Soft Landing (EP.269)

Episode Summary

Executive Summary: The episode centers on the market’s summer rebound as recession fears fade, with hosts arguing the economy has likely avoided a first-half recession but still faces inflation, wage, and rate volatility. They dig into cooling goods inflation, stubborn labor strength, housing softening, tech/fintech earnings, and the market’s rapid rotation from panic to risk appetite, with lighter commentary on travel, streaming, and movies.

Main Topics: Recession call gets challenged by stronger data (Priority: 5/5): The hosts argue that the U.S. likely was not in a recession in the first half of 2022, citing robust payroll growth, falling unemployment, and Dallas Fed recession-indicator composites that did not behave like prior recessions. Inflation, wages, and the Fed’s dilemma (Priority: 5/5): They debate whether strong wage growth is good or bad, noting the Fed fears a wage-price spiral while the hosts question whether workers making more money is inherently negative when inflation remains high. Housing market cooldown without a crash (Priority: 4/5): The discussion highlights rising stale listings, price cuts, and affordability pressure, but also emphasizes that borrower equity remains strong and inventory has not exploded despite mortgage-rate volatility. Markets and earnings were less bad than feared (Priority: 5/5): The hosts argue that stocks and earnings had priced in too much doom. They point to Apple, Amazon, Uber, Robinhood, Zillow, Opendoor, and NVIDIA as examples of businesses adapting better than expected. Inflation relief from commodities and logistics (Priority: 4/5): They note falling gas prices, declining shipping costs, and lower inflation expectations as evidence that headline inflation may ease in coming months, even if it remains well above target. Consumer behavior, travel, and post-pandemic demand (Priority: 3/5): They discuss unusually heavy travel demand, crowded destinations, and the possibility that experience-seeking behavior is more durable than expected after the pandemic. Pop culture and movie recommendations (Priority: 2/5): The episode closes with recommendations including Black Bird, Prey, Brawl in Cell Block 99, and reactions to upcoming adaptations and old favorites like Michael Clayton and Bond films.

Key Arguments: The economy may have avoided a recession in the first half of 2022 because employment and industrial production did not decline like they do in historical recessions. Strong labor data is not automatically bad; it only becomes a problem if it sustains inflation, which is still the key risk. The market may have over-discounted a recession and over-punished large-cap growth names, so the summer rally is partly a correction of excessive pessimism. Housing is cooling, but strong homeowner equity and limited inventory suggest a crash is not the base case. Inflation likely moderates as gasoline and shipping costs fall, though wage growth remains sticky and could keep inflation elevated. Many pandemic-era digital businesses are being forced to refocus from growth to profitability, and some can still adapt their economics. Travel and experience spending may stay elevated longer than expected because consumers are still making up for lost time. Retail trading and meme-stock speculation remain surprisingly persistent even after major declines in speculative assets.

Data Points: Jobs added in July: 528,000 - U.S. payroll growth showed the labor market remained very strong. Unemployment rate: 3.5% - Returned to the pre-pandemic low and used as evidence against an active recession. Average hourly earnings growth: 5.2% (with a June revision to 5.4% cited by Jason Furman as 5.8% annualized in July) - Presented as a sticking point for inflation because wage growth remains elevated. Amazon stock decline: about 47% - Example of how deeply some large stocks had sold off before rebounding. Apple stock decline: 29% at worst - Used to argue some selling was overdone despite record earnings. CPI annualized over 10 years: 2.6% - A benchmark used to show that some volatile prices, especially gas, still lag inflation on a long horizon. Retail gas prices annualized over 10 years: 1.3% - Shown as unexpectedly below CPI over a decade despite recent spikes. Shipping cost change Shanghai to Los Angeles: -32% year over year - Evidence of easing goods inflation via lower freight costs. Consumer median five-year inflation outlook: 2.3% from 2.8% - Survey-based inflation expectations fell, suggesting some relief in sentiment. Mortgage rate swings: 5.0% to 5.5% to 5.15% to 5.45% over four days - Illustrated unusually high volatility in borrowing costs. Negative equity in homes: about 2% of borrowers - Indicates homeowners have substantial equity cushions versus the post-GFC period. Homes listed 30+ days without contract: 61% up from 54% - Redfin data showing increasing stale inventory as the housing market cools. Recent price reductions in single-family homes: 37% - Higher than the last five years at this point in the cycle. Robinhood monthly active users: 14 million - Down from a peak of 21.3 million in Q2 2021. Robinhood assets under custody: $64 billion - Down from a peak of $102 billion. Robinhood average revenue per user: $56 - Down sharply from a peak of $137 in Q1 2021. Robinhood quarterly net loss: $295 million - Illustrates the pressure on the business model as trading activity fell. Zillow average monthly unique users: 234 million - Only up 2% year over year despite a major housing cycle shift. Zillow Q3 IMT revenue outlook: $409 million to $434 million, down 12% YoY at midpoint - Signaled slowdown in its core advertising segment due to affordability pressure. Opendoor revenue: $4.2 billion, up 254% YoY - Showed growth despite a more difficult housing market. Uber stock move after earnings: from $24 to $31 - Market rewarded the shift toward profitability and cash flow. NVIDIA gaming revenue decline: 44% sequentially - Attributed in the discussion to demand normalization after pandemic-era gaming demand. Gas price decline over 60 days: almost $1 drop - Used as a concrete sign of disinflation pressures. Monthly travel demand: Qualitative but described as unusually crowded - Northern Michigan and other destinations were reported as busier than usual. Disney trip budget: about $10,000 for four people - Illustrated how expensive experience spending has become.

Pivotal Quotes: "The stock market at one point… was pricing in an imminent recession. And now it's kind of saying, okay, wait, wait. We overdid it a little bit." — Michael/Ben: On the summer market rebound and whether the selloff got too extreme. "Uncomfortably hot jobs report: 528,000 jobs added, and unemployment rate falls to 3.5%. What worries me are inflation is average hourly earnings were up…" — Jason Furman (quoted by hosts): Used to frame the labor market as too strong for the Fed’s comfort. "Our job here is done." — Michael/Ben: A shorthand for the market’s interpretation that inflation may be easing enough for the Fed to slow down.

Implications: Listeners should expect more volatility but less recession panic than earlier in the year. Inflation may cool from goods, fuel, and shipping, yet wages and the Fed remain the big wild cards for stocks, housing, and rates.