The Crockpot Recession (EP.304)

Episode Summary

Executive Summary: The episode covers rising uncertainty across rates, inflation, recession risk, housing, consumer spending, and AI. The hosts argue the economy is sending mixed signals: T-bills look compelling, but higher short rates, sticky inflation, and resilient spending complicate the outlook. They also discuss Vanguard’s dominance, demographic trends, and why a “crockpot recession” may be unfolding slowly rather than as a sudden event.

Main Topics: Interest rates and fixed income positioning (Priority: 5/5): The hosts debate whether 3- to 6-month T-bills at around 5% are a no-brainer for conservative cash/short-duration investors, while acknowledging reinvestment risk and the possibility that yields fall quickly if the Fed pivots. Fed pause, hikes, and recession signals (Priority: 5/5): They review Goldman’s historical data on market performance after Fed pauses, but argue this cycle is different because markets move faster and the Fed communicates more clearly. They also note the market rapidly shifted from expecting no hike to pricing in another May increase. Consumer spending, inflation, and recession ambiguity (Priority: 5/5): The discussion focuses on conflicting evidence: retail sales, card spending, and bank data suggest moderation, but travel and services spending remain strong. The hosts repeatedly frame the economy as confusing rather than collapsing. Housing affordability and demographic demand (Priority: 4/5): They discuss rising housing prices, high rents, and the possibility that millennial household formation is creating a durable floor under prices even with higher mortgage rates and affordability challenges. Market structure, flows, and diversification (Priority: 4/5): Vanguard’s outsized inflows and the surprising evidence that more diversified portfolios tend to outperform concentrated ones are used to reinforce the case for broad, disciplined investing over stock-picking heroics. AI disruption and job risk (Priority: 4/5): The hosts weigh the scale of AI’s potential impact, especially on knowledge work and tech jobs, while noting that physical-world jobs are less vulnerable and that regulation/litigation may slow some use cases like AI-generated music. Behavioral finance, generational wealth, and everyday investing habits (Priority: 3/5): They discuss why boomers may not spend down savings, why millennials feel poorer despite strong income trends, and how high cash balances and backtests can distort investor behavior.

Key Arguments: The bond market currently offers a rare, low-risk opportunity: short-term T-bills around 5% provide compelling income without duration risk for investors who need stability. This Fed cycle is harder to model from historical backtests because markets, data, and Fed communication are far more transparent and faster-moving than in prior decades. The economy is not clearly in recession; instead, it looks like a slow, uneven slowdown with mixed signals from spending, labor, and rates—a 'crockpot recession' if one is coming. Consumer spending anecdotes are strong, but the data suggests moderation rather than runaway debt-fueled demand; high-income households appear to be driving much of the discretionary travel spend. Housing prices may have a floor because millennial household formation and demand are strong enough to offset some pressure from high mortgage rates. Diversification matters: broad ownership of many stocks improves odds of success because most stocks are poor long-term performers and only a tiny fraction drive market gains. AI will likely create as well as destroy jobs, but knowledge workers and tech employees are more exposed than most physical-world occupations. Vanguard’s scale and investor behavior remain unique, with mutual funds still dominating assets even as ETFs grow. High cash balances in brokerage accounts remain a common investor mistake, but that may shift if cash sweeps continue to pay attractive yields.

Data Points: Pacer Cow G strategy tech exposure: 46% - The sponsor read mentions the strategy’s largest sector weight is technology. S&P 500 average return after Fed funds peak: 19% - Goldman Sachs data cited for the 12 months after the Fed funds rate peaked since 1982. Fed tightening cycles analyzed: 6 cycles - Goldman Sachs study referenced in the discussion of post-pause market returns. Three-month T-bill yield: 5.1% - Used as the main argument for staying short duration in fixed income. 10-year Treasury yield: 3.5% - Compared unfavorably with short T-bills for investors seeking income and safety. Two-year Treasury yield move: 3.55% to 4.16% - The hosts note a sharp rise in the two-year yield over about two weeks. Implied probability of another May hike: 21% to 91% - Market pricing shifted quickly from one month earlier to current expectations. YouTube poll: recession?: 55% yes - Audience vote mentioned during the recession discussion. Bank of America household card spending: 0.1% YoY in March - Moderated to the slowest pace since February 2021. Bank of America household card spending MoM: -1.5% - Shows spending cooled month over month. Average inflation peak: 9.06% - The annualized inflation reading peaked in June. Latest inflation reading: 4.98% - The hosts note inflation has fallen for nine consecutive readings. Average inflation over last five years: 3.3% - Jeremy Schwartz statistic cited as roughly equal to the long-term average. Vanguard Q1 flows: $13 billion - Eric Balchunas thread: Vanguard took in $13B in Q1 while the rest of the industry had outflows. Money market inflows at Vanguard: $30 billion - Part of Vanguard’s dominant quarterly flow picture. Vanguard ETF flow share: 36% of second place - Balchunas says Vanguard ETF flows were 36% of the next competitor. Households earning over $125K credit card utilization: 23% - Compared with about 28% in 2018-2019, suggesting lower relative utilization. Households earning over $125K historical utilization: 28% - Pre-pandemic baseline used for comparison. Credit card debt utilization overall: back on trend - They reference a chart showing debt behavior normalized after the pandemic spike. Empire State Manufacturing prices paid: down - They note the prices paid component is trending lower, signaling easing inflation pressure. Delta international flights booked for summer: 75% booked - Used to illustrate strong travel demand. European trip reservations: up 8% - Reservations for European trips rose versus last summer. Household spending growth at BofA: 0.1% YoY / -1.5% MoM - A sign of moderation in consumer spending. Cash as % of portfolio at Schwab clients: 5% - Transactional cash per account is at the low end of the 2004-present chart. Tax under-withholding in 2021: $762 billion - Used to support the case for equity-comp tax modeling software. Apple Savings rate: 4.15% - Apple’s new Goldman-backed savings account rate. Goldman Marcus savings rate: 3.9% - Compared with Apple’s higher advertised rate. Bitcoin YTD move: $16.5K to $30K - Illustrates a roughly doubled price from the start of the year. Residential housing markets back to highs: 218 of 400 - Zillow-tracked markets at or near all-time highs. Median price of a single-family home: $439.9K - Mike Simonson data point showing home prices remain elevated. Median price of new listings: $399K - Down 4% versus last year but still high. Manhattan rents: studio: $3,200 - Average listed rent by bedroom count. Manhattan rents: one-bedroom: $4,200 - Average listed rent by bedroom count. Manhattan rents: two-bedroom: $6,000 - Average listed rent by bedroom count. Manhattan rents: three-bedroom: $10,800 - Average listed rent by bedroom count. Bottom 25% wage gains: record gains after inflation - Stephen Ratner chart discussed as one of the more surprising labor data points. Stock concentration statistic: 4.3% of stocks drove all net gains (1926-2016) - Professor Bessembinder data cited to explain why most stocks are lousy long-term investments. Stocks with positive lifetime returns: about half - Referenced in the concentrated vs diversified portfolio discussion.

Pivotal Quotes: "This is a crockpot recession, Ben, if we're heading towards one." — Michael Batnick: He argues any downturn is likely to unfold slowly and unevenly rather than as a sudden, obvious event. "The bond market is just utterly confused." — Ben Carlson: Used to summarize mixed signals from T-bills, Treasuries, inflation, and recession concerns. "If you're not confused, you're not paying attention." — Michael Batnick: They invoke Charlie Munger to explain why the current macro environment is hard to interpret.

Implications: Listeners should expect more volatility in rates and macro narratives, with short-term cash yields still attractive but recession risk unresolved. The episode reinforces disciplined diversification, caution around cash and backtests, and close attention to housing, labor, and AI-driven disruption.