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Oil Spikes, Markets Slide, and the Global Ripple Effect · The Financial Exchange Show

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  Speaker 1: and Paul Lane.
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  Speaker 2: Good morning, Happy Thursday. Welcome back to the Financial Exchange.
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  Speaker 2: I feel a bit like the camper from Wet Hot
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  Speaker 2: American Summer who's talking into a mic that all are unplugged.
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  Speaker 2: If if you're watching on YouTube, you'll see here that
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  Speaker 2: I've gotten unplugged a snipped cord on my mic. But
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  Speaker 2: apparently it's still working because you can all hear me this.
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  Speaker 3: Yeah, I I had a mini panic attack when I
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  Speaker 3: saw that cut wire. But it turns out just for
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  Speaker 3: your microphone light, so the microphone does work for the
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  Speaker 3: reference firm.
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  Speaker 2: A mini panic attack for Tucker is a full on
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  Speaker 2: heart attack for everybody else listening.
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  Speaker 4: That is quite accurate.
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  Speaker 2: It's Mike, Paul and Tucker with you here on a Thursday.
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  Speaker 2: We've got markets reacting to President Trump's address last night
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  Speaker 2: to the nation on the state of.
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  Speaker 4: The war and Iran.
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  Speaker 2: We've got weekly jobless claims that came out this morning.
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  Speaker 2: We've got another private credit company getting walloped with redemption requests.
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  Speaker 2: But in terms of what's moving markets this morning, Paul,
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  Speaker 2: it's clearly the President's address last night, and perhaps a
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  Speaker 2: little bit of rebound from the last two days of trading,
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  Speaker 2: which we're all trading on just hell bent optimism, I
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  Speaker 2: think is the way that I would put it. But
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  Speaker 2: to recap here, you had equity markets on Tuesday surging
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  Speaker 2: up more than two and a half percent from the
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  Speaker 2: S and P five hundred. Wednesday you saw an upward
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  Speaker 2: move again, though not to that severity, and today we
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  Speaker 2: are correcting on that front. And so before we get
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  Speaker 2: to the minutia of President Trump's speech and what he highlighted,
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  Speaker 2: I think we'll start off with how markets are reacting.
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  Speaker 2: First would be oil prices, which are shooting up this morning.
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  Speaker 2: You've got West Texas crewed up eleven percent to one
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  Speaker 2: hundred eleven dollars per barrel. The Brent crude is up
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  Speaker 2: to one hundred and eight dollars at barrel. You have
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  Speaker 2: gold prices and silver prices moving down. Bond yields were
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  Speaker 2: surging in the morning, but they've comed way down. The
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  Speaker 2: ten year treasury now is now ten year treasury is
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  Speaker 2: now four point three one five percent, actually down slightly
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  Speaker 2: for the day. And as has been the case recently,
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  Speaker 2: when oil prices shoot up, stock prices moved down. So
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  Speaker 2: we've got the S and P five hundred dollf fifty
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  Speaker 2: four points or eight tens of a percent, Nazdak off
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  Speaker 2: two forty six one point one percent, in the Dow
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  Speaker 2: Jones Industrial Average off four hundred and sixty eight points
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  Speaker 2: one percent for the morning as well. Uh, those were
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  Speaker 2: all worse in pre market trading. They've comed down a
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  Speaker 2: little bit. But let's get to that address from last
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  Speaker 2: night and what investors seemed to be focusing in on,
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  Speaker 2: because ultimately the President was attempting to deliver a message
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  Speaker 2: of Hey, where you're going to wind this thing down?
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  Speaker 2: And nonetheless investors didn't really applaud that point or grasp
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  Speaker 2: on to that point.
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  Speaker 4: I don't think from the messaging.
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  Speaker 5: Yeah, kind of a meandering sort of address where there
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  Speaker 5: were a couple pieces that were noted here that the
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  Speaker 5: hard part and I quote is done, so it should
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  Speaker 5: be easy. Was a code from President Trump pertaining to
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  Speaker 5: this idea of a two to three week time horizon
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  Speaker 5: to close down this war. But then in similar vein
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  Speaker 5: during the same speech, there was mention of further attacks
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  Speaker 5: on Iran energy infrastructure ANDAPS perhaps going at some of
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  Speaker 5: their oil resources. So sort of two different messages. One, hey,
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  Speaker 5: this perhaps will be wrapped up in two three weeks,
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  Speaker 5: but also mentioning that there could be an escalation of attacks,
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  Speaker 5: and I think ultimately markets sort of leaning more on
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  Speaker 5: this idea that jeez, if there are perhaps more escalation
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  Speaker 5: and attacks to come, then that only further delays this
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  Speaker 5: inedible resolution to the conflict. And it's interesting that the
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  Speaker 5: markets had really rallied significantly in days prior without any
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  Speaker 5: real speech. I guess there was some messaging.
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  Speaker 2: It really came from some of that internal messaging and
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  Speaker 2: the promise of this address to and then you know,
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  Speaker 2: it was a bit of a buy the room or
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  Speaker 2: sell the news type of situation where people seemingly got
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  Speaker 2: excited about the potential resolution here and then you get
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  Speaker 2: a speech here that it.
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  Speaker 5: Was limited on specifics and details, and I think that's
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  Speaker 5: what the market is concerned about.
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  Speaker 2: It no doubt there's not a certain timeline for the
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  Speaker 2: wind down. The other piece that I think really important
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  Speaker 2: to acknowledge it from what we've been saying now for weeks,
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  Speaker 2: let's not pay attention to what gets said by Israeli media,
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  Speaker 2: you know, the limited Iranian media that gets out there,
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  Speaker 2: or even what US media is saying, because frankly, there's
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  Speaker 2: a lot of misinformation out there. There's a lot of misunderstanding,
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  Speaker 2: even with the India own US administration about what is happening.
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  Speaker 4: At least earlier in the stages.
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  Speaker 2: Right, we had messaging from I don't remember which secretary
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  Speaker 2: is saying that a ship had successfully navigated the straight
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  Speaker 2: and then had to be walked back Energy Sect. Yeah,
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  Speaker 2: but the interesting part to me was the statement from
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  Speaker 2: the President that reopening the Strait of Hormuz is not
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  Speaker 2: one of the goals of the United States. And we've
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  Speaker 2: been saying for the last few weeks here that you know,
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  Speaker 2: forget about the words. What matters to markets in the
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  Speaker 2: economy even here domestically is can ships navigate the straight?
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  Speaker 2: And effectively what he said is that the United States
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  Speaker 2: doesn't need ships to be able to navigate the straight
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  Speaker 2: of horror moves, that the US economy is not reliant
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  Speaker 2: on the you know, on the different products that go
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  Speaker 2: through there, and our economy will will be just fine
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  Speaker 2: whether or not it happens. So, you know, Middle Eastern allies,
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  Speaker 2: NATO allies, you know, get your stuff together, because you
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  Speaker 2: do need it to happen, and you'll need to figure
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  Speaker 2: that out on your own.
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  Speaker 4: Quote.
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  Speaker 2: They must grab it and cherish it. They can do
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  Speaker 2: it easily. We will be helpful, but they should take
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  Speaker 2: the lead here. And I think that more than anything else,
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  Speaker 2: more than the lack of a timeline, more than you know,
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  Speaker 2: questions about when gas prices will snap back, and you know,
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  Speaker 2: the president's optimism about the stock market, that one piece,
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  Speaker 2: to me, I think indicated that potentially the President is
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  Speaker 2: going to try and wind down this war without reopening
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  Speaker 2: the Strait of hornm Mooz. And that's the piece that
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  Speaker 2: I think investors are latching onto this morning that I think,
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  Speaker 2: more than anything is driving oil prices up one hundred
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  Speaker 2: you know, or up to one hundred and ten plus barrels.
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  Speaker 2: One hundred and ten plus dollars per barrel. That's a mouthful.
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  Speaker 2: And it'll take something else to navigate that into a
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  Speaker 2: different direction here, Because there's a few things that are
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  Speaker 2: true at the same time. One, the President is absolutely
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  Speaker 2: correct the United States is not nearly as dependent on
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  Speaker 2: what goes through the Strait of Hormuz as any nation
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  Speaker 2: that is east of the Strait of Hormuz right right,
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  Speaker 2: Just geographically thinking here, yeah, if you are in India
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  Speaker 2: or Pakistan or any country east of the Strait, you
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  Speaker 2: are far more reliant on the stuff that goes through it.
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  Speaker 2: If you're close to the street in the Middle East
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  Speaker 2: and you rely on it to export your stuff, you're
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  Speaker 2: very reliant on that opening. And if you're Europe, which
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  Speaker 2: is west but pretty close to the Straight, you are
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  Speaker 2: also pretty heavily reliant on it. The further a way
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  Speaker 2: you are, the less important it is. But that doesn't
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  Speaker 2: mean that we don't operate in a global market for commodities.
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  Speaker 2: And that's the piece that I think we'd struggle to
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  Speaker 2: deal with here, because what you're seeing this morning is, yeah,
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  Speaker 2: we don't need any oil coming from Middle Least. We
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  Speaker 2: have enough oil here domestically produced to still be able
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  Speaker 2: to export. I think something like I don't even know
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  Speaker 2: the number of barrels per day that we export on
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  Speaker 2: a net basis, but you still have oil prices moving
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  Speaker 2: up eleven percent today because it's a global commodity. And
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  Speaker 2: if the refinery over off the coast of Europe is
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  Speaker 2: going to pay one hundred and fifty bucks a barrel,
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  Speaker 2: then you can better believe that they're going to pack
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  Speaker 2: that stuff onto a tanker in the United States and
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  Speaker 2: ship it out to whoever is willing to pay the
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  Speaker 2: highest price. Likewise, we're gonna be covering a story later
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  Speaker 2: about how a bunch of domestic manufacturers of fertilizer yeap
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  Speaker 2: are you know, sending this stuff all over the world
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  Speaker 2: outside the United States because it is a global commodity
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  Speaker 2: with a global price, and they can make a whole
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  Speaker 2: bunch of money elsewhere, so there will be these offsetting
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  Speaker 2: features here. Of yes, domestic producers of these goods are
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  Speaker 2: profiting a whole bunch They might even need to expand
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  Speaker 2: employment in the area. But is that enough to offset
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  Speaker 2: what would happen if gas prices remained at four dollars
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  Speaker 2: plus a gallon for the year of diesel prices shot
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  Speaker 2: up to six bucks a gallon, and if you know,
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  Speaker 2: all sorts of other commodities either went up in price
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  Speaker 2: dramatically or you know. The piece that I still think
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  Speaker 2: we are underestimating the possibility of is what happens if
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  Speaker 2: manufacturing hubs in places like Vietnam and other parts of
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  Speaker 2: Asia get taken offline for periods of time because of
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  Speaker 2: the lack of infrastructure. We might want to manufacture war
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  Speaker 2: stuff here today, but the fact of the.
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  Speaker 4: Matter is on the capacity we don't.
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  Speaker 2: Yeah, and so that's the piece that I think is
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  Speaker 2: being ignored by all this. No, we're not reliant on
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  Speaker 2: the oil coming from the Middle East as much as
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  Speaker 2: we used to.
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  Speaker 4: But it's a global commodity with a global price. Yeah.
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  Speaker 5: I think that's a great point that you bring up.
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  Speaker 5: And it was a subject that we discussed in the
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  Speaker 5: show yesterday, Mark and I because the Texter had reached
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  Speaker 5: out with that exact same question, and perhaps many Americans
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  Speaker 5: are thinking, as hey, why should I care about the
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  Speaker 5: straight up our moves. We are net exporters of oil
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  Speaker 5: and gas, and so we won't be as impacted by it.
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  Speaker 4: But you did a good job of sort.
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  Speaker 5: Of outlining it is global commodity, so it does have
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  Speaker 5: impact to us domestically, even though we are a net exporter,
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  Speaker 5: because we will export to other countries that will pay
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  Speaker 5: greater than what we would pay for it, and then
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  Speaker 5: the trickle down effects. Yes, perhaps some fertilizer companies benefit
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  Speaker 5: from the surge of demand for their exports, and maybe
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  Speaker 5: the same applies for Exton and Chevron domestic companies here
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  Speaker 5: as well. To me, in Mark and I were saying,
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  Speaker 5: they say that doesn't do enough to offset the fact
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  Speaker 5: that Joe Schmo is paying four dollars a gallon and
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  Speaker 5: all of a sudden, the consumer discretionary expenses of that
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  Speaker 5: individual multiplied across one hundred million households throughout the country,
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  Speaker 5: it doesn't do enough to offset that. And then you
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  Speaker 5: have just some companies that are going to be negatively
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  Speaker 5: impacted on the other side of things here, if you
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  Speaker 5: look at airline stocks today, cruise stocks, say, companies, trucking
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  Speaker 5: stocks are example too. Companies that rely on the global
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  Speaker 5: commodity of energy of oil and gas for their businesses.
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  Speaker 5: Their margins get compressed, so that's a negative impact. And
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  Speaker 5: then you have the consumer spending side that I mentioned
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  Speaker 5: as well. Those impacts outweigh anything that would be benefited
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  Speaker 5: on the corporation side, a few corporations selling more or
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  Speaker 5: perhaps employing more folks.
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  Speaker 2: Let's take a quick break here. When we come back,
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  Speaker 2: I do want to jump into that story about fertilizer.
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  Speaker 2: It is a really interesting one, especially for those of
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  Speaker 2: us in the Northeast who are not really exposed at
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  Speaker 2: all to agriculture. Quick break, when we come back, we're
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  Speaker 2: talking fertilizer on the financial exchange.
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  Speaker 2: Well, if you're looking for the winners out there in
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  Speaker 2: the war and Iran, it's US fertilizer producers. They're looking
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  Speaker 2: at a pretty big win follower, or even just the
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  Speaker 2: traders of it. The US managed to import a whole
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  Speaker 2: bunch of fertilizer in the first quarter of the year.
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  Speaker 2: The country managed to import over half a million metric
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  Speaker 2: tons of diamonium phosphate, the most common type of phosphate fertilizer.
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  Speaker 4: January three Arch. Good old daum phosphate. You got that?
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  Speaker 4: You want to try that five times south?
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  Speaker 1: Oh?
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  Speaker 4: Yeah, that com.
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  Speaker 2: But once again, it's now finding American farmers on kind
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  Speaker 2: of the wrong side of a trade here as the
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  Speaker 2: importers of all this fertilizer are finding that they can
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  Speaker 2: toss it on ships, send it to India, and get
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  Speaker 2: a pretty nice price for it. US farmers had planned
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  Speaker 2: on pulling back on plantings this spring anyway, based on
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  Speaker 2: global commodity prices, and so it is setting up those
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  Speaker 2: domestic producers and those domestic exporters of fertilizer to make
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  Speaker 2: a pretty significant profit as they send this stuff all
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  Speaker 2: over the world down to Latin America, to India and countries.
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  Speaker 4: That you know, rely heavily on it.
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  Speaker 2: China has begun restricting the export of some of their
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  Speaker 2: their own fertilizer as they you know, favorite domestic farmers
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  Speaker 2: and domestic production there. But again, when we talk about
• 13:55
  Speaker 2: all this stuff, it's just not something we do here
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  Speaker 2: in the US, right, We do not generally restrict the
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  Speaker 2: export of basic goods like oil, basic goods like fertilizer.
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  Speaker 2: It's a global commodity with a global price, and so
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  Speaker 2: what you see happening here is US farmers taking another
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  Speaker 2: hit on elevated elevated prices for fertilizer.
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  Speaker 4: But those who are able to.
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  Speaker 2: Export it making a pretty nice profit at the moment
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  Speaker 2: for that stuff they can get on ships and get
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  Speaker 2: out of the US.
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  Speaker 5: Yeah, it's interesting with everything that's gone on in the
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  Speaker 5: commodity market over the course of the last six months
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  Speaker 5: or so, you just really continue to learn. For someone
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  Speaker 5: who doesn't follow fertilizer markets that closely, how.
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  Speaker 4: Global the is that closely at all?
• 14:43
  Speaker 5: How global the it's such a global economy. Like I
• 14:47
  Speaker 5: continue to have that takeaway amongst you know, everything with
• 14:49
  Speaker 5: the straightform moves and issues like this in fertilizer trade
• 14:53
  Speaker 5: or other commodities, whether it be soybeans or others. It
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  Speaker 5: is just truly very intert wined global economy that.
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  Speaker 4: We have, as we you know, monitor trading here.
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  Speaker 2: Obviously, the big news today's that gas oil prices rather
• 15:09
  Speaker 2: shooting through the roof. Here for an update on that front,
• 15:13
  Speaker 2: we are sitting at a national average on gasoline prices
• 15:16
  Speaker 2: at four dollars eight cents a gallon. In California, you're
• 15:19
  Speaker 2: pushing six bucks a gallon at five eighty nine here
• 15:22
  Speaker 2: across the Northeast, we're just slightly below that national average
• 15:25
  Speaker 2: unless you're in Connecticut, which is at four h two,
• 15:28
  Speaker 2: but generally across the Northeast, pretty low gas taxes, and
• 15:32
  Speaker 2: you're averaging slightly below four bucks a gallon across the Midwest.
• 15:36
  Speaker 2: It's even lower lower Texas, et cetera. But that national
• 15:39
  Speaker 2: average sitting at just over four bucks. On the diesel
• 15:42
  Speaker 2: side of things, continues to climb and will almost certainly
• 15:45
  Speaker 2: climb again today with diesel prices getting all the way
• 15:49
  Speaker 2: to five fifty a gallon. That's up from a year
• 15:51
  Speaker 2: ago when we were sitting at three sixty three per gallon.
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  Speaker 2: So that's been the most immediate impact and the most
• 15:57
  Speaker 2: severe impact, and the one that I think we had
• 16:00
  Speaker 2: a textra text in on Tuesday on the show. Like again,
• 16:04
  Speaker 2: the gas prices at the pump matter psychologically, but not
• 16:08
  Speaker 2: nearly as much as the diesel prices for the state
• 16:11
  Speaker 2: of the US economy the global economy. We tend to
• 16:14
  Speaker 2: focus very much on the US, but we've covered at length.
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  Speaker 2: You know, Brazilian truck drivers who are just refusing to
• 16:21
  Speaker 2: move a whole bunch of soybeans from the middle of
• 16:24
  Speaker 2: the country out to the ports because why, diesel prices
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  Speaker 2: are through the roof. They can't make a profit on
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  Speaker 2: moving that stuff. And so globally we're barely starting to
• 16:35
  Speaker 2: feel the impact of all of this. But you know,
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  Speaker 2: I think that diesel price, especially if it does not
• 16:43
  Speaker 2: know the President has talked about, Hey, this war wraps up,
• 16:45
  Speaker 2: and you'll you'll see a very quick swing back on
• 16:48
  Speaker 2: gas prices. You'll see a swing back on stock prices,
• 16:52
  Speaker 2: is what the President has said. And just how quickly
• 16:55
  Speaker 2: that happens on stock prices, you know, not going to
• 16:58
  Speaker 2: affect the average American that much on how quickly stock
• 17:01
  Speaker 2: prices rebound, But if diesel prices do not shoot back
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  Speaker 2: down quickly, it's really tough to see a scenario where
• 17:08
  Speaker 2: inflation is getting you to a point of below three
• 17:11
  Speaker 2: percent anytime in the next year.
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  Speaker 5: Yeah, the diesel market is an area that just dramatic
• 17:16
  Speaker 5: impact for those businesses that are trucking or any impact
• 17:21
  Speaker 5: from you know, shipping around cargo supplies throughout the United States,
• 17:24
  Speaker 5: and so there's all sorts of scrutiny on looking for alternatives,
• 17:28
  Speaker 5: which there aren't very many in that space, and that
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  Speaker 5: dramatically will have a trickle down impact to those people
• 17:34
  Speaker 5: who are buying those services.
• 17:36
  Speaker 2: Yeah, yeah, i'd heard. I guess Amazon trucks are or
• 17:41
  Speaker 2: Amazon local delivery trucks are now electric. Right last time
• 17:44
  Speaker 2: I checked, the eighteen wheelers you know barreling down the
• 17:46
  Speaker 2: highway are.
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  Speaker 4: Still running on diesel. So yeah, not a lot of alternatives.
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  Speaker 5: I've heard some practices going on that people are doing
• 17:54
  Speaker 5: off road diesel some some sort of stuff that you're
• 17:57
  Speaker 5: not not allowed to do and would be fined by
• 17:59
  Speaker 5: the Car of Transportation if caught.
• 18:03
  Speaker 2: We will have a full jobs report for the month
• 18:06
  Speaker 2: of March tomorrow that gets released at eight thirty am. Tucker,
• 18:10
  Speaker 2: let's go with eight thirty am. But this morning, at
• 18:13
  Speaker 2: eight thirty we had the weekly jobless claims. This does
• 18:16
  Speaker 2: not give you the unemployment rate, but rather the number
• 18:18
  Speaker 2: of people filing for unemployment, and it was relatively mild.
• 18:22
  Speaker 4: For the week ending March twenty eight.
• 18:24
  Speaker 2: The advance figure for the adjusted initial claims was two
• 18:27
  Speaker 2: hundred and two thousand, which is a decrease of nine
• 18:30
  Speaker 2: thousand from the previous week. And the continuing claims again
• 18:35
  Speaker 2: do not do not get up to a level that
• 18:38
  Speaker 2: I think most people are terribly concerned about. It does,
• 18:44
  Speaker 2: I think, paint the same salient picture that we got
• 18:46
  Speaker 2: earlier this week though from the Jolts report, and the
• 18:49
  Speaker 2: Jolts is the Job Opening's Labor Turnover Survey. What that
• 18:52
  Speaker 2: report indicated once again is that layoffs are not a
• 18:55
  Speaker 2: real problem here. But the problem with the labor market
• 18:58
  Speaker 2: you're seeing is one of there is very little churn
• 19:02
  Speaker 2: in the labor market, which makes it very easy for
• 19:04
  Speaker 2: employers to hold on to the employees they want to
• 19:07
  Speaker 2: very tough. If you are not currently employed to go
• 19:10
  Speaker 2: find a new job. And when you look at things
• 19:12
  Speaker 2: like the rate of people quitting their jobs or the
• 19:15
  Speaker 2: rate at which companies are hiring new employees, they're both
• 19:19
  Speaker 2: sitting at levels we haven't seen outside of two occasions
• 19:22
  Speaker 2: in the last twenty years. One was the pandemic, two
• 19:25
  Speaker 2: was the early twenty tens. So that's where we are
• 19:28
  Speaker 2: with the labor market. We'll have a full report tomorrow
• 19:31
  Speaker 2: on the state of jobs. Right now, we're gonna take
• 19:33
  Speaker 2: a break, and Wall Street Watch is coming up next.
• 19:41
  Speaker 1: Like us on Facebook and follow us on Twitter at
• 19:44
  Speaker 1: TFE show. Breaking business news is always first right here
• 19:48
  Speaker 1: on the Financial Exchange Radio Network till now for Woo
• 19:53
  Speaker 1: Street Watch, treking the stocks, the dato and the headlines
• 19:57
  Speaker 1: driving markets so far today right here on the f
• 20:00
  Speaker 1: the Natual Exchange Radio Network.
• 20:01
  Speaker 3: The markets are giving back gains from their recent rally
• 20:04
  Speaker 3: after President Trump escalated the conflict with Iran and an
• 20:07
  Speaker 3: address to the nation last night indicating over the next
• 20:10
  Speaker 3: two to three weeks i Ran would be hit extremely hard.
• 20:14
  Speaker 3: Oil surging higher as a result. Right now, the Dow
• 20:17
  Speaker 3: is down half a percent. SMP five hundred also down
• 20:20
  Speaker 3: about half a percent or twenty nine points, Nasdaq down
• 20:23
  Speaker 3: seven tenths of a percent or one hundred and fifty
• 20:26
  Speaker 3: four points, RUSS two thousands down eight tenths of a percent.
• 20:30
  Speaker 3: Ten Your Treas reeled down one basis point at four
• 20:32
  Speaker 3: point three zero three percent. In oil jumping ten percent
• 20:37
  Speaker 3: higher today trading at one hundred and ten dollars a barrel.
• 20:41
  Speaker 3: Oil stocks including x On Mobile, Chevron, Conico, Phillips, and
• 20:44
  Speaker 3: others are all up about one percent in reaction to
• 20:48
  Speaker 3: Trump speech. Travel sector also taking a hit. Delta Airlines,
• 20:52
  Speaker 3: United Airlines in Southwest are all pulling back anywhere between
• 20:55
  Speaker 3: three and five percent, while Royal Caribbean Incredible down about percent. Meanwhile,
• 21:01
  Speaker 3: Tesla reported about three hundred and fifty eight thousand vehicle
• 21:04
  Speaker 3: deliveries in the first quarter below street expectations, marking one
• 21:08
  Speaker 3: of its worst sales quarters in years. This is now
• 21:11
  Speaker 3: the second straight quarter that the ev maker has fallen
• 21:14
  Speaker 3: short of projections projections. Tesla stock is taking a hit
• 21:19
  Speaker 3: of about four percent. Sticking with auto with General Motors
• 21:22
  Speaker 3: said its first quarter sales fell nearly ten percent compared
• 21:26
  Speaker 3: to a year ago, citing high borrowing car costs, economic
• 21:30
  Speaker 3: uncertainty in vehicle prices. GM shares it down about four
• 21:34
  Speaker 3: percent in as a reminder, markets will be closed in
• 21:37
  Speaker 3: observance of Good Friday tomorrow. However, the March Jobs report
• 21:41
  Speaker 3: will still be released tomorrow morning at a thirty I'm
• 21:44
  Speaker 3: Tucker Silva and that is Wall Street Watch.
• 21:47
  Speaker 2: At the end of twenty twenty five, Blue Owl Capital,
• 21:51
  Speaker 2: which we've talked about on the program before, is a
• 21:54
  Speaker 2: private credit fund manager manage two vehicles which, using leverage
• 21:59
  Speaker 2: to amplify their returns and multiply their ability to invest.
• 22:03
  Speaker 2: Managed portfolio is worth more than forty two billion dollars.
• 22:06
  Speaker 2: That was the end of twenty twenty five, and that's
• 22:08
  Speaker 2: according to the Financial Times. Those two funds in the
• 22:11
  Speaker 2: most recent quarter faced redemptions that were the equivalent of
• 22:17
  Speaker 2: forty about forty one percent of one funds value and
• 22:21
  Speaker 2: about twenty two percent of another one. This requires a
• 22:25
  Speaker 2: bit of a one oh one, I think, Paul, because
• 22:27
  Speaker 2: for those who have never invested in private investments before,
• 22:30
  Speaker 2: they probably have no idea what any of that means.
• 22:32
  Speaker 4: So I was compare this to like a stock market.
• 22:35
  Speaker 2: A stock portfolio that somebody might have where if I
• 22:38
  Speaker 2: need money, it's not a question of whether I can
• 22:41
  Speaker 2: get it in most cases, rather it's a question of
• 22:44
  Speaker 2: what price I will get.
• 22:45
  Speaker 5: Yeah, let me just step back for a second and
• 22:47
  Speaker 5: try and sort of outline that point you were making
• 22:49
  Speaker 5: about using leverage to amplify the returns on a private
• 22:53
  Speaker 5: credit fund. So let's say you have one hundred million
• 22:56
  Speaker 5: dollars that you're willing to loan out to business. Let's
• 22:58
  Speaker 5: say you're gonna say, all right, we're gonna loan this
• 23:00
  Speaker 5: one hundred million dollars out of ten percent, So you
• 23:02
  Speaker 5: would collect ten million dollars of income a year on
• 23:05
  Speaker 5: that ten percent loan of the one hundred million that
• 23:07
  Speaker 5: you loaned out. What private credit does is they say
• 23:10
  Speaker 5: we're going to put in one hundred million, but we're
• 23:12
  Speaker 5: also going to borrow another one hundred million from somewhere
• 23:15
  Speaker 5: else to put in two hundred million combined in terms
• 23:18
  Speaker 5: of the pool a bank or something like that. So, hey,
• 23:21
  Speaker 5: instead of having one hundred million collecting our ten percent
• 23:25
  Speaker 5: just as a straight up loan, we're going to double
• 23:27
  Speaker 5: the size of it. We're gonna be put in two
• 23:28
  Speaker 5: hundred million bucks for one hundred million of the money
• 23:31
  Speaker 5: that we borrow, we're going to borrow that at six percent,
• 23:34
  Speaker 5: but we're still going to collect ten percent on the
• 23:36
  Speaker 5: one hundred million that we're lending out to everyone else.
• 23:38
  Speaker 5: So all of a sudden, you go from a one
• 23:40
  Speaker 5: hundred million dollar pool netting ten million dollars of income
• 23:44
  Speaker 5: to a two hundred million dollar pool netting what turns
• 23:47
  Speaker 5: out to be twenty million of income. But then you
• 23:49
  Speaker 5: have to pay six million of interest on the money
• 23:52
  Speaker 5: that you borrowed for your one hundred million, So you
• 23:54
  Speaker 5: net fourteen mili versus the ten mili in that prior example.
• 23:58
  Speaker 5: So your return on your one hundred million, instead of
• 24:01
  Speaker 5: being ten percent in that cut and dry example, becomes
• 24:04
  Speaker 5: fourteen percent because you're using the amplifier of leverage. The
• 24:09
  Speaker 5: problem becomes is when people want to get their money out.
• 24:14
  Speaker 5: So let's say that one hundred million dollars of equity
• 24:17
  Speaker 5: that has been put in by the fund. The problem
• 24:19
  Speaker 5: becomes when you want to withdraw money from that. You're
• 24:22
  Speaker 5: creating a cascading scale of forcing redemptions or selloffs of
• 24:29
  Speaker 5: loans or other securities that can lend to a very
• 24:34
  Speaker 5: stressful financial situation. For that lender. And typically what happens
• 24:38
  Speaker 5: in these markets is, unlike those public investors in the
• 24:42
  Speaker 5: stock market, that if I want to sell X on
• 24:44
  Speaker 5: Mobile today, you can get a market for that, there's
• 24:47
  Speaker 5: a bit an ask and you're able to sell relatively quickly.
• 24:50
  Speaker 5: With private credit. They limit the redemptions in those funds.
• 24:53
  Speaker 5: They're much more longer term nature. We're only five percent
• 24:56
  Speaker 5: of that one hundred million in this hypothetical example that
• 24:59
  Speaker 5: we're speaking can come out on a quarterly basis.
• 25:02
  Speaker 2: So I've never invested or know anybody who's invested in
• 25:06
  Speaker 2: these specific funds, so I'm not speaking from experience, but
• 25:08
  Speaker 2: generally speaking, the way that these work is once a quarter,
• 25:12
  Speaker 2: you're able to submit this redemption request to the firm
• 25:15
  Speaker 2: and you say, hey, I've got you know, I've got
• 25:18
  Speaker 2: this many shares and I want to redeem all of them.
• 25:21
  Speaker 2: And then the company will say, okay, well, for this
• 25:23
  Speaker 2: most recent quarter, we are only willing to in this
• 25:26
  Speaker 2: case redeem five percent of the shar's net asset value.
• 25:30
  Speaker 2: And so what they will typically do then is it's
• 25:32
  Speaker 2: not first come, first serve. They will get all of
• 25:34
  Speaker 2: those requests together and they'll say okay, we're doing five
• 25:38
  Speaker 2: percent of all of the you know what's equivalent to
• 25:40
  Speaker 2: five percent of all of these requests. So you get
• 25:42
  Speaker 2: a tiny portion each of your money out of these things.
• 25:45
  Speaker 2: And they do that because they're not liquid investments. They
• 25:48
  Speaker 2: are not investing an ex on mobile stock. They are
• 25:51
  Speaker 2: going out to small businesses of some sort or another
• 25:54
  Speaker 2: and making a loan to them. And while they may
• 25:57
  Speaker 2: be able to go to that small business and say, hey,
• 25:59
  Speaker 2: we're calling your lone, we want you to refinance it,
• 26:01
  Speaker 2: there's a lot of them that might not be able
• 26:03
  Speaker 2: to do so, or the terms of the loan may
• 26:05
  Speaker 2: not dictate that they're able to call that loan back
• 26:07
  Speaker 2: at that point in time. And so this is both
• 26:12
  Speaker 2: typical and atypical of these types of funds. What is
• 26:15
  Speaker 2: typical is limiting withdrawals, very typical. What's atypical is investors
• 26:20
  Speaker 2: of for instance, the Blue Owl Technology Income Corp.
• 26:23
  Speaker 4: Asking for forty asking for.
• 26:25
  Speaker 2: Forty percent of the firm's three billion dollar value. Right,
• 26:29
  Speaker 2: So if maybe you thought that with all the distraction
• 26:33
  Speaker 2: from the war in Iran, it was you know, taking
• 26:36
  Speaker 2: away from the focus on hey, what's going to happen
• 26:39
  Speaker 2: with AI and is it going to bankrupt a bunch
• 26:41
  Speaker 2: of software companies. My answer would be, Nope, that's not
• 26:44
  Speaker 2: what's happening. We are clearly still seeing a lot of
• 26:46
  Speaker 2: pressure on private credit funds and and we still don't
• 26:50
  Speaker 2: have a real good sense for what it all means
• 26:52
  Speaker 2: for the state of the market.
• 26:53
  Speaker 4: Yeah. I think that's the That's.
• 26:55
  Speaker 5: Always the biggest question that I come back to when
• 26:57
  Speaker 5: we cover these stories is should we care? Is this
• 27:00
  Speaker 5: an issue that is concerning Yes, we should, We should
• 27:02
  Speaker 5: monitor it. But typically these private credit exposures are are
• 27:06
  Speaker 5: more limited in nature. We're talking about some retail investors,
• 27:09
  Speaker 5: but not a huge swath of them. It's more institutions,
• 27:13
  Speaker 5: I think from a short term, short to intermediate term
• 27:16
  Speaker 5: from a lending capacity, you could see a lot of
• 27:19
  Speaker 5: banks and you've already seen JP Morgan and others really
• 27:22
  Speaker 5: scrutinize what are we really lending to these private credit
• 27:25
  Speaker 5: entities that are out there that that that funding could
• 27:28
  Speaker 5: really dry up.
• 27:29
  Speaker 2: It's always the focus on the banks, Yeah, right, it's
• 27:32
  Speaker 2: the focus remains on the banks to say what happens
• 27:36
  Speaker 2: if this all fails, Because, as you pointed out, many
• 27:39
  Speaker 2: of these private credit funds went to banks and said,
• 27:42
  Speaker 2: we want a loan. Here is our collateral, give us
• 27:45
  Speaker 2: one hundred million dollars so we can go make some riskier.
• 27:48
  Speaker 4: Loans that you are not allowed to make. It's a
• 27:52
  Speaker 4: kind of fun.
• 27:53
  Speaker 2: Way to get around a lot of the restrictions from
• 27:55
  Speaker 2: the Dodd Frank Act of no, we're not going to
• 27:56
  Speaker 2: go lend this money.
• 27:57
  Speaker 4: We're not lending this somebody else business that's going to
• 28:00
  Speaker 4: lend it out.
• 28:01
  Speaker 2: But by all accounts, it is a lot smaller than
• 28:04
  Speaker 2: what we're dealing with in mortgage backed securities, and by
• 28:07
  Speaker 2: all accounts, it's also what made that event so different
• 28:11
  Speaker 2: is the lending that dried up after the crisis was
• 28:17
  Speaker 2: two individuals. It made it so you, me and everybody
• 28:21
  Speaker 2: else really felt it. And that's not where this is
• 28:25
  Speaker 2: coming from. Like, if this all turns out to be
• 28:28
  Speaker 2: something similar, it was originated by a bunch of businesses
• 28:32
  Speaker 2: that took out irresponsible loans, not individuals. And so then therefore,
• 28:36
  Speaker 2: what happens to the liquidity for the average consumer, for
• 28:40
  Speaker 2: the average business if this all does end up blowing
• 28:43
  Speaker 2: up in our faces, which is not is not a
• 28:45
  Speaker 2: foregone conclusion.
• 28:46
  Speaker 5: To be clear, this isn't a situation where there is
• 28:50
  Speaker 5: you know, fraud or wrongdoing. Well, well, ok, trycolor Sorry
• 28:55
  Speaker 5: in Blue Owl's case, at least, well, I guess they
• 28:59
  Speaker 5: had I'm exposed to try colle Broadly speaking, there is
• 29:03
  Speaker 5: some cockroaches, as Jamie Diamond says, but it served a purpose,
• 29:06
  Speaker 5: you know, having this lending capacity did serve a purpose
• 29:10
  Speaker 5: of picking up for the fact that banks weren't lending
• 29:13
  Speaker 5: to these middle market businesses.
• 29:14
  Speaker 2: If we're going to continue to make the oaight comparison,
• 29:16
  Speaker 2: there is not a compelling evidence of mortgage brokers going
• 29:20
  Speaker 2: out there selling loans to people that they did not understand.
• 29:25
  Speaker 3: Uh.
• 29:25
  Speaker 2: For instance, you know, a thirty year mortgage with a
• 29:28
  Speaker 2: two year teaser rate that would suddenly balloon to payments
• 29:31
  Speaker 2: in year three that would absolutely crush you, and then
• 29:34
  Speaker 2: failing to verify any of the income of the individual,
• 29:37
  Speaker 2: right like that was what was happening in two thousand
• 29:39
  Speaker 2: and five. You could go get a million dollar loan
• 29:43
  Speaker 2: on twenty thousand dollars of income with a balloon payment
• 29:45
  Speaker 2: starting in five years. And by the way, you didn't
• 29:48
  Speaker 2: need to speak any English in order to sign on
• 29:50
  Speaker 2: the dotted line, so you had no idea what you
• 29:51
  Speaker 2: were getting that's I don't think that's the case with
• 29:54
  Speaker 2: companies that borrowed from private credit. What I think is
• 29:58
  Speaker 2: the case is there is a lot more possibility of
• 30:02
  Speaker 2: getting those loans, and it might have been loaned out
• 30:06
  Speaker 2: on the assumption of a false premise of, Hey, we
• 30:09
  Speaker 2: have a real business here that's going to grow in
• 30:12
  Speaker 2: the face of a new wave of technology around AI.
• 30:14
  Speaker 5: There was a ton of exuberance in the sector and
• 30:17
  Speaker 5: as a result, as happens with credit cycles, you kind
• 30:20
  Speaker 5: of overextend yourself to try and lend out more money,
• 30:23
  Speaker 5: and then you're left with some loans that, like you said,
• 30:27
  Speaker 5: aren't in the best of condition.
• 30:28
  Speaker 2: Let's take a quick break when we come back here
• 30:31
  Speaker 2: on the Financial Exchange, what the FED cares about is
• 30:34
  Speaker 2: what this war in Iran means for inflation and growth.
• 30:39
  Speaker 4: They've acknowledged that in j. Powell's speeches.
• 30:41
  Speaker 2: We're gonna be talking about the FED next on the
• 30:43
  Speaker 2: Financial Exchange.
• 30:45
  Speaker 1: Miss the show. You can find them on our YouTube page.
• 30:48
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• 30:51
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• 30:55
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• 30:59
  Speaker 1: Fast follow the Financial Exchange live on X so you
• 31:03
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• 31:25
  Speaker 2: In March of twenty twenty two, post the Russian invasion
• 31:31
  Speaker 2: of Ukraine, J Powell was fielding questions about the impact
• 31:34
  Speaker 2: on inflation, and among his many quotes that stuck with me,
• 31:38
  Speaker 2: this one just rings familiar to the moment.
• 31:42
  Speaker 4: This was from March third of.
• 31:43
  Speaker 2: Twenty twenty two quote it's way too early to know
• 31:47
  Speaker 2: how large the energy price shock would be, though it
• 31:50
  Speaker 2: was expected to boost inflation, and of course, over the
• 31:55
  Speaker 2: course of the next several months, Jay Powell was proven
• 31:59
  Speaker 2: just how wrong or how dramatic the impact would be
• 32:03
  Speaker 2: on inflation of the combined effects of COVID stimulus, shutdowns
• 32:10
  Speaker 2: of supply chains that continued for two years, and the
• 32:13
  Speaker 2: Russian invasion of Ukraine on not only the energy supply
• 32:17
  Speaker 2: but the food supply globally. I'll remind people like gas
• 32:21
  Speaker 2: prices got up to five five dollars ago during that
• 32:24
  Speaker 2: period of time. The inflation then shot up and we
• 32:29
  Speaker 2: hit a high you know, not seen since the nineteen
• 32:33
  Speaker 2: seventies in June of twenty twenty two of nine percent,
• 32:38
  Speaker 2: and so naturally, right now, all sorts of global leaders
• 32:43
  Speaker 2: are asking the same question of what is going to
• 32:45
  Speaker 2: be the risk to inflation this time around, and the
• 32:49
  Speaker 2: answer for the time being seems to be people more
• 32:51
  Speaker 2: focused on the growth impact than the inflation impact. And
• 32:55
  Speaker 2: I'll say that I do agree, at the risk of
• 32:59
  Speaker 2: repeating exactly what we did in twenty twenty two, I
• 33:03
  Speaker 2: tend to agree. But a big caveat there is it
• 33:07
  Speaker 2: depends on how governments react to all of this. So
• 33:12
  Speaker 2: simple example, and I'm way over simplifying things, but I
• 33:15
  Speaker 2: believe in the Philippines they have basically limited traffic on streets,
• 33:21
  Speaker 2: they have gone to a four day work week and
• 33:24
  Speaker 2: taken other measures to curb the demand for gasoline. In Australia,
• 33:30
  Speaker 2: they have dramatically cut the gas tax to make gasoline
• 33:35
  Speaker 2: more affordable. Those are two policy decisions aimed at the
• 33:39
  Speaker 2: same problem of we don't have enough gas at a
• 33:41
  Speaker 2: reasonable price to fuel our economy. One of them is stimulative,
• 33:45
  Speaker 2: the other one is not. The Philippines one is in
• 33:48
  Speaker 2: acknowledgement that they don't have the money to do that
• 33:50
  Speaker 2: sort of thing, and so they're instead trying to curb demand.
• 33:53
  Speaker 2: On the Australian policy, it will pay whatever price we
• 33:56
  Speaker 2: have to do for the gasoline, but we're not going
• 33:57
  Speaker 2: to tax you quite as much on it to make.
• 33:59
  Speaker 4: It more affordable.
• 34:00
  Speaker 2: And depending on average, which nations do what in that circumstance,
• 34:06
  Speaker 2: it's going to determine the path for inflation.
• 34:09
  Speaker 4: Right.
• 34:09
  Speaker 2: If more countries go the Australia route, then I would
• 34:13
  Speaker 2: expect a whole bunch of inflation. If Congress passes some
• 34:16
  Speaker 2: law to make things more affordable here in the US,
• 34:18
  Speaker 2: it temporarily or gives out stimulus again, then yeah, you
• 34:21
  Speaker 2: can most certainly expect inflation. But all else equal, we
• 34:25
  Speaker 2: are in a very different moment than we were in
• 34:27
  Speaker 2: twenty twenty two for a number of reasons. And for
• 34:30
  Speaker 2: that reason, I'm much more concerned about the recession possibility
• 34:32
  Speaker 2: from this event than I am about the nine percent
• 34:35
  Speaker 2: inflation possibility of this event.
• 34:37
  Speaker 5: The savings rate had swelled so significantly in twenty twenty
• 34:40
  Speaker 5: one that many Americans were incredibly flushed with cash heading
• 34:44
  Speaker 5: into that twenty twenty two period. We all recall the
• 34:46
  Speaker 5: investment that was made, whether because of what was previously
• 34:50
  Speaker 5: low interest rates on renovations and all sorts of other
• 34:52
  Speaker 5: types of expenditures. So when you had that combined with
• 34:56
  Speaker 5: the surgeon price and the demand still being there. That's
• 34:59
  Speaker 5: why you saw inflation persists for as long as it did.
• 35:03
  Speaker 5: We now look at a backdrop that is far different,
• 35:05
  Speaker 5: where the savings are far in the rear view mirror.
• 35:08
  Speaker 5: There is no real robust amount of savings here. And
• 35:11
  Speaker 5: in fact, you could probably make the argument a little
• 35:13
  Speaker 5: bit that you've seen credit card delinquencies and some payments
• 35:17
  Speaker 5: on loan delinquencies for vehicles also get in the arrears too,
• 35:21
  Speaker 5: So the consumers in a far different place. The labor
• 35:24
  Speaker 5: market is much softer, much softer. I wasn't gonna say
• 35:28
  Speaker 5: in a worse place, but it was in a tremendous
• 35:30
  Speaker 5: place in twenty one and twenty two. So it's different
• 35:32
  Speaker 5: dynamics and that's what we are looking at where inflation is.
• 35:36
  Speaker 5: I agree with you lesser concern. It's the economic slow
• 35:38
  Speaker 5: down that you're more concerned about.
• 35:40
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• 35:43
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• 35:47
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  Speaker 1: The proceeding was paid for and the views expressed are
• 36:43
  Speaker 1: solely those of Cushing and Dolan. Cushing and Dolan and
• 36:45
  Speaker 1: or Armstrong Advisory may contact you offering legal or investment services.
• 36:48
  Speaker 1: Cushing and Armstrong do not endorse each other and are
• 36:50
  Speaker 1: not affiliated.
• 36:51
  Speaker 2: A first of its kind law in the US appears
• 36:54
  Speaker 2: likely to pass in the state of Maine, where the
• 36:58
  Speaker 2: Democrat controlled House passed a bill on a floor vote
• 37:03
  Speaker 2: that collected some Republican support as well. The bill would
• 37:06
  Speaker 2: call for a ban on major new data center construction
• 37:09
  Speaker 2: until November of twenty twenty seven, so that the state
• 37:12
  Speaker 2: can assess the impact of the development on environmental and
• 37:15
  Speaker 2: electricity concerns that they have. As I mentioned, this would
• 37:18
  Speaker 2: be the first in the nation type of ban on
• 37:21
  Speaker 2: data center construction, and I think is an interesting indication
• 37:27
  Speaker 2: of the backlash against this type of construction in local communities.
• 37:33
  Speaker 4: Again, this isn't a local community law. This is a
• 37:35
  Speaker 4: state wide law.
• 37:36
  Speaker 2: But clearly we're seeing some of that backlash, and I
• 37:40
  Speaker 2: do wonder how many states are going to follow suit
• 37:42
  Speaker 2: here of maybe not banning it, but taking a pause
• 37:46
  Speaker 2: here and trying to better understand what the impact is
• 37:48
  Speaker 2: going to be on at citizens.
• 37:49
  Speaker 5: This law is definitely going to set a present because
• 37:51
  Speaker 5: you have states like New York and South Carolina, Oklahoma
• 37:54
  Speaker 5: and Ohio others that have sort of percolated around this
• 37:57
  Speaker 5: similar idea. I have mixed feelings about this, where on
• 38:00
  Speaker 5: one side you get it with the electricity concerns, but
• 38:03
  Speaker 5: on the other side, we need to develop these data
• 38:05
  Speaker 5: centers for AI. Yeah, contrastity with China, Yes, exactly, That's
• 38:09
  Speaker 5: exactly knt to mind. Yeah, there will be no vote
• 38:11
  Speaker 5: on data consenter construction.
• 38:13
  Speaker 4: There goes your home. You people move, We got to
• 38:16
  Speaker 4: take quick break.
• 38:16
  Speaker 2: Markets have dramatically rebounded by the eleven o'clock hour. We'll
• 38:19
  Speaker 2: have a full recap and more next on the Financial
• 38:22
  Speaker 2: Exchange