The Biggest Risk in 2026 | Animal Spirits 444

Episode Overview

• The hosts analyze the 2025 stock market, concluding its performance was historically normal despite feeling strange, while also debating the inevitability of an AI bubble and the risks of extreme S&P 500 concentration.
• They explore a major economic paradox where a slowing labor market coexists with strong economic growth, questioning which factors are truly driving the economy today.
• The conversation delves into the rise of "financial nihilism," debating whether it's a genuine sense of hopelessness among younger generations or simply the result of unprecedented, frictionless access to gambling and speculation.
• The hosts discuss the powerful, long-term disinflationary potential of AI and examine the growing pains in private markets, particularly the risks of illiquidity and redemption gates in alternative investments.

Key Concepts

• Market Performance & Volatility: The discussion covers the idea that holiday trading is insignificant noise, and that 2025's market returns and intra-year drawdowns were historically typical, despite perceptions.
• AI Bubble Debate: A central theme is whether an AI-driven market bubble is inevitable, has already peaked, or if widespread fear of a tech crash is actually a bullish contrarian indicator.
• S&P 500 Concentration: The hosts examine the extreme concentration in the market, with the top 10 stocks now comprising 40% of the S&P 500, and question if this trend will continue to expand or revert to the mean.
• Economic Disconnect: The podcast highlights the current paradox of a slowing labor market that has not hindered strong economic growth, suggesting forces like AI may be overriding traditional indicators.
• Financial Nihilism vs. Frictionless Access: The conversation explores whether the recent surge in speculative gambling is driven by generational economic despair or, more likely, the unprecedented ease and accessibility of trading and betting apps.
• AI as a Disinflationary Force: A key idea presented is that AI could be the most powerful disinflationary force in history, creating a stark contrast to the persistent inflation fears of recent years.
• Private Market Illiquidity: The risks associated with alternative investments are analyzed, focusing on the structural problems of redemption gates and illiquidity in non-traded funds, which can penalize long-term investors.

Quotes

• At 1:37 - "Markets around the holidays do not matter. Whatever happens in the markets around the holidays, it gets forgotten or washed away." - Ben Carlson argues that holiday trading is generally noise and not indicative of future trends.
• At 2:13 - "It turns out it was a bizarre year for the markets, as I mentioned last week. At least it felt weird. But if you zoom out... it looks pretty much in line with every other year." - Michael Batnick comments on a chart showing that the S&P 500's returns and drawdowns in 2025 were historically typical.
• At 5:12 - "AI is gonna be a bubble, isn't it? Aren't we gonna get a bubble? Isn't it not inevitable that we would get a bubble?" - Michael Batnick expresses his belief that the hype around artificial intelligence will inevitably lead to a market bubble.
• At 7:06 - "The question that we'd ask into 2026 is: what comes first, the 10 largest weights to 50% or 30%?" - Ben Carlson reads a quote from a chart, questioning whether the extreme market concentration will increase further or mean revert.
• At 26:28 - "The labor market hasn't mattered yet." - Ben Carlson argues that despite concerns about a slowing labor market, the economy continues to grow, suggesting other forces are having a greater impact.
• At 29:43 - "I tend to think that this is not—there is some financial nihilism to this. I tend to think it's just the barriers have been broken down." - Ben Carlson argues that the recent surge in speculative gambling is more about easy access via technology than generational despair.
• At 32:30 - "I would say that those fears are, I don't know, making this up, 30% of it. But the other 70% is, as you mentioned Ben, it's just easier." - Michael Batnick agrees that the primary driver of increased speculation is the ease offered by modern apps.
• At 40:11 - "Wow, we were really worried about 1970s-style inflation when the most deflationary force in the history of the world was coming on board?" - Ben Carlson speculates that future generations will look back in disbelief at today's inflation fears, given the concurrent rise of AI.
• At 43:49 - "If they were to close down the site tomorrow, I would be mad because I couldn't do it. But it would be helping me in the long run." - Ben Carlson quotes a woman addicted to online casino apps, highlighting the severe struggle that comes with frictionless access to gambling.
• At 49:21 - "'Cause if you've invested in it for 10 years but you're still locked on how much you can get out, like that doesn't make any sense, right?" - Ben Carlson criticizes the structure of illiquid private funds that unfairly penalize long-term investors with redemption gates.

Takeaways

• Look past short-term market noise and subjective feelings about performance; instead, ground your perspective in long-term historical data on returns and drawdowns.
• Be wary of consensus thinking, as widespread fear of a market bubble or crash can sometimes be a contrarian bullish signal for future returns.
• Recognize that traditional economic indicators, like the labor market, may be losing their predictive power as new, transformative forces like AI begin to reshape the economy.
• Understand that the biggest driver of risky financial behavior is often the removal of friction, so be mindful of how easily accessible platforms can influence decision-making.
• When forming a long-term economic outlook, factor in the massive disinflationary potential of AI, which may serve as a powerful counterweight to short-term inflation fears.
• Before investing in private or alternative funds, thoroughly investigate their liquidity terms and redemption rules, as structural gates can prevent you from accessing your own money when you need it.