Never Pay Off Your Mortgage | Animal Spirits 436

Episode Overview

• The hosts discuss the psychological challenges of long-term investing, emphasizing the importance of "staying the course" through significant market volatility and debating the merits of behavioral versus mathematically optimal financial decisions.
• They explore current market trends and potential bubbles, analyzing the massive capital expenditures in the AI sector and the systemic risks emerging within the rapidly growing private credit market.
• The conversation examines consumer behavior in an inflationary environment, questioning why spending on conveniences remains high despite widespread complaints about costs.
• The episode also touches on the evolution of investment products, particularly the push to include alternative assets like private credit in retail 401(k) plans, and shifts in the media landscape, such as Netflix's declining market share in streaming.

Key Concepts

• Staying the Course: The most effective default strategy for long-term investors is to remain invested through significant intra-year market drawdowns, as markets often recover to post strong annual returns.
• AI Capex Boom: Tech giants are engaging in a massive capital expenditure "arms race" to build AI infrastructure, which raises questions about a potential bubble, especially given the rapid depreciation of these assets compared to historical booms.
• Risks in Private Credit: The private credit market contains potential systemic risks, including "ratings arbitrage" where smaller agencies provide investment-grade ratings, and a circular structure where asset managers own the insurance companies that buy their credit products.
• Behavioral vs. Mathematical Finance: There is a fundamental conflict between making financially optimal decisions (like not paying off a low-rate mortgage) and choices that provide psychological comfort (being debt-free).
• Inflation and Consumer Behavior: Despite high inflation, consumers continue to spend heavily on "food away from home" and other conveniences, suggesting habits are difficult to change even when costs are a major concern.
• Retail Access to Alternatives: There is a supply-driven push from asset managers to include complex alternative investments like private credit in 401(k) plans, primarily by embedding them in default options like target-date funds.

Quotes

• At 1:50 - "If your default is staying the course works, and then one time it blows up in your face... I think that's okay." - Ben Carlson arguing that even with occasional failures, sticking with a long-term strategy is the correct default behavior.
• At 30:11 - "I'm willing to go bankrupt rather than lose this race." - Ben reads a quote from Google co-founder Larry Page, used to illustrate the high-stakes, all-in mentality of tech CEOs in the AI arms race.
• At 45:04 - "Who has heard of private credit funds? Like what normal people have?" - Michael expresses disbelief that the average investor would be aware of or asking for private credit in their 401(k).
• At 52:27 - "If everyone is involved and it's... systemic risk, guess what? Someone's getting bailed out." - Ben argues that the interconnectedness of the private credit market might ironically create a safety net because regulators would have to step in during a crisis.
• At 62:45 - "This is a black or white... This is an insane decision." - Ben strongly disagrees with the personal finance argument for paying off a mortgage with a 2.6% interest rate, framing it as a clear-cut poor financial choice.

Takeaways

• Enduring market volatility is the price of admission for long-term returns; resist the urge to sell during downturns.
• Be aware of the immense capital flowing into sectors like AI and private credit, which presents both transformative potential and significant, often hidden, risks.
• Acknowledge the tension between financially optimal choices and those that provide psychological peace, and be clear about which you are prioritizing in your own financial life.
• The default investment options in retirement accounts like 401(k)s are becoming more complex, making it crucial to understand what is inside them.