0:01

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We’re out of here.

Happy New Year and welcome back to plain English.

0:34

It’s great to be back in this seat, hosting this podcast, which I have so loved doing it for the last thirteen.

Fourteen months, one thing that I wanted to do at the beginning of 2023 is look, back over.

Some of the stories that I was telling about the world.

0:50

One year ago.

There were a lot of things that I think we thought we knew about the economy at the end of 2021 rounding into early 2022.

This is a period where R stocks were essentially at multi-decade highs.

The tech industry was absolutely booming crypto had not yet crashed metaverse, still seemed like a thing and looking back.

1:11

Now it’s just remarkable.

How 2022 was an extinction level event for narratives that have thrived in the previous few years?

Michael symbolist who is the chairman of market and investment strategy.

1:30

For JP Morgan asset and wealth management publishes an annual report about what to look out for in economic and finance news.

It just came out really like a few hours before we put up this podcast and it has this remarkable observation if the top where it asks us to look at some of the quote Equity Market catalysts.

1:53

Over much the last decade and in particular in 2020 and 2021 the pandemic years.

The peak pandemic years that is what were the narratives that were driving growth that we’re driving our sense of the future.

In the last few years, things like profitless Innovation or the millennial consumer, subsidy the name that I gave to that Fleet of companies like uber and Lyft and doordash Peloton that were making very little money in terms of It still seemed to be growing and growing.

2:25

Those seem to have crashed quantitative easing, that’s clearly over the Western conceit of geopolitical change through trade.

The idea that we could change a country like, China’s values simply by trading with it.

2:40

Well, that’s clearly been discredited.

There is also, this idea for a long time, that inflation was over that we were in this era of low, flashin that is clearly changed.

Modern monetary Theory, the idea Dia that fiscal stimulus could solve basically any problem without negative consequences that’s gone away.

2:58

Tina T Ina there is no alternative to equities, that’s gone poof.

That potemkin Village of metaverse and fintech narratives, the pseudo libertarian gibberish of unregulated crypto as Michael put it that is gone away as well so that is quite the graveyard of narratives that seemed to explain the economy just want a year ago.

3:20

That no longer explain the economy today.

To look forward into 2023.

Today’s guests are Michael bat neck and been Carlson of riffles wealth management and the podcast Animal Spirits.

In today’s show, we talk about what we got wrong about the economy in the last 12 months, what we think is going to happen to the economy in the next 12 months, whether there’s going to be a recession.

3:41

What the FED is going to do?

How far housing is going to crash, whether the text Swoon is going to bottom out.

It’s great episode and I hope you enjoy it.

I’m Derek Thompson and this is planning.

4:14

Michael and Ben, welcome back to the show.

Thank you having us.

So, what I want to do today is review The biggest stories, make the biggest predictions about the 2023 economy.

I thought one way that we could start, is that in the interest of beginning a new year with a new slate?

4:33

I wonder if there was one thing that you could tell yourself on January first 2020 to tell yourself one year ago that you know.

Now what would that lesson be, what is the biggest learning from the last year in financial and economic news and the rule for this game.

4:51

Before you guys each off me, your Is that you cannot commit insider trading.

You can’t try to tell your one year, old self short Tesla or sell out of NASDAQ can crypto.

And by United stock, you can’t do that.

You have to tell yourself a principal and idea about the economy or the nature of markets that you’ve learned in the last 12 months.

5:14

So Michael, why don’t we start with you?

Yeah, this is an easy one and usually markets don’t work like this where if you knew the news ahead of time if you do The economic numbers and had all of them.

It’s very rare that you could use that information to sort of Insider trade, right?

5:29

To know what the market would do to respond in response to anything, take the pandemic.

For example, if you knew that the economy was going to shut down for several quarters, you probably wouldn’t buy stocks, but you didn’t know that the Fed was going to do what it did in response to fiscal statements about sort of stuff.

So 2022 is the outlier in the sense that if you had I known that inflation was going to be above 7% every month for the year.

5:52

It would be very easy to know what to do with my money.

What would I do?

I would short the longest duration, stocks and bonds.

That’s what I would do when you say longest duration stocks, what kind of stocks you talking about?

So these are the high flyer.

6:10

Don’t worry about.

When you pay me back companies, lose them as much money as you want.

Because money cost, not the if money cost nothing.

Who cares, just burner and just grow grow, grow, grow, grow well, that Trend reversed entirely.

So, you know, The shopify’s and spotify’s of the world and and the Ubers and the money’s that were just had yet to turn a profit because they were being subsidized by Silicon Valley, all of those stocks are the ones that I mean by long duration and the same thing with bonds meaning it takes you a long time for you to get your money back, those are the ones that are particularly sensitive to Rising inflation higher costs of money and they got absolutely shellacked last year then you go.

6:46

I thought we were to have the same answer you but we don’t I would tell myself a year ago that The FED no longer cares about the stock market as much as people think, because four years in the 2010s every Financial pundit who was kind of an anti fed anti-government person said, the only thing the FED cares about is stock market, at every time the stock market Falls, the FED steps in and lowers interest rates or does some sort of monetary policy and 2022.

7:10

Totally turned that on its head because the FED not only said, we don’t care about the stock market.

They kind of said, we don’t care about the economy in terms of growth and unemployment, and there was days.

The FED would speak out and it’s not like they were using some weird, you know, cryptic try to read into this thing.

7:27

Some of the FED officials are saying we’re happy, the stock market is falling and I don’t think I ever would have believed that would have been the case before 2022.

So if I would have known this, the Fed was going to be cheerleading.

The stock market, the fall that would have probably helped head it going into 2022.

I’ll tell you what I would have told myself and it lives at the intersection of your answers.

7:49

I would have told myself Derek, you’re wrong about the pandemic being an accelerator.

You guys remember like two years ago like especially in the middle of 2020, what everyone kept talking about was how the pandemic is an accelerator, it’s bringing us into the 2030s.

8:05

So e-commerce is at X percent.

Well the pandemic is accelerating us into the projected, 2030s share.

Of e-commerce, in terms of total retail streaming was clearly on its way to growing and taking over the movies and people say, well, the pandemic is an accelerator is pushing us ahead.

8:23

Five years, I bought into that whole sale, I totally bought in that narrative and that narrative was simply flatly wrong, and I would have said, Derek you’re wrong.

The pandemic is not an accelerator for e-commerce and streaming for the most part, for the most part, the pandemic should be thought of as a kind of bubble.

8:40

It was a bubble for a category of Anything you can think of as promises without profits, and this is the category that I think Michael was talking about the metaverse spax, crypto profitless, Innovation, and software, e-commerce biotech.

All of that stuff.

8:58

Is that is it was that me or was that you guys you know, Derek this is ironic because that was that was the ring which is owned by Amazon telling me that there is an Amazon package outside my front door.

And I was going to say that it’s not just those really high flying stocks that Pulled everything forward.

9:14

It’s Amazon.

I was on, CNBC this morning, talking about this.

I’m looking at at the Amazons operating income and to your point about 2020, being being the bubble and just pulling forward years of growth, the operating income I’m doing with my finger just completely went off the rails for Amazon and accelerated to like eight billion dollars and now it’s back on Trend or a little bit below.

9:33

It’s two and a half billion dollars, so it’s not just, it’s not just the money losers, it’s the money’s.

It’s the companies that are like at the center of our of our Technological Universe.

Derek, my way of thinking about this is your point is the round trip, and I think we saw around trip and everything technology.

9:51

We saw this huge pull forward.

We saw these enormous gains in these stocks that everyone thought we’re going to change the world and in 2020 and 2021, really felt like they were going to if you just base it solely on the games and what people were thinking in 2022, erased, almost all, or most of those games for almost all those stocks and then also on their their fundamentals.

10:11

Yet 2022 is our round trip.

To reality.

Absolutely and yeah, Michael.

When your, when your Amazon Echo told you someone to the front door that was drone.

Powell raising rates on all these come on the economy and knocking on the front door and bringing all of these valuations back down to earth.

All right, let’s get into the questions and predictions about 20-23.

10:29

So, from The Wall Street Journal, just yesterday, quote, more than two-thirds of The Economist at 23, large financial institutions that do business directly with the Federal Reserve are betting that the US will have a recession in 2023 Americans are spending down there.

10:45

Pandemic savings.

The housing market is in Decline and banks are tightening their lending standards and quote today, Tuesday, we learned that the quits rate that is the share of Americans who leave their job stayed elevated for another month.

11:01

And so in the somewhat wacky, logic of today’s economy, that means the economy or least, the labor market seems to be stronger than a many people thought.

And that suggests that wage growth will continue with suggestive.

A Fed rate increases might also have to continue.

So Michael, I’ve gone back and forth in the last year, on the odds of a recession about 70 times.

11:23

What do you say for the next 12 months recession?

Yay, or nay?

Yeah, I’ve been arguing with myself a lot about this as well Derek.

Like, will they won’t?

They will, they won’t they, or will there be a won’t there be?

And I’ve got, I’ve got six questions that if I knew the answers to these, I could tell you what’s going to happen by definition, which I guess is obvious, but here they are.

11:43

Number one, has inflation peaked and we can talk about all this later on but number two is the wealth effect real, we would logic would suggest it is.

And what that means is do people spend more money when they’re at when their net worth Rises, so you sell the stock market Fall twenty percent last year house, prices are going to decline.

12:00

Those are people’s biggest assets, right?

So, so how real is the wealth effect?

Number three, what happens with the excess savings does that all get burned off, number 4, will the fed overtighten the market is expecting two, maybe three more little rate hike.

So we’ll see about that.

That I have a question about earnings, what happens to corporate earnings and then lastly what happens to unemployment, you can’t really have a recession without unemployment, so why does everyone meaning 2/3 of Economist?

12:24

Why does why do people seem to think that there will be a recession?

Even though we’ve been in this environment and the data is not willing over the economic data is okay so why does everyone think there’s going to be recession?

Maybe this is circular logic but it’s because everyone thinks there’s going to be a recession.

It just seems like the smart thing to say that we are on the other side.

12:43

I’d of an era of low rates and free money and do whatever you want.

And now companies are on the other side of that, Wall Street cares about cash flow.

They care about not overspending, and tightening and therefore laying people off.

So there is a lot of cross currents.

12:59

I could talk myself into anyway, but I think it’s possible and I made mine on both sides and it’s, but I do think it’s part of the FED orchestrates.

A soft Landing because again, think about where the unemployment rate is, it’s as low as it’s ever been.

Basically GDP the lat The FED tracker which, which estimates GDP is.

13:15

Looking at a three point, nine inch percent fourth-quarter GDP.

So I know this is by definition.

You can’t have a recession with with Rising GDP and unemployment that is through that is, you know, on the floor.

However, however, with the FED continuing to raise rates and the housing market being susceptible to much lower prices, how long can consumers continue to spend with their biggest asset fall rolling over?

13:38

So I’m probably as if not more confusing, you are before we get to Ben, Just in the interest of making everyone choose a side even if it’s 5149 because the truth is no Michael.

You’re you’re thinking about this in a very similar way, to me, I was prepared to both sides this, but now that you’ve both sides it, I think I’d prefer that everyone.

13:56

At least land there 51 percent on one side of the equation.

So recession.

Yes, or no?

Even if this is marginal, no, all right, then If I’m using my logical history brain, I would say almost definitely because we’ve never had inflation.

14:11

This High that has come down without a recession.

And it’s one of those things is I’m trying to figure out if I want to believe the fed.

And I’m playing chicken with the FED right now.

And I I think that the labor market is so strong.

I think this is one of those instances where history is going to be misguided and I I’ve never seen a labor market like this in my life and I think it’s strong enough in the the amount of savings people have.

14:35

Strong enough work at the consumer has just never been more prepared for something like this.

I think we kind of just muddle through and don’t get a recession again this year.

And people just next year it’s going to be 90 percent of economists predicted recession 2024.

I think I kind of think that’s where we might land.

I can’t believe that we’re all agreeing on this.

14:52

I was sure that someone was going to take.

Yes.

Here’s why all definitely wrong.

Then I’m a little bit nervous that my prediction.

Here’s why I would say I’m 51% toward know.

So again to both sides, this a little bit, the Bad news that I see that you guys haven’t mentioned, is that I think about global trade right now, having a ton of headwinds.

15:14

You look at Europe, they are clearly the EU is clearly going to enter a downturn.

I think there’s just no way that Europe Metals through.

What’s coming for it.

China is clearly turning inward.

It’s possible to China is already in a recession.

How I would know that Beyond any certainty.

I don’t know, because I can’t really trust any of the specific statistics that are coming out of China, but You look at some other things, I think China is clearly turning Inward and imports are going down so I wonder where is growth from trade going to come from.

15:43

If it’s not coming from Europe and it’s not coming from China, like Canada and Mexico, can’t buy all of our shit and I wonder if that export component of GDP comes down down down and consumer spending isn’t strong enough to make up for it, then we do enter a technical recession.

16:00

If she DP comes down for the next four for six consecutive months at the Same time, you go back to the first thing that Michael said, inflation is the Ballgame.

Inflation is the whole ball game and every measure of inflation.

Seems he pointing in the right direction.

16:16

You look at overall inflation, which includes oil prices, it’s going down, you look at core inflation, which excludes energy and food that’s going down.

You look at what we’re now calling super core inflation, because we have to keep coming up with new terms that is that X cludes energy and food and shelter and used vehicles for a variety of reasons.

16:34

Sometimes these measures have slight lags.

That’s a pretty good proxy for services inflation, that’s going down to.

So in a world where the FED is raising rates and that lever on the economy, is our greatest threat for turning into recession.

They’re raising rates.

16:49

Because if here’s a verse of inflation, but inflation seems to be edging toward for, or 3%.

I think that soft Landing is in the cards here.

It’s not the 1970s, it’s a new decade.

New economy has been said, we can’t just look too.

17:05

History to make predictions.

So, I do think that we have a shot at modeling our way through this, and coming through, with either, something that is a lot, like a 2,000 recession or 2001 recession, which is our recession in name only essentially or that there really is.

No nber.

17:21

Determined recession at all?

That’s where I come down.

Michael been anything about that analysis that you guys want to poke holes in?

Yeah, I guess I would just know.

I think that spot and I guess what I would add is the American Consumer feels our economy.

And in order for them to stop spending, they need to get laid off.

17:39

And in order for them to get laid off the economy, needs to slow down again.

Once I know once again this is maybe some circular thinking but there needs to be a reason for people to stop spending and if the stock market going down, 20% hasn’t done it.

Because retail sales are still right near all-time highs and the home the housing market cooling off any other do you know where to start to feel it?

17:57

Has it done it?

I question.

What is going to do it?

So again, can you have a recession without unemployment Rising without people stopping spending?

The answer, the answer.

There’s no.

So you’re gonna have to see the things.

Those things happen before the economy can cool off.

I think that’s the biggest thing is if all that excess space savings gets spent down and I think it’s only lasted longer than people thought.

18:17

I think everyone assumed everyone’s going to take one or two trips and get that out of your system after covid and then to go kind of like settle down.

But if you go to the airport to a restaurant, they’re all still packed with people and bustling and I think that’s the thing if we finally start see that people pull back a little bit but I don’t know what’s going to stop that short of people.

18:35

Doing their jobs.

That’s a really good point.

And it goes back to the thing.

I said earlier about the pandemic wasn’t an accelerator, the pandemic was a bubble because what did you see during the pandemic?

The service is economy was fundamentally closed and as result everyone had to order shit order goods from companies like Amazon or experience things in the services economy virtually by for example streaming.

18:58

But the second the service economy opened up.

We saw everything shift, we saw a Goods recession and we saw that people started flying More people started going out to restaurants more and services boomed.

And that’s where a lot of the energy around.

Inflation is right now so I agree.

19:13

There’s been a really historically bizarre trade-off between goods and services in the last three years.

Services are shut down and goods explode, and then Goods fall into recession and services explode.

But there’s a possibility.

They fall in the next 12 months into a kind of normal equilibrium that leaves us out of a recession.

19:34

Any last words before we go on to Two predictions about the fed.

My only thing is that the economy is so big and dynamic in the United States now that we could just see recessions in certain sectors that don’t impact the entire economy.

So last year, we certainly had a recession in technology.

If you worked one of these companies, it felt like a recession because you a lot of people got laid off and then this year it’s probably going to be something like the mortgage industry where no one’s refinancing anymore because mortgage rates doubled, no one’s taking out new loans because not a lot of housing activity.

20:00

So I think we could just see these many pockets and it might kind of move around a little bit to different sectors and Segment of the economy that are impacted more than others.

We’re going to put a pin in housing because that is coming up after this next question.

But the next question is about the Fed.

So the FED is clearly raising rates until inflation settles at a number closer, to 2 percent, and 2 percent for whatever historical reason has this sort of magical power about it.

20:23

It is the shelling point.

It is the number that everyone thinks they’re aiming for even if we don’t know exactly.

Why 2.0 percent is a number that we should aim for where do you think the FED will be satisfied?

I’d if inflation hits that number for several consecutive quarters.

20:39

Do you think they’re satisfied?

If we hit four percent 3.5% Michael to you?

Yeah, this is an interesting question, because inflation, the headline numbers that people see on USA Today, or whatever, like the average person sees year-over-year numbers.

20:57

The thing is, there’s a huge gap between year-over-year numbers and say month over month or the most if you annualize the most recent three months, so we could be at six percent year over year but like two to three percent three on with the three-month moving average like on an annualized basis and so the question is I know the FED should be a political but of course there are, you know, there are politics involved here so I think I think, I think it depends what the market is, expecting is a 25 basis, point rate hike in February, and another 25 basis point rate, high rate, hike and March taking us to 402 4.75 Percent to 5 percent.

21:36

That would be the range and then they’re expecting maybe one more in may now the mark that.

So that’s that’s like the FED funds probabilities that.

You could that you could find online, the bond market is disagree because the two-year yield, which is a reasonable gauge for where these rates are going is below that.

21:54

And every time that’s happened, the FED has stopped tightening, but right now, they’re still going.

So, I think the biggest risk is the clear and present danger, that staring us right in the face of the FED just doing too much.

And I think it’s going to be dependent on, I think wages of the big thing that is going to determine, I don’t think it’s going to be so much a number year over year as much as it is going to be combating.

22:16

The sticky part because a lot of the things we worked through you mentioned like oil and rent and things like this but it’s the wages that really don’t go away.

Then I want to follow up on that with you because you’re a really close fed Watcher.

I wonder what is it about the words from Powell is using that.

22:35

Make you confident that he’s going to either go too far and raise rates into the teeth of a recession or raise rates.

Just enough to settle inflation between 34 percent, without tipping us into an actual downturn.

22:55

What, what about his words?

Give you a clear indication of his motivations.

The only thing I’m really confident about the FED is that they’re probably going to change their mind at some point.

If you look at Past forecasts of anything with the economy interest rates, or inflation or growth, it they’re just as bad at.

23:12

This is all of us are, they’re not at their past forecasts are nowhere near anything close to what actually happens.

And I think they say, well, we’re data-dependent we see what happens and so I think the people that say, listen, the FED is telling us exactly what they’re going to do, and they’ve been doing it.

That’s fine, but I think once the data shifts and if inflation does have a serious, you know, downturn and it gets to three or four percent, I think they’d be nuts to not.

23:35

Not try to rethink what they’re doing and recalibrate because at that point do you want to send the economy into a recession just to prove a point?

I looked at this, the whole volcker LED fed in the 1980s when they sent the economy into recession.

It took a long time, I mean inflation was much higher back then it was like, 15% 1980 but it took a long time for inflation to ever hit two percent.

23:55

It wasn’t till like 1986 and the majority of the 80s was above 4%.

I think it was 60% of the time.

It was about 4% the trailing 12-month inflation rate.

No one looks back at the 80s as this hell Cape of inflation in Crazy Prices.

So I think as long as it’s heading in the right direction and trending downward people are going to be happy, they’re going one of the podcast we were on a view before early in the year we talked about the importance of gas prices I guess this is early last year and gas prices are lower at the end of 2020 to than they were beginning of the year that’s after hitting five dollars a gallon.

24:26

It’s so crazy.

It’s crazy.

Yeah that that’s that’s one of the many big surprises of 2022 that there was, but that’s the kind of sediment thing where people aren’t going to be Be as angry about it anymore.

Once these things start to come down and their their real wages are going to be rising as inflation comes in.

24:42

Because it’s not like they’re going to.

The employers are going to take back all the wage gains that they gave them.

So so what does the FED raising rates actually due to the economy, where is it?

Most acutely felt.

And the answer to that is housing, right?

The housing market.

So you saw mortar 30-year mortgage rates.

24:59

One from, I don’t know, three percent up to over seven percent in a year, which is an unprecedented game and The account of the housing market is roughly 20 percent of the economy and so I think that nuking the housing market.

25:15

It’s hard to see how that doesn’t have Broad Ripple effects, everything from constructing and the financial aspects of it in the lending and all those people that are involved in that portion of the economy that is that is a substantial piece of our economy.

I want to know how far you guys think housing is going to fall, or how far is going to crash.

25:36

So, my view is that housing prices are probably going to decline in 2023 that they’ll probably fall by about 10% from Peak to trough that it might take several years for us to dig out of that hole.

We just got news that mortgage applications volume was down more than 13% at the end of last week from two weeks earlier.

25:58

That is a huge drop.

Really there is a bit of an Ice Age coming for housing.

Michael to you, you said that, you don’t think that I recession is coming, but you also acknowledge that housing is 20 percent of the economy and it is likely entering its own finite recession.

26:19

So how do these things Square?

Yeah, it’s a good question.

So we were better now we’re talking about this yesterday and animal spirits that if so we mentioned that like everything was artificial in terms of as Price inflation, for lack of a better word in after the pandemic and housing is may be the poster child for this.

26:38

If you look at like the median sales price for new or existing home you have this trend line and it just completely went off Trend vertically and and part of that is obviously low interest rates but it’s also the pandemic people trying to get out work from home.

All of that, sort of the the perfect, The Perfect Storm of housing prices accelerating.

26:58

So if you were to just get back, Back to the prices the average price for 2019.

So pre-pandemic you would have a 32% plummet in housing prices which would be unfortunately by far the largest price decline that we’ve ever seen and it would get super scared.

27:16

The headlines would be absolutely diabolical because in during the great financial crisis, the max decline was roughly 22%.

So again just to get back to the average 2019 price for a new home sale.

That’s a 32 That decline now.

27:32

I don’t think that’s going to happen.

Why?

I think that this is a structural issue and so long is mortgage rates, don’t go back to 7% or Beyond or higher than that.

I think buyers will return very quickly because there are, I don’t know what the this is direction of the, right?

27:47

I might be misquoting the number, but 70 million Millennials that are that are entering really, like, like Peak home, buying age and they have to buy a house, right there, the having kids, they’ve dated, they need the house.

And so there is just way more demand than there is Supply.

28:04

So any any easing of mortgage rates and I think you mentioned mortgage applications Plumbing, I think that you’re going to see a huge object very quickly.

Yeah.

One statistic that I found from a JP Morgan analyst node from Michael symbolists who’s really fantastic notes that quote, we are seeing the largest percentage increase in multifamily units coming online since the 1970s and quote, that basically means that the Of apartment buildings that are under construction.

28:33

Relative to the entire rental stock is the highest.

It has been since the 1970s that is some really good news for Millennials looking to buy or rent the fact that we could potentially have a lot of housing come online, that’s the good news, the bad news at least for the short term could be that a lot of Supply coming online plus these Rising rates, could mean that prices could fall substantially in the short-term contributing to a recession.

29:02

So the long-term is longer than the short term.

I’m happy that there are more Apartments coming online that I am unhappy that we might see a relative minor recession in the housing market specifically.

But that’s some that’s some news to to look out for then.

What’s your outlook for housing in 23?

29:19

This is the one where you asked us earlier, what what we wish we’d have known at the beginning of last year.

If you tell me where mortgage rates are going to end the year, I think I could probably tell you how Housing Works.

If rate stay above six or seven percent, Going to be a tough year for its go back to 45 percent.

I think to Michael’s Point there’s going to be a flood of people that are just waiting on the sidelines.

29:37

The thing is in the first two years of the 2020s, the first two or three years, we had bigger gains than we’ve seen in any other decade besides one and that was the 1940s when you have this huge snap back from World War Two and the Great Depression.

So we pulled forward a whole decades worth of gains in probably 18 to 24 months.

29:54

So even a 20% bear market and housing would bring us back to March 20 21 levels and we’d still be Be 20 or 30 percent above where we were prepend emic that.

I mean, even a double-digit decline, wouldn’t surprise me even though that’s very rare.

Historic lie because we pulled forward such, you know, such huge gains and having rates go up that much with with price Rises that quickly 10 or 15% decline.

30:18

Really?

Wouldn’t surprise me?

I just do think that structurally, the lack of supply.

And the fact that we have so much household, formation means there’s probably going to be a floor eventually where people just start hopping in and even if people don’t get that, Prices that they thought that they were going to get it you know just six or nine months ago it’s housing is going to be a problem in the United States for a while.

30:40

I think so.

I think people are going to be ready when that happens.

I think people are relatively okay for overpay for a home right?

It’s not an asset they plan on Flipping 12 months in there that’s sensitive to the price where becomes a huge issue?

And it already is a huge issue is just affordability plan and simple like there is only so much money that you could put down for a house.

30:56

There’s only so much money that you can pay towards a monthly mortgage payment and so if rates cool off and they’re stabilized and prices remain, you know, elevated relative to history.

All right, so it’s an extra 70 box for your monthly mortgage payment.

Like people are relatively okay a home overnight houses.

31:14

We have a weird thing where we anchored to higher low values.

So when rates went from 3 to 5 that 5 seem really high.

If rates go from 7 to 5, that 5 is gonna seem low because people were looking seven in the face and going this is ridiculous.

I can’t believe how high my payments are going to be.

So I think having that that Change having that 7% up there and seeing declines from there.

31:35

I think is going to cause some people to come back in a little faster than they would have otherwise, that’s question.

I have for you guys is about what’s happening in Tech.

So the text moon was one of the biggest stories in markets in 2022.

I remember one of the one of the first shows that I did at the end of 20 21 so it’s two years ago at the end.

31:55

December 20, 21.

I talked about how Elon Musk was not only times man of the year, but he might be One of the most important figures of the century that Tesla and SpaceX were extraordinary accomplishments.

And this guy had gone from being, you know, a thin Tech entrepreneur to being the richest person, maybe in the history of the world he is now after 2022, the owner of the not so proud moniker of being.

32:19

The only person who lost two hundred billion dollars in one year in terms of net worth.

So that I think is just a little detail that goes to show a broader story which is that the text moon was absolutely astonishing and it came.

The back to the FED, raising rates as inflation increased.

32:34

It’s obviously a bigger story than just Elon Musk.

All the NASDAQ was down about 60, 70 percent, Fang was absolutely crushed.

That’s Facebook.

Apple, Amazon, Netflix, Google.

Do you guys think that 2023 is the year, the text Swoon ends?

32:52

Or is there more pain in store for this group of companies?

Michael, I think that there is more pain in the rear.

Real economy of Tai Chi, you know the stock prices will see but a lot of these companies just overstaffed.

33:08

If you think back to when Facebook bought Instagram for a billion dollars, when they had 13 employees, it seemed like, oh my, you know, it just seemed like a crazy number and then it’s a decade more than a decade later.

Instagram has 20,000 employees and so the productivity growth just gave them the, the green light to just accelerate their hiring.

33:29

It was all not not.

In the case of Facebook.

But, but certainly, a lot of the starters, all being subsidized by low, interest rates by Silicon Valley, they were happy to subsidize our loss or their losses, which were the consumers games.

But I think that is, that is over, right?

And so I just I don’t have it up here, but I made a chart of employment at these big tech companies from 2019 to today.

33:51

And Apple has remained relatively sober, but a lot of the other Tech Giants just over hired and I think back to the point you made about Elon He cuts what was it?

75% of the workforce at Twitter and you know the wheels didn’t completely come off.

I mean for the most part it still functions and I think a lot of them are going to use that as a roadmap.

34:09

Not to that same extent.

But you know what?

We could probably do with 20% less employees, whatever the number is, and it’s out.

Salesforce just announced today a 10%, why often?

And a rule, an animal spirits, and it’s a good one.

If if you see around 10% layoffs, that is never ever ever where it ends.

34:25

There’s always another one coming and There’s this old saying, on on Wall Street that nothing feels quite like success.

And I think that’s that happened with tech because you had this thing where Tech used to be the upstart, right?

It was the we started our companies in garages and Silicon Valley and look at us now.

34:43

And then, they became the Behemoth where they’re they’re making up, you know, 25 30 percent of the stock market.

And I think when you get that big in that potentially potential for overconfident seeps in, and that’s why you see over hiring and you see this stuff where they are doing these crazy ideas that Sometimes don’t pan out because things have worked out.

35:02

So, well, in the aftermath of the.com, bubble blowing up in the early 2000s, even eight, or nine years later.

The tech sector as a whole was down like 50% from the highs in terms of like the NASDAQ.

So it took a long time for that to happen, things got a little crazy back then and the business models are certainly much more secure.

35:20

Now, they actually produce some revenues and cash flows and like back then.

But this is the kind of thing where when we see these huge regime ships in the markets, it It’s not too often that it’s like goes back immediately and goes back to the winners.

A lot of times when we have a regime shift, the winners going in are rarely the winners coming out and it’s you’ve seen it in energy stocks, they got pummeled for years and years and years oil a Hit - it was - 37 dollars a barrel on April 20, 20 or whatever and people through the energy, stocks out, you know, for dead and now they’ve been the only thing kind of holding up the stock market for the past 18 months or so.

35:56

And so these things are always cyclical.

So, I’m not saying that these companies are going to go out of business by any means, but to see them immediately returned to their leadership position.

I think just after this short of a downturn probably doesn’t make a lot of sense.

I talked about this in other shows, I do think that the entire tech industry is experiencing something like an existential midlife crisis.

36:18

Not understanding.

What comes next?

What is the next Mountain that we have to scale in order to retain the kind of earnings ratios?

That we are used to because the advertising business business is not only a mature business, it’s also no longer the kind of duopoly that it was five years ago.

36:35

We’re Google and Facebook, just ate everybody’s lunch.

Now, Amazon is the largest growing where the, the fastest-growing Advertiser in.

In the US, the content is coming to the chat.

Here comes Netflix, Here Comes Microsoft, which is now working with Netflix and may, I suppose, one day be even by Netflix.

36:53

If the price gets juicy enough and US Regulators allow such a thing, I mean, I think we’re seeing That that mountain of a dove essentially, attentional economics, right?

Create stuff that people look at and then set sell advertising against it.

37:09

That is such a mature business.

That the margin is going to come from something else.

Maybe it’s a I maybe it’s some other technology that I can’t necessarily think of right now.

Maybe it’s clean energy like maybe you know, a lot of the money that’s going to come into this space is going to come into solar and wind and geothermal.

37:29

And nuclear, but you can tell they’re all looking for that next Mountain to scale with Elon Musk.

I think the midlife crisis is more literal than it is existential and conceptual, but they’re all looking for that next thing.

And, you know, I do wonder, I think I agree with what you guys said about the theme that we saw emerging for the last few months of 2022 carrying on, which is that people like Elon discovering that you can keep a company afloat, even after firing 50% more of the 50 percent plus of After we could see that continue because see more layoffs in these big tech companies.

38:03

But I wonder what the next shoe to drop is, what’s the 2023 narrative that?

We can’t quite see yet.

And I wonder if it’s going to be in this General space of.

We can see that these companies like open a, I are breaking open.

This really exciting Frontier and they’re leaving the big guys in the Dust.

38:21

How do we catch up?

I’m very curious to see what what happens there, and but I don’t exactly understand how that’s going to cash out in terms of Stock prices and and labor.

Actually, think the, the biggest surprise, for a lot of people in Tech would be that there’s not a next big thing for a while.

38:37

I think people have been trying to predict that and what if like the big tech stocks that we have Amazon and apple and Facebook, they’re the big four, like the big four automakers and they’re there just isn’t a whole lot of moving forward for a while and those big behemoths just turn into these old-school.

38:52

Kind of value companies that eventually have to start buying back stock and paying more dividends.

That’s really interesting you.

So I wrote this essay for Land Tech about how what I called the Eureka theory of progress is wrong which essentially said that when we tell a story of scientific and technological progress, we often Focus too much on invention.

39:10

We say well you know Edison invented the light bulb in 1879 yada yada that was electricity.

It’s like no actually electricity had like nothing to do with you as economy for the next like 40, 50 years deployment implementation rather than invention is the real story of progress.

39:26

And it’s possible that we’re in an era of Went rather than invention for these big tech companies, right?

Amazon isn’t Reinventing drones so much as they are catching up on Advertising.

Netflix, isn’t Reinventing television so much as they’re catching up on Advertising.

39:43

All these companies are essentially becoming, you know what, GE was the 1980s 1990s, this kind of, you know, megaliths that tries to do everything it possibly can in order to add more and more and more to the bottom line.

So it’s possible that bend your right.

This is this is not Not an arrow.

39:59

We’re going to see a clear next Mountain materialize.

It’s going to be an era where people are trying to to catch up to each other on the mountain already created and they’re all trying to essentially become very similar to the next company.

I see this in entertainment a lot like you.

What was the old line that Netflix wants to come HBO before HBO becomes Netflix?

40:18

Now, every entertainment companies try to become the exact same thing.

They’re all trying to become a major streamer that also plays in film.

It’s just that Netflix has to catch up and film and Disney has to catch up and streaming and, you know, Paramount, figure its outward where it fits in that landscape, and HBO figures out where it fits into that landscape.

40:39

But they’re all like, trying to become the exact same company.

So, yeah, maybe we’re just in an era of of, of big corporate sameness and that essentially is an era of deployment and not invention.

I’m seeing nods.

40:54

All right, they’re all time, never cutting like cable because all the streamers are going to eventually turn back into a bundle again.

And I’m gonna be sitting there waiting with open arms.

Yeah.

II said this in a podcast toward the beginning of the show that the history of media is the three bundling of unbundled bundles and a lot of people got mad at me because they didn’t like me saying bundle so often in a row.

41:15

But anyway, we will leave it there.

Michael been happy New Year, and thank you so much for reviewing 23 at Uconn and finance news with me, we will You again very soon.

Thank you, perfect.

Thank you for listening.

Plain English is produced by Devon manzi.

If you like the show, please go to Apple podcast or Spotify.

41:32

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