The First Thing to Go During a Crisis (EP.132)

Episode Summary

Executive Summary: The episode centers on market panic, hindsight bias, and the scale of the COVID-era economic shock. Ben and Michael argue that no one really predicted the crisis, that valuations matter but don’t explain this selloff alone, and that fiscal stimulus is urgent because households need cash now. They also discuss global policy responses, bond-market dysfunction, investor behavior, and the dangers of trying to bottom-fish in long-term accounts.

Main Topics: Hindsight bias and false victory laps (Priority: 5/5): The hosts discuss how investors will quickly rewrite history after the crash, claiming they sold in time or saw the crisis coming, even though the shock was not meaningfully predictable. They criticize long-standing bear-market gurus who are now taking credit for luck rather than skill. Economic shutdown vs. market reaction (Priority: 5/5): They debate whether the economy could be worse than stocks and note that the market can overshoot GDP deterioration. The conversation emphasizes that the downturn is driven by a deliberate shutdown, making standard recession playbooks less useful. Fiscal stimulus and social stability (Priority: 5/5): A major theme is the need for immediate government aid to households and small businesses. The hosts argue against waiting, worry about people running out of money, and reject inflation fears as irrelevant compared with the need to prevent hardship and unrest. International policy comparisons (Priority: 4/5): They compare the U.S. response with countries like Denmark, South Korea, Singapore, and others, suggesting some foreign governments have acted more decisively. This leads to a broader discussion about U.S. exceptionalism and whether other systems are better equipped in crises. Bond-market stress and liquidity (Priority: 5/5): They examine severe dislocations in corporate bonds, investment-grade fund outflows, and how the Fed has progressively backstopped different parts of the market. The hosts argue that the bond market, not ETFs, is the core problem, and that Treasuries remain the key safe haven. Investor behavior and long-term allocation choices (Priority: 4/5): They answer listener questions about rolling over 401(k)s, buying beaten-down sectors, and changing allocations. Their advice is to avoid using retirement money to catch falling knives and to prioritize personal financial resilience over aggressive market bets. Life under quarantine and cultural recommendations (Priority: 2/5): The episode closes with reflections on family time, productivity, drinking, and entertainment recommendations. Both hosts suggest the crisis is forcing people to reassess what matters and shared various books, films, podcasts, and resources for people under stress.

Key Arguments: No one can credibly claim they predicted the coronavirus selloff; most retroactive certainty is hindsight bias. Bear-market pessimists do not deserve extra credit for being wrong for years and right only because of a once-in-a-century pandemic. Valuation concerns alone cannot explain the crash because cheaper markets outside the U.S. were hit just as hard. The proper policy response is immediate fiscal support; worried talk about inflation or debt is secondary in a shutdown. People need income to buy food and pay rent, so governments must act to avoid broader social and economic breakdown. The economic shock could be worse than the stock-market shock, but stocks may not need to fall in proportion if markets can look through the temporary shutdown. Bond-market dysfunction is a liquidity and structure problem, and the Fed’s backstops matter more than ETF mechanics. Trying to bottom-fish with retirement money in airlines, casinos, or cruise lines is too risky and can create permanent impairment. Personal financial strength should come before investing aggression because nobody knows how deep the crisis will get. Countries with smaller, more coordinated systems may be responding more effectively than the U.S., challenging assumptions about American superiority.

Data Points: Potential U.S. employment rate: 30% - James Bullard’s forecast for second-quarter unemployment cited by the hosts Potential GDP decline: 50% drop in GDP (annualized forecast) - Bullard forecast referenced in discussion of extreme economic estimates Bank forecasts for GDP decline: 12% to 30% - Range mentioned from Bank of America, JPMorgan, Goldman Sachs, and Morgan Stanley Vanguard global equity return forecast: 4.4% to 6.8% annually over 10 years - Illustrates higher expected future returns after market declines March 2020 U.S. GDP estimate: 17% annualized decline - Joe Davis/Vanguard estimate described as the deepest since the 1950s Global market capitalization loss: $26 trillion - Aswath Damodaran’s estimate of market value destroyed over five weeks Denmark wage support: 75% of salaries - Government plan to subsidize private-sector pay to avoid layoffs Denmark stimulus scale: 13% of national economy - Size of the Danish response to the shutdown Largest investment-grade bond fund outflows: $55.9 billion - Record taxable bond fund withdrawals in one weekend Prior record bond fund outflow: $15 billion - Previous largest outflow compared with the recent record LQD monthly drawdown: -20.3% month to date - Corporate bond ETF selloff compared with 2008 crisis levels LQD worst month in 2008: -10.5% - Used as a comparison showing the current bond panic is more severe OpenTable reservations / restaurant traffic: -100% - Restaurants effectively shut down, illustrating collapse in services demand Europe/UK/Japan composite PMIs: Worse than the financial crisis - Early flash PMI data showing severe contraction in services and manufacturing Corporate earnings estimate for S&P 500: $110 per share - Goldman Sachs full-year earnings projection cited in market discussion S&P 500 level referenced: 2,377 - Used in the earnings discussion to note valuations could still be high if earnings fall further 1920–21 depression GDP decline: -38% - Historical comparison used to frame how bad current economic declines might get 1907 panic GDP decline: -30% - Another historical precedent mentioned in relation to extreme downturns 1893 panic GDP decline: -37% - Historical depression-level GDP contraction cited from NBER data

Pivotal Quotes: "The first casualty in a crisis is perspective." — Aswath Damodaran: Quoted by the hosts while discussing how investors lose objectivity during market panics "We need the government to step up to make sure that this thing goes away." — Michael Batnik: Argument for urgent fiscal stimulus and household support "This is more a reflection on the fixed income market structure than it is on ETFs." — Reggie Brown: Explaining that bond ETF dislocations are primarily a bond-market plumbing issue

Implications: Listeners are urged to prioritize liquidity, job security, and long-term discipline over panic trading. The crisis may reshape policy expectations, accelerate global comparisons, and leave lasting lessons about market structure, public support, and investor psychology.