The Bears Capitulate (EP.390)

Episode Summary

Executive Summary: This episode blends sponsor reads, personal stories, and market commentary. The hosts discuss Michael Batnick’s disastrous Audi ownership saga, then shift to a broader market review: 2024’s unusually smooth rally, skepticism about CAPE-based valuation warnings, surging retail and foreign inflows, rising concentration in passive and active portfolios, optimism after the election, Bitcoin’s return above $100k, housing undersupply, and inflation’s persistence. They close with TV and movie recommendations.

Main Topics: Audi ownership fiasco and bad consumer decisions (Priority: 5/5): Michael recounts a long, expensive, and frustrating sequence of lease buyout mistakes, repeated engine problems, warranty confusion, and the eventual forced roll into a new Q7 after the car became uneconomical to keep. 2024 market rally and expectations for 2025 (Priority: 5/5): The hosts review a remarkably low-volatility year for U.S. equities, with the S&P 500 up strongly and barely any drawdowns, and debate whether 2025 is more likely to see earnings-led gains or an overdue correction. Valuation debate and the CAPE ratio (Priority: 5/5): They revisit their long-running criticism of using the CAPE ratio as a standalone warning signal, arguing that historical comparisons ignore structural changes in market composition and profitability, especially among mega-cap tech firms. Flows, concentration, and speculative behavior (Priority: 4/5): The conversation covers explosive growth in single-stock leveraged ETFs, heavy post-election equity inflows, foreign purchases of U.S. stocks, and the increasing concentration of earnings and market cap among the largest companies. Bitcoin’s rise and changing narrative (Priority: 5/5): They react to Bitcoin crossing $100,000, noting the power of supply/demand and investor belief, while also arguing that Bitcoin’s real-world use has shifted from decentralized currency rhetoric toward a centrally accessible speculative asset. Housing shortage, inflation, and deregulation (Priority: 4/5): The hosts argue that U.S. housing affordability is constrained by too few homes being built for decades, and that inflation is persistent because businesses routinely raise prices; they suggest deregulation should prioritize housing supply. Entertainment recommendations and airplane movies (Priority: 2/5): They close with recommendations for Black Doves, The Agency, Say Nothing, Interstellar in IMAX, and a debate over the greatest family movie and best airplane movies, including Home Alone and Ocean’s 11.

Key Arguments: Michael’s Audi experience is framed as a cautionary tale about lease buyouts, warranties, and the hidden costs of owning a problematic car. The 2024 market has been unusually easy for investors, so a large correction in 2025 is plausible even if the long-term trend remains positive. CAPE ratio warnings often fail because they compare current markets to a historical baseline that ignores major changes in index composition, especially the growth of mega-cap tech. The top companies now account for a share of earnings and market cap that is much more aligned than critics suggest, weakening simplistic concentration arguments. Single-stock leveraged ETFs show how speculative demand has become more intense and concentrated in a few names. A lot of equity demand may be coming from outside the U.S., especially foreign investors chasing strong performance. Bitcoin’s price rise is best explained by supply constraints plus collective belief, not by its original ideological claims. Housing prices are elevated in part because the U.S. has not built enough homes relative to population growth. Inflation tends to persist because firms gradually raise prices to grow revenue; deflation would be worse because it would reduce wages and employment. Asset ownership is the best hedge against inflation, especially stocks, homes with fixed-rate mortgages, and productive labor/income.

Data Points: S&P 500 year-to-date return: 29% - Used to describe the strength of the U.S. stock market in 2024. Worst peak-to-trough drawdown in 2024: 8% - Shows how mild volatility was during the year. New all-time highs in 2024: 56+ (later 57-58 mentioned) - Highlights how frequently the market set records. Down days of 2% or worse: 3 - Shows how few meaningful selloffs occurred. Down days of 3% or worse: 1 - Another measure of unusually low volatility. Top 25 S&P companies' share of net income: 49% - Pranav Guy’s Calcbench data showing income concentration among the largest firms. Top 25 S&P companies' share of market cap: 49% - Their market-cap share matches their income share, suggesting concentration is not obviously mispriced. Assets in single-stock leveraged long ETFs tied to NVIDIA: Almost $8 billion - From the chart on leveraged single-stock ETF assets. Assets in single-stock leveraged long ETFs tied to MicroStrategy: Almost $5 billion - Shows extreme speculation in crypto-linked equities. Assets in single-stock leveraged long ETFs tied to Tesla: Over $4 billion - Shows strong speculative demand in a high-volatility name. Top three single-stock leveraged ETF exposures share of assets: 85% - NVIDIA, MicroStrategy, and Tesla dominate the category. Foreign private purchases of U.S. stocks: All-time high in September - Ed Yardeni chart showing foreign investors chasing U.S. equities. US adults who are millionaires: 8% - From UBS global wealth data; roughly 22 million millionaires in the U.S. Global adults worth $10,000 or less: 39.5% - Down from 75% in 2000, showing long-run improvement in global wealth. Global adults worth $100,000 or less: 75% - Used to illustrate the scale of global wealth inequality and opportunity. Bitcoin price level: $100,000 - Discussed as a major psychological and market milestone. Bitcoin low after crypto winter: About $15,000 - Referenced as the 2022 low before the rebound. Bitcoin mined/supply created: About 19 million of 21 million - Used to emphasize scarcity and limited supply. Satoshi holdings: 1.1 million BTC - From Eric Balchunas/tweeted chart, discussed as the largest individual holding. Bitcoin spot ETFs holdings: More than 1.1 million BTC - U.S. spot ETFs reportedly surpassed Satoshi’s holdings. Bitcoin lost supply: 7.5% - From the supply-distribution chart. U.S. homes built in 1972: 2.4 million - Compared against recent construction to show long-term underbuilding. U.S. homes built last year: 1.4 million - Used to argue the housing market needs more supply. Suggested annual housing need: At least 2 million homes - Hosts argue current construction is insufficient. Inflation since 2020: 25% - Used to explain higher prices and wages over the period. Wages since 2020: 25% - Used to argue people have more nominal income to invest/spend. Large suitcase cutoff issue: 45-minute check-in cutoff - Michael missed an earlier flight because he checked luggage too late by one minute. Flight time: 7:30 PM - The flight he missed because of airport delays and baggage cutoff.

Pivotal Quotes: "Comparing the Cape ratio from 1960 to today is like comparing Oscar Robertson to Russell Westbrook. Same game, but things have changed." — Michael Batnick: Used to argue that historical valuation benchmarks need market-structure context. "I do not want a 30% up year in 2025." — Michael Batnick: Said while discussing the risk of multiple expansion after two very strong years. "Bitcoin really is proof that you don't have to be right to make money." — Michael Batnick: A summary of how Bitcoin’s original narratives were often wrong even as the asset price soared.

Implications: Listeners are encouraged to think in terms of context, behavior, and flows rather than single-variable market narratives. The episode suggests the market, housing, and crypto are all shaped by scarcity, concentration, and sentiment—not just fundamentals.