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Why the U.S. Could Be Headed For the “Weirdest Recession Ever”

Plus, what’s the long-term viability of cryptocurrency?

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Crypto crashes, rate hikes, recession, fears, and inflation prints: The U.S. economy is in a very bizarre place right now, and Derek needs help explaining it. Michael Batnick and Ben Carlson of Ritholz Wealth Management are back on the pod to reconvene the economic roundtable. We play a game of “Finish the Sentence”: The single most shocking stock market stat is …? The long-term bull case for crypto is ... ? The worst sign for the U.S. economy is … ? The BEST sign about the U.S. economy is …? Part of their conversation is excerpted below.

If you have questions, observations, or ideas for future episodes, email us at PlainEnglish@Spotify.com.


Derek Thompson: What I wanted to do today is play a game of Fill in the Blank finance, econ Mad Libs. So I’m going to set us up for seven fill in the blanks, and then you guys are going to finish sentence for me. So to start, my very first sentence is: “The single most shocking or depressing market statistic right now is” what? This is a question for both Michael and Ben. So who wants to take this one first? The single most shocking or depressing market statistic right now is …

Michael Batnick: Oh, since I’m bald, I’ll go first. There’s a theme here and it’s not good. I’ll start with this: In October [2020], I think we all remembered that Zoom, the video company, or the teleconferencing company, passed ExxonMobil in market cap. It’s not even [two years] later, and Exxon is 14 times larger. And that is from a combination of Zoom collapsing, and Exxon going vertical. I’ll give you two more quickly: More than one in 10 large cap stocks are down more than 60 percent from their highs, more than one in 10. And lastly this is sort of the epicenter of this ARK complex. Now ARK is a high-beta, high-flying ETF of Tesla and Coinbase and Robinhood and all of the stay-at-home stock winners from the pandemic. From ARK’s inception in late 2014 to their peak in February of 2021, it was up over 700 percent from October, from early 2014 through 2021, that’s annualized a gazillion percent a year, right? It did phenomenally well, the S&P 500 over the exact same time was up 125 percent. All of that spread has now disappeared from inception. ARK is now underperforming the S&P 500.

Thompson: Wow. So there was a period where it was performing six times better than the S&P 500. But when you look at the entire story now, it’s performing worse—like that is an incredible reversal of fortune.

Batnick: It all unraveled in less than two years.

Thompson: And a great microcosm for what we’re seeing, which is this shift from narrative-driven companies, growth-driven companies to value-driven companies, profit-driven companies. Investors have basically said for years and years or especially between 2020 and 2021: “We are betting on the future. We’re betting on stories. We’re betting on the next decade.”

Batnick: We’re betting on memes.

Thompson: We’re betting on memes.

Ben Carlson: I think there was something like 15 million new brokerage accounts opened in 2020 and 2021. So the [Russell 3000 Index], if you own an index fund, right in your 401k index fund, you own just the whole U.S. stock market. It’s down like 16 or 17 percent right now. That’s not fun, but it’s also relatively normal every few years, you should expect that to happen. But if you’re one of these people that opened your Robinhood app, and you decided “I’m gonna trade stocks”—one of every 10 stocks in the Russell 3000 is down 90 percent or worse from all-time highs. One of five is down 80 percent or worse. These aren’t just like little corrections. These are like, you got your face ripped off.

Almost half of all stocks are down 50 percent. And this is the darlings: Peloton and Robinhood and Coinbase and Teledoc and Zoom. But also if you own Facebook stock, you’re down 50 percent. Amazon is down 40 percent. So all of the companies that people really love are getting crushed right now. So if you decided, “Oh, I’m gonna pick some stocks because it sounds easy. I’m gonna be the next Warren Buffet,” and this is your entrance into the stock market investing; you had an awesome year in 2020 and now is the other side of that, where you have a hangover. And you’re just like, “What, what happened here? What am I supposed to do? Because I did not sign up for this.”

Thompson: Well, there’s this adage, I suppose, in investing that says you should invest in what you know. And it’s ironic because if you look at the pandemic, you’re like, all right, what did people know in 2020, 2021? Well, they got up in the morning. They rode their Peloton. They Zoomed for work. And then they watched Netflix. If your portfolio was literally just exclusively Peloton, Zoom, and Netflix, I think you might be down 80 percent.

Carlson: Netflix is the worst stock in the S&P 500 this year, down like 70 percent.

Thompson: It’s unbelievable.

Batnick: Peloton literally lost 93 percent of its value, 6 or 7 cents on the dollar. I mean, that’s, that’s wild.

Thompson: It is crazy. Do you guys think that just as with the dot com bubble bursting, you could say at the time, “Oh my God, software was way overrated. These kind of companies are not going to make it in a materials economy. They’re not going to compete with oil or steel.” But obviously they did, obviously software did to a certain extent eat the world. By that same token, do you think that in the ashes of the growth stock portfolio, there are some like little baby phoenixes that will rise? And five, 10 years from now, some of these companies—who knows which—but some of these companies are going to be absolute rock stars. Amazon’s a good example from 20 years ago. Amazon got destroyed in 2000, 2001. Jeff Bezos basically said, “I don’t care. I’m still gonna pursue my day one strategy.” And then he became the richest man in the world, the largest e-commerce company in the world. Do you think something like that is going to happen with some of these growth stocks as well?

Batnick: Here’s the problem. When that happened, when Amazon lost 95 percent of its value from the peak and the dot com bubble, I’m guessing it was a billion-dollar market cap. These companies are still massive. Even with the gigantic decline, Peloton still has a $5 billion market cap. So you mentioned these baby phoenixes, they’re not babies. Zoom is still [around] a $25 billion market cap. Rivian came public at over a 100 billion.

Thompson: Rivian is the electric truck company.

Batnick: Yeah, its revenue was zero. So why is this happening, particularly with growth stocks? Well, prior to the inflation coming, you know, spiraling out of control and when we had so much free money, when money costs nothing, when you could borrow it for free, basically it didn’t matter whether a company was going to pay you back today or whether it was gonna pay you back, you know, 10X in the future. So this was the theme in the last decade—Silicon Valley subsidizing all of our losses. DraftKings could lose $400 million a quarter, whatever, it’s all good because it’s all about TAM. It’s all about growth. Well, we’re not in that world anymore. And now when interest rates are going up, when money costs something, when inflation is what it is, people are much more sensitive to the promise of profits in 10 years. It’s like, no, no, no, you had your decade to figure this out. You had a decade to deliver me some cash flow and it’s over, those days are gone. So why growth stocks? It’s the same thing. It’s just the long-duration assets.

This excerpt was lightly edited for clarity.

Host: Derek Thompson
Guests: Michael Batnick and Ben Carlson
Producer: Devon Manze

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