Yolo Spenders (EP.328)

Episode Summary

Executive Summary: The episode focuses on the sharp rise in long-term Treasury yields, its mixed implications for markets and the economy, and whether higher rates signal stronger growth, sticky inflation, or policy error. The hosts also debate recession risk, consumer resilience, housing affordability, and investor behavior, while touching on active fund performance, Disney pricing power, and a few lighter culture/movies segments.

Main Topics: Surging long-term rates and the bond market (Priority: 5/5): The hosts spend most of the episode trying to explain the rapid rise in 10-year and 30-year yields, noting that short rates barely moved while long rates jumped sharply. They debate whether the move reflects positioning, inflation persistence, or the Fed keeping policy restrictive for too long. Higher rates: good for savers, bad for borrowers (Priority: 5/5): They stress the uneven effects of higher yields: great for pension funds, insurers, retirees, and fixed-income buyers, but painful for mortgage borrowers, homebuyers, and consumers facing higher auto and housing costs. Recession risk and consumer resilience (Priority: 5/5): The conversation weighs Bloomberg’s recession case against evidence that consumers still have strong balance sheets, cash, home equity, and spending power. The hosts argue that a slowdown is plausible but not imminent because spending remains resilient. Housing market distortion and affordability (Priority: 4/5): They discuss 8% mortgage rates, weak existing-home turnover, and the possibility that higher rates are eventually offset by lower prices and stronger activity if rates fall. They also note new construction is supporting total housing value. Inflation trends and the Fed (Priority: 4/5): Recent inflation prints are described as improving, especially core PCE, which contrasts with the bond market’s aggressive selloff. The hosts repeatedly question why yields are rising while inflation data is moving toward target. Investor behavior and active fund outcomes (Priority: 3/5): A side discussion examines whether active mutual fund investors are really worse at timing than passive investors, with data suggesting active-fund investors roughly matched fund returns while passive investors lagged more due to behavior and flow timing. Media, culture, and lighter commentary (Priority: 2/5): The episode closes with tangents on The Meg 2, Saw 10, The Big Chill, Yellowstone, cast technology, and the Meta/Lex Fridman demo, providing a lighter endcap to an otherwise macro-heavy discussion.

Key Arguments: The rise in long-term Treasury yields is unusual because short-term rates have not moved much, suggesting something beyond standard Fed tightening is driving the bond market. Higher yields are not uniformly bad: they improve income opportunities for savers, retirees, insurers, and pension funds even as they hurt borrowers and pressure asset prices. The bond market may be exhibiting recency bias, extrapolating the recent inflation surge into the future even though historical correlations between long rates and future inflation are weak. Despite warnings of excess savings depletion, households still have large cash balances, home equity, and rising net worth, which should cushion spending. Consumers may continue spending even as conditions worsen because behavior changes slowly until unemployment or a recession forces a reset. Housing affordability is being crushed by the combination of higher prices and higher mortgage rates, but turnover could rebound if rates fall or prices adjust. The episode is skeptical that 2023 would produce a recession, but sees 2024 as materially riskier. Active-fund investors appear to have behaved better than expected, with average investor returns close to fund-category returns. Inflation is genuinely cooling in recent data, which makes the bond-market selloff harder to reconcile with fundamentals. In the hosts’ view, the Fed risks overtightening and damaging the soft landing if it allows rates to remain elevated too long.

Data Points: 30-year Treasury yield: 4.85% - Jim Bianco quote cited as the long bond reaching the highest level since 2007. Treasury yield move: +55 bps in 13 days - Describes the rapid rise in the 30-year Treasury yield. TLT drawdown from highs: -46% - Total return decline cited for long-duration Treasuries. 10-year Treasury yield change since end of June: +~1% - Hosts note the 10-year yield rose roughly one percentage point in about three months. May 2023 CFA Level 1 pass rate: 39% - Kaplan Schweizer ad discussion referencing recent CFA exam pass rates. Most recent CFA Level 1 pass rate: 36% - Used to illustrate how difficult the CFA exam remains. CFA Level 3 pass rate: 48% - Mentioned during the Kaplan Schweizer sponsor read. S&P 500 year-to-date performance: +13% - Despite rate volatility, the index remained up for the year. Nasdaq year-to-date performance: +35% - Used to highlight tech’s surprising strength despite rising rates. Nasdaq 100 year-to-date performance: +36% - Referenced as still strongly positive even with higher yields. Core PCE 1-month annualized: 1.8% - Jason Furman tweet cited as evidence inflation is improving. Core PCE 3-month annualized: 2.2% - Shown as another improving inflation measure. Core PCE 6-month annualized: 3.0% - Still above target but moving in the right direction. Passive investor return gap: -1.43% per year - Average investor in passive funds underperformed the category by this margin over a decade. Average passive category return: 12.1% annualized - Benchmark figure used in the investor-return comparison. Average investor return in passive funds: 10.7% annualized - Shows behavioral/timing drag in passive investing. Average investor return in U.S. active equity funds: 11.2% annualized - Very close to the category return. Average U.S. active equity fund category return: 11.5% annualized - Used to show active investors roughly matched fund performance. Money market assets: ~$6 trillion - Evidence that household liquidity remains high. U.S. housing market value: $52 trillion - Residential housing market value cited as a record level. U.S. housing market value growth vs. pre-pandemic: +49% - From Zillow-linked discussion on housing appreciation. Average U.S. home value increase over past year: +1.3% - Small contributor to total housing market value growth. Disney hotel price in 2010: $234/night - Example of Disney pricing power over time. U.S. spending in August: +5.8% YoY - Wall Street Journal data cited to show consumers are still spending strongly. Inflation in August: +4.0% - Compared with spending growth to argue demand remains solid. Ticketmaster tickets sold in first six months: 295 million - Used as evidence of strong discretionary spending. Crypto ownership survey: 20% - Coinbase survey of 2,000 American adults; hosts expressed skepticism. Global crypto market cap: slightly above $1 trillion - Mentioned in the discussion of crypto adoption. Outstanding mortgage debt at <=4% rates: 77% peak in 2022 - Jeff Tucker chart showing the share is now declining. Existing home sales/falloff context: Pending home sales down 44% from peak - Used to show turnover is very weak. Mortgage rate: 7.6% - Current rate cited when discussing affordability pressure. Wagoneer L starting MSRP: $111,000 - Used as a humorous example of oversized, expensive consumer goods. First weekly outflow for U.S. fixed income: in 39 weeks - Signals investors are finally leaving bonds after a prolonged selloff.

Pivotal Quotes: "I think we have to close the bond market until we can figure out what the hell is going on." — Michael Batnick (paraphrased in transcript as Jim Bianco quote): Reaction to the sudden surge in long-term Treasury yields. "The bond market is way dumber than people think." — Michael Batnick: Core thesis that bond yields may be driven by recency bias rather than superior forecasting. "Team long-term transitory for the win." — Paul Krugman: Tweet cited after core PCE inflation continued to improve.

Implications: Listeners should expect continued volatility in rates, mixed effects across asset classes, and a fragile but still-productive consumer backdrop. Higher yields help savers and fixed-income buyers, but they threaten housing, leveraged trades, and sentiment if they stay elevated.