Never Pay Off Your Mortgage (EP. 436)

Episode Summary

Executive Summary: Michael and Ben cover a wide range of market, economic, and consumer themes: the dramatic V-shaped market rebound after April’s selloff, whether AI is a genuine bubble or a capex cycle, the rise of private credit in retirement accounts, softening labor demand, and how inflation and tariffs are affecting consumer behavior. The episode blends macro debate with humorous personal-finance and pop-culture tangents.

Main Topics: Market rebound and breadth thrust after April selloff (Priority: 5/5): They discuss the stock market’s huge reversal from the April 2025 downturn, highlighting technical signals like the breadth thrust and arguing that staying invested continues to matter even after sharp drawdowns. Bubble debate: AI, capex, and valuation (Priority: 5/5): A long debate centers on whether AI is in a bubble. They distinguish between a price bubble and a capex bubble, arguing that today’s market may be expensive but not necessarily doomed like 2000 because the business fundamentals are stronger. Labor market and AI-driven restructuring (Priority: 4/5): The hosts discuss a wave of corporate announcements about hiring restraint and layoffs, suggesting AI is both a real disruptor and a convenient excuse for companies to reduce headcount after overhiring. Inflation, spending behavior, and consumer resilience (Priority: 4/5): They examine persistent consumer frustration with high prices, especially lunch and food away from home, while arguing that people rarely change behavior much even when they complain about costs. Tariffs and pass-through costs (Priority: 4/5): They debate who ultimately bears tariff costs, citing Goldman’s estimate and questioning the common assumption that tariffs are simply a tax on consumers when the effects may be distributed across businesses and consumers differently over time. Private credit, 401(k)s, and financial-system risk (Priority: 4/5): The hosts discuss Wall Street’s push to embed private assets in retirement plans, the demand from investors, and concerns about opaque ratings and insurance-company exposure to private credit. Consumer finance, housing, and personal behavior (Priority: 3/5): They talk about mortgage prepayment, housing affordability, repossessions, and credit-card rewards, using these examples to show how psychology and convenience often overpower pure math in personal finance decisions.

Key Arguments: The April 2025 breadth thrust and market rebound support the idea that major washouts often mark durable lows, and staying the course generally works despite frightening drawdowns. A bubble is not just a stock price that falls; it is a system-wide collapse in faith and liquidity that can take years to unwind, like 2000 or 1929. AI may be a real technological revolution, but it is more likely to diffuse gradually and extend existing growth trends than to instantly transform GDP growth. Current AI-related spending looks more like a capex bubble than a pure valuation bubble because the biggest firms are shifting from asset-light to asset-heavy. Companies may be using AI as a justification for layoffs that they were already inclined to make after the pandemic hiring surge. Consumer spending habits are sticky: people complain about prices, but they still pay for convenience, eat out, and keep spending through inflation. Tariff impacts are still evolving, but the costs are shared between consumers and businesses rather than being absorbed entirely by one side. Private credit may become more mainstream in 401(k)s, but demand will likely be slow among retail investors and stronger among advisers, target-date funds, and older investors seeking yield. Opaque private-credit ratings and insurer exposure create the clearest potential systemic risk in the private-asset ecosystem. The true issue in housing may be affordability and price expectations, not just mortgage rates; lower rates alone may not revive demand if prices remain too high.

Data Points: S&P 500 year-to-date change: -15% on April 8, 2025; +18% later in the year - Used to illustrate the dramatic reversal after the spring selloff Nasdaq year-to-date change: -19% on April 8, 2025; +23% later in the year - Shows the scale of the rebound in growth stocks Russell 2000 year-to-date change: -20% on April 8, 2025; +14% later in the year - Highlights the small-cap recovery MSCI EAFE / international developed markets: -4% on April 8, 2025; +28% later in the year - Shows broad international recovery Emerging markets year-to-date change: -8% on April 8, 2025; +35% later in the year - Demonstrates especially strong EM performance S&P 500 six-month gain after breadth thrust: +24% - Reported as the fourth-best six-month result in history after the April 24 breadth thrust signal Tech sector gain off April low: +66% over six months - Cited as one of the strongest six-month sector rebounds outside 1983, 1999, and 2000 Companies outperforming the index: Roughly 45% average; almost 300 in 2022; 152 implied in the discussion - Used to argue that more stocks outperform in weak markets and that breadth matters Mag 7 share performance since 2015: +27.5% per year; over $23 trillion in wealth created - Cited in discussion of the extraordinary performance of the largest tech stocks Mag 7 return on invested capital: 22.5% - Used to compare the profitability of the largest tech firms with the rest of the market S&P 493 return on invested capital: 6% - Comparison point from Kai Wu’s analysis Mag 7 return on equity: 30% - Illustrates superior capital efficiency of the biggest tech companies S&P 493 return on equity: 13% - Benchmark for the rest of the index Mag 7 free cash flow margin: 16% - Supports the argument that fundamentals have been exceptional S&P 493 free cash flow margin: 9% - Comparison point for the broader market Tech company capex comparison: Capex as a share of GDP for AI is described as historically elevated after depreciation adjustment - Used to argue that AI investment looks like a capex bubble Telecom sales growth post-2000: +1,030% over 20 years - Example showing that strong business growth can still deliver poor stock returns if valuations compress Telecom multiple compression: -85% - Illustrates how valuation collapse overwhelmed operating growth in the dot-com era Consumer lunch spending: $108 per week in Monday-Friday lunches, up from $88 a year earlier - Used to show the persistence of elevated everyday spending Food away from home vs. food at home: Food away from home has overtaken food at home over the past decade - Supports the argument that convenience spending has expanded Tariff burden estimate: Consumers eventually absorb 55%; currently 37% - Goldman estimate discussed to debate tariff pass-through Businesses absorbing tariffs: 51% currently - Shows businesses are bearing a large share of tariff costs for now Private 401(k) sentiment: ~40% of respondents had never heard of private credit funds - Survey cited to show low consumer awareness 401(k) satisfaction: 45% satisfied and have enough offerings; 45% satisfied but want more mutual funds/ETFs; 10% dissatisfied - Used in discussion of retirement-plan product demand Mortgage rate move: From 8% peak to around 6% - Used to argue that lower mortgage rates have not yet revived homebuying Housing market declines: 105 of the 300 largest metro areas saw year-over-year price declines - Supports the claim that housing is correcting, but modestly Repo/vehicle repossession scale: 1.73 million cars surrendered - Used to illustrate that consumer stress remains real but often context-dependent Tiffany-style leverage ETF data: 55% of leveraged ETFs launched have closed; 17% lost 98% of value - Used to warn about the dangers of extreme leverage products

Pivotal Quotes: "Staying the course worked again. It usually does." — Michael / Ben: Discussing the market’s dramatic rebound after the April selloff "I think this is probably a bubble. Then why do you own stocks? Because why would you sell stocks in a bubble?" — Michael: During the debate over whether AI and mega-cap tech constitute a bubble "AI isn’t going to supercharge GDP growth. It’ll just keep us on the same trajectory." — Andre Karpathy (as quoted by Ben): Ben summarizes Karpathy’s view from the Dwarkesh podcast on AI’s macro impact

Implications: Listeners should expect continued volatility, but also a strong case for discipline: broad market recoveries can be violent, AI may reshape jobs and capex before affecting GDP, and private credit could become more mainstream while creating new transparency and risk questions.