The Worst Bear Market Ever (EP.329)

Episode Summary

Executive Summary: Animal Spirits covers the Israel/Hamas atrocities, then dives into why U.S. rates are rising: debt worries, Fed distortion, supply/demand, and stronger nominal growth. The hosts argue higher yields may reflect a healthier economy, while noting the speed of the move is painful for housing, stocks, and bond holders. They also discuss labor-market strength, aging boomers’ spending, retirement savings, housing affordability, and pop-culture recommendations.

Main Topics: Israel and the moral response to violence (Priority: 5/5): The episode opens with a direct, carefully worded statement condemning the weekend attacks in Israel, emphasizing the difference between supporting Palestinians and supporting Hamas atrocities, and acknowledging Jewish fear amid antisemitic chants. Why interest rates are rising (Priority: 5/5): The hosts review competing explanations for higher Treasury yields: debt concerns, Fed manipulation/distortions, supply-demand imbalances, reduced foreign demand, and the possibility that markets are pricing in stronger nominal growth. Higher rates as a signal of stronger growth (Priority: 4/5): They develop the more optimistic view that 5%-6% nominal GDP growth can justify 5%-6% long-end yields, and that higher rates may reflect better economic conditions rather than only a policy problem. Labor market and wage trends (Priority: 4/5): They unpack the mixed jobs week—soft ADP, strong payrolls, slowing wage growth but still above inflation—and argue that the economy looks healthy even if markets interpret it through a recession/Fed lens. Boomer spending and the changing consumer base (Priority: 4/5): A Wall Street Journal piece sparks discussion of older Americans spending more in retirement, boosting consumer demand and helping explain why the economy remains resilient despite higher rates. Housing, mortgages, and affordability (Priority: 4/5): The hosts note how much housing activity has fallen, why mortgage purchase indices are depressed, and how unaffordable homes remain relative to income and mortgage rates. Markets, retirement, and behavioral finance (Priority: 4/5): They discuss bond drawdowns, stock outflows, auto-enrollment in 401(k)s, the growing role of 401(k)s in millennial retirement security, and how finance brain can make good news feel like bad news.

Key Arguments: Rising debt alone is an incomplete explanation for higher rates; if the Fed wanted lower rates, it could likely still force them lower, so the Fed losing control would be the real warning sign. Higher yields can be consistent with stronger nominal growth; if the economy enters a higher-growth, higher-inflation regime, 6% long-term yields are plausible and not inherently alarming. The Fed’s Treasury and MBS buying likely distorted bond markets; when it stepped back, it left a vacuum in supply/demand conditions. The yield curve is unusual because it has steepened without the Fed cutting rates, making the current environment historically uncharted. The labor market remains strong: wage growth is slowing but still outpacing inflation, and employment has expanded materially over the last year. Older Americans are spending more in retirement, which supports consumption and helps offset some tightening effects from rates. Auto-enrollment in 401(k)s is a simple but hugely impactful policy mechanism that likely improves long-term retirement outcomes. Long-duration bond investors had an escape hatch in T-bills; staying in long bonds through the rate shock was a self-inflicted risk given better short-term alternatives. Housing affordability is constrained by the combination of elevated home prices and sharply higher mortgage rates, not by rates alone. A lot of market pessimism comes from “finance brain,” where good economic data is seen as bad for asset prices because it could keep rates higher for longer.

Data Points: 30-year Treasury yields: 5%-6% - Used as a plausible range if nominal GDP growth and inflation remain elevated. Nominal GDP growth in the 1990s: almost 6% - Referenced in a table comparing decade-average bond yields, inflation, and nominal growth. Inflation in the 1990s: 3% - From the decade-average comparison table. Average bond yields in the 1990s: 7% - From the decade-average comparison table. Tips yield: surging past 2.25% - Mentioned as a real-yield alternative in the equity risk premium discussion. Russell 1000 Value 3-year return: 30% - Cited to show value has performed better than many might assume over the last three years. Russell 1000 Growth 3-year return: 24% - Compared with value over the same three-year period. Small-cap value 3-year return: 31% - Shown as outperforming small-cap growth materially. Small-cap growth 3-year return: -5.5% - Compared with small-cap value over the same three-year period. ADP private payrolls estimate: about 150,000 - The market expected private payroll growth around this level before the report. ADP private payrolls actual: about 80,000+ - Described as roughly half of expectations. Year-over-year employment gain: 2.7 million more people employed - Heather Long’s summary of labor-market improvement over the past year. Wage growth one year ago: 5.1% - Compared with current wage growth. Current wage growth: 4.2% - Used to show wages are still rising, though slower than before. Inflation one year ago: 8.2% - Compared with current inflation. Current inflation: 3.7% - Used in the labor-market and real-income discussion. Average hourly earnings m/m: 0.2% - Described as the lowest monthly gain in at least a year. Average hourly earnings y/y: 4.15% - Current year-over-year wage growth. U.S. population age 65+: 17.7% - Cited as the oldest age cohort’s share of the population, the highest on record since 1920. Consumer spending share by 65+: 22% - Older Americans’ share of spending last year. Consumer spending share growth since 2010: 15% - Used to show the rising importance of older households in consumption. Older household spending change: 2.7% more last year - Average household led by someone 65+ increased spending even after inflation. Delta SkyMiles active members: 25 million - Used in the discussion of airlines as “banks” because of loyalty/credit-card revenue. Delta-affiliated cardholders: 30% of SkyMiles members - Shows how important card partnerships are to airline economics. Delta Amex consumer charges: nearly 1% of U.S. GDP - Illustrates the scale of spending on the Delta-branded card. Delta Amex partnership revenue: $5.5 billion in 2022 - Revenue Delta reported from its Amex partnership. Vanguard/401(k) retirement replacement estimate: 60% - Projected retirement income replacement for older millennials from Social Security and savings. Gen X / youngest boomer replacement estimate: about half - Compared with the millennial estimate. Existing home sales (12 months): about 4 million - Used to show the volume is low but not zero. Single-family new homes sold: 675,000 - Compared with existing-home turnover. Home affordability gap: 55% income spike / 35% home-price drop / 4% mortgage-rate drop - Lance Lambert’s framework for returning to pre-pandemic affordability. Redfin survey: 59% - Share of recent home buyers saying buying a house is more stressful than dating. Recession expectations poll: 63% yes - Audience poll asking whether the U.S. will have a recession in 2024. Bond market drawdown: down 50%+ - They note long-term government bonds have suffered a historic decline. BofA bond bear market claim: worst in history - Referenced as a long-term historical comparison. Food price index: crashed from prior spike - The UN food price index is described as having clearly rolled over after a major surge.

Pivotal Quotes: "what those animals did, raping women, kidnapping children, and killing babies is unconscionable" — Michael Batnick: Opening statement condemning the Israel attacks and distancing support for Palestinians from support for Hamas violence. "if you're lucky enough to not have to worry about stuff like that and you have to worry about stuff that doesn't really matter as bad as that, I think consider yourself lucky" — Michael Batnick: Reflection on privilege after discussing the horrors in Israel. "the good news is actually bad news" — Ben Carlson: Explaining the finance-brain reaction to strong labor data, where good economic news can pressure markets by keeping rates higher.

Implications: Listeners should expect a prolonged higher-rate regime if growth stays strong, with ongoing pressure on housing and duration-heavy bonds. At the same time, retirement savings, older consumer spending, and automatic 401(k) enrollment remain powerful stabilizers for households.