Never Bet Against America (EP.193)

Episode Summary

Executive Summary: The episode centers on whether rising interest rates threaten risk assets, with Ben and Michael arguing rates matter but are often overstated versus flows, psychology, demographics, and business model changes. They also discuss Buffett’s annual letter, bubble dynamics, supply-chain bottlenecks, crypto’s rapid institutionalization, real estate friction, vaccine breakthroughs, and listener questions on student loans and writing.

Main Topics: Interest rates, flows, and market psychology (Priority: 5/5): The hosts debate whether the recent jump in Treasury yields is fundamentally bearish or mostly driven by technical flows, CTA rebalancing, and investor psychology. They argue rates matter, but not as a sole explanation for market behavior. Buffett’s annual letter and long-term investing (Priority: 5/5): They react to Warren Buffett’s latest letter, focusing on his optimism about America, Berkshire’s asset mix, and the challenge of comparing Berkshire’s returns directly to the S&P 500. Bubble talk, speculation, and historical context (Priority: 4/5): The conversation contrasts today’s retail-led speculation with prior bubbles, and questions whether current conditions resemble a true systemic bubble or a narrower speculative episode. Supply-chain shortages and inflation pressures (Priority: 4/5): They discuss lumber, semiconductors, and broader supply constraints, suggesting inflation may stem from too little supply rather than only too much demand, implying more capital spending may be needed. Crypto, Coinbase, Robinhood, and democratization of finance (Priority: 4/5): The hosts examine Coinbase’s business model, Robinhood’s IPO plans, and the explosive growth of retail crypto trading, noting tension between democratization rhetoric and middleman economics. Housing, commissions, and iBuyers (Priority: 3/5): They talk about stagnant real-estate commissions despite more online tooling, falling housing inventory, and why iBuyers and market structure changes may be more important than headlines suggest. Listener questions, self-improvement, and culture picks (Priority: 2/5): The episode closes with advice on paying off student loans, developing a writing voice, and media recommendations including Barton Biggs’s book, For All Mankind, Interstellar, and WandaVision.

Key Arguments: Rising rates matter, but their impact is often more psychological and flow-driven than people assume. Technical factors like CTA rebalancing can create sharp market moves that look macro-driven but may not be. Historical episodes such as the 1960s, dot-com era, and 1975-1985 housing period show that assets can do well even with high or rising rates. Demographics and secular demand can overpower interest-rate effects, especially in housing. If enough investors believe rates will hurt growth stocks, that belief can become self-fulfilling through valuation compression. Today’s speculative behavior looks more retail-driven than the dot-com or housing bubbles, which had much broader institutional involvement. Supply shortages in lumber, semiconductors, and housing suggest inflation may require more investment and capacity, not just tighter policy. Berkshire’s underperformance may reflect the market’s preference for intangible, capital-light businesses over capital-intensive assets. Coinbase and Robinhood are democratizing access in practice, but they also reveal that finance democratization still comes with substantial fees and intermediaries. Real-estate commissions and housing frictions persist because the job is operationally difficult and the market still needs human coordination in many cases.

Data Points: 10-year Treasury yield move: about 1.5% to 1.6% - Referenced as the sharp rate jump that triggered market concern TLT drawdown: down 18.5% from highs - Long-term Treasury ETF performance cited as near-bear-market territory 1960s average 10-year Treasury yield: over 5% - Used to show stocks can rise during higher-rate regimes Dot-com bubble average 10-year Treasury yield: 6% - Illustrates that high yields did not prevent speculative excess Mortgage-rate era: 12% average from 1975 to 1985 - Housing prices still rose strongly despite very high borrowing costs Housing price appreciation: up 133% - 1975-1985 period, illustrating demographic demand overwhelm U.S. pension/endowment fixed income and cash allocation: under 15% - Compared with roughly 40% in 1990, showing a huge portfolio shift Berkshire vs. S&P 500 performance: S&P up 18% vs. Berkshire up 2%; S&P up 32% vs. Berkshire up 11% - Cited to explain recent Berkshire underperformance Apple stake value: cost about $30 billion; now about $120 billion - Berkshire’s Apple position as a major driver of asset growth Berkshire Apple ownership: over 5% increasing to 5.4% - Position increased partly due to Apple buybacks Berkshire domestic fixed assets: $154 billion depreciated cost - Used to emphasize Berkshire’s capital-intensive nature ATT property, plant, and equipment: $127 billion - Second-place comparator in Buffett’s discussion Bubbles in top 1,000 companies: about 12% in late 1990s vs. 5% today - Dalio chart on companies in bubble conditions Bubbles in S&P 500: about 10% in late 1990s vs. under 3% today - Used to argue the market is less bubble-like than the late 1990s Two-year Treasury auction: sold at a premium for the first time ever - Illustrates how oversubscribed fixed income had become Robinhood valuation: up to $40 billion - Potential IPO valuation discussed after prior fundraising Robinhood valuation in April 2020: $8.4 billion - Shows the magnitude of the firm’s repricing Coinbase transaction volume: $193 billion in 2020 - From Coinbase S-1 discussion Coinbase gross transaction revenue: $1 billion in 2020 - Used to highlight fee monetization Coinbase fee capture: over $5,000 per million - Compared with listed derivatives to show high take-rate Square Bitcoin revenue: $4.57 billion in 2020 - Context for comparison with Coinbase Square Bitcoin gross profit: $97 million, about 2% of Bitcoin revenue - Highlights low-margin economics on crypto activity Coinbase institutional trading volume in Q4: $57 billion - Compared with retail trading volume Coinbase retail trading volume in Q4: $32 billion - Retail smaller than institutional in that quarter Robinhood new crypto customers: 6 million - Reported as a surge versus prior peak monthly signups Prior monthly Robinhood crypto customer peak: 401,000 - Shows explosive growth in 2021 Average Robinhood crypto account size implied: around $500 - Estimated from new customer activity Homes listed for sale: 1.3 million in 2015 vs. about 468,000 now - Evidence of housing inventory collapse Real-estate commission: roughly 6% - Discussion of why commissions remain sticky Loan rate threshold discussed: over 6% - Suggested as a possible line where paying off student loans becomes more attractive

Pivotal Quotes: "Flows over pros." — Ben Carlson / Tracy Alloway reference: Summarizes the argument that technical flows often explain market moves better than headlines or macro narratives "Don’t bet against America." — Warren Buffett: Core message the hosts say Buffett communicates every year in his annual letter "It’s not a lie if you believe it." — Michael Batnick: Used jokingly to describe how market narratives can become self-fulfilling through investor belief

Implications: Listeners should expect continued volatility in rates, equities, and crypto driven by flows, narratives, and supply constraints. Long-term investors are encouraged to stay focused on fundamentals, demographics, and structural change rather than daily macro panic.