Will Higher Rates Kill the Stock Market? | Animal Spirits 484

The Market's Excuse to Sell Off [0:43]

• The market has a "43-page doc" presenting reasons for a sell-off, including historical instances where central bank rate hikes preceded market bubbles bursting.
• Despite expectations of the Fed raising rates to 4.5% or 5%, the market may not take the "excuse" to sell off.
• The current environment feels similar to April, with a slow, daily decline rather than sharp drops.

  "Everyone knows what the biggest risk is right now. And the market is not always right, but I think the market is expecting, pricing in now, the Fed to raise rates to like 4.5% or 5%."

Doubt Versus Fear in the Market [2:11]

• The current market is characterized by "a lot of doubt, but basically zero fear."
• AI valuations, specifically an AI basket of 81 companies, trade at an average EV to EBITDA of 15 times, which is not a significant premium over historical averages.
• Multiple compression is widespread across most sectors, with only Consumer Staples seeing a slight increase in multiples.

  "So there's no premium in the AI trade anymore, okay? So a lot of doubt."

Lack of Fear Despite Sell-Off [4:41]

• The VIX is at 16, indicating low fear despite market declines.
• Consumer Staples and Utilities, typically defensive havens, are trading at multi-year lows against the S&P 500.
• This suggests investors are not seeking refuge in traditional safe-haven assets.

  "When investors get scared, they often hide in these groups. Nobody's hiding there right now."

The Index vs. Individual Stock Disconnect [5:48]

• The S&P 500 is near all-time highs, while over 70% of stocks within the index are at least 10% below their highs.
• This divergence is historically unusual, with a similar pattern observed only before the dot-com bubble burst.
• Deterioration is concentrated in sectors sensitive to higher interest rates, like utilities, staples, and real estate.

  "The only other time that's happened over the last 30 years is right before the dot-com bubble burst."

Concentrated Market Performance [7:05]

• The S&P 500 is up 13% year-to-date, but 40% of stocks within the index are down this year.
• A small number of stocks, about 20, are up 100% or more, driving the overall index gains.
• The market has experienced a cycle where previously underperforming stocks (Mag seven) have rebounded.

  "So more stocks are down this year and a double digit up here than are outperforming the index."

Rising Rates and Economic Growth [8:49]

• Rapidly rising 10-year Treasury yields (from 4% to 5.2%) are a significant factor for the stock market.
• The market's resilience is explained by the belief that AI spending and economic growth will continue, supporting earnings.
• The Atlanta Fed's GDP Now forecast for the third quarter is 5%, suggesting strong economic momentum.

  "That's why the stock market's not selling off. It's because we think economic growth is going to be strong."

The "No Rules" Market [11:36]

• Traditional finance theory suggests higher interest rates should lower asset present values, but this has not happened.
• Since March 2020, the S&P 500 has annualized at 19%, even as Treasury yields rose from below 0.5% to 5.2%.
• This disconnect highlights the unusual nature of the current market, where traditional relationships seem to be broken.

  "Since treasury yields bottomed in March of 2020, they bottomed before the stock market did. I think the treasury rate bottomed like March 9th or something, below 50 basis points. Since that date, the S&P 500 is up 19% annualized, since rates went from 0.5% to 5.2%."

Contradictory Economic Signals [12:35]

• Mortgage rates are above 7%, unemployment is at 4%, bond yields are over 5%, cash yields are near 4%, oil is around $100, gas prices are high, and inflation is around 3.5%.
• Despite these challenging economic indicators, the stock market is at all-time highs, and consumer sentiment is at all-time lows.
• The strong stock market performance may be preventing greater public concern about other negative economic factors.

  "All-time highs in the stock market. All-time lows in consumer sentiment."

Tech Fund Flows and Retail Buying [14:02]

• Net ETF flows into tech stocks are at record highs, dwarfing previous periods.
• Retail buying on Robinhood is also near record levels, indicating widespread bullishness.
• These indicators suggest a crowded market with high conviction among investors.

  "Simultaneously, we have near-record retail buying from Robinhood."

Broken Sentiment Indicators [15:00]

• Sentiment indicators are considered "completely broken" and unreliable.
• Actual investor flows are seen as a more accurate gauge of market sentiment than surveys.
• Different investor groups (Robinhood, institutional, Schwab) behave distinctly, making broad consensus difficult to ascertain.

  "You can't ask people what they want to do or what they feel. You have to, what are they actually doing?"

The "K" Chart and Market Sentiment [18:04]

• A "K" chart illustrates a divergence where the stock market goes up while sentiment goes down, a phenomenon that began around COVID.
• Historically, stock market movements and sentiment have correlated, but this relationship has broken down.
• This suggests that traditional sentiment indicators may no longer be predictive of market behavior.

  "Stock market goes up. Sentiment goes down. Because I said, there's no chart that actually looks like the letter K."

Income and Wealth Growth for Lower Earners [18:54]

• Since the 1990s, the lowest income quintile has seen the greatest inflation-adjusted income gains.
• Income gains for lower and middle-income households have significantly increased in the past 10-20 years.
• The share of households earning $150,000 or more (inflation-adjusted) has quintupled since 1967.

  "The lowest fifth has seen by far the greatest gains in income since 1990."

Household Assets vs. Liabilities [21:43]

• Household assets are now over 10 times liabilities, a significant increase.
• This suggests a strong wealth effect, with stock market gains flowing into the real economy.
• High-income individuals are increasingly using investment wealth to support spending.

  "Household assets to liabilities is now 10 times."

Baby Boomers and Retirement Spending [23:11]

• The idea that baby boomers cashing out retirement accounts would crash the market is deemed a "dumb take."
• Baby boomers are experiencing significant wealth gains, contrary to fears of a retirement crisis.
• This increasing wealth may contribute to consumer spending and support asset prices.

  "Baby boomers cashing out their 401k was going to crash the stock market. Yeah."

Rent Growth Slowdown [24:33]

• National median rent has returned to its pre-pandemic trend of slow, steady growth after a spike in 2021.
• Rent growth has significantly fallen off since 2022, returning to a 2% annualized rate.
• This is considered good news for consumers, particularly renters, as housing is a major household expense.

  "So you had this huge, enormous spike in rents in 2021 in rents, and ever since 2022, rent growth has completely fallen off, and it's back on the pre-pandemic trend."

AI Agents and Cash Management [25:52]

• AI agents could potentially sweep household cash into higher-yield accounts, moving from 0.1% to 3.3%-5%.
• This could lead to banks losing a significant portion of their cheap deposits, impacting their ability to lend.
• Banks may restrict access to prevent such automated transfers, and adoption may be slower than anticipated.

  "If every household used AI agents to optimize the return on their cash— This is stupid. This is very stupid."

The "AI Slop" Debate [27:30]

• Some express indifference to "AI slop," viewing AI-generated content as a filter to ignore certain sources.
• Others worry about AI's impact on creativity and the potential decline in the quality of content.
• The discussion highlights differing perspectives on AI's role in content creation and consumption.

  "I don't give a s*** about AI slop. How about that?"

Instinct AI Assistant [30:33]

• Instinct is a text-messaging AI platform that can perform various tasks, from scheduling to managing subscriptions.
• It's growing rapidly, with a $10 billion valuation and significant funding.
• Users are sharing sensitive information, including credit card details, indicating high trust and adoption.

  "It is a text messaging platform where you text it to do anything."

Concerns about AI Security and Control [32:59]

• There are significant concerns about the security and privacy of AI agents handling personal financial information.
• The potential for AI agents to "go rogue" and make unauthorized financial transactions is a major worry.
• Despite these concerns, the rapid adoption and capabilities of AI assistants suggest a significant shift in how people manage their lives.

  "I am simply not ready to give my information up to these places yet."

The Decline of the Creative Class [36:45]

• America has lost over 200,000 creative jobs in the last four years, with 50,000 in the past year alone.
• This decline is comparable to the periods of 2001 and 2008, impacting industries like movies, newspapers, and music.
• Spending on video content, including movie tickets and streaming, has fallen significantly.

  "America's lost more than 200,000 creative jobs in the last four years."

AI and the Future of Film [38:23]

• Concerns exist that AI could lead to a decline in the quality of movies and other creative content.
• Examples of films with poor CGI and questionable artistic merit are cited.
• The potential for AI integration into the arts raises questions about authenticity and human creativity.

  "I know we did this last week. But now that you saw it, isn't it just... What's the word? Bizarre, unfortunate, sad."

The Resurgence of Film Theaters [39:40]

• Despite industry challenges, some films are drawing crowds and positive reactions, suggesting a potential resurgence for movie theaters.
• Movies like "Resident Evil" and "Encore" are highlighted as fun, engaging experiences that brought audiences together.
• The industry is still in disarray, but certain films are proving to be box office successes.

  "So there was a theater here called Crown Violet. It's fantastic. Really cool little theater. There's a bar there, which I enjoyed."

Top TV Shows of the 21st Century [41:53]

• The New York Times' list of top 100 shows includes "Breaking Bad," "The Wire," "Mad Men," "Succession," "Fleabag," "Game of Thrones," "Veep," "30 Rock," "Curb Your Enthusiasm," and "Atlanta."
• "Succession" is lauded as a perfect show with no fluff, re-watched multiple times.
• Debate arises over the ranking of shows like "The Wire" and the omission of "Friday Night Lights" and "Six Feet Under."

  "I think Succession is probably my number one. It's the only one of those shows that I right away went back and watched."

Notable TV Snubs and Friday the 13th [44:34]

• Notable omissions from the top TV list include "The Walking Dead," "Dark," "Silicon Valley," "Fargo," "Entourage," "Yellowstone," "Grey's Anatomy," "Boardwalk Empire," and "Sons of Anarchy."
• The "Friday the 13th" movie franchise is described as "unwatchable" and "absolute dog shit."
• The early films in the series featured a less formidable Jason Voorhees compared to later iterations.

  "Nobody's handing out medals for finishing all 12."

CIA Shows and Fassbender's Performance [45:52]

• There's a strong affinity for CIA-themed shows like "The Agency," "Slow Horses," and "The Patriot."
• Michael Fassbender's performance as an agent is praised for its intensity and effectiveness, drawing comparisons to Jason Bourne.
• His ability to portray complex, often sociopathic or psychopathic characters is highlighted.

  "He played a robot in the Prometheus movie. He played, he's been in a couple of CIA. And he was weird in The Fincher."

American Hostage and John Hamm [47:34]

• "American Hostage" on MGM+ is a series based on a true story of mortgage fraud where a man takes a hostage.
• John Hamm plays a radio interviewer who communicates with the hostage-taker.
• The show is recommended as a reason to keep the MGM+ subscription.

  "John Hamm plays a radio interviewer who the guy, who the hostage taker is communicating with."

The Everywhere Millionaire Book [48:30]

• "The Everywhere Millionaire" is described as the finance book of the year, well-researched and inspiring.
• It features stories of people who became rich by starting businesses and figures out how to get rich.
• The book also highlights how wealthy individuals receive significant tax breaks, offering something for everyone.

  "This is like the finance book of the year. It's so good."

Rates and Market Uncertainty [49:24]

• There's a desire for interest rates to stop rising, as continued increases could lead to a stock market sell-off.
• The rapid rise in the 10-year Treasury yield from 4% to 5.3% this year, while the stock market is up, is seen as a strange phenomenon.
• The market's resilience despite rising rates is a key point of discussion, with the "excuse to sell off" remaining a possibility.

  "If rates keep going up at the pace they've been going up, the stock market has to fall off."

The Future of Personal AI Assistants [50:23]

• The rapid development and potential of personal AI assistants are highlighted, with one host expressing strong bullishness.
• Concerns about privacy and security are acknowledged, with one host hesitant to fully entrust their life to AI.
• The idea of AI disrupting traditional industries and personal lives is a recurring theme.

  "It's here, dude. It's f***ing here."