More Sellers Than Buyers (EP.247)

Episode Summary

Executive Summary: The episode centers on the market shock from Russia’s invasion of Ukraine, with Michael and Ben discussing inflation, energy and commodity spikes, rising recession risk, and the pull between higher inflation and falling bond yields. They also cover ETF flows, Russia-related market distortions, housing affordability, and whether long-term investors should fear a lost decade. The tone is cautious but still constructive on long-term investing.

Main Topics: Russia/Ukraine shock and market selloff (Priority: 5/5): The hosts open by noting the S&P 500 is down about 12% from highs and the NASDAQ 100 and Russell 2000 are down roughly 20%, attributing the move to war, sanctions, and broader geopolitical uncertainty. Energy, commodities, and inflation surge (Priority: 5/5): They emphasize the dramatic rise in oil, gas, wheat, and natural gas prices, arguing that inflation is being pushed higher and that consumers will feel both a psychological and real economic burden. Bond yields, recession risk, and policy tension (Priority: 5/5): They discuss the unusual tug-of-war where crisis fear pushes Treasury yields lower even as inflation pushes them higher, and they debate whether Europe is more likely than the U.S. to enter recession. Russia market distortions and sanctions (Priority: 4/5): The conversation examines bizarre trading in the RSX Russia ETF, the freezing of Russian assets, and the devastation to Russian investors and institutions after sanctions and market closures. Housing affordability and real estate strain (Priority: 4/5): They warn that rising costs and limited supply could keep home prices elevated, worsening affordability for middle-class buyers and making it a bad time to become a realtor without an existing book of business. Long-term investing during turbulence (Priority: 4/5): A listener question leads to a broader discussion of whether U.S. stocks could face a lost decade; the hosts argue that investing still makes sense if the alternative is cash, and that long horizons remain the key advantage. Entertainment and media recommendations (Priority: 2/5): They briefly review Ghostbusters Afterlife, Euphoria, Severance, and Super Pumped, with mixed reactions and a critique of the rapid fictionalization of recent business scandals.

Key Arguments: Geopolitical shocks and inflation can cause real bear markets, not just emotional selloffs; stocks fall for legitimate reasons. Energy price spikes are especially potent because gas is highly visible and psychologically salient to consumers. The U.S. consumer still has strong balance sheets and may keep spending despite higher prices, limiting the immediate recessionary impact domestically. Europe is more vulnerable than the U.S. because of its reliance on Russian energy. Sanctions and asset freezes have become more powerful in a digital financial system than in the past. Even if a lost decade occurs, long-term investors and savers benefit from lower entry prices and higher future yields. The market’s rapid repricing means that highly speculative growth stocks can swing violently regardless of index-fund effects. Housing may remain a long-term pain point because supply is constrained and affordability is deteriorating. ETF flows into Vanguard and persistent autopilot buying suggest not all investors are panicking or capitulating. A bear market, if it happens, may be a buying opportunity rather than a reason to abandon equities.

Data Points: S&P 500 drawdown: 12% off all-time closing highs - Michael describes the market as of Monday afternoon during the selloff NASDAQ 100 drawdown: ~20% off all-time highs - Used to frame the tech-led decline Russell 2000 drawdown: ~20% off all-time highs - Shows broadening weakness beyond mega-cap tech RSX buy/sell orders on Fidelity: 3 buy orders for every sell order - Eric Balchunas tweet cited to show retail rushing into the Russia ETF Russian equity ownership: 95% - Jeffrey Kleintop chart on domestic ownership of Russian stocks by Russian investors USA share of global equity markets: 60% - Credit Suisse Investment Returns Yearbook chart at the start of 2022 UK share of global equity markets: 4% - Credit Suisse yearbook chart showing long-run decline Average U.S. gas price: $4.00/gallon (as of March 6) - AAA data discussed as already stale due to rapid increases Natural gas move: +40% since Friday - Commodity spike cited from Michael McDonough tweet Wheat futures move: +7% to 1294/bushel; +41% last week - Daily limit move and the biggest weekly surge in records going back six decades Energy sector weight in S&P 500: Under 4% - Contrasted with almost 17% in 2008 and around 30% in 1980 XLE year-to-date return: +37% - Energy sector ETF performance during the crisis period XLK year-to-date return: -17% - Technology sector ETF performance during the same period U.S. jobs added in February: 678,000 - Strong labor market report before Russia invaded Ukraine Unemployment rate: 3.8% - February jobs report Wage growth: 5.1% - February jobs report Pandemic job recovery: Over 90% of jobs lost returned - Shows labor market strength before the geopolitical shock Home affordability listing ratio: 1 listing for every 65 households in income bracket vs. 1 for every 24 in 2018 - Highlights worsening housing affordability for households earning $75k-$100k Affordable inventory decline: 411,000 fewer affordable homes - End-of-year housing affordability study referenced from the Wall Street Journal Real estate agent growth: More than 156,000 joined in 2020 and 2021 combined - New realtor boom during the pandemic Kentucky teacher retirement system stake in Sberbank: $13 million down to $770,000 - Example of sanctions destroying Russian equity value; discussed as a very small allocation relative to total assets Kentucky teacher retirement system size: About $23 billion - Used to contextualize the Sberbank holding as only about five basis points Snowflake share price path: $260 IPO -> $390 -> $188 -> $400 -> $192 - Illustrates violent price swings in speculative growth stocks Snowflake valuation context: Price-to-sales ratio described as roughly $300 at IPO - Used to underscore extreme valuation and active-manager-driven price discovery Ukraine conflict implication: Potential 10% inflation in a quarter - A risk mentioned if energy and commodity spikes persist

Pivotal Quotes: "I would almost be more surprised if we didn't go into a bear market." — Michael: Initial reaction to the market selloff and geopolitical shock "Gas prices have an outside impact psychologically on consumers because they're in like a million font when you drive down the road." — Michael (quoting Derek Thompson): Explaining why gasoline inflation hits consumers harder than many other price increases "What is the alternative? If you don't think things are going to get better in the future, then why would you invest anyway?" — Ben: Answering a listener question about long-term investing and possible lost decades

Implications: Expect more volatility, persistently high inflation pressure, and a possible recession scare, especially in Europe. For long-term investors, the message is to stay diversified and keep contributing, since crises often create better future entry points.