The Zero Dollar Club | Animal Spirits 435

Key Concepts

• Sentiment Analysis: The difficulty in gauging market sentiment due to overwhelming and conflicting information.
• AI Bubble: Ongoing discussion and concern about a potential bubble in AI-related stocks.
• Historical Parallels: Comparisons between current market conditions and historical events like the 1929 market peak.
• Contrarian Indicators: Using widespread amateur success as a signal for market downturns.
• Financial Media Influence: The role of financial media in shaping narratives and its potential bias.
• Systemic Risk: Concerns about potential systemic risks in various sectors like regional banks, BDCs, and private credit.
• Gold as an Asset: Debate on the role and effectiveness of gold as an investment and hedge.
• Bull Market Analysis: Examining the characteristics and duration of bull markets, particularly the current one.
• ETF Flows: The significant inflow of money into ETFs and the sources of this capital.
• Household Wealth Distribution: Changes in equity holdings across different age and wealth demographics.
• "Zero Dollar Club" Companies: Companies with little to no revenue but significant market capitalization.
• National Security Index: Companies deemed critical for national security, potentially influencing valuations.
• Single-Stock Leveraged ETFs: The emergence of highly leveraged ETFs and their potential market risks.
• Trade Wars and Tariffs: China's export restrictions and the US response, with analysis of their impact.
• Short Selling Effectiveness: The challenges and perceived failures of hedge funds in shorting stocks.
• Crypto Predictions: Market sentiment and odds regarding Bitcoin's future price.
• Housing Market Dynamics: Factors influencing the housing market, including interest rates, down payments, and affordability.
• Corporate Earnings and Reporting: The incentive for CEOs to report truthfully due to 90-day reporting cycles.
• Consumer Spending Trends: Analysis of spending patterns by different generations, particularly Millennials and Gen Z.
• Credit Card Debt and Delinquencies: Trends in consumer credit usage and potential signs of distress.
• Historical Economic Booms and Busts: Examining periods of prosperity and their aftermath, like the Roaring Twenties and the Great Depression.
• Wealth Accumulation and Preservation: The difficulty of achieving and maintaining wealth, and the role of side hustlings and day trading.
• Wealth and Longevity Gap: The correlation between wealth levels and life expectancy.
• Automotive Market: Rising car prices, the age of vehicles on the road, and underwater car loans.
• Media Consumption: The shift in how people consume information and its impact on historical interpretation.
• Horror Movies: Personal preferences and analysis of various horror film subgenres and specific titles.

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Market Sentiment and the AI Bubble

The discussion begins with the challenge of interpreting market sentiment, particularly in the context of the current AI-driven market. Michael notes that the S&P 500 has gone nearly 100 days without a 5% pullback, which is around the historical average, suggesting potential turbulence ahead. He observes that articles across major financial publications (Wall Street Journal, Bloomberg) are now prominently featuring "AI takeaways," often focusing on the possibility of a bubble and an impending stock market pullback. This widespread discussion of a potential bubble, even among the media, is contrasted with historical bubbles where fewer people called it in advance.

Key Point: The sheer volume of discussion around an "AI bubble" is unprecedented, making it difficult to discern genuine sentiment from noise.

Historical Parallels: 1929 and Jesse Livermore

Michael references Andrew Santoro's book on 1929, highlighting the parallels between that era and the present. A New York Times article from 1929, "The Magnet of Dancing Stock Prices," is quoted, describing "violent advances and declines in leading issues" and noting that "the people who know the least about the stock market have made the most money out of it in the last few months." This sentiment led legendary trader Jesse Livermore to short the market, making a significant profit. Livermore's quote, "Stocks could be beat, but no one can beat the stock market," is presented as a profound observation.

Argument: The current market, with amateurs making substantial gains, mirrors aspects of the 1929 market, suggesting a potential contrarian indicator.

Counterpoint: Michael argues that these sentiment indicators are less effective now due to the pervasive and constant flow of information, making it difficult to isolate and act upon them as effectively as in the past. Ben agrees, emphasizing that the media's focus on sensational stories (like a market crash) for ratings can distort perceptions.

Systemic Risk and Default Positions

The conversation shifts to concerns about systemic risk, with specific mention of regional banks, Business Development Companies (BDCs), and private credit. Michael points out that the 10-year Treasury yield has fallen back below 4%, contradicting earlier fears of fiscal discipline and rising inflation. He advocates for a default position of "probably nothing matters" when it comes to many of these worries, not out of complacency, but as a disciplined approach to avoid being overwhelmed by noise.

Argument: The majority of perceived systemic risks tend to fall by the wayside, and investors should adopt a default position of skepticism towards imminent collapse unless concrete evidence emerges.

Example: The current worries about BDCs are framed as an example where, despite potential bad behavior and loans, it's unclear if it represents systemic risk. The hosts express fatigue with constant warnings of systemic risks without tangible evidence of them materializing.

Gold as an Investment: A Contrarian View

The discussion turns to gold, with Michael explaining his personal decision not to own it, despite its recent strong performance. He acknowledges Meb Faber's tweet about uncomfortable year-end conversations for advisors who don't own gold.

Michael's Rationale for Not Owning Gold:

• Historical Performance: He highlights that gold had three out of four losing decades in the 80s, 90s, 2000s, and 2010s. He dismisses the 1970s performance as a unique, unrepeatable event due to Nixon ending the gold peg.
• Comparison to Bonds: He argues that gold's long-term returns are closer to bond returns than equity returns.
• "Insurance" Argument: While understanding the "insurance" or "hedge" rationale for owning gold, he personally finds the historical data unconvincing for his investment strategy.

Ben's Perspective: Ben acknowledges the "insurance" argument as valid and understands the case for owning gold. He also notes that gold is a unique asset class that marches to its own beat. He admits that he "wish[es] we owned gold this year" given its performance.

Key Point: The debate centers on whether gold's historical performance justifies its inclusion in a portfolio, especially when compared to other asset classes, and whether its "insurance" value outweighs its potential for long-term underperformance.

The Bull Market and Its Drivers

The conversation moves to analyzing the current bull market, with Yuri Nimmer's piece on being "Year Three of the Bull Market" being a focal point.

Key Observations from Nimmer's Charts:

• Cyclical Bull Markets: The current bull market is following the median length and is consistent with historical patterns, even when adjusted for inflation and CAPE ratios.
• Year 1 vs. Year 2 Dynamics: Typically, year one of a bull market sees PE expansion, and year two sees earnings growth with PE compression. However, the current bull market has seen PE expansion and steady earnings growth, indicating a fundamentally driven rally.
• Earnings-Driven Rally: Over the past 12 months, the PE ratio has only grown by 1%, while earnings have grown by 11%. This suggests the rally is primarily driven by fundamental earnings growth, not just multiple expansion. This is contrasted with the 2020 rebound, which was heavily driven by multiple expansion.

Argument: The current bull market is fundamentally sound, driven by earnings growth rather than speculative euphoria or excessive multiple expansion.

ETF Flows and Sources of Capital

The discussion touches upon the massive inflows into ETFs, with over $1 trillion in the first two and a half months of the year.

Key ETFs with Significant Flows:

• Vanguard S&P 500 ETF (VOO)
• iShares Core S&P 500 ETF (IVV)
• Vanguard Total Stock Market ETF (VTI)
• iShares Bitcoin Trust (IBIT)
• Short-term Treasuries

Question: Where is all this money coming from?

• Inflation: A portion is likely due to inflation.
• Earnings: American people earning more money and investing it.
• Baby Boomer Retirements: Rollovers from 401(k)s to IRAs.
• Diversification: Investors with concentrated stock holdings seeking diversification into funds.

Conclusion: The influx of capital is likely a combination of these factors, with earnings and retirement rollovers being significant contributors.

Household Wealth and Generational Spending

A chart from Citadel Rubner shows a dramatic increase in equity holdings for households under 40 (542%) and the final 50% of households (50%), compared to the middle 40% (50%).

Concerns: Michael expresses concern that the younger cohort, with a 542% increase in equity holdings, is the most susceptible to a dramatic drop, especially if they are invested in non-profitable, speculative names.

Counterpoint: Ben views this as fantastic news, indicating increased participation in the market by younger generations. He believes it would take a severe and extended downturn to make young people give up on the stock market, given their current "diamond hand" mentality.

Self-Correction: Michael revisits his earlier statement, clarifying that the younger cohort's holdings are likely dominated by "Mag Seven" names and ETFs, not just speculative penny stocks. He believes the truly speculative, high-growth, non-profitable names represent a smaller slice of the pie.

The "Zero Dollar Club" and Speculative Companies

The "Zero Dollar Club" is introduced, referring to companies with little to no revenue but significant market capitalization. Examples include Serve Robotics, ASML, Ollo, Regetti, QuantumScape, and Joby.

Observation: These companies, despite their lack of revenue, have substantial market caps, indicating a high degree of speculation. Many are involved in areas deemed critical for national security (e.g., nuclear energy, rare earth metals, AI, quantum computing).

Argument: While valuations may seem irrational, government involvement in national security could potentially justify elevated prices. The potential for these companies to drive future economic expansion is also considered.

Michael's Take: He believes that if an AI bubble bursts, it will present a "glorious buying opportunity" as the underlying technology is expected to work eventually.

Leveraged ETFs and Market Structure Risk

The emergence of new five-times leveraged single-stock ETFs (e.g., for AMD, Amazon, Nvidia) is highlighted as a concerning development.

Concerns: The potential for extreme volatility and flash crashes with such products is raised. The question of how these instruments function during significant drawdowns is posed.

Dave Dondic's Insight: He suggests these ETFs might be "nixed by the SEC staff" but notes that under current ETF rules, they are technically "normal" and could go live if not explicitly blocked. The timing of their potential approval during a government shutdown is seen as a strategic move to sneak them through.

Argument: The proliferation of highly speculative financial products poses market structure risks and could lead to significant investor blow-ups.

Trade Wars and China's Strategy

The discussion touches on China's export restrictions on rare earth minerals and Trump's threat of additional tariffs.

Analysis: China is perceived as playing hardball, knowing that Trump is likely to "cave" based on past interactions. The ability of China to tolerate economic pain is seen as significantly higher than that of the US, giving them an advantage in trade wars.

Argument: The US has historically been at a disadvantage in trade wars with China due to China's willingness to endure greater societal pain and their advanced production capabilities. The US is seen as "tiptoeing away" from many of Trump's tariffs, exempting goods that cannot be produced domestically, which disproportionately impacts small businesses.

Short Selling and Retail Outperformance

A Financial Times chart shows that heavily shorted US stocks have outperformed the market significantly, even over the past decade.

Two Interpretations:

1. Speculation Unleashed: The market is highly speculative, driven by trading apps and platforms like Reddit.
2. Hedge Fund Incompetence: Hedge funds are demonstrably bad at shorting stocks, as evidenced by the GameStop saga.

Jim Chanos's Perspective: The famous short seller suggests that long-only managers also generally underperform the market, implying that in this environment, retail investors are the primary winners.

Argument: The current market rewards speculation and retail investors, while professional investors (both long and short) struggle to keep pace.

Crypto Predictions and Housing Market

A bet on Bitcoin reaching $200,000 by 2027 is discussed, with the odds presented as 53% "yes." Michael believes these odds are too high, suggesting a 25% probability would be more appropriate.

Housing Market Analysis:

• Bearish Indicators: Homes are sitting on the market longer, and most are selling below list price. The median down payment has hit a record high ($70,000).
• Bullish Case: Ben's bull case is simply that interest rates will come down, leading to increased activity.
• Affordability Crisis: The primary issue is the monthly payment, which is crushing affordability.
• Regional Pain: Texas and Florida are highlighted as areas experiencing significant housing market pain.

Key Point: While interest rates are a key factor, the current high down payment requirements and monthly payments are significant barriers to entry for many potential buyers.

Corporate Reporting and Consumer Spending

Michael emphasizes that CEOs are incentivized to tell the truth due to the 90-day reporting cycle, as blatant lies would lead to severe stock price consequences and potential removal from their positions.

American Express (AMX) Performance: AMX is described as being in the "sweet spot" of a K-shaped economy, with strong year-over-year growth in its total billings and spending across goods, services, travel, and entertainment.

Generational Spending: Millennials are now spending more at AMX than baby boomers, despite Gen Z's higher growth rate. This is seen as a positive sign of consumer confidence among premium spenders.

Credit Card Debt: US credit card debt has reached $1.2 trillion, but Michael views this as an expansion of the pie for most people who can manage their payments, citing AMX's stable credit metrics.

Bank of America (BAC) Data: BAC's net charge-offs and credit card delinquencies are falling, indicating resilience in consumer credit quality, despite anecdotal stories of struggle. Michael emphasizes the importance of aggregate data over individual anecdotes.

Historical Economic Context and Media

Michael reflects on the Great Depression, noting that even after the Roaring Twenties boom, 60% of US households were below the poverty line by 1929. He contrasts this with the current situation, where aggregate data shows improvement.

Historical Records and Diaries: The importance of diaries in understanding past qualitative data is discussed, with Twitter being compared to a modern-day diary.

Future of History: The proliferation of information and opinions online is expected to make history more subjective and a "choose your own adventure" narrative.

Wealth Accumulation and the "Zero Dollar Club"

A tweet suggests that it's harder than ever to be wealthy, with many people's "paper wealth" evaporating. Michael agrees that most people won't become wealthy but disagrees that it's harder to be wealthy now, arguing that it's easier to preserve wealth with the help of experts.

"Zero Dollar Club" Revisited: The discussion returns to companies with no revenue but high market caps, highlighting the speculative nature of these investments. The potential for these companies to be deemed national security assets is mentioned again.

Car Market and Underwater Loans

The average price of a new car has reached $50,000, with over 60 models averaging more than $75,000.

Factors Contributing to High Prices:

• Inflation: A significant driver.
• Technology: Increased sensors, cameras, and infotainment systems.
• Consumer Preference: A shift towards trucks and SUVs.

Affordability: The average age of US passenger cars on the road has increased to 14.5 years. The Toyota Camry is noted as being more affordable than ever when adjusted for median hourly wages.

Underwater Car Loans: Over 28% of trade-ins for new car purchases carried negative equity, the highest level since Q1 2021. However, this is still lower than in 2019, suggesting the current media focus might be disproportionate. Ally's CEO states they are not seeing this impact their credit performance.

Horror Movies and Personal Preferences

Michael shares his list of favorite horror movies, deliberately excluding mainstream titles. His preferences lean towards found footage and demented films.

Notable Mentions:

• Deadstream
• Hell House LLC
• In the Mouth of Madness (John Carpenter)
• VHS series
• The Dark and the Wicked
• Speak No Evil
• Green Room
• Eden Lake
• When Evil Lurks

Ben's Reaction: Ben admits to being easily scared by horror movies and finds the genre doesn't evoke strong emotions for him, contrasting with Michael's enjoyment.

Other Topics

• Rocky Documentary: Michael expresses interest in a documentary about Sylvester Stallone making Rocky, but not a remake.
• Audiobooks: The positive impact of audiobooks on learning is noted.
• Home Renovation: A humorous anecdote about a significant price discrepancy for removing a bar from a basement.
• Pumpkin Farms: Michael's exasperation with increasingly elaborate pumpkin farms.
• John Candy Films: Michael's deep appreciation for John Candy's work, particularly "Uncle Buck" and "Planes, Trains, and Automobiles."
• Tremors: A classic Kevin Bacon film enjoyed by Ben's son.
• Sneakers: A 90s spy thriller with a great cast.
• The Task: A well-acted HBO show with a courtroom scene highlighted.
• "P.T. Anderson" Films: Michael expresses a nuanced appreciation for P.T. Anderson's films, acknowledging their quality but not fully understanding the "film nerd" adoration.

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Synthesis/Conclusion

The podcast episode delves into a wide array of market and cultural topics, highlighting the complexity and often contradictory nature of current financial and societal trends. A central theme is the difficulty in discerning genuine signals from noise, whether it's market sentiment, the potential for AI-driven bubbles, or the true state of consumer credit. Historical parallels are drawn to understand present-day phenomena, but the pervasive nature of information in the digital age makes direct comparisons challenging. The discussion emphasizes the importance of focusing on fundamental data, particularly earnings growth, as a driver of market performance, while acknowledging the speculative forces at play. Debates around asset allocation, such as the role of gold, and the emergence of highly leveraged financial products underscore the ongoing evolution of investment strategies and risks. The episode also touches on generational differences in spending and wealth accumulation, the challenges of the housing market, and the evolving landscape of media consumption and historical interpretation. Ultimately, the hosts advocate for a disciplined approach, a focus on data, and a healthy skepticism towards sensational narratives, while also celebrating the enduring power of storytelling and entertainment.