Negative Arbitrage (EP.358)

Episode Summary

Executive Summary: The episode mixes personal travel anecdotes with a broader discussion of markets, inflation, consumer behavior, housing, and long-term investing. The hosts argue that U.S. consumers remain resilient, inflation is sticky because spending habits persist, and housing affordability will likely stay difficult. They also discuss bond drawdowns, ARK’s delayed outflows, Big Tech volatility, and how automation and retirement asset allocation trends are reshaping markets.

Main Topics: StubHub/Ticketmaster frustration and ticket-market penalties (Priority: 5/5): Michael recounts two different ticket fiascos—first as a buyer who was left without delivered tickets, then as a seller who faced a severe penalty despite the buyer ultimately needing no replacement. The discussion highlights inconsistent marketplace rules and the hidden costs of resale platforms. California travel observations and price inflation in everyday life (Priority: 4/5): The hosts share observations from California theme parks, restaurants, malls, and neighborhoods, using them as evidence that consumers continue to spend freely despite high prices. Examples include expensive Disney meals, costly drinks, and the persistent popularity of travel and leisure. Long-term markets: stocks, bonds, and risk tolerance (Priority: 5/5): Ben and Michael review 30-year return data for stocks, bonds, and cash, arguing that long-term equity compounding remains impressive even through crises. They also note that bond investors are enduring a prolonged real drawdown, but it is psychologically easier to tolerate than a stock market crash because yields are known upfront. Inflation, consumer pricing power, and corporate behavior (Priority: 5/5): They discuss how corporations like Pepsi and Chipotle have raised prices while consumers largely accept them, suggesting inflation remains sticky because spending habits have not materially changed. Walmart’s comments about stabilizing prices are presented as a counterpoint showing some easing in retail inflation. Wealth concentration, generational inequality, and retirement security (Priority: 4/5): The episode examines how older Americans hold most household assets and how younger households have been disadvantaged by rising home and stock prices. At the same time, the hosts note millennials are likely to become the wealthiest generation over time through inheritance and asset accumulation, while many older adults still have little or no retirement savings. Big Tech, AI, and capital allocation (Priority: 4/5): They debate whether AI will create new winners or simply make incumbents like Microsoft, Amazon, and Google even stronger. Relatedly, they criticize corporate R&D projects that consume huge amounts of capital without clear payoff, using Apple’s car project and Vision Pro as examples. Lifestyle and cultural side notes: coaching, movies, and streaming (Priority: 2/5): The conversation closes with a humorous but pointed look at youth sports coaching styles, airplane entertainment, and a few show/movie reviews. These segments reinforce the show’s mix of market analysis and everyday life observations.

Key Arguments: Ticket resale platforms can be punitive and inconsistent: buyers get little remedy when sellers fail to deliver, while sellers can face full-price penalties even when the buyer ultimately does not need replacement tickets. High consumer spending persists even amid inflation, which helps explain why companies can keep raising prices without immediately losing demand. The U.S. stock market’s long-term compounding power remains strong despite major crises, reinforcing the case for staying invested through volatility. Bond investors are suffering a severe real drawdown, but the pain is easier to contextualize because current yields are visible and future returns are more observable than for stocks. Inflation has been sticky not just because of policy and supply shocks, but because consumers and corporations have not meaningfully changed pricing or purchasing behavior. Younger Americans are disadvantaged by current asset-price levels, but over time wealth transfer and compounding should make millennials very wealthy. AI may not produce the dramatic disruption many expect; incumbent megacaps may be the main beneficiaries because they already control distribution, data, and capital. Large firms can still experience enormous single-day market-cap losses, showing that short-term stock prices remain highly sentiment-driven and not perfectly efficient. Automated retirement investing and higher equity allocations likely mean U.S. household exposure to stocks will continue to rise over time.

Data Points: S&P 500 annualized return (1994-2023): 10.1% per year - Used as a 30-year example of strong equity compounding through multiple crises and a lost decade 10-year Treasury annualized return (1994-2023): 4% per year - Benchmarked against stocks to illustrate fixed-income performance over the same 30-year period Calendar years with 20%+ stock gains: 12 out of 30 years - Shows how often equities delivered very strong annual returns Double-digit down years for stocks: 4 out of 30 years - Illustrates the relative rarity of large annual losses over three decades ZROZ drawdown: -60% - Example of the severity of the bond bear market TLT drawdown: -44% - Nominal drawdown of long-duration Treasuries IEF drawdown: -20% - Seven- to ten-year Treasury ETF performance from the highs AGG drawdown: -13% - Broad bond ETF still below prior peaks Real drawdown estimate for TLT: ~65% - Inflation-adjusted estimate from 2020 highs ARK fund outflows: $2.2 billion net pulled from six actively managed funds - Signals investors are finally leaving after a long period of standing pat ARK assets at peak: $60 billion - Peak asset base before heavy losses and outflows ARK assets now: $11 billion - Approximate current asset base after drawdowns and withdrawals ARKK returns over recent years: +36%, +150%, -23%, -67%, +68%, about -20% - Illustrates extreme volatility in Cathie Wood’s flagship fund Households age 55+ asset growth: $114 trillion - Asset growth cited from Fed data Households age 55+ asset level four years earlier: $84 trillion - Shows magnitude of wealth accumulation among older Americans Total U.S. household assets: $170 trillion - Context for the older cohort’s share of household wealth Households under 40 share of assets: $15 trillion / 9% - Shows younger adults’ relatively small slice of household wealth Ages 40-54 share of all assets: less than one-quarter - Compared with nearly 40% in 2001 Vanguard participant assets in equities: 74% - Year-end equity allocation in retirement accounts Vanguard planned contributions to equities: 79% - Share of new contributions going to equities in 2023 Vanguard target-date fund share of contributions: 64% - Indicates passive automatic allocation into equities remains dominant Pepsi pricing increase: +5% - Organic sales volume fell while pricing rose Pepsi volume change: -2% - Example of consumers accepting higher prices Pepsi Q1 2023 pricing increase: +16% - Shows earlier peak inflationary pricing power Chipotle menu-price increases: 6 times since 2021 - Illustrates frequent restaurant price hikes Chipotle traffic: 1% higher last year; 8% below pre-pandemic levels - Despite higher prices, demand remains resilient Walmart CEO pricing comment: Prices in line with 12 months ago; extra cuts in produce, meat, and fresh food - Used as evidence of easing retail inflation Ford F-150 discount: $10,000 off MSRP - Signals improving vehicle inventory/pricing conditions Ford financing offer: 1.9% APR for 72 months - Another sign of softer auto pricing conditions Disney buffet cost: $350 - Family-of-four buffet with character interaction Universal/Disney family dinners: $99 each for two dinners - Example of finding sub-$100 family dining even in a high-cost market Casamigos Reposado at Universal CityWalk: $12.50 - Highlighted as surprisingly cheap relative to venue pricing Price doubling in many housing markets: 68 cities in under 10 years - Point2 data showing rapid housing appreciation Home prices in Miami and Tampa: doubled since 2018 - Example of recent runaway housing appreciation Homes in Irvine, CA: $750k to $1.5 million in seven years - Illustrates dramatic local price growth U.S. GDP share of world output: ~20% in 2009-2010 to ~27% now - Used to support the view that U.S. economic dominance has increased

Pivotal Quotes: "StubHub is like the blockchain. If you make a mistake and send money somewhere, gone. Sorry." — Michael Batnick: He compares ticket resale platform penalties and lack of recourse to irreversible blockchain transactions "You have to give the U.S. economy the benefit of the doubt until proven otherwise." — Ben Carlson: On repeated claims that recession or stagflation is imminent despite resilient growth and consumer spending "The weather is the last thing you get used to." — Michael Batnick: On why California remains attractive despite very high living costs

Implications: Listeners should expect persistent consumer spending, sticky inflation in key services, continued housing affordability pressure, and elevated equity ownership in retirement accounts. Long-term investing still looks favorable, but the path will remain volatile and shaped by huge incumbents, not just startups.