Redefining a Recession (EP.267)

Episode Summary

Executive Summary: This episode centered on a broad market and macro discussion: the hosts debated whether the U.S. is in a recession, how inflation and consumer behavior are evolving, and which sectors and companies are being hit hardest. They also covered housing, crypto contagion, tech layoffs, and several earnings updates, while mixing in culture and entertainment recommendations.

Main Topics: Recession vs. slowdown debate (Priority: 5/5): The hosts argued that two negative GDP quarters do not automatically define a recession and emphasized broader labor and spending data. They expect political/media debate to intensify if GDP is negative, but they also think a real recession may still be developing. Inflation, consumer strain, and spending shifts (Priority: 5/5): They discussed how inflation is squeezing the upper middle class and changing spending patterns, while wealthier households continue borrowing and spending. They argued inflation is likely peaking and may be followed by a recession-driven reset in prices and behavior. Earnings season and corporate warnings (Priority: 5/5): A large section focused on weak or cautious company updates from Walmart, Verizon, Shopify, DoorDash, Snap, Netflix, and others. The hosts used these examples to show slowing demand, inventory issues, and labor cuts across sectors. Housing market resilience and stress (Priority: 4/5): They reviewed falling mortgage demand, slowing home-price gains, and a rise in price drops, while arguing the housing market is not repeating 2008 because borrowers generally can still service their debt. They see high rates as a bigger risk than falling prices alone. Sector performance and market breadth (Priority: 4/5): The discussion highlighted which S&P sectors are holding up in 2022, including energy, staples, utilities, and healthcare, and noted that market index weakness is being driven heavily by mega-cap tech rather than the whole market. Crypto collapse and risk management (Priority: 4/5): They discussed Celsius, Voyager, Three Arrows, and broader crypto contagion, criticizing poor risk controls and overconfident claims from some platforms while praising more measured voices in the space. Media, entertainment, and lifestyle recommendations (Priority: 2/5): The episode ended with movie and TV recommendations and commentary on current releases like Nope, The Gray Man, Avatar, and The Old Man, plus a discussion of how people spend time across life stages.

Key Arguments: Two consecutive quarters of negative real GDP do not, by themselves, prove a recession; labor market and spending data matter more. Inflation has hit the upper middle class especially hard because they got less government support and lacked enough asset gains to offset rising costs. Wealthier households are still borrowing and spending, showing the consumer base is splitting into very different experiences. Many retailers are partly blaming inflation for weak results, but inventory glut and over-ordering are also major factors. If a recession arrives, inflation likely falls further, and many investors may resist believing the decline after becoming conditioned to the inflation narrative. Housing is slowing, but the system is healthier than in 2008 because borrowers can usually still make payments even if home prices decline. Tech and growth stocks are being pressured by layoffs, slower hiring, and a reset in e-commerce and ad demand. Crypto behaved like a high-beta risk asset, not a diversifier or inflation hedge, undermining many bullish narratives.

Data Points: Morgan Stanley mortgage loan growth: 30% - Wealth management mortgages rose in the second quarter among wealthy clients. Morgan Stanley securities-backed and other loan growth: 23% - Borrowing by wealthy Americans increased despite higher rates and market weakness. Securities-backed loan rates: 3.75% to 5.75% - Rates cited for wealthy borrowers, depending on collateral. Upper middle class income range: $75,000 to $127,000 - The Wall Street Journal’s definition used in the discussion. Mark Yu's monthly brokerage saving: Up to $3,000/month previously - Pandemic-era savings rate that later slowed sharply. Ken Barra age: 69 - Retired physician assistant who returned to part-time work to avoid drawing down assets. Unemployment rate change in 2022: 3.9% to 3.6% - Used to argue the economy did not resemble prior recession onsets. Gas prices decline streak: 36 days in a row - Hosts noted falling gasoline prices as evidence inflation may be easing. S&P 500 year-to-date: Down about 16% to 17% - Used as the benchmark against sector performance and market stress. Energy sector performance: Up 35% - A standout outperformer in 2022. Utilities sector performance: Basically flat - One of the defensive areas holding up better than the market. Consumer staples performance: Down 3% - Another relatively strong sector during the selloff. Nasdaq 50-day moving average streak: 68 days below the average - Longest such streak since December 2008. S&P 500 annual indicated dividend rate: $550 billion - Highlighted as a stabilizing feature and inflation hedge characteristic. Mortgage applications to purchase a home: Down 7% week over week and 19% year over year - Signaled continued housing demand deterioration. Case-Shiller home price growth, May: 19.7% year over year - Slower than April’s pace, but still very strong. Case-Shiller home price growth, April: 20.6% year over year - Shown to compare the slowing pace of appreciation. Real home price gain since 2020: About 21% - After inflation, this was described as one of the strongest decades in modern history so far. Pending sales under contract within two weeks: 41% - Evidence that desirable homes still sell quickly even as price cuts rise. Late-stage fintech deals: Down 41% - CB Insights data showing a major private-market slowdown. Shopify layoffs: 10% of workforce - Announced as evidence of the e-commerce boom unwinding. Verizon share decline: -6.7% - Described as the stock’s biggest drop since 2008. DoorDash delivery cost example: $100 order became $170 delivered - Used to illustrate how expensive delivery has become. Netflix U.S. TV viewing share: More than CBS and NBC combined - Presented to underscore Netflix’s dominance in streaming viewing. Snap stock-based compensation as % of revenue: 26%-27% - Compared to Meta’s lower figure as a red flag for unit economics. Snap stock-based compensation at prior peak: 43% of revenue in Q2 2019 - Showed how heavily diluted the company once was. Shopify employee count: 1,900 in 2016; 10,000 in 2021 - Illustrated the scale-up during the pandemic. E-commerce adoption growth rate: Spiked and then came down - Chart cited to show pandemic pull-forward normalizing.

Pivotal Quotes: "What is a recession?" — White House / quoted in transcript: Discussed in response to criticism that the administration was moving the goalposts on GDP and recession definitions. "Inflation is going to be the next big short" — Ben: He argued investors may disbelieve falling inflation numbers even after prices cool, similar to post-2008 doom loops. "The economy is bad in a lot of ways. That doesn't mean it's a recession." — Michael: Core distinction made during the recession debate.

Implications: Listeners should expect more volatility in markets, more layoffs and spending cutbacks in consumer-facing sectors, and an ongoing fight over recession/inflation narratives. Housing may slow without crashing, while tech, crypto, and discretionary spending remain vulnerable.