s Retail Basket (Priority: 3/5): They questioned the reliability of venture capital marks and criticized Robinhood’s proposed investor index, using both to illustrate how retail/speculative assets have been repriced or distorted.

Key Arguments: Markets may already have priced in a 2023 recession, so the June lows may not necessarily be the final bottom. This year is unusually bad because both stocks and bonds are down sharply at the same time, breaking the usual diversification pattern. Higher rates and inflation likely compress valuation multiples even if earnings do not collapse; that may explain much of the market drawdown. The U.S. dollar’s strength is a key reason international stocks and multinational earnings have lagged. Corporate earnings remain surprisingly strong because companies can raise prices and preserve margins during inflation. The housing market is effectively frozen because most mortgages are locked in below 5%, making trade-up activity difficult. Consumer sentiment is heavily influenced by gas prices and tends to improve when people see filling up their tanks get cheaper. Retail-driven indices like Robinhood’s may be poor proxies for investable market performance and can be highly distorted by speculative concentrations.

Data Points: Q2 earnings beat rate: 75% of companies reported EPS above estimates - Second-quarter earnings season results discussed as slightly below the five-year average of 77% Q2 revenue growth streak: Sixth straight quarter above 10% YoY revenue growth - Used to show earnings and sales remained resilient across sectors Earnings reaction for beats: +1.9% next-day average move - Stocks that beat earnings in Q2 versus the five-year average of +0.8% Earnings reaction for misses: -0.1% next-day average move - Stocks that missed earnings in Q2 saw very mild punishment Financials earnings change: -22.9% - Largest earnings decline among the 11 sectors due to higher provisions for loan losses Stock fund outflows: $10.9 billion - Week of Sept. 7, led by technology stocks; cited as a sign of risk aversion Institutional put buying: $8.1 billion in puts vs. less than $1 billion in calls - Sentiment Trader data for institutional traders in a single week, described as extremely bearish Two-year Treasury yield: ~3.5% - Shown as a dramatic rise from near-zero levels over the prior decade S&P 500 earnings growth: 6.3% - Second-quarter earnings growth for the index overall Foreign-revenue-heavy S&P companies earnings growth: 2.1% - Companies deriving 50%+ of revenue outside the U.S.; weaker due to dollar strength Domestic-revenue-heavy S&P companies earnings growth: 13.4% - Companies deriving less than half of revenue outside the U.S.; much stronger earnings growth Tech revenue from outside the U.S.: 56% to 58% - Illustrated why technology stocks are especially exposed to dollar strength S&P 500 overseas revenue share: 40% - Share of index revenue derived outside the United States Duration of U.S. stock outperformance over international: 15 years - Longest stretch on record, per JP Morgan guide chart discussed on the show Gas price decline streak: 89 consecutive days - Longest streak of falling gasoline prices since 2015 Average monthly job growth: 381,000 jobs per month - Used by Conor Sen to argue the labor market still looks exceptionally strong Potential annualized job growth: 4.5 million jobs - Projected if monthly pace were sustained for a full year Mortgage rate lock-in share: 85% of outstanding mortgages below 5% - Explains why homeowners are reluctant to sell or refinance Very low mortgage share: 24% below 3% - Shows how powerful the lock-in effect is for existing homeowners Buyer reluctance: 51% reluctant to buy; 64% reluctant if rates stay above 5% - Survey cited to show continued weakness in housing demand Venture deals below prior valuation: 4.9% down rounds - Kai Wu/Sparkline data for 1,495 U.S. venture deals in the first half of the year Venture index divergence: Liquid replication down 30%+ vs. Cambridge Associates VC index down 4% - Used to question whether private venture marks are lagging public-market reality Robinhood investor index top names: Tesla, Apple, GameStop, Microsoft, Ape, Amazon, Nio, Disney, Ford, AMC - Illustrated the retail/speculative concentration of the proposed index Market drawdown examples: NASDAQ 100 -25%; long bonds -35%; zero coupon bonds -45%; Bitcoin -70% - Used to argue this year is painful but not equally bad across assets

Pivotal Quotes: "“Normally always, only, bottoms in a recession.”" — Michael / Deutsche Bank chart discussion: A humorous critique of overly confident recession-bottom forecasting "“The cleanest shirt in the dirty laundry pile.”" — Ben Carlson: Describing the 60/40 portfolio relative to the unusually weak performance across assets "“Inflation is good for corporations. Moderate is.”" — Michael Batnick: Explaining why nominal revenue and earnings can look strong even in a high-inflation environment

Implications: Listeners should expect volatility to remain high, but the market may be shifting from recession panic to valuation compression. Bonds, housing, and international assets remain pressured by rates and dollar strength, while earnings and labor data still look sturdier than the headline doom narrative suggests.