The Impact of Financial Market Turmoil on Real Estate

In this episode of the Top of Mind podcast, Mike Simonsen sits down with Michael Batnick from The Irrelevant Investor to talk about how today’s economic turmoil is affecting the financial and real estate markets. Michael shares his thoughts and insights into where the economy is going, offers his take on the Fed’s recent aggressive moves, and provides some wisdom on what consumers can do to come out ahead in a volatile market.

About Michael Batnick

Michael Batnick is a Managing Partner at Ritholtz Wealth Management and a highly influential financial markets commentator. He is the Author of The Irrelevant Investor and Co-host of the podcasts Animal Spirits and The Compound & Friends. 

 

Here’s a glimpse of what you’ll learn: 

• Where Michael Batnick sees the broader economy going and what we should be planning for
• Leading indicators to watch for a potential recession
• Whether the Fed is making mistakes with interest rates right now 
• How real estate is different than other types of assets in a portfolio
• Why cashing out your portfolio is “poison” as a strategy

Resources mentioned in this episode:

• Michael Batnick on LinkedIn
• Ritholtz Wealth Management
• The Irrelevant Investor
• Animal Spirits Podcast
• The Compound & Friends
• Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic — and Prevented Economic Disaster by Nick Timiraos
• Conor Sen on the Top of Mind podcast
• Mike Simonsen on LinkedIn
• Altos Research

About Altos Research

The Top of Mind Podcast is produced by Altos Research.

Each week, Altos tracks every home for sale in the country - all the pricing, and all the changes in pricing - and synthesizes those analytics to make them available before becoming visible through traditional channels.

Schedule a demo to see Altos in action. You can also get a copy of our free eBook: How To Use Market Data to Build Your Real Estate Business.

Episode Transcript

Intro 0:02

Welcome to Top of Mind, the show where we talk to real estate industry insiders and experts about the biggest trends impacting the market today. Enjoy the show

Mike Simonsen 0:13

Mike Simonsen here. Thanks for joining me today. Welcome to the Top of Mind podcast. This is where I talk to the smartest leaders, thinkers and doers in the real estate and related industries. For a couple of years now, we've been sharing our latest market data video every week and in their weekly Altos Research video series. With the new Top of Mind podcast, we're looking to add more context to the discussion about what's happening in the market from from leaders and people who are out there participating each week, Altos tracks every home for sale in the country, all the pricing the supply and demand all the changes in that data. And we make it available to you before you see it in the traditional channels. People desperately need to know what's going on in the housing market right now. In fact, all the markets, real estate went from being so hot and so competitive to now suddenly a dramatically changed landscape. So if people ask me, like, can I get the data from my local market? To understand what's happening? The answer is yes, go to altosresearch.com book free consultation with our team, you can learn how to use the market data in your business, your local data. But really, without further ado, I'm super excited to have my guest today, Michael Batnick. Michael is a managing partner at Ritholtz Wealth Management. He is a author of a terrific investment blog The Irrelevant Investor. He's co-host a couple of podcasts, Animal Spirits, and The Compound & Friends. You know, we've in this Top of Mind, we've been talking to real housing market specialist deep dive in housing market. And Michael is more broader investment markets. And so I'm really looking forward to which by the way I know nothing about I've proven over and over again, that I know nothing about equities markets, the rest of us. That's so so I'm looking forward to this conversation. We're going to talk about the economy and the direction and the markets. And so Michael, welcome.

Michael Batnick 2:14

Oh, that's so great to be here. Thank you, Mike. I'm a big, big fan of your research. So I appreciate the opportunity.

Mike Simonsen 2:19

Awesome, awesome. Let's start here. Why don't you tell me about your background, your work? Like how do you how do you get to be where you are right now, what you're doing?

Michael Batnick 2:28

Well, in my case, and I think in the case of probably a lot of people you speak to, it's a lot of good, good fortune, and good luck. And sometimes people say that, but like, you know, you could tell they're just being diplomatic. In my case, that's absolutely correct. Because I got kicked out of the same college twice. I never cared about my education growing up, I really, truly did get lucky. And so to make a long story short, I started my career, and I use like air quotes around that word at an insurance company, and the great financial crisis, which was a wonderful time to be getting into a business of selling things to strangers, and, you know, products nobody wants to buy. And so I did that for about a year and a half. And the only reason why I did it for so long. And again, I'm being very liberal with with the use of the word did it, I went there to work. And it was basically like a library for me sort of for because I did the cold calling thing for like, I don't know, nine months before I became disenchanted and learned about the products that we were, you know, trying to sell and quickly realized that whole life insurance for you know, 27 year olds probably wasn't, wasn't the greatest idea. And so from there, I floated and I realized quickly that, oh, this is why people actually pay attention to their education. Like, I know that sounds so ridiculous, but I really and truly, I don't know if I ever thought about it. That sounds so idiotic. But it's the truth. I didn't care. I kind of thought I assumed that everything would be okay. I don't know if that's because my parents always took care of me. Or if it's just the way that I was born, I always thought that things would work out. And they and they very closely did it. I was very, very close to be like, You know what, I'm just gonna pack it in. And I guess I'll just get a job at like a Verizon or Starbucks, you know. And so I met my partner, Josh Brown and the train station. And it was a very, it was a chance encounter that had that not happened, my life would have likely turned out very differently.

Mike Simonsen 4:22 

Wow. Really? So you met Josh, just like in a random place. 

Michael Batnick 4:27

And yeah, there's, there's, there's layers to that story, but for the sake of time, and not to bore anybody like it was truly a very serendipitous moment that got me to where I am. 

Mike Simonsen 4:36 

That's great. Well, fast forward like 15 years and you are a very influential commentator on the markets you you write and people read and you view broadcast and, and like, that's a that's a really fascinating position to be in.

Michael Batnick 4:53

I think one of the reasons why I've had success to the extent that I have is because I come at this from a Very every person's perspective, I did not grow up on Wall Street. My parents were not in the business. I am a regular person who's trying to figure this out like the rest of us. And it's not easy. In fact, it's very difficult always, but particularly now we'll get into the challenges that the average investor is facing. I've never been more confused. And so I think that sort of maybe humility, and curiosity and frustration comes through.

Mike Simonsen 5:26

Yeah, I think so. And like, I like reading the blog, The Irrelevant Investor, I like the voice, that you write it, and it's, you know, it's, it's inquisitive. And it's like, the, you know, I think, you know, that the, the habit or the default position is very easy to get into is to be like, well, they think I'm an expert, so I better right, like, I'm like, I know everything. 

Michael Batnick 5:52

Yeah, I don't believe in it. I don't believe in that. Yeah. I don't think that anybody's crystal ball is clearer than anybody else. So I just want to make one thing clear, go back to be get a kick out of state college twice. I wasn't like a destructive child or adolescent. I just didn't go to class. It was it was just Yeah, it was just the grades that didn't inform me. So yeah, I am. I think that I think that you can be a market expert, without knowing where the market is going. And I think that those sound contradictory, but they're not. I can tell you, as an a lot of market prognosticators and pundits and whatever you want to call us, or people that do that, I can tell you what's happening in most sections of the market. I wouldn't dare give a prediction like that I, I give my opinion, obviously. But I wouldn't dare give a prediction like sincerely. Not only do I think here's what's going to happen, and I actually think you should listen to me, I would never dare do that. Right. I have opinions. But I would never think suggest that the average person or anybody act on anybody else's opinions, whether it's mine, or Warren Buffett's who would never give us an opinion or Druckenmiller who would but who wouldn't tell you when he changed his mind? I mean, I think that people are so desperate for Yeah, I know, you don't do that. But just seriously, what stock Do you like? People really, they just want to be told what to do, no matter how many times you try and tell them that it can't be done. That's just the reality. People want to be told what to do.

Mike Simonsen 7:11

They that people appreciate the they want the shortcut. Yeah. And we'll get into some of the, you know, your predictions about the future, as we go further on. And but you know, it's like, your comment on college, like, you know, it took me you know, five years of undergrad and a couple more years in grad school to really, you know, learn that going to classes to thing. world out there. That's right, but who knew, you knew I tried to communicate that to my daughter, just just go to class, just like, that's the key, just go sit in front and center, that's the key. Everything else takes care of itself. From there. Great. So so we've got a lot to talk about. And the perspective I'm interested in today is broader financial markets. And, you know, looking at trends, things are going nuts. So this is now into September, mortgage rates are just spiking through the roof that, like the headlines today are about the dollar is, you know, everything is crashing against the dollar, which is a really bearish signal around the world. And all this, you know, the, the yield curve is getting more inverted, like all of the things are happening. So, so, but, and then I'm interested in like, like, how did those things play out for housing, and, and not just home prices, but like, you know, the volume of people buying homes and like, How many can buy homes or, you know, all of the things down the road? So, so maybe maybe we can start off with like, there's a bunch of headlines right now, financial markets, headlines, and a lot of them are scary. Which ones are you paying attention to that are like, you know, that that we should be thinking about in the in the world?

Michael Batnick 8:51

Yeah, probably all of them. In short, I think that to say that. Okay. So let's just rewind and a quick explainer of how we got to this Frankenstein of a situation that we find ourselves in when the pandemic hit. I think it is probably the first time in history that everybody in the world at the same time knew that we were going into a recession. The question was, how long and how severe, and the Fed acted quickly, in concert with Congress and the Treasury. And not only did they take rates to zero, but they sent out a lot of money, which in my opinion, at the time was the appropriate course of action. You were putting the economy on life support a self-induced coma, and nobody knew when we were going to wake up. And when we did wake up, we found ourselves dying to spend money, right, because we had extra money and lacked experiences. And so we were ready to do that. But the problem was the world doesn't can't You can't just turn the economy back on like that. Right? It's just it's never been done before. And so I think we were ill-prepared and equipped to turn the economy back on on. So there was the combination of a demand shock with the supply shock, which is not where you want to be. Right. And so in the financial markets, there was, of course, a lot of speculation, whether it was in crypto and NFTS stocks, housing, collectibles, literally everything, anything that you could put money into, it went up over a 12 month period, like 96% of stocks went up. I mean, it was impossible to lose money. And so now we are very clearly and obviously, on the other side of that, inflation has persisted longer than I, I thought I couldn't get it back. Like nobody knows anything. I certainly am not an economic interest rate inflation expert, but I thought that it was transitory and, and clearly very, very wrong on that front. And so higher inflation has crept into all areas of our life. It's it's not just things that we thought were pandemic related. It's everything right. So we know that now. Okay, the Fed is taking inflation very, very seriously. And they are trying to destroy demand. I mean, they're literally saying it, and they're trying to do it. And so don't fight the Fed has been a mantra on the way up. If you believe that on the way up, you should probably heed some some warning on the way down. And so there's been a lot of damage in the financial markets, the s&p 500 is down 23% year to date, bonds are getting destroyed, as interest rates go up, the price of bonds go down, the housing market is grinding to a halt, you know that better than I do, we can get into that. I'm curious to hear your thoughts. The dollar is is just a wrecking ball right now. And so there's been a lot of damage done in financial conditions. Okay. However, it is failing to show its head in some of the economic data. So for example, initial jobless claims, which are a decent leading indicator are still very, very low. Unemployment is still very, very low retail spending net of inflation, at or near all time highs, corporate profits, at or near all time highs, corporate profit margins at or near all time highs. And so you say okay, stocks have obviously done a lot of work, right, there's been a lot of destruction, all of the declines that you've seen year to date have been multiple compression, which is fine. That makes sense, right? When when when the one year goes from seven basis points to 4%. Yeah, people are gonna want to pay less for corporate for profits. I mean, that's just that intuitively makes a lot of sense. And so the market has done a lot of correcting. And you'll have places like Walmart earlier in the second quarter tell you that things were in really bad shape spending habits have changed, no doubt. But what that really was, was and I'm not pointing fingers was they mismanaged their inventory, right? They were, they were behind. And so then they overwinter they have a glut of inventory. And maybe it wasn't a macro economic story, or it was but it wasn't a read through it to the rest of the economy. It really was a retailer specific story. Then you hear from other companies visa, who said that just looking at their data, they've never, they've never been in better shape. And so for every Walmart, there's a FedEx who will corroborate the fact that things are really bad or Facebook. But again, these are maybe all idiosyncratic stories, and you have a company like Visa, or Ralph Lauren, or some other luxury brands who say what recession, things have never been better. And so it is a very, very confusing and difficult time to be an investor.

Mike Simonsen 13:20

Yeah, I got triggered a bunch of thoughts along the way here first making some notes as we're talking. The he said about the Fed is trying to destroy demand. And they've said that they're trying to destroy demand. I'm not a Fed follower. So like, tell me more about that. Like, what's Yeah.

Michael Batnick 13:38

So something Something happened last week, where very quickly, it seemed like the world all agree that the Fed was making a mistake. And I was talking with Ben on Animal Spirits today that I think that I don't think that Jerome Powell would say this out loud. But it's understandable. We're all human beings that he's trying to overcorrect for mistake that they made the mistake number one, buy mortgage bonds in March of 2022, when housing prices were already up 20% year over year, and the housing market was scorching hot. In real time, a lot of people were saying what the hell you don't like this? What are you doing? And so they were they were late to tighten. They were wrong on inflation again, so let's die. However, I don't have a PhD. And I it's not my job to get this right. It's their job. Okay, so they got it wrong. Okay, fine, they got that wrong. But then they started talking tough, and not just speaking but acting. And the pace of rate hikes that we've seen, is greater than anything we've seen outside of 1980 When Paul Volcker jacked up interest rates and destroyed the economy. And so it seems as if they are overcompensating for a previous mistake. And so people are saying, hey, wait a minute, not only are you maybe going too far, which is up for debate, the data that you're looking at is not even. You're not You're not even looking at real time data you're looking at year over year stuff that's, that has clearly peaked, and so people So it's just, it's very confusing what they're doing at this moment in time. And I suspect that inside Jerome Powell is head, but I suspect that he fears Hey, listen, we're so close. We're at the five yard line, we're doing our jobs, the market is reacting, not just the stock market, but the housing market that consumption, it's all it's all working to now, pause, and potentially have financial conditions, loosen, again, would undo all of the, you know, the nasty medicine that we've already swallowed. I know, this is painful, but inflation is serious. And the risk of persistent inflation is a greater risk than dealing with a recession. I assume that's what he's thinking.

Mike Simonsen 15:40

Yeah. And okay, so and I by that, and by the way, have you read them? Nick Timiraos book, The trillion dollar triage?

Michael Batnick 15:47

Not all of it, but I really should I read the first couple of chapters, it was phenomenal. 

Mike Simonsen 15:50

It's phenomenal. I'm having Nick on in a couple of weeks, on the podcast, we're going to talk about the book in detail, it's really, really great, like day by day on making really remarkable decisions. So we're gonna learn more about the Fed then and, and so, okay, so, right. So I think that comment, you know, like, all of a sudden, and I noticed this too, like, about a week ago, everybody knows that the Fed is wrong. And, and is using old data and, and we look at it in the, you know, inflated housing and rent inflation is such a big part of that about of the CPI, the headlights, you know, inflation numbers is that like, it's like a third is, is that and, you know, in 2020, early 2021, inflation was still looking low, even though housing and rents were on the way up, and now, those are at best flat, probably down. And and yet, it's probably another year before the the numbers that they're looking at are going to get that in fact, that that the numbers that they're looking at, are probably going to keep climbing for a big chunk. And and you know, some of it like says there's at least 5% more, you know, impact on inflation over the next couple of quarters that isn't yet baked in, you know, because of the difference in, in how far it's moved, how far the rental numbers have moved from where the CPI already knows them. And then it starts coming down.

Michael Batnick 17:15

Right. So yeah, it's good. I'm just looking at I was just looking at this earlier today, the year for your children's change a 30. Year and this is, with some leg dead, I saw that the numbers might be 7%. Today. I mean, it's we haven't seen anything like this again, since the late 70s, early 80s. The one year Treasury rate was was 07 basis points a year ago. Now it's 400 basis points. So this is having all sorts of nasty reverberations. And I think from an investor's point of view, investors understand what they're signing up for with the stock market, right? Investors, everyone has lived through 2020. Well, not everyone, most investors, I've lived through 2020, except for the people that came in after that. And a lot of investors saw 2008, some investors saw the dot com bubble. And so they understand that painful as it may be, the reason why you are rewarded over the long term, is because you have to endure these declines. volatility. I think investors, by and large, understand that doesn't mean that it's easy, but they understand that right? They understand that they don't understand that with bonds, because they've never seen it before. And bonds have never kicked them in the face before. The worst annual return for a broad index of bonds prior to 2022. It was negative 3%. Right. And so you've never seen and that's that's an anomaly. You've never seen a nominal decline more than 3%. Certainly when stocks were going down bonds were the balance. That was that was it right people sold their stocks, and they fled into the safety of Uncle Sam's treasuries. Now, not only our bonds, not protecting investors on the downside in a balanced portfolio, they are one of the reasons for the downside volatility. And so it is a double whammy. And it has just been a very, very uncomfortable year for investors. But I would say on the bright side, what is a better environment to be investing in 2021 when there's nothing about euphoria, and bonds are yielding nothing. And stocks are going up every day and photo returns are lower, or an environment like this, where you can actually get 4% risk free, you can get 6% tax equivalent or there abouts on municipal bonds, you actually have fixed income and your fixed income for the first time in 15 years. And so it's not fun to be to see losses in your portfolio of course, but it is certainly better than where we were prior prior to this.

Mike Simonsen 19:41

That's really it because it brings up a thought for me investors were talking about, you know, it's always the hardest point to invest in you when when the things are the scariest. And and, and but one of the things I think about in housing is that in like the at least in the of the bubble of people that I know there is this still a lot of cash on the sidelines, cash, you invest cash to do housing and Cash to Cash that been made over the last the bull run in all the things and, you know, up until, you know, very recently one of my one of my downside protection, hypotheses about about housing is that like, you know, the there's a lot of people who've been waiting on the sidelines with their cash for the market to correct. And, and so the question I have is Do you like, is that like, just, you know, Mike lives in San Francisco, and he's got a bunch of tech friends who happen to have money or is that, like, it's my sense that that's broader than that. It's like a brother. And as you know, the investor, there's a lot of cash.

Michael Batnick 20:57

Are you talking throughthe lens of the housing market or just investing enerally?

Mike Simonsen 21:01

I'm thinking about the amount of cash that that Americans have. And, and as a result that one of the things that they do is they go, Oh, I've been, I know, people who've been waiting to buy in San Francisco for 15 years, waiting for the housing market to to finally tank. Right. And, and, you know, they've they've, and so like, is this opportunity? And do those people act now? And is that is, but is that? Like, my question is like, is that true across the economy? Like, do we have a lot of cash sitting out there? 

Michael Batnick 21:35

I, listen, you could pick a data point that shows absolutely, and I could probably show you data point that says no, that data points wrong. Okay. I thought that with, with the 30 year way back when, when it was on the rise, I don't if this is eight weeks ago, when it was 5%, whenever it was, I thought that the floor on housing prices was relatively elevated, because there were still so many more people that wanted to buy, than wanted to sell there are I feel with the numbers is there 70 million millennials that are around my age that imprime you know, home buying age, but with with some interest rates where we are today on September 27, the math doesn't work anymore. And so I think the floor is a lot lower. And unfortunately, and you know, this is not my area of expertise, it's yours, I think that the housing market is going to freeze up. Because the bid ask between where sellers are anchored to, oh, I could have sold it at you know, they're anchored to 2021 prices. And not that buyers are anchored to anything, they're anchored to their monthly payment. And they're down, you know. So in 2021 people were complaining about housing being unaffordable because the down payments were unaffordable, which sucked. Now you can't afford the down payment or the monthly payment. And so I suspect that how's the transaction volume is going to absolutely plummet. And I think that I don't see any other way for people to buy homes with a 7% mortgage. Aside from prices coming way in Am I crazy? 

Mike Simonsen 23:03

Yeah, no, I mean, I think and I think we can see it like week to week already, you know, in the data of it, talking about it. Like in the last couple of weeks, we've watched inventory climb, you know, and it's really seems extremely coincident with the the recent most recent spike in mortgage rates, like we were under, you know, we're in the fives, just a few weeks ago. And we went, you know, to six and a half to seven, in a couple of weeks. And it sure looks to me, like we could see buyers like freezing solid in that time, we could watch price reductions kick up, we had, we had price reductions had to hit like a plateau in August. And then all of a sudden duped last couple of weeks, we see it accelerating again. And it's like coincident with the latest spike in rates and man 7% was way beyond what I would have expected mortgage rates to land at, I have no ability to predict where mortgage rates are gonna go. 7% is is way outside of that range. And so that like I haven't even begun to think about forecast implications. If it stays at seven, what if it goes to eight? Like and why would I don't know? Why would Yeah.

Michael Batnick 24:13

So yeah, so So the question is, like, people want us to Fed blink. Right? And I, you know, we don't know, they don't know, we don't know, it's but But what people do know, because this is just straight up arithmetic. They know what their monthly mortgage rate is going to be if they take out a 7% mortgage. And, you know, maybe at five and a half, you could make it work and say you'll refinance the next you know, when you get an opportunity to add 7% You can't hope, right? It's just it just the numbers don't work. The home prices are too high mortgage mortgage rates are too high. It doesn't work. And I don't know what percentage of the economy GDP is. I think I heard something like 18% Maybe something along those lines, but psychologically how important is it? Right the multiplier Fact. And so so goes the housing market. So goes to consumer. I don't know if you could draw a line that direct but it's it's passive. It's yeah, it's it. This is it. Yeah. That's,

Mike Simonsen 25:10

that's fascinating. Do you have any view about what happens to rates from here?

Michael Batnick 25:15

Oh, definitely not. I, I remember talking to somebody on six months ago, we were saying at what level? Would you start to get nervous about the housing market? I think he said 6%. And I probably was thinking in the back of my head, this guy smoking dust, how do rates get there? 6%. Now, we're, now we're at seven.

Mike Simonsen 25:32

I did I was doing this, this podcast interview with Conor Sen from Bloomberg, I think we did in January. And we you know, you could see it on the horizon rates are gonna climb, and Conor of was like, four and a half. Yeah. And we're like, looking at four and a half. And I was like, okay, that's gonna be a big change. We go from three to four and a half. But I could see how the market stays at four and a half. And then, like, seven is like, Wow, and so just if sevens if sevens, you know, possible then is eight, like, you know, what happens in the real estate?

Michael Batnick 26:06

Yeah, so it's really unfortunate for new homebuyers. And existing homebuyers, you're not? You're not selling a 3%? Mortgage for seven. Right? You can't afford to,

Mike Simonsen 26:20

you're not gonna do Yeah, that's right.

Michael Batnick 26:22

So so again, not not the housing expert, I just think it stands to reason common sense would suggest that transactions are going to absolutely fall off a cliff. And then that has that has impacts how many people just a housing market employee, from materials to home builders to loan officers to people inside the bank? Like there's a whole giant economy there.

Mike Simonsen 26:43

Yeah. Yeah. It's, it's wild. And, you know, and like, and B, there's a couple of maybe green shoots in there that are that are, you know, interest,

Michael Batnick 26:54

please, I'm dying for green shoots. I'd love to hear them, please. 

Mike Simonsen 26:55

Oh, like you were saying that, you know, the, like, everybody's employed. Right. You call jobless? The new jobless claims. As a leading I've seen, like, I think about employment, I guess, as sort of a lagging indicator. Yes. Yes. And, and, like, you know, and so does that mean, you know, the employment now, is that is that record high levels and an impact? You know, six months lagging from eight months lagging? 

Michael Batnick 27:22

Mike, I have no idea. Honestly, things are very, things are very confused. So I'll give you Okay, going into this year, my partner Josh and I were talking a lot about if this, if we do go into a recession, this will be the most widely telegraphed recession of all time, I think it doesn't 20 was not that was not telegraphed. That was everyone knew at the same exact time that we were, but the average person, you know, will probably tell you that we're heading into a recession. But we're just not you're just not seeing stress in credit markets, for example, which are another what would be a leading indicator. And I think one of the reasons that we we spoke about is that the consumer has never been better positioned for a recession, if we do go into one, given how much their balance sheets were healed in 2020, a lot of people paying off some of their debt. And same thing with the corporation. Corporations gorged on cheap debt in 2021, as they should have. So they took advantage of easy money and there will capitalize so the consumer flush with cash, corporate balance sheets are healthy, if we do go into recession, never been better prepared to withstand one. And so I think that might be partially explaining one of the reasons why we haven't really seen the data turn yet. Now the question is like, you're always but you're also seeing credit card spending at all time highs. And so are people relying on their credit card to fill the gap? Maybe. So there are just so many different stories that would seem entirely contradictory. Well, this can't be happening while this is happening, and that can't be happening while this is happening. Things that have never happened before are happening every day. And so, if you if you honestly per convince yourself that you have any ability to predict the future, you really need your head examined.

Mike Simonsen 29:07

Yeah, yeah, exactly. And I think those the consumer in the corporate, you know, balance sheet is sort of like the my observation about people having cash right, they are reasonably well positioned. And homeowners are you know, in a strong pool the people who already own are in super strong position, right they they are locked in at 3% rates and they have you know, a ton of equity even if even you give up, you know, half of the the the pandemic boom, even if you give that up, you know, we are still you still have a ton of equity in the house and so, like all of those things add up to a to like, like, are those that they put a floor on, you know, correction things they haven't put a floor on, you know, on stock market correction. or, you know, crypto market corrections, but do they put a floor on housing?

Michael Batnick 30:05

Hey, Mike, I'm so sorry. My headphones just died. That's okay. Oh, no, I'm sorry. So what? We're good. Okay. Hang on a second. Okay. There we go. Perfect. 

Mike Simonsen 30:19

Are we in? Good? Okay, great. No problem. So yeah, so I'm just, you know, thinking about that, that consumer strength in the in the corporate strength. And I see it around like, and I also see you, you mentioned this sort of bifurcated market where we have you heard we have some, you know, companies that are like filling it hard and some that are not. And I see that in Silicon Valley, like I see, see, tech, some tech companies like laying people off, and others still hiring as fast as they can. It's really remarkable. And I wonder, who has the clearer vision?

Michael Batnick 30:59

I'll tell you in six months,

Mike Simonsen 31:00

let me tell ya, great. So So let's shift gears then. So you work with individual clients on managing money? Yeah, yeah, we do. And how do you think about real estate in in an overall portfolio these days?

Michael Batnick 31:17

So, can, I'll caveat this with I am not a financial planner, we have, I think 26 financial advisors that are working full time with clients on a daily basis. And so I asked, you know, how about if I punt on that question, I want to speak for how the advisors will think about that in the sense of, because we obviously do have some clients that are real estate people, right, that have a large percentage of their net worth in real estate, because that's what they do for a living. And then we have people with a fully paid off, you know, $2 million house, that is a big part of their net worth. And so I think that a lot of people spent 2021, rightfully, either refinancing, or taking money out of their house, because there were other opportunities to do better with your money with your

Mike Simonsen 32:06

cash. Yeah. Do you? Do you think about it in your personal portfolio?

Michael Batnick 32:10

So I have, so I refinanced twice last year. Last year, I refinance from I think, for eight to oh, you know, what I did, I know what I did, I think I wasn't from four eight, and my original mortgage, I was, I was 30 years to three years to upstart 15 years at 3% and then I said, you know, what on second thought, I think I am going to be in a fortunate enough position to where I don't need my primary residence to be such a large percentage of my retirement. Right? I think for a lot of, for a lot of this country, your primary residence ends up becoming your biggest asset. And I love the forced savings mechanism of building equity over time. And I love that it just compounds right. But for me, I am obviously subject to change. I had this idea, hey, wait a minute. I don't know that I really need to pay off my primary residence. And this was the this was with the assumption that interest rates would stay low for a long time, which I was 1,000% wrong on that. And so I just thought, hey, you know, what, every five to 10 years, I'll do a cash out refi. And so I went from 30 to 15. Back to 30 to 30. So I'm still paying, I'm still paying it as if it's a 15 year mortgage. I just gave myself some more flexibility. 

Mike Simonsen 33:38

Uh huh. Yeah. I, I when I did a refi, you know, I had been, I'd been, you know, prepay and like paying on a 15 year schedule. And then I went to refi to I got to like 2.8 or something. And I, in retrospect, I was like, Well, if this money is so cheap, I shouldn't be prepaying it. Like I should be using that cash elsewhere. Like, this is the cheapest money ever. And in retrospect, I should have done a cash out refi and take it but I but like, I'm a super conservative, you know, with my money and I'm like, No, I just want to keep my mortgage really low and like my mortgage payment now is less expensive than my two bedroom apartment rent was in San Francisco 24 years ago. You know, my mortgage payment is less than, you know, two point whatever percent. And so it is a

Michael Batnick 34:38

this is housing is very personal. There's no right answers. I think people do it. People have different risk tolerances for me right now. I'm 37 years old. Talk to me when I'm 45. And I might I might say, you know it actually, I've only gotten another X number of years in the workforce. Maybe I better go ahead and get this mortgage paid off yet this

Mike Simonsen 34:53

thing, right? Yeah. Yeah, right.

Michael Batnick 34:55

It's not on my radar. So

Mike Simonsen 34:56

that's good. So So then let's talk about So let's talk about the future. What do we have? Like what's give a framework for thinking about? You know, we, we have like a bunch of risks on the head, you know, the horizon everybody knows about and but how do we look beyond that? Do you have a framework for thinking beyond next year?

Michael Batnick 35:19

You know, there was a study, I can't remember, I think it might have been the University of Michigan, and it had something to do with financial behaviour. And the way to get people to consider their future selves, was they showed people digitally aged version of themselves. And were basically told think about yourself, this is your self in the future is actually you don't shortchange yourself. And so I think that in a period of heightened volatility and economic uncertainty, will you regret putting money to work on a systematic basis, over the next couple of years, like, put Fast Forward 10 years, and there's no like, trick to doing that. It's just think about all of the horrible things that the world has seen. And I think you just have to have this underlying belief that things get better, perpetually, even though the world is a really scary place, and bad shit happens on a daily basis, I have a fundamental belief, especially in this country, that people are motivated, that they want to provide for their families, that they are inspired by work by a better future. And so we just marched forward. And of course, there are temporary setbacks, some setbacks lasts longer than others. But I have an unwavering belief that the future will look brighter than, than than the present.

Mike Simonsen 36:42

Interesting. I like that. And, and it's, it's important to refresh that, that message, right? We like it's, it's so easy for me to get distracted by all of the crazy things going on.

Michael Batnick 36:57

Yeah, and I think I think it's important to be able to hold to opposing thoughts in your head at the same time that stocks are in a downtrend. And when stocks are going down, they you know, they they continue to go down, of course, until they start going down. And so it's okay to feel either nervous or even dare I say, like, bearish, say to yourself, I have no ability to I have no ability to pick the bottom, I am not interested in picking the bottom, I think that going into cash is poison. I think that if you go to cash, like either two things happened, you're proven right. Right. And stocks do go low, and you feel like a genius and you say to yourself, Well, I'm not gonna get it now. Just I'll wait a little bit more. And then of course, you never get back in or, or, more likely, you sell. And, you know, eventually stocks go higher. And you feel like, you know, you missed it, the markets straight, whatever. If you sell a 10 You're not buying back in an 11 or 12. Right? And then you get this. Oh, I hope stocks get lower, go lower. So and you just have this pervasive negativity. What what I think investors need to do is figure out and unfortunately the time to do this is not now it was you know, when when the time to prepare for storm is not during the storm, right? It's before, but really the key is to figure out your risk tolerance. And if you if you overestimate your risk tolerance, it's not the end of the world, right? If you say, Okay, I thought I can handle a portfolio of 80% stocks, but I'm really having trouble sleeping. I can't do it. Okay, fine. No big deal. Nobody knows where their personal line is, unfortunately, until they cross it. And so if you have to downshift from 80% Your portfolio to stocks to 50 whatever whatever the case may be fine. But you can't you can't swing from all in to all out to bullish to bearish now. I'm not now I'm scared. Now. I'm greedy you for I mean, you have to control your behaviour, you really have to control your behaviour. 

Mike Simonsen 38:42

Alright, I'll work on that.

Michael Batnick 38:44

Lesson. I say I'm, I'm more human than anybody else. I feel it.

Mike Simonsen 38:50

Yeah, that's, that's so we have the fundamental optimism for the future we have. It can be I like the concept of that, you know, go into cash is poison, it's likely that you're going to cash at the wrong moment anyway. And it's and it's that also much more likely that you you go back in at the wrong time. Do you think

Michael Batnick 39:10

we've we've seen this a million times where when stocks do bottom, the news isn't getting better? Right, right. Stocks will start to go up as the news either gets less bad than expected. But things are black. Yeah. When the market bottoms and they go up in spite of the news, and it won't make any sense. And people will tweet about headlines on the stock market and but the stock market is a forward looking. The stock market has this uncanny ability to not always obviously doesn't get it right. But we we are the market investors are the market and we have a really amazing ability to price and risk and to see past things and one individual just will not be able to emotionally He do that things will get worse before the stock market. The stock market will bottom as things continue to worsen. And it drives you nuts.

Mike Simonsen 40:08

Yeah, yeah, they have my favorite moments with with Altos and the Altos data over the years are the moments when we have been the data has been contrarian and bullish. So the, you know, the headlines are the worst. And the, you know, it's like, we were watching it like January of 2011, the housing market, the signals are up, and that the headlines are still from 2010 data from 2010. And in 2010, the there was a first time homebuyer tax credit in 2009. It pulled demand end ended April of 2010, it pulled demand forward. So by the end of 2010, everything was looking really scary again, after the fair housing, and so and that mark, and that that data was then in the headlines in January and February, March of 2011. But meanwhile, the actual real time data was was turning and, and, you know, we could sit there and go, I don't know, guys, like, people are buying houses this spring, even though you know, even though the headlines and so those are the moments are really rare. We had it again at the beginning of the pandemic, because we had, you know, we had three weeks of housing market downturn. And and then, you know, by week four, I'm like, Hey, guys, something's going on here. And so, you know, but then you still had a couple of months where a lot of traditional players were still, you know, because there's a big recession, they were still forecasting now and down housing well into 2021. You know, because as a function of, you know, macro recession stuff. Meanwhile, housing was like rocketing already in May of 2020. Really, like, so those are the fun times. So I can't say yet that the Altos data is, is bullish, or contrarian. Like we're not there yet. But those are my fun. My favorite moments.

Michael Batnick 42:07

Yeah, it's hard. It's hard. It's hard to convince people that they can't see the future, even though they would obviously never claim to, but their actions sometimes would dictate otherwise. So who do you think will end up doing better over the long run the person that can put themselves in the proper asset allocation between stocks, bonds, cash, real estate, whatever, and endure? Right, the ups and downs, or the person who thinks that they can call tops and bottoms? I mean, it's like, it's kind of a joke, right. But some people, people behave that way. And so I don't think you need to be a genius to have good long term returns, I think you need to be patient, you need to have an Iron Stomach, and an unwavering belief that even though things will, will get bad from time to time, eventually they'll get better. And that's just listen, the s&p 500 companies have raised their dividends on a compound that I'm sorry, compounded since 1988 6% a year. corporate earnings since 1988, have compounded at six 7% a year, in the stock market, we're not investing in, you know, numbers on a screen, we're actually buying incredible businesses that grow over time, and that growth is ultimately reflected in the share price. So it's not to say that stocks can't have lower, of course, we might be going through a recession. And we might be going through the deep recession. I don't think so. But we might be who knows, but you have to be able to survive. That's the name of the game, you have to be able to survive. 

Mike Simonsen 43:27

Yeah. What is it? What is it about that, that makes you think it's not going to be a super deep recession?

Michael Batnick 43:33

I think that, given how strong earnings have been, profit margins have been, employment has been, I think that if things were going to fall apart, they would have it would have showed itself already. Now, maybe listen, maybe we get q3 earnings. And we're in for a rude awakening. I'm open minded to the fact that that that's going to happen. I just think that everybody's waiting for the data to forget about worse than for it to fall apart. And I just think it's lesson one start ticking up. It's been it's been over a year already. You know, and we maybe we have an earnings recession. But I don't I don't think it's going to be a severe and deep one, unless, unless the Fed makes a policy mistake, like tightening too much into a contracting economy, which is the big worry. And that's why the NASDAQ is down 30%. And that's why the SP is down 23% People are worried about a polyamines policy mistake. That's why the curve is has inverted as it's been since 1980. People are worried that the Fed is making a mistake and I get it.

Mike Simonsen 44:35

Yeah, and yeah, it's gonna be interesting to see how that plays out.

Michael Batnick 44:38

I can't wait. I I'm kind of always I can't wait for the next 12 months. But I mean, at this time, I really can't wait to see what where we're at a year from now.

Mike Simonsen 44:47

Yeah, really gonna be fascinating. That's terrific. So I really appreciate your your take on on how to look how we look at the economy and the factors coming in. It's like I said, you know, we spent so much time talking about just housing but like it's a it's a big ecosystem. They're all interrelated. So I appreciate the the interaction here. Did we? Was there anything we missed that we should have covered yet today?

Michael Batnick 45:09

No, Mike, this is my pleasure. I appreciate the research that you put out. Like I said, I'm a fan. So thank you very much for having me.

Mike Simonsen 45:15

Really appreciate it. So So Michael Batnick Irrelevant Investor. And

Michael Batnick 45:22

what are your thoughts, The Compound & Friends, but I'm not hard to find.

Mike Simonsen 45:25

Yeah, really. And I love the Animal Spirits podcast too. So really appreciate your time and your views. Thank you so much, and we'll talk to you again soon. Thanks. Bye.

Outro 45:38

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