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Is Ford throwing in the towel on EVs? · The Financial Exchange Show

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Speaker 1: Armstrong and Mark Vandetti.
1:16
Speaker 2: Happy Tuesday, Mark, Happy Tuesday, Talker, Happy Tuesday. Everybody listening.
1:21
Speaker 2: We finally have data again after a long government shutdown.
1:25
Speaker 2: So I'm in a good mood, even if that data
1:26
Speaker 2: is not very good. In fact, it is pretty bad
1:29
Speaker 2: in a few ways. I'm just excited that we have
1:31
Speaker 2: data again, we have actual government statistics to talk about.
1:35
Speaker 2: It's Mike, Mark and Tucker with you. I already said
1:38
Speaker 2: that on a Tuesday. And we've got the jobs report
1:42
Speaker 2: for the months of October and November to dive through
1:46
Speaker 2: now that they have been officially released, to recap a
1:50
Speaker 2: few of the highlights. I think, first and foremost the
1:52
Speaker 2: most important statistic on here. In September we had an
1:56
Speaker 2: unemployment rate of four point four percent. For October, we
2:00
Speaker 2: have no unemployment rate because the survey wasn't done because
2:02
Speaker 2: of the government shutdown. In November, that rate sat at
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Speaker 2: four point six percent. It's a pretty big increase. Back
2:09
Speaker 2: in January of this year, we were sitting at for
2:13
Speaker 2: even and so we've seen a six tense in my
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Speaker 2: wrong about that. You're frowning one.
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Speaker 3: No, I'm trying to find news. I wasn't even listening
2:23
Speaker 3: to oh, I saw some flash, so I'm trying to
2:26
Speaker 3: find it. Talking to my I'm doing a producer's job, Michael,
2:30
Speaker 3: is the post job.
2:31
Speaker 2: Don't try and read your facial expressions and guess what
2:33
Speaker 2: they mean. I'll sit It is a fun game. So
2:37
Speaker 2: we've seen an uptick in the unemployment rate. It's been
2:40
Speaker 2: a steady uptick for the last couple of years. The
2:43
Speaker 2: same question is on our minds that was on our
2:45
Speaker 2: minds last year. Is this just a natural reshuffling of
2:48
Speaker 2: the unemployment rate back to what is a longer term
2:52
Speaker 2: trend of about five percent, or are we heading for
2:55
Speaker 2: something worse, because typically when unemployment rate increases, it doesn't
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Speaker 2: just plateau and right.
3:01
Speaker 4: This is the question for the Fed. Are we back
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Speaker 4: to something more sustainable somewhere between four and five which
3:07
Speaker 4: would be very healthy historically speaking, sustainable in the sense
3:11
Speaker 4: that it's not pushing the economy beyond its natural limits.
3:15
Speaker 4: The Fed seems to think the economy is not growing
3:19
Speaker 4: as fast as it could, or it thinks that the
3:23
Speaker 4: rate of interest, consistent with just sort of trend growth,
3:26
Speaker 4: normal growth, if you will, is lower due to long
3:30
Speaker 4: term structural factors. We don't really we don't really know.
3:33
Speaker 4: These are questions The Fed doesn't even have the answer
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Speaker 4: to this. They have to make their best guess.
3:37
Speaker 2: The other part of the statistic we got to, the
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Speaker 2: number of jobs created in the month of November ticked
3:42
Speaker 2: up to sixty four thousand after a net loss of
3:45
Speaker 2: one hundred five thousand jobs in the month of October. However,
3:49
Speaker 2: you know a caveat on the October data. There were
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Speaker 2: one hundred and fifty seven thousand government jobs that disappeared
3:56
Speaker 2: from the report in October. That's largely being blamed on
4:00
Speaker 2: the buyouts that some federal employees took earlier this spring,
4:04
Speaker 2: so we knew it was coming. September was the last
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Speaker 2: pay period, and so therefore they're being counted in that
4:10
Speaker 2: hiring rate for October. So bad looking data for October,
4:14
Speaker 2: but not quite as bad as it would have been
4:18
Speaker 2: absent to the government stuff, So it's not that that
4:20
Speaker 2: doesn't matter. There are one hundred and fifty seven thousand
4:23
Speaker 2: fewer government workers who are receiving a paycheck now from
4:25
Speaker 2: that work, but we knew about it. It was coming
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Speaker 2: at some point, and it dropped in October. During all
4:31
Speaker 2: this anything else to highlight on the jobs report, its
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Speaker 2: implications for policy at the FED or anything else regarding
4:39
Speaker 2: the state of the economy and the unemployment rate.
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Speaker 4: No news, But the challenges is in interpreting what we
4:46
Speaker 4: do know, and that's really hard. Again, if the job
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Speaker 4: market just normalized after the frantic pace following COVID and
4:53
Speaker 4: the stimulus that accompanied efforts to combat COVID and the
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Speaker 4: unnaturally low unemployment rate that resulted. You pointed out in
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Speaker 4: the last hour we hit three point four percent in
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Speaker 4: April of twenty twenty three. It's been going up, not uninterrupted,
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Speaker 4: but it's been pretty much rising steadily since. Is that
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Speaker 4: just normalization or because there is persistence in the change
5:16
Speaker 4: in unemployment You could think of that as just like momentum,
5:19
Speaker 4: when it starts to go up, it generally continues to historically.
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Speaker 4: Is is that kind of business cycle fact relevant here?
5:28
Speaker 4: The Fed seems to think it is.
5:30
Speaker 2: Right early indications of the bond market. Bond investors don't
5:34
Speaker 2: seem overly spooked by this rise in unemployment. The yield
5:37
Speaker 2: them the ten year treasury barely moving. We're sitting at
5:39
Speaker 2: four point one seven two percent. I find that interesting.
5:43
Speaker 2: I was theoryizing yesterday with Chuck are we in a
5:46
Speaker 2: bad news equals good news market cycle, where hey, if
5:48
Speaker 2: we get allowsy jobs report, it means the Fed's going
5:50
Speaker 2: to cut rates further and therefore equities jump. We don't
5:53
Speaker 2: seem to be getting that reaction, uh this morning, at
5:56
Speaker 2: least from equities. Could be a number of differ and things,
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Speaker 2: but it is just one month's data point, and so
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Speaker 2: we will see whether it's confirmed, but whether it's enough
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Speaker 2: to shift thinking at the FED from where most market
6:09
Speaker 2: ptystants think they're going, which is a pause in the
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Speaker 2: January meetings. So we will see and the next job's
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Speaker 2: report will be out what January fifth is at the date,
6:21
Speaker 2: or it might be the do we have one on
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Speaker 2: the third, that's the friday after the New Year's holidays.
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Speaker 2: So sometime in early January we will get back into
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Speaker 2: the normal cycle of regularly released jobs reports, and we'll
6:34
Speaker 2: see if that unemployment rate, which is the main thing
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Speaker 2: that the FED cares about, is confirmed or goes in
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Speaker 2: another direction.
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Speaker 3: Yeah.
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Speaker 4: I mean, the big problem for the FED, and I
6:43
Speaker 4: don't know that this is the case, but nobody does,
6:45
Speaker 4: is that the non inflationary rate of unemployment due to
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Speaker 4: structural changes in the economy has gone up yep. Unemployment
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Speaker 4: between four and five, historically speaking, is very rare outside
6:56
Speaker 4: of the sixties nineties, late nineties, late sixties, mid to
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Speaker 4: late six these late twenty tens, something in the fives
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Speaker 4: has been considered healthy. It certainly was in the nineteen eighties.
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Speaker 4: But the economy changes structurally. What unemployment rate is consistent
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Speaker 4: with stable inflation changes along with the structure of the economy.
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Speaker 4: And you don't know what the true structure of the
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Speaker 4: economy is.
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Speaker 3: December's jobs report it's going to be January ninth.
7:24
Speaker 2: Actually, okay, these.
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Speaker 4: Guys are all over the place. Excuse me, but why
7:27
Speaker 4: are why are we not back? Nobody has well?
7:30
Speaker 3: That is a Friday?
7:31
Speaker 4: Well, I know, but why why isn't it the first
7:32
Speaker 4: Friday New Year's.
7:33
Speaker 2: New Year's Days is a friday.
7:36
Speaker 4: You do your work ahead of you do your work
7:37
Speaker 4: on New Year's ago. I'm sorry, but why are we
7:39
Speaker 4: not back to a normal rhythm here?
7:40
Speaker 2: I agree?
7:40
Speaker 4: I don't care too much, but it's a bit annoying.
7:44
Speaker 4: Random releases.
7:46
Speaker 2: Bl it sounds like New Year's Day.
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Speaker 4: It's mildly. I don't care deeply. I'm gonna forget about
7:51
Speaker 4: it as soon as we move on here, but it's
7:53
Speaker 4: it's somewhat annoying that we're not back to a normal
7:55
Speaker 4: rhythm yet.
7:56
Speaker 2: So let's move on.
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Speaker 4: Do you see today's report their gaps? They didn't sum
8:00
Speaker 4: it up the way they normally, They didn't list the
8:02
Speaker 4: change and there was the way they normally do. Is
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Speaker 4: anybody proofing this or are they just kind of handing
8:08
Speaker 4: it in at the shaf from the hood enough sh
8:11
Speaker 4: it does, though, But when you see sloppiness like that,
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Speaker 4: assuming it's not deliberate and there wasn't a footnote that
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Speaker 4: I missed, it does sort of make you call into
8:17
Speaker 4: question the whole thing.
8:18
Speaker 2: Ford taking a nineteen and a half billion dollar hit
8:21
Speaker 2: on their EV business, which since it's starting in twenty
8:26
Speaker 2: twenty three has lost a good thirteen billion dollars on
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Speaker 2: their big giant electric vehicles like the Mustang mach E
8:35
Speaker 2: and the Ford is it the Ford F one to
8:37
Speaker 2: fifty Lightnings is the name for it? Body just well,
8:41
Speaker 2: good for him because they're gonna be pretty rare what
8:43
Speaker 2: it sounds like, quote from the CEO Jim Farley. Instead
8:46
Speaker 2: of plowing billions into the future knowing these large evs
8:50
Speaker 2: will never make money, we are pivoting. He goes on
8:52
Speaker 2: to say, we know we now know enough about the
8:55
Speaker 2: US market where we have a lot more certainty in
8:58
Speaker 2: this second inning. So for things first, I will applaud
9:02
Speaker 2: anytime a CEO is willing to cut losses and walk
9:06
Speaker 2: away from a failing business, which it appears that Ford's
9:08
Speaker 2: ev business is one. I will not applaud somebody who
9:13
Speaker 2: made such a dramatic shift over the course of twenty
9:17
Speaker 2: one two and twenty twenty three and seemingly didn't know
9:22
Speaker 2: something about the American consumer just four years. We're not
9:25
Speaker 2: talking about a decision that was made by a different
9:27
Speaker 2: CEOs years ago. We are talking about the same CEO
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Speaker 2: with largely the same customers, who made a massive investment
9:34
Speaker 2: in evs in order to seemingly appease investors and get
9:40
Speaker 2: some of the Tesla action in the stock booket that
9:42
Speaker 2: was going on. And I just you don't see a
9:45
Speaker 2: lot of large business CEOs making such shortsighted decisions. But man,
9:52
Speaker 2: this is one for the textbooks.
9:54
Speaker 4: I agree. It's it's astonishing I have lost I don't
9:57
Speaker 4: know about you, but since the financial crisis, I used
10:02
Speaker 4: to be someone that's kind of deified CEOs put them
10:05
Speaker 4: on a pedestal. I thought, if they climbed that greasy pole.
10:08
Speaker 4: And there's some politicking and it's not all merit based. Well,
10:13
Speaker 4: I guess politicking is a skill. But their behavior during
10:17
Speaker 4: and after the financial crisis, begging for bailouts, excusing everything away.
10:21
Speaker 4: Never mind the shenanigans that went on in two thousand
10:24
Speaker 4: to two thousand and two, embracing the Green Revolution because
10:27
Speaker 4: it was politically expedient to do so, embracing DEI because
10:31
Speaker 4: it was politically expedient to do so, now turning their
10:33
Speaker 4: backs on it, which I have no problem with, by
10:35
Speaker 4: the way, but it's the one to eighty and there.
10:37
Speaker 4: I won't even name names, but there are some examples
10:40
Speaker 4: of people that were champions of this stuff, the Green
10:43
Speaker 4: Revolution DEI come to mind only three years ago, who
10:46
Speaker 4: now totally disavow it and act like it was somebody
10:48
Speaker 4: else that was in charge. People who go to top
10:52
Speaker 4: business schools will tell you that American CEOs are on
10:54
Speaker 4: average average I'm gonna choose my words really here, not
11:00
Speaker 4: paid average, And I didn't I used to defend them
11:03
Speaker 4: because I was looking at profits and the usual sort
11:06
Speaker 4: of objective metrics, but I no longer have any confidence
11:11
Speaker 4: in the people leading American business.
11:12
Speaker 2: It leads to another important.
11:14
Speaker 4: Question to say on a money show, but I hear you.
11:18
Speaker 2: It leads to another interesting question for the US auto
11:20
Speaker 2: industry generally, which is can it actually compete anywhere other
11:24
Speaker 2: than the United States. I don't really have a great
11:27
Speaker 2: answer here because I don't see much proof that they can.
11:30
Speaker 2: I don't see them making great sales in Latin America
11:33
Speaker 2: and Europe.
11:33
Speaker 4: And it's it's not barriers to trade elsewhere, folks.
11:36
Speaker 2: It is that through you know, a bunch of practices
11:40
Speaker 2: that I disagree with and undoubtedly are government subsidies. China
11:44
Speaker 2: has pulled way ahead of US in vehicle manufacturing. It's
11:48
Speaker 2: not a fun thing to say as the country that
11:51
Speaker 2: invented the darn thing, but that's the reality. Is that
11:56
Speaker 2: anywhere other than the United States, where China is unable
11:59
Speaker 2: to vehicles, they are dominating the markets. And it's a
12:04
Speaker 2: threat to US automakers. It's a threat to German automakers.
12:07
Speaker 2: But I don't see any real competition coming from this.
12:10
Speaker 2: And I don't think that Ford's f one point fifty
12:13
Speaker 2: is going to sell terribly well anywhere other than the
12:16
Speaker 2: United States. Let's tay a quick break. We've got to
12:19
Speaker 2: break for trivia here. When we come back, well A,
12:23
Speaker 2: we're playing a little bit of trivia, and then I
12:24
Speaker 2: want to talk about retail sales as we head into
12:26
Speaker 2: the last few days of the year. That's next on
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Speaker 2: the Financial Exchange.
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Speaker 3: movie trivia here up till the holiday. Here in nineteen
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Speaker 3: ninety four, The Santa Claus was released in theaters and
14:26
Speaker 3: was the fourth highest grossing movie of the year. The
14:30
Speaker 3: success of The Santa Claus spawned two sequels and a
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Speaker 3: TV show. So trivia question today is simply which actor
14:38
Speaker 3: becomes Santa Claus in the Santa Claus series of films?
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Speaker 3: Once again, which actor becomes Santa Claus in the Santa
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Speaker 3: Claus series of films? Be the ninth person today to
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Speaker 2: I gotta tell you, Tucker, I'm two for two on
15:17
Speaker 2: this so far, and well, I would love to claim
15:20
Speaker 2: that that makes me a nineties Christmas movie officionado. I
15:23
Speaker 2: think it probably means that the trivia question is too easy. Yeah,
15:26
Speaker 2: it's the letter, Yeah, yeah, we get to start off
15:28
Speaker 2: on a you know, yeah, Okay, as long as you
15:31
Speaker 2: get more challenges as we go. Yeah, yeah, okay, fair enough.
15:35
Speaker 2: By the way, I this past weekend, I think it
15:39
Speaker 2: was or sometime last week, decided that it'd be acceptable
15:43
Speaker 2: to show uh National Lampoon's Christmas Vacation to my kids.
15:48
Speaker 3: You know, I was debating that I couldn't decide.
15:50
Speaker 2: Yeah, they're not quite there a couple of scenes. Forgot
15:54
Speaker 2: about a few of those scenes and a few of
15:56
Speaker 2: those curse words that are now being repeated around my house.
15:59
Speaker 2: And I don't regret it per se, but the look
16:02
Speaker 2: on my wife's face on a few occasions was less
16:05
Speaker 2: than enthusiastic. So if anybody's wondering, if no, it's a
16:09
Speaker 2: A PG thirteen movie is great for a nine year old.
16:12
Speaker 2: That one didn't quite make the mark in my house.
16:16
Speaker 2: But I had a great time.
16:18
Speaker 3: That's all that matters.
16:19
Speaker 2: Right. We'll be getting retail sales later this week. The
16:23
Speaker 2: October data is expected to confirm a slight consumer slowed down.
16:27
Speaker 2: Economists are predicting a point one percent rise in October
16:30
Speaker 2: retail sales from the month of September. Car sales in
16:34
Speaker 2: particular likely to impact the spending. So apparently we weren't
16:38
Speaker 2: get well, no, this was October. So yeah, I don't
16:41
Speaker 2: know anybody that was buying their spouse as a Halloween.
16:43
Speaker 3: I thought, we're got retail sales this morning, did we?
16:46
Speaker 2: Yeah?
16:47
Speaker 4: It was October? Man.
16:50
Speaker 2: Ah, Man, Now I'm getting called out on attention of stuff.
16:53
Speaker 2: I thought this was on Thursday. No, up exactly point
16:57
Speaker 2: one percent, so economists were right. Came in exactly where
17:01
Speaker 2: it was expected. I apologize. I thought this was later
17:05
Speaker 2: this week October twenty twenty five. Adjusted for seasonal variations,
17:10
Speaker 2: we're seven hundred thirty two point six billion, virtually unchanged
17:15
Speaker 2: from the previous month, up three and a half percent
17:17
Speaker 2: from October of twenty twenty four. So pretty much confirmed
17:20
Speaker 2: what I just said, but I wasn't actually prepared with it.
17:23
Speaker 2: The follow along pieces, consumers are feeling gloomy about the economy,
17:28
Speaker 2: but they're spending anyway. Why are they doing that? And
17:30
Speaker 2: this seems to get asked every year around this time,
17:34
Speaker 2: and I have a very simple answer. I don't want
17:36
Speaker 2: to overly complicate this. We have credit cards and we
17:40
Speaker 2: have jobs, so it might be the worst financial decision
17:43
Speaker 2: we can possibly make, but Americans are going to keep
17:46
Speaker 2: spending until one of those two things changes, either the
17:50
Speaker 2: credit card gets shut down or they lose their job,
17:53
Speaker 2: and usually it's because of the latter that causes the former.
17:57
Speaker 2: But I charted this because Mark Fandett has taught me
18:01
Speaker 2: to do this. I'm looking right now at year over
18:05
Speaker 2: year percentage changes in retail sales, and I charted against
18:09
Speaker 2: the unemployment rate. And the only time in history that
18:12
Speaker 2: you ever have year over year retail sales dropping by
18:16
Speaker 2: more than like a tenth of a percent is when
18:18
Speaker 2: the unemployment rate spikes. It happened back in twenty twenty.
18:23
Speaker 2: It happened back in two thousand and eight. Those are
18:26
Speaker 2: the only instances where genuinely you see people get financially
18:31
Speaker 2: disciplined is when they lose their job because they literally
18:34
Speaker 2: can't spend the money anymore. So, if anyone's predicting a
18:37
Speaker 2: big drop off in retail sales this holiday season because
18:40
Speaker 2: everybody's talking about affordability and how it's a problem and
18:43
Speaker 2: how they're going to finally tighten their wallets and not
18:47
Speaker 2: spill a bunch of money that they don't have into
18:50
Speaker 2: the retail sector, I'm Colin Beloney. I'm just not willing conception.
18:55
Speaker 4: The media focuses a lot on spending, and there's there's
19:00
Speaker 4: some pretty high frequency data that comes in like this
19:02
Speaker 4: report every month, and there are a lot of private
19:04
Speaker 4: sectors surveys in the space. Media focuses on spending because
19:09
Speaker 4: it's something we all do, but consumption spending fancy way
19:12
Speaker 4: of saying it is. Consumption doesn't vary a lot. Even
19:14
Speaker 4: during recessions, during slowdowns, the culprit's usually investment.
19:18
Speaker 2: And by the way, like you know, even in the
19:20
Speaker 2: dot com bubble where you had a stock market crash,
19:22
Speaker 2: add recession but not a sizeable uptick in the unemployment
19:25
Speaker 2: rate now looking at from like four to four to
19:27
Speaker 2: mid fives, retail sales didn't drop them.
19:29
Speaker 4: Yeah. Consumption again, it doesn't really because it's pretty incentive.
19:33
Speaker 4: Most consumpt most spending. Sorry for using the technical term,
19:36
Speaker 4: but everybody knows what consumption is. I think is not
19:40
Speaker 4: very sensitive to the economic We don't all go out
19:42
Speaker 4: buying truffles or whatever you would consider something that might
19:46
Speaker 4: be sensitive to the economic cycle.
19:48
Speaker 2: No stock market hit all time high, so I loaded
19:50
Speaker 2: up on fifteen pounds of foie gras and that's all
19:53
Speaker 2: we're eating this alday season Quick Break Wall Street Watch
19:56
Speaker 2: coming up next.
20:09
Speaker 1: Bringing the latest financial news straight to your radio. Every day.
20:13
Speaker 1: It's the Financial Exchange on the Financial Exchange Radio Network.
20:19
Speaker 1: Time now for Wall Street. Watch a complete look at
20:22
Speaker 1: what's moving market so far today right here on the
20:26
Speaker 1: Financial Exchange Radio Network.
20:28
Speaker 3: Market's seeing a modest sell off as traders react to
20:32
Speaker 3: the November jobs report posted earlier this morning. Last month,
20:37
Speaker 3: sixty four thousand jobs were added, stronger than forecasts of
20:41
Speaker 3: fifty thousand. The unemployment rate ticked higher from four and
20:44
Speaker 3: a half percent to four point six percent. In data
20:47
Speaker 3: from October also revealed one hundred and five thousand jobs
20:51
Speaker 3: were lost. Right now, the Dow is down nearly half
20:55
Speaker 3: a percent, or two hundred and eighteen points. SMP five
20:58
Speaker 3: hundred also down near half a percent or thirty two points,
21:02
Speaker 3: NASDAK down three tenths of one percent or sixty four
21:05
Speaker 3: points lower. Rusted two thousand is off about nearly half
21:09
Speaker 3: a percent. A ten year treasure feled is down one
21:13
Speaker 3: basis point at four point one sixty three percent, and
21:16
Speaker 3: crude oiled down over two and a half percent, now
21:19
Speaker 3: trading at fifty five dollars and thirty two cents a barrel.
21:23
Speaker 3: Ford said it expects about nineteen point five billion dollars
21:27
Speaker 3: in charges as it scales back its EVY ambitions and
21:31
Speaker 3: shifts focus to gas powered in hybrid vehicles. Ford stock
21:35
Speaker 3: is flat. Meanwhile, Pfizer issued a twenty twenty six earnings
21:38
Speaker 3: guidance that came in below analysts expectations. The pharma giant
21:42
Speaker 3: also reaffirmed its twenty twenty five outlook. Pfizer shares are
21:46
Speaker 3: falling five percent. Elsewhere, at Craft, Heines announced former Kelenova
21:51
Speaker 3: CEO Steve K. Hill Lane will take over as its
21:55
Speaker 3: chief executive next year as the company prepares to separate
21:59
Speaker 3: into two publicly traded entities. Craft shares are up nearly
22:03
Speaker 3: one percent. PayPal shares are up almost two percent after
22:06
Speaker 3: the payments company said IF filed an application to establish
22:10
Speaker 3: PayPal Bank that would focus on granting loans and offering
22:13
Speaker 3: savings accounts to small businesses. And after today's close, we'll
22:17
Speaker 3: see earnings from home builder Leonar Holdings. I'm Tucker Silva
22:21
Speaker 3: and that is Wall Street Watch. And on the previous segment,
22:23
Speaker 3: we asked you the Christmas trivia question, which actor becomes
22:28
Speaker 3: Santa Claus in the Santa Claus series of films? That
22:32
Speaker 3: would be Tim Allen. Of course, Tony from Yarmouth, Mass
22:35
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22:39
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22:42
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22:46
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22:48
Speaker 2: The eerie parallels between Aimania and the dot com bubble
22:52
Speaker 2: is being written about today in the Wall Street Journal,
22:55
Speaker 2: and it's certainly something that we've been discussing on the program.
22:59
Speaker 2: It's conversation that I've been having over and over with family,
23:03
Speaker 2: friends and clients, and I think there, well, there are
23:07
Speaker 2: a lot of them, and there are differences too, and
23:09
Speaker 2: I think it's important that we highlight both. Let's start, though,
23:12
Speaker 2: Mark with the valuation argument, because that, to me is
23:17
Speaker 2: one of the easiest and most measurable ones to make right.
23:20
Speaker 2: Everything else is just kind of about how does it feel,
23:22
Speaker 2: how are people talking about it? But on the valuation stuff,
23:26
Speaker 2: we can actually measure this and so correct me if
23:30
Speaker 2: I'm wrong. I don't think it is too difficult for
23:33
Speaker 2: I don't think it's inaccurate for me to say that
23:36
Speaker 2: in terms of valuations, pretty much, regardless of which tool
23:40
Speaker 2: you're using to measure it, the only time in history
23:43
Speaker 2: that US stocks have been pricier than they are right now.
23:46
Speaker 2: Was the lead up to the dot com bubble? Is
23:48
Speaker 2: that is that oversimplifying things?
23:51
Speaker 4: No, that's accurate.
23:52
Speaker 2: Okay, So there is no time in history when the
23:55
Speaker 2: price that you are paying for a stock is higher
23:57
Speaker 2: than it is right now. The investment that's being done
24:01
Speaker 2: on behalf of companies I find really interesting too. So
24:07
Speaker 2: in two thousand, Cisco, the maker of routers, you know
24:11
Speaker 2: that you pretty much needed in order to connect to
24:13
Speaker 2: the Internet, and then the telecom companies were boosted dramatically
24:18
Speaker 2: by the investment that they were making. Cisco in nineteen
24:21
Speaker 2: ninety nine their revenue expanded by more than forty percent.
24:25
Speaker 2: In two thousand by more than fifty percent. In videos
24:28
Speaker 2: is even more. You know, Robust and Video in the
24:30
Speaker 2: past twelve month period managed more than one hundred and
24:32
Speaker 2: fifty percent in the twelve months to October sixty percent, so,
24:37
Speaker 2: you know, massive growth rates. But quite honestly, I don't
24:41
Speaker 2: see these two companies as all that different in the
24:44
Speaker 2: context of the technology that they are implementing. Right, it's
24:48
Speaker 2: we are the pick and shovel companies to this modern
24:55
Speaker 2: day gold rush, Right, we are going to be supplying
24:57
Speaker 2: the infrastructure you need in order to run AI systems,
25:01
Speaker 2: and in Cisco's case, it was the infrastructure you need
25:04
Speaker 2: in order to connect to this brand new thing called
25:06
Speaker 2: the Internet. The single mindedness of the market, I think,
25:11
Speaker 2: is a little bit less concentrated than it was in
25:13
Speaker 2: the dot com era. In nineteen ninety nine, more stocks
25:17
Speaker 2: in the SMP actually fell than rose. Whereas you know
25:20
Speaker 2: this year, in twenty twenty five, one hundred and eighty
25:22
Speaker 2: three stocks are down, so you know, a far smaller
25:26
Speaker 2: percentage of companies are down, but the concentration is definitely there.
25:30
Speaker 2: Right the top ten companies in the SMP make up
25:33
Speaker 2: more than they ever have. The only I don't know
25:38
Speaker 2: what other similarities or contrasts you have.
25:41
Speaker 4: I think, well there's a big one, and it's new era.
25:44
Speaker 4: As Robert Schiller, the famous financial economist who wrote the
25:48
Speaker 4: book Irrational Exuberance that Greenspan took the title from when
25:52
Speaker 4: he testified. Some people associate that quote with green Spin,
25:55
Speaker 4: but it was Shuller, so he's sort of the godfather
25:58
Speaker 4: of the valuations. There are others like John Campbell over
26:01
Speaker 4: at Harvard, but Shiller is kind of the personification of this,
26:06
Speaker 4: Schiller's main point is that valuations become extreme and valuation
26:10
Speaker 4: just It's like price per square foot for your house.
26:12
Speaker 4: It allows you to compare your house today to ten
26:15
Speaker 4: years ago, your house to your neighbor's house. You want
26:17
Speaker 4: to know price p on top per square foot on
26:20
Speaker 4: the bottom. So I got a quotion here, I got
26:21
Speaker 4: a numerator, I got a denominator. Pe is also a
26:25
Speaker 4: ratio P on top. The questions what do you use
26:28
Speaker 4: for e? Shiller uses long term inflation adjusted average, long
26:34
Speaker 4: term average or smooth earnings adjusted for inflation. And when
26:36
Speaker 4: you use that, or, like you said, some other measures,
26:38
Speaker 4: you get the conclusion that valuations have stocks have never
26:42
Speaker 4: been more expensive. So what does that mean? Why are
26:45
Speaker 4: we worried about that? Well, because the higher the price
26:49
Speaker 4: you pay for something, whether it's a bond of stock,
26:52
Speaker 4: real estate, property, and anything with the yield, the lower
26:55
Speaker 4: the yield.
26:56
Speaker 2: And lower the expected future return.
26:58
Speaker 4: Yield in this case would be the equivalent. Right, So
27:02
Speaker 4: should we be worried? And the main reason to worry
27:05
Speaker 4: is that it's been seemingly propelled. Maybe not seemingly, maybe
27:08
Speaker 4: I'm being too cautious. It's definitely been propelled by new
27:11
Speaker 4: era thinking. The new era thinking in the nineteen twenties
27:15
Speaker 4: was commercial radio. I'm reading off Shower's paper here. Obviously,
27:18
Speaker 4: in the nineteen sixties it was television and space travel.
27:21
Speaker 4: Those were two periods of elevated valuations, extreme valuations in
27:25
Speaker 4: the nineteen nineties, which we're all more familiar with. Obviously
27:29
Speaker 4: it was the Internet, all characterized by new era thinking.
27:32
Speaker 4: The trend and growth is going to change. We've never
27:35
Speaker 4: seen anything like this. Those are phrases we're hearing again.
27:38
Speaker 4: We've heard them all before. Does that mean that there's
27:41
Speaker 4: overinvestment in data centers, that stocks are too expensive? It
27:44
Speaker 4: probably does mean all those things. The question is the
27:47
Speaker 4: prices come way down when you get a P and
27:50
Speaker 4: and E and you'd think the ratio is too high.
27:53
Speaker 4: That means one of a couple things. The P's going
27:55
Speaker 4: to come down or the E is going to go up.
27:57
Speaker 4: Historically after extremes like this, the E has never gone
28:01
Speaker 4: up to normalize the PE. That's the concern, Mike, folks.
28:06
Speaker 2: Here's where it comes down to. There are plenty of
28:09
Speaker 2: people talking about this being a bubble. Ultimately, only time
28:12
Speaker 2: will tell, you know, is it a bubble? Does it pop,
28:15
Speaker 2: does it look similar to the dot com era, or
28:17
Speaker 2: does it look completely different? The question you need to
28:19
Speaker 2: be asking yourself is, even if you are utterly convinced
28:23
Speaker 2: it's not likely to happen i e. A bubble popping,
28:26
Speaker 2: you have to ask are you prepared for it? Because
28:28
Speaker 2: ultimately these things are unpredictable by their very nature, and historically,
28:33
Speaker 2: when equity market bubbles pop, there aren't very safe places
28:38
Speaker 2: to hide. And so if you are planning out your portfolio,
28:42
Speaker 2: if you are planning out something important like your retirement,
28:45
Speaker 2: like your kids going to college, like buying that first home,
28:48
Speaker 2: and you are not sure whether or not you are
28:51
Speaker 2: positioned well for a potential bubble pop, I would really
28:55
Speaker 2: encourage you to take this moment when markets are darn
28:58
Speaker 2: near their all time highs, to evaluate and do the
29:02
Speaker 2: work and put in the exercise to understand if you
29:05
Speaker 2: are prepared for an event like that. If you would
29:08
Speaker 2: like help with it, please call the Armstrong Advisory Group.
29:11
Speaker 2: Our numbers eight hundred three nine three for zero zero one.
29:15
Speaker 2: This is the type of work we do on behalf
29:17
Speaker 2: of our clients every day. We'd be happy to share
29:19
Speaker 2: our thoughts with you as well. You can book your
29:22
Speaker 2: time for us to call you back at Armstrong Advisory
29:24
Speaker 2: dot com. But that number is eight hundred three nine
29:27
Speaker 2: three for zero zero one.
29:30
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
29:32
Speaker 1: registered investment advisor. Nothing in the ad or in any
29:35
Speaker 1: Armstrong guide a specific financial, legal, or tax advice. Consult
29:38
Speaker 1: your own financial tax into state planning advisors before making
29:41
Speaker 1: any investment decisions. Armstrong may contact you to offer investment
29:44
Speaker 1: advisory services.
29:45
Speaker 2: Mark, I want to go back to the same subject
29:47
Speaker 2: we just talked about, because you were getting at a
29:50
Speaker 2: important point, which is price earnings ratios are high, and
29:54
Speaker 2: historically when they've gotten this high, they've eventually corrected back.
29:57
Speaker 2: But it is a ratio, and so there's a you know,
30:00
Speaker 2: when there's a numerator and a dominator, there's two things
30:03
Speaker 2: that can happen. The numerator can go down or the
30:07
Speaker 2: denominator can go up, and in either case that fixes
30:11
Speaker 2: the problem.
30:12
Speaker 4: I think look at this to say that earnings will
30:15
Speaker 4: go up and fix this. Suppose you think shuler pe
30:18
Speaker 4: for what it is worth, I say shuller pe because
30:19
Speaker 4: that's how some people refer to it. You could also
30:21
Speaker 4: call it cyclically adjusted PE or just bring and call
30:23
Speaker 4: it PE. Who cares right, It could correct, but not
30:28
Speaker 4: all the way to its historical average. His historical average
30:31
Speaker 4: is it's uncomfortably below where it is today. I'm not
30:35
Speaker 4: in that camp. I don't think it's going back to
30:36
Speaker 4: twenty or fifteen. Might go to thirty, though, which would
30:38
Speaker 4: be a twenty five percent drop in valuations. How do
30:41
Speaker 4: we get there, Well, earnings could just grow faster than
30:44
Speaker 4: prices for the next several years, and that could normalize
30:48
Speaker 4: the ratio. Unfortunately, it's never happened that way here or elsewhere.
30:55
Speaker 2: And that's the piece is if you are buying into
30:59
Speaker 2: whoever is selling whatever it is they're selling about this
31:02
Speaker 2: market right now, you have to genuinely believe that it
31:05
Speaker 2: is different to this time then every time in history.
31:08
Speaker 4: And if you say that, you will sound just like
31:11
Speaker 4: people in other new eras. When radio replaced well nothing,
31:17
Speaker 4: TV replaced radio, the economy switched from agriculture to manufacturing
31:23
Speaker 4: to services. These shifts have happened before. Interestingly, none of
31:28
Speaker 4: them have fundamentally changed the trend in growth, nor have
31:32
Speaker 4: they permanently pushed up valuations. Now we could be at
31:37
Speaker 4: a different it could be different, as you said, Mike,
31:39
Speaker 4: this time, pees may stay at these extreme levels and
31:43
Speaker 4: they won't look like extreme levels in twenty years. But
31:46
Speaker 4: that's a little like saying I'm going to improve my
31:48
Speaker 4: body mass index by growing six inches. I assume the
31:52
Speaker 4: body mass index is a ratio of some kind, the
31:55
Speaker 4: BMI right, and I assume that height is somewhere in
31:58
Speaker 4: that ratio, and I assume he is on top. So
32:01
Speaker 4: if somebody said that, you laugh, like, you're not going
32:03
Speaker 4: to improve your cholesterol by doubling your volume, and then
32:06
Speaker 4: there's less cholesterol to go around. Okay, that's no doctor,
32:09
Speaker 4: I don't think. Maybe RFK junior, But other than RFK Junior,
32:12
Speaker 4: nobody thinks you can improve your cholesterol by doubling your
32:15
Speaker 4: your volume. Similarly, you typically don't grow your way out
32:18
Speaker 4: of very high valuations.
32:20
Speaker 2: Let's take a quick break. When we come back. Stack
32:23
Speaker 2: Roulette is next.
32:25
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33:34
Speaker 2: Continued bad news for Zillo investors, I say continued because
33:38
Speaker 2: in February of twenty twenty one, this stock hit nearly
33:42
Speaker 2: two hundred dollars per share and is currently training at
33:44
Speaker 2: seventy bucks a share, So it's been a pretty big
33:47
Speaker 2: fall for those who have held on to it. But
33:51
Speaker 2: yesterday the stock was down about seven percent on rumors
33:54
Speaker 2: that Google might be interested in getting into their game
33:59
Speaker 2: and completely upending their business model. If you're not familiar
34:02
Speaker 2: with how Zillow makes money, they put out real estate
34:07
Speaker 2: listings and then largely realtors pay to advertise on their
34:10
Speaker 2: platform and hopefully get clients from those advertisements. Hey, you
34:15
Speaker 2: want to put an offer on this home? You know,
34:16
Speaker 2: talk to Jeff, I said Jeff. Oh, I did have
34:21
Speaker 2: a realtor named Jeff's. That was probably why I went
34:23
Speaker 2: to Jeff. If Google gets into this business, which I
34:28
Speaker 2: don't know how big of a lift it would be,
34:31
Speaker 2: you know, the reports are that they are running tests
34:33
Speaker 2: and putting real estate sale listings into their search results.
34:38
Speaker 2: If Google Flights and other businesses that they've gotten into
34:41
Speaker 2: are any indication, my guess is that they would be
34:44
Speaker 2: pretty darn good at it, undercut the competition, be faster,
34:48
Speaker 2: more user friendly, and have a pretty good platform. I
34:51
Speaker 2: don't know that, you know, maybe this one is different,
34:54
Speaker 2: but history tells me that once they get into one
34:59
Speaker 2: of these businesses one, their computing power is so much
35:02
Speaker 2: stronger than all the competition that it tends to be faster.
35:04
Speaker 2: They're better at building development, you know, developing websites, and
35:08
Speaker 2: I just think about Google flights is the best example
35:11
Speaker 2: I can give, right, I mean, anybody out there if
35:14
Speaker 2: you want to go to Expedia search for a flight
35:19
Speaker 2: and then do the same thing on Google, and I
35:21
Speaker 2: can guarantee you the results will come back faster with Google,
35:25
Speaker 2: and in many cases they will produce more results for
35:28
Speaker 2: you than the than the other third parties. So if
35:31
Speaker 2: it's the case, then Zillo might be having some problems.
35:34
Speaker 2: Here would be my guess. I don't know you have
35:36
Speaker 2: any take on this mark. Do you do you browse
35:39
Speaker 2: these sites like I do. I feel like one of
35:41
Speaker 2: my hobbies is looking at real estate on redfin and
35:44
Speaker 2: so I'm constantly browsing these things but no no interest.
35:48
Speaker 2: It's weird.
35:49
Speaker 3: I still find myself going on Zillo even though I
35:52
Speaker 3: have zero interest or any likelihood of buying.
35:55
Speaker 2: A house any time soon.
35:57
Speaker 4: But it is but I still go on.
35:58
Speaker 2: Like whenever we drive, I buy a home that's for sale.
36:01
Speaker 2: I just if I'm not driving, I can't help myself.
36:04
Speaker 2: I pull up Redfinn and I go look at the property, like, oh,
36:06
Speaker 2: that's a nice bedroom.
36:07
Speaker 3: I'm just curious to see what the market looks like
36:09
Speaker 3: in terms of my location.
36:11
Speaker 2: But things that Google could probably do better than Zillow
36:14
Speaker 2: or redfin. You know, they probably can pull in the pictures,
36:17
Speaker 2: pull in all the same information about the schools and
36:20
Speaker 2: everything else. I think they'd also do a better job
36:22
Speaker 2: being able to tell you about nearby attractions, details about
36:24
Speaker 2: the neighborhood, traffic patterns in the neighborhood.
36:27
Speaker 4: None of these guys are doing including open AI. I'm
36:30
Speaker 4: just going to be very broad here. None are doing
36:32
Speaker 4: anything that could not be undermined by a clever eighteen
36:34
Speaker 4: year old at MIT right now who's figured out a
36:38
Speaker 4: way to write more efficient code.
36:40
Speaker 2: This is my sure hope.
36:41
Speaker 4: Seeing this is all Googled forgive me, but none of
36:45
Speaker 4: these people do anything that imparts a sustainable advantage to
36:50
Speaker 4: their business model, unless you count the scale required to
36:54
Speaker 4: get to invest in data centers, the capital required to
36:59
Speaker 4: get these up and run. Any one of these guys
37:01
Speaker 4: what they do could be knocked off and improved on
37:03
Speaker 4: tomorrow by some kid working on his laptop.
37:06
Speaker 2: I really hope so, because what I've appeared over the
37:09
Speaker 2: last decade or so is that Google, Amazon, Microsoft, and
37:13
Speaker 2: Facebook have gotten so large that they can crush any
37:16
Speaker 2: competition that ever comes about. And I hope I'm wrong
37:19
Speaker 2: about fifteen twenty. I hope you're right. I do hope
37:23
Speaker 2: you're right because different form trend recently has been. Anytime
37:27
Speaker 2: something that looks like competition starts to come along, Google's
37:31
Speaker 2: just been able to buy it, or Facebook has, or
37:33
Speaker 2: Amazon has and crush the competition and then roll out
37:39
Speaker 2: their own products that are cheaper and put the everybody,
37:42
Speaker 2: all the competition that would have existed out of business.
37:45
Speaker 2: So I don't love what it means for monopolistic concerns,
37:49
Speaker 2: but for building a better product. I bet that Google
37:52
Speaker 2: is able to do it. Got thirty seconds, Mark, got
37:54
Speaker 2: anything for me?
37:55
Speaker 4: I have a Shiller quote. That's what I was scrambling
37:57
Speaker 4: feverishly for. Is the twenty first century a new era question?
38:00
Speaker 4: Mark Chiller says in response. Over the past century, the
38:04
Speaker 4: American economy has been transformed in many fundamental ways. Agriculture
38:07
Speaker 4: gave way to industry. Industry has given way to services
38:10
Speaker 4: as the economies leading sector. Automobiles and planes have revolutionized transport,
38:15
Speaker 4: while radio, television, and now the Internet have transformed communication.
38:20
Speaker 4: Despite the historical stability of valuation ratio, some observers and
38:24
Speaker 4: he wrote this twenty five years ago, you can apply
38:27
Speaker 4: it to today. Some observers have questioned whether these patterns
38:30
Speaker 4: are a guide and at the time he didn't know markets.
38:33
Speaker 4: He concludes that they are, and we know what happened subsequently.
38:37
Speaker 2: That's all the time we have. Markets are still in
38:40
Speaker 2: negative territory. We'll have a full recap for you and
38:43
Speaker 2: more tomorrow here on the Financial Exchange