The Super Bubble (EP.273)

Episode Summary

Executive Summary: The episode centers on a fast-shifting macro backdrop: the Fed’s renewed hawkishness, fading inflation fears, and the market’s struggle to price a tighter policy regime without a deeper economic slowdown. The hosts debate whether the Fed will stay committed to 2% inflation if recession risks rise, dissect valuation dispersion between mega-cap and the rest of the market, and argue that housing, rents, and labor data are more resilient than popular pessimism suggests. They also weave in cultural commentary and media recommendations.

Main Topics: Fed hawkishness vs. recession risk (Priority: 5/5): The hosts discuss Neil Kashkari’s strong anti-inflation rhetoric and whether the Fed can really stay committed to 2% if unemployment rises and growth weakens. They argue the Fed’s stance may soften quickly if economic conditions deteriorate. Market valuation and the role of the top 10 stocks (Priority: 5/5): A JPMorgan chart sparks debate about valuation compression in mega-caps versus the broader S&P 490, and whether a true washout would require another large decline in the biggest names. Jeremy Grantham and the 'super bubble' debate (Priority: 4/5): Barron’s cover story on Grantham leads to a critique of his long-running bubble calls. The hosts acknowledge valuation risks but question his repeated 'everything bubble' framing and timing. Inflation is easing, but housing remains sticky (Priority: 5/5): They cite declines in gasoline and goods-related pressures, but emphasize that rents, mortgage costs, and housing affordability remain a major lagging problem created by rapid rate hikes. Labor market strength vs. anecdotal pessimism (Priority: 4/5): The hosts push back on claims that the labor market is weak, citing prime-age employment, job gains, and broader labor force participation as evidence that the jobs picture remains relatively strong. Sentiment extremes and narrative polarization (Priority: 3/5): They argue that social media and politics have pushed sentiment to extremes, making traditional consumer-confidence or market-sentiment indicators less reliable because people report love-or-hate views rather than nuanced opinions. Consumer/media and personal recommendations (Priority: 2/5): The episode closes with lighter commentary on streaming, books, TV, and movies, including Welcome to Wrexham, Bad Sisters, Harry Potter, and Nightmare Alley, plus a live podcast preview for Future Proof.

Key Arguments: The Fed is talking tough now, but if inflation falls and unemployment rises, it is unlikely to maintain maximal hawkishness for long. Don’t fight the Fed may matter in the short term because policy rhetoric is clearly bearish for risk assets over the next few months. The broader market is cheaper than the mega-cap cohort; the S&P 490’s forward multiple is already below its historical average. A real market washout likely requires another leg down in the largest stocks such as Apple, Microsoft, Amazon, and Google. Grantham may be right that valuations are elevated, but his repeated super-bubble framing has become overused and lacks timing credibility. Inflation is rolling over in several real-world indicators, especially gasoline and commodity costs, suggesting disinflation is underway. The housing market was badly disrupted by the speed of rate increases, and rent affordability is now a major problem that likely has to grind out over time. Despite anecdotal layoffs, broad labor data still point to a strong labor market, especially for prime-age workers. Sentiment data are harder to trust because public attitudes now swing quickly toward extremes rather than centrist views. For lower-income households, inflation has been mitigated somewhat by wage gains and transfers, even if the broader cost-of-living burden remains painful.

Data Points: Masterworks minimum investment: $500 - Lower minimum for new paintings on Masterworks, down from the earlier $5,000 level discussed by the hosts. Cecily Brown investment gain: Up almost 40% - Ben’s Masterworks painting 'Girl Trouble' is cited as his biggest current win. Ben’s Basquiat gain: Up 28% - Another Masterworks artwork referenced as a strong performer. Top 10 S&P 500 forward P/E: 35 down to 24 - JPMorgan chart showing valuation compression in the largest stocks. S&P 490 forward P/E: 14.6 - The S&P 500 excluding the top 10 stocks is priced below its 20-year average. S&P 490 average forward P/E: 16.4 - Historical average referenced for comparison with current 14.6 reading. Top 10 earnings contribution: 33% of earnings - The top 10 stocks’ share of aggregate S&P 500 earnings recently reached a high before rolling over. Consumer confidence forward return anomaly: Never happened before - They note that previous extreme consumer-confidence washouts had not been followed by negative 12-month stock returns. Gasoline futures decline: Down 43% from the high - Used as evidence that inflation pressures are easing quickly. Average US rent: A little over $1,600 to over $2,000 - Zillow rent data cited from pre-pandemic to August 2022. Mortgage payments: Up almost 40% year over year - Higher rates and home prices are squeezing monthly housing affordability. Pending home sales: Down 18% year over year - Redfin data indicating slowing housing demand. New home listings: Down 16% year over year - Redfin data showing sellers are not flooding the market. Jobs added over the last year: 5.8 million - Heather Long data cited to counter claims that the labor market is weak. Employment vs. pre-pandemic: 240,000 higher - Overall employment is slightly above pre-COVID levels. Manufacturing jobs added: 461,000 - Year-over-year increase in manufacturing employment. Labor force expansion: About 800,000 people - Betsy Stevenson data on labor force growth. People reporting employed: 442,000 - A component of the labor force expansion discussion. Real income growth for lower half since April 2020: About 45% - Shows strong cumulative income gains for the lower half of households. Bottom 50% wealth growth in first half of 2022: 2.8% - Bloomberg data showing the bottom half saw inflation-adjusted wealth growth. Middle 40% wealth change: -4.9% - Same Bloomberg data, showing the middle class lost ground. Top 1% wealth change: -10% - Top households were hit harder by the stock market drawdown. Share of prime-age workers with full-time jobs: Only 26 months since 1986 have been higher - Used to rebut the 'nobody wants to work' narrative. Share of 35-and-under who think they can beat pros: 66% - Survey cited on confidence in self-directed investing. S&P 500 top 10 earnings share trend: Peaked around prior bear markets - Used to suggest earnings concentration can reverse with a lag. Six-month CD returns vs inflation in the 1990s: About 5.5% - JPMorgan chart comparing historical CD yields across decades. Six-month CD returns vs inflation in the 2020s: 0.3% - Illustrates how low risk-free returns have been in the current decade. Penguin Random House title sales: About 30,000 titles sell fewer than 12 books - The hosts discuss the economics of publishing and podcast/book promotion.

Pivotal Quotes: "I certainly was not excited to see the stock market rallying after our last FOMC meeting because I know how committed we all are to getting inflation down." — Neil Kashkari: Quoted by the hosts to illustrate the Fed’s hawkish tone and apparent desire for tighter financial conditions. "I think the whole don't fight the Fed thing here... if you're looking at a three-month window for the stock market and you're not a little bearish because of what the Fed is saying, I think you're not paying attention." — Ben Carlson: Ben argues that short-term market outlooks should reflect the Fed’s openly restrictive stance. "I consider myself a bubble historian and one who is eager to see one form and break." — Jeremy Grantham: Used in the discussion of Grantham’s long-running bubble warnings and the hosts’ skepticism about his timing.

Implications: Listeners should expect continued volatility as markets reconcile falling inflation with a more restrictive Fed. Housing may stay under pressure, while labor and lower-income income trends remain more resilient than doom narratives suggest. Timing the next move matters more than declaring a bubble.