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What Is the Most Powerful Force Moving Markets Right Now? · The Financial Exchange Show

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1:03
Speaker 1: This is the Financial Exchange with Chuck Zada and Mark Vandetti.
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Speaker 2: Chuck Mark and Tucker with you, and early this morning,
1:20
Speaker 2: round eight am, the Israeli government indicated that they had
1:24
Speaker 2: attacked facilities in the South Pars gas field in the
1:29
Speaker 2: Persian Gulf. This is the largest gas field on the planet.
1:34
Speaker 2: Some estimates, in fact say that it may have more
1:36
Speaker 2: natural gas in it than every other gas field combined.
1:40
Speaker 2: And basically this is a shift in strategy for the
1:47
Speaker 2: Israeli Air Force in terms of potentially targeting upstream oil assets.
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Speaker 2: Iran fifteen minutes later indicated on confirmed that this facility
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Speaker 2: had been targeted, that they were shutting down some production
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Speaker 2: from it, and they also indicated a list of five
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Speaker 2: targets in Qatar, the UA I'm sorry, Katar, the UAE,
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Speaker 2: and Saudi Arabia that they were likely to target in
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Speaker 2: the near future and urged evacuations of civilians from those targets.
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Speaker 2: All five of those targets, by the way, are oil
2:18
Speaker 2: production facilities that have Western partners associated with them, either
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Speaker 2: an Exon Mobile or a Chevron or someone like that
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Speaker 2: who is a part of a joint venture in the region.
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Speaker 2: So on. This this has basically taken what looked to
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Speaker 2: be about a half percent rise in S and P
2:38
Speaker 2: five hundred futures and turned it into about a half
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Speaker 2: percent decline, so about a one percent intra day swing.
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Speaker 2: And Brent crude, which at the time was down about
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Speaker 2: four tenths of percent, now up about five and three
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Speaker 2: quarters percent following the move that we have seen here.
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Speaker 2: So we'll continue to watch things and see how they change,
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Speaker 2: but that is, you know, continuing to show that oil
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Speaker 2: is in the driver seat as far as what's going
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Speaker 2: on with equity markets in the short term. Taking a
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Speaker 2: look through other markets, we've got the Dow down three
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Speaker 2: hundred eighteen points, the NASDAK composite is off eighty six,
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Speaker 2: so again, anywhere from about a third of one percent
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Speaker 2: to two thirds of a percent moved down across your
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Speaker 2: major US Indicas ten year Treasury moving up two point
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Speaker 2: two basis points on combination of higher oil prices and
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Speaker 2: a hot producer price index rating for February that came
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Speaker 2: out at eight thirty am. The dollar is up another
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Speaker 2: point two eight percent to ninety nine point six, and
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Speaker 2: we've got gold falling significantly today, down one hundred and
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Speaker 2: thirty six point nine I'm sorry, one hundred and thirty
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Speaker 2: six dollars and ninety cents to forty eight hundred and
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Speaker 2: seventy two and eighty cents crude oil. We talked about
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Speaker 2: there is a divergence that's widening in the short term
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Speaker 2: here between West Texas Intermediate and Brent. Now a ten
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Speaker 2: dollars spread between the two of them, and that is
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Speaker 2: what is moving in markets today. Mark, you'll knows that
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Speaker 2: I didn't mention the fact that we've got a FED
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Speaker 2: meeting today at two pm. Talk to me about the
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Speaker 2: FED today. I have my theories. I'm interested in yours, though.
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Speaker 3: Well, it's probably.
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Speaker 2: Boy.
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Speaker 3: I can't think of a worse time, because all their
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Speaker 3: choices are bad choices to be a monetary policy maker.
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Speaker 3: We had inflation of roughly three percent last year using
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Speaker 3: the fed's choice measure. That's not bad if wages went
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Speaker 3: up by more than that, which they did, but it's
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Speaker 3: way above their two percent target, obviously, Sure, and we
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Speaker 3: talked throughout the disinflation that happened, the reduction and the
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Speaker 3: rate of inflation from roughly mid twenty twenty three on.
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Speaker 3: We talked a lot about well, do you need to
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Speaker 3: get inflation back down to two? Can you live with three?
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Speaker 3: Can you live with four, and we said, sure, you
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Speaker 3: can live with any rate once people start to incorporate
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Speaker 3: it into their expectations, wages and prices, just tojust no problem.
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Speaker 3: As it turns out, there is a little bit of
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Speaker 3: a problem with not getting it down to two. It's
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Speaker 3: that when you have a supply show.
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Speaker 2: And this is what we talked about all last year,
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Speaker 2: which is you don't want to bottom at three. You
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Speaker 2: can average three, but you don't like to bottom. Yeah.
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Speaker 3: I mean, we've done the same thing with monetary policy
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Speaker 3: as we've done with fiscal policy, which is not prepare
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Speaker 3: for the rainy day. We've run emergency size deficits, We've
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Speaker 3: run emergency size FED balance sheet, and we continued the expansion.
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Speaker 3: We resumed the expansion of that so called balance sheet
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Speaker 3: to keep longer term interest rates down even before this shock,
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Speaker 3: and we've given ourselves very little room to respond to
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Speaker 3: a shock. As a result, inflation expectations remain elevated. Now
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Speaker 3: I'm jumping around a little bit. Let me just summarize
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Speaker 3: by saying the Fed has a choice here. This is
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Speaker 3: a big shock. It's going to make its way into
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Speaker 3: all items inflation, so called headline inflation, and depending on
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Speaker 3: its duration, it will make its way into the trend
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Speaker 3: in inflation too. Can't do anything about events in the
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Speaker 3: Middle East, but the FED can decide how much trend
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Speaker 3: inflation will go up as a result of this, And
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Speaker 3: by that I mean they need to decide are we
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Speaker 3: going to accommodate this shock, Are we going to allow
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Speaker 3: expectations to rise and become self fulfilling, or are we
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Speaker 3: gonna nip it in the button. Nip it in the
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Speaker 3: bud may mean more than standing pat today, which everybody
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Speaker 3: thinks they're gonna do. It may mean actually pushing against
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Speaker 3: it with tighter monetary policy. Otherwise you run the risk
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Speaker 3: of inflation becoming embedded. It probably won't go as high
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Speaker 3: as it did in twenty twenty two because they were
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Speaker 3: both supply and demand factors at work there, but it
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Speaker 3: could get uncomfortably high again and become uncomfortably persistent, as
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Speaker 3: it has been for most of this decade. So this
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Speaker 3: is a very bad situation for the FED.
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Speaker 2: I want to touch on just what you said in
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Speaker 2: terms of you know what the Fed may or may
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Speaker 2: not do. So if you went back a month ago,
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Speaker 2: there was a ninety three point six percent chance the
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Speaker 2: Fed would do nothing. Today, there was a six point
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Speaker 2: four percent chance the Fed would cut by a quarter percent.
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Speaker 2: This according to the CME FED Watch tool that you
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Speaker 2: know shows current pricing on these things. Fast forward to today,
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Speaker 2: ninety eight point nine percent chance that the Fed maintains
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Speaker 2: its current interest rate posture. You do actually have a
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Speaker 2: one point one percent chance of a hike that is
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Speaker 2: priced in now and no chance of a cut here
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Speaker 2: now today isn't really what matters. What ultimately matters to
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Speaker 2: monetary policy, in my opinion, is the rate path, the
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Speaker 2: eventual you know, terminal rate be at you know, high
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Speaker 2: end or low end, and you know what's what's also
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Speaker 2: communicated about that along the way. What you have right
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Speaker 2: now is the market has basically taken cuts off the table, uh,
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Speaker 2: for the remainder of this year. You know, I'm looking
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Speaker 2: at the calendar this year and the market is pretty
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Speaker 2: much saying no, Like maybe you get a December one
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Speaker 2: that happens, but that is being priced in as a
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Speaker 2: coin flip.
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Speaker 3: Yeah, okay. The problem with that is that as inflation
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Speaker 3: goes up, real rates go down down, Yes, and real
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Speaker 3: rates going down is stimulative.
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Speaker 2: Now, now, you could make a case, here's the case
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Speaker 2: that I think the FED will make. I forget who
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Speaker 2: said this earlier this week, it's where I picked it
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Speaker 2: up from the Fed's going. If they want to, the
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Speaker 2: FED can make the case that an oil price shock
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Speaker 2: can act as effectively tighter monetary policy in terms of
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Speaker 2: restricting household you know, purchasing capacity otherwise and so by
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Speaker 2: virtue of doing nothing, the FED can balance that.
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Speaker 3: Now, the problem with that reasoning, and people advanced it
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Speaker 3: in the seventies, is that it neglects expectations, which was
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Speaker 3: that the key, the key observation to come out of
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Speaker 3: that seventies experience. If you let expectations run ahead, if
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Speaker 3: you let real rates get more negative, if you sort
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Speaker 3: of ignore that or try to look surpast it and
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Speaker 3: ignore the expectations component, you lose control of inflation, like
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Speaker 3: the FED did in the seven I mean, I hear you.
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Speaker 3: I use the term supply shock earlier. People throw it around,
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Speaker 3: but it technically means something that both lowers the GDP
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Speaker 3: growth rate and at and low and raises prices, so
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Speaker 3: it's doubly bad. A demand shock is kind of more fun.
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Speaker 3: It raises the growth rate, the real growth rate, growth growth,
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Speaker 3: real growth grows faster than prices. Supply shocks are really
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Speaker 3: really unpleasant.
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Speaker 2: Now, the anecdote that supports what you're saying is it
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Speaker 2: was either yesterday or Monday, I forget which one. The
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Speaker 2: Delta CEO was out talking about you know what they've
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Speaker 2: seen so far, and he said, look, what we are
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Speaker 2: seeing is a significant push on our cost structure. The
9:48
Speaker 2: amount that I've seen, I think I want to make
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Speaker 2: sure I get the numbers right on this in terms
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Speaker 2: of the time period. Here is again, I just want
9:59
Speaker 2: to make sure that I get it right. Let's see. Yep,
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Speaker 2: So Delta saying, look, we've already incurred additional four hundred
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Speaker 2: million dollars in fuel costs. Delta CEO says, we've pushed
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Speaker 2: through two separate price hikes on routes and we've received,
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Speaker 2: you know, no indication that we're getting meaningful pushback. That
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Speaker 2: to me, would be an example potentially of inflation expectations
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Speaker 2: being embedded, where consumercy prices go up for routes that
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Speaker 2: they've formed previously or for trips that they're looking at,
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Speaker 2: and they simply say, yeah, we have no problem accepting
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Speaker 2: that because the psychology is okay. The prices are going
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Speaker 2: to go up or the prices may get worse, and
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Speaker 2: so we're willing to pay the higher ones now to
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Speaker 2: lock that in. Yeah, that could be an exactly at
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Speaker 2: a micro level, that could be what seeing that.
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Speaker 3: So it's always hard to.
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Speaker 2: You can't untangle all the splen effics and.
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Speaker 3: Then aggregate these anecdotes. But that's yeah, that's one example
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Speaker 3: of how it can become embedded. We don't know if demand.
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Speaker 3: There are a couple factors at work, the supply shock,
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Speaker 3: this oil shock, and it is a really big one,
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Speaker 3: as you were pointing out in the earlier segment. It's
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Speaker 3: going to cloud everything for a while and it's going
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Speaker 3: to paralyze the FED. But the FED not acting does
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Speaker 3: not mean monetary policy is not changing. It is because
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Speaker 3: markets dictate monetary policy in between FED meetings. And the
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Speaker 3: worry here of students of inflation and researchers is that
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Speaker 3: the FED is going to make the same mistake it
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Speaker 3: did in the seventies, but for different reasons. Their tools
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Speaker 3: and are understanding of the economy is way more sophisticated now.
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Speaker 3: But thinking there's not much they can do in the
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Speaker 3: short term, so just do nothing. Let real rates come down.
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Speaker 3: The economy both overheats and at the same time is
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Speaker 3: dealing with the impact of this supply shock.
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Speaker 2: We got a piece in uh the Bloomberg. It's titled
14:04
Speaker 2: Investors are Wondering if stocks have seen the worst of
14:07
Speaker 2: the war and the answer is like, no one has
14:09
Speaker 2: any idea, so I don't have any unique insight as
14:13
Speaker 2: to like, yes, like the worst is over and know
14:16
Speaker 2: the worst is yet to come. I I don't know
14:18
Speaker 2: because things can change very quickly. And what I can
14:24
Speaker 2: tell you and I talked about this a little bit
14:25
Speaker 2: with Mike on on Monday morning, is Mark, were you
14:30
Speaker 2: listening to the show on Monday?
14:32
Speaker 1: No?
14:32
Speaker 3: I wasn't.
14:33
Speaker 2: Okay, I'm gonna ask the same question that I asked
14:35
Speaker 2: Mike on Monday. What has been the I don't know?
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Speaker 2: Thank you, Michael. What has been the single most powerful
14:43
Speaker 2: force in markets in the past fourteen months?
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Speaker 3: Are you asking like which sector is pushed?
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Speaker 2: No, I'm asking you what has been the single story?
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Speaker 3: When you say force, what has.
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Speaker 2: Been the most like the most powerful thing that can
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Speaker 2: move markets?
14:58
Speaker 3: Inst prospect of FED rapcuts seems to be the dominant narrative.
15:03
Speaker 3: But that's that's that's a qualitative answer. There's a there's
15:08
Speaker 3: a quantitative answer.
15:09
Speaker 2: Tucker, Do you have a wrong buzzer that you can
15:11
Speaker 2: play for me?
15:12
Speaker 1: Not ready?
15:13
Speaker 2: But do you do you have one? Like we can
15:17
Speaker 2: kind of build up to it.
15:19
Speaker 3: Okay, Well, well, AI AI enthusiasm, I mean, we've a
15:23
Speaker 3: qualitative here.
15:24
Speaker 2: Still wrong? Oh do you want to go three for three?
15:26
Speaker 3: Yeah? Probably?
15:27
Speaker 2: What almost always do powerful force in markets for the
15:32
Speaker 2: last fourteen months?
15:33
Speaker 3: Is it something vague like optimism?
15:35
Speaker 1: No?
15:36
Speaker 3: Okay, God, excuse me, well we were going Homer Simpson.
15:42
Speaker 2: Now no, I can I just feel like an ant?
15:46
Speaker 2: Like they don't have it? You don't, don't. You don't
15:48
Speaker 2: have one of those you got Homer Simpson going dope,
15:51
Speaker 2: But you don't have an ant in any case, I'm
15:57
Speaker 2: gonna I don't. Are you still working on her? Should
15:59
Speaker 2: I just go do something else? Okay? Play that one?
16:05
Speaker 2: There we go, that'll work. Okay. No, the single most
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Speaker 2: powerful force in markets over the past fourteen months is
16:12
Speaker 2: President Trump, and specifically, when we talk about in any
16:16
Speaker 2: short timeframe, markets, in my opinion, have learned a response that, hey,
16:22
Speaker 2: if you get too nervous about things when they look dodgy,
16:25
Speaker 2: you miss out on a whole bunch of upside like
16:27
Speaker 2: This was the response all through twenty twenty five, and
16:32
Speaker 2: I part of me wonders if it is just embedded
16:35
Speaker 2: into this market right now in that Hey, if you
16:40
Speaker 2: bail out when you get nervous, you're going to miss
16:43
Speaker 2: that upside. Think about how quickly markets tried to rally
16:45
Speaker 2: last Tuesday when the Energy Secretary mistakenly announced that the
16:50
Speaker 2: US had escorted a ship through the Strait of Horror
16:53
Speaker 2: moves like markets are just desperate for that sense of oh,
16:56
Speaker 2: like this is resolved. And part of me wonders if
17:01
Speaker 2: the last fourteen months, because of what's kind of been
17:05
Speaker 2: built there like that Pavlovian response of oh, things got bad,
17:08
Speaker 2: I should buy the dip because it'll be you know,
17:09
Speaker 2: resolved quickly. Part of me wonders if, like the the
17:14
Speaker 2: market psychology is just kind of broken because of that.
17:17
Speaker 3: There's this feedback between the people in the administration who
17:21
Speaker 3: are like career TV people and internet posters and podcast
17:25
Speaker 3: hosters and the short term traders who look for things
17:31
Speaker 3: like sound bites.
17:33
Speaker 2: It's I guess it's just the question of look, anything
17:36
Speaker 2: that broke last year in markets the Trump administration could fix.
17:41
Speaker 3: Well, first, first, get broke it.
17:44
Speaker 2: They were able tariff's tarffs broke it. Just just hear
17:46
Speaker 2: me out for a second, Hey, the market doesn't like
17:48
Speaker 2: our tariff, our tarff policy, great, We're gonna punt a
17:52
Speaker 2: change it, revise it. That's what I mean, Hey, you
17:55
Speaker 2: know we've got you know this, go hey, we just
17:57
Speaker 2: you know, signed this deal with ex country. Here's this
18:02
Speaker 2: and hold on.
18:02
Speaker 3: You don't think markets would have gone up as much
18:04
Speaker 3: if all this hadn't taken place, though the rest of
18:06
Speaker 3: the world was up thirty percent in dollar terms?
18:08
Speaker 2: From what what are we talking about?
18:09
Speaker 3: Markets would have rallied harder and more consistently without all
18:13
Speaker 3: the policy chaos. I assume I'm not making an argument
18:16
Speaker 3: on that. I'm saying the results would have been the same,
18:19
Speaker 3: or no.
18:19
Speaker 2: I'm not making any Mark. You need to listen to
18:21
Speaker 2: what I'm saying. Yeah, Mark, Okay. What I'm saying specifically
18:25
Speaker 2: is anytime the market needed to pick me up, the
18:28
Speaker 2: Trump administration was able to give it to them. That's
18:31
Speaker 2: all I'm saying. Yeah, And so I wonder if I'm
18:35
Speaker 2: not talking about what may have been like forget about hypotheticals.
18:38
Speaker 2: I'm talking about what was anytime markets came under threat,
18:42
Speaker 2: here you go, here's here's a cookie, go up.
18:44
Speaker 3: The rest of the world was going on, there was
18:46
Speaker 3: this trend.
18:48
Speaker 2: Mark, I'm not talking about that.
18:51
Speaker 3: All we had to do was hold the heliums market.
18:54
Speaker 3: Everybody else well, you haven't listened to me either, though.
18:57
Speaker 3: All I'm saying is that there was this powerful trend,
18:59
Speaker 3: and there was a force throwing us off the powerful
19:02
Speaker 3: world trend line. Yes, and all that force had to
19:04
Speaker 3: do was stop fussing with things.
19:07
Speaker 2: But my point is every time that they needed to,
19:08
Speaker 2: they did stop fussing with things because they and let
19:12
Speaker 2: the market go from there, just let it do its thing.
19:14
Speaker 2: In this case, it is fundamentally different for a couple
19:18
Speaker 2: of reasons, the first being that there is actually another
19:21
Speaker 2: side that's already been acted on that can have some
19:23
Speaker 2: say in what plays out. The second being there's no
19:25
Speaker 2: way that you can get the market to print commodities.
19:27
Speaker 2: Actually you can't actually do that. Take a quick break.
19:31
Speaker 2: When we come back, We've got the Trivia Answer and
19:33
Speaker 2: Wall Street Watch after.
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19:59
Speaker 1: on the Financial Exchange Radio Network.
20:02
Speaker 4: Markets are pulling back as oil prices are climbing higher
20:05
Speaker 4: after Iranian state media reported explosions in the world's largest
20:09
Speaker 4: gas field investor is also awaiting the conclusion to the
20:12
Speaker 4: FEDS meeting this afternoon, where interest rates are expected to
20:16
Speaker 4: remain steady. Right now, the Dow is now nearly nine
20:18
Speaker 4: tenths of one percent, or four hundred points lower, SMP
20:21
Speaker 4: five hundred, off about a half a percent, NASDAK also
20:25
Speaker 4: off about a half a percent or one hundred points lower.
20:28
Speaker 4: RUSS two thousands down three quarters of a percent. Tenure
20:30
Speaker 4: Treasure reeled is up two basis points at four point
20:33
Speaker 4: two to eight percent, and crude oil up three percent
20:37
Speaker 4: higher today trading at ninety nine dollars a barrel. Macy's
20:41
Speaker 4: shares are up over four percent after the department store
20:44
Speaker 4: chain said its sales were unexpectedly lifted by its Bloomingdale's brand,
20:48
Speaker 4: where it saw a surprise one point eight percent rise
20:51
Speaker 4: in same store sales in the holiday quarter. Sticking with retail,
20:55
Speaker 4: where Lulu Lemon posted a decline in profit after it
20:58
Speaker 4: sold more products at a disc count. However, shares are
21:01
Speaker 4: rising over three percent on the day. Meanwhile, Bloomberg reported
21:05
Speaker 4: that Unilever is considering a separation of its food assets
21:08
Speaker 4: to focus on beauty, personal care, and well being brands.
21:11
Speaker 4: Unilever stock is down by three percent, and chipmaker Micron
21:15
Speaker 4: Technology will post their earnings after today's closing bell. I'm
21:21
Speaker 4: Tucker Silva and that is Wall Street Watch. On the
21:23
Speaker 4: previous segment, we asked you the trivia question, how many
21:26
Speaker 4: months were Sonny Williams and Butch Wilmore stranded in space?
21:31
Speaker 4: It'll be nine months. Who is our winner today? I
21:35
Speaker 4: wrote it down. I wrote down the town was in Orleans, Ah.
21:39
Speaker 4: Susan Susan, Orleans, Mass is our winner today taking on
21:42
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21:45
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21:49
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21:53
Speaker 2: So there's a piece in the Wall Street Journal, I'm sorry,
21:55
Speaker 2: I know the New York Times. It's titled why this
21:58
Speaker 2: jump in gas prices feel different? And this basically where
22:04
Speaker 2: we are here is whether you're looking at twenty day
22:07
Speaker 2: change or four week change. The change in gas prices
22:11
Speaker 2: that we've seen is now the largest in a short
22:14
Speaker 2: period of time since Hurricane Katrina, which was still a
22:18
Speaker 2: little bit bigger than this. But that's the magnitude that
22:23
Speaker 2: you're talking about here. If you're looking at the largest
22:26
Speaker 2: twenty day change, it's, you know, around a twenty seven
22:29
Speaker 2: percent move that we've seen there. The four week change
22:32
Speaker 2: is just a touch higher than that. And a couple
22:36
Speaker 2: things on this. The big thing is, look, this has
22:38
Speaker 2: happened in a very short period of time. Even back
22:40
Speaker 2: in twenty twenty two, when gas prices went to all
22:43
Speaker 2: time highs, the twenty day change that we saw was
22:46
Speaker 2: only around a twenty three percent move, and the four
22:49
Speaker 2: week change was a twenty four percent move. But you
22:52
Speaker 2: were also starting with gas prices higher to begin with,
22:55
Speaker 2: and then that rise continued a little longer, and so
22:58
Speaker 2: that's what ended up getting you north of five dollars
23:00
Speaker 2: a gallon for the first time ever. So a few
23:04
Speaker 2: different things on this. The first is that I think
23:11
Speaker 2: that when we look at this in the context of
23:13
Speaker 2: the US economy, one of the things that I will
23:15
Speaker 2: point out is the impact of arising gas prices on
23:19
Speaker 2: the US economy is smaller than it's ever been for
23:21
Speaker 2: two reasons. The first is that when you look at
23:25
Speaker 2: overall any type of fuel as a percentage of household budgets,
23:30
Speaker 2: it's declined from around six percent of household budgets in
23:33
Speaker 2: the late seventies to around two percent today. The two
23:36
Speaker 2: culprits on this are Number one, fuel efficiency, where the
23:42
Speaker 2: average miles per gallon of a vehicle in nineteen seventy
23:45
Speaker 2: five was around thirteen miles a gallon. Today, even looking
23:49
Speaker 2: at cars and trucks combined, you're somewhere in the high
23:51
Speaker 2: twenties and so like, literally our vehicles are twice as
23:55
Speaker 2: fuel efficient, so you don't need as much gas. The
23:58
Speaker 2: other piece is when you look at the shift from
24:02
Speaker 2: rural concentrations to not rural concentrations, but the shift in
24:07
Speaker 2: where people live. You've largely seen a move that has
24:12
Speaker 2: been away from more rural communities and towards ones that
24:16
Speaker 2: have additional mass transit. And so there's a different percentage
24:18
Speaker 2: of people that are not necessarily driving on a daily basis,
24:23
Speaker 2: they might have other means of transportation relative to what
24:27
Speaker 2: it used to be. So that's kind of, you know,
24:29
Speaker 2: been one piece. The other is, hey, we produce a
24:32
Speaker 2: lot more oil and gas in natural gas than we
24:34
Speaker 2: used to, and so that means that even though for
24:38
Speaker 2: you know, where our show is based in the Northeast, yeah,
24:41
Speaker 2: high gas prices, we get just the bad side of things.
24:43
Speaker 2: If you're in Texas, you get you know, far more
24:46
Speaker 2: of the good in terms of, hey, you know all
24:48
Speaker 2: those you know, anyone working in the oil or energy
24:51
Speaker 2: sector has you know, more money to spend and so
24:54
Speaker 2: on and so forth, and so that offset some of
24:57
Speaker 2: things in there. Some communities that you know are kind
24:59
Speaker 2: of between. So overall, I do think that when we
25:04
Speaker 2: look at the impact of gas prices on the US economy,
25:08
Speaker 2: it's smaller than it ever has been. This is a
25:12
Speaker 2: much more rapid move in gas prices, and by the way,
25:15
Speaker 2: it's not over. If you look at where short term
25:17
Speaker 2: gasoline futures are pricing things triple A national average right
25:21
Speaker 2: now sits a three eighty four and two tenths of ascent.
25:24
Speaker 2: That's up five cents overnight. We're probably heading for the
25:27
Speaker 2: four h five to four fifteen range by the middle
25:30
Speaker 2: of next week. So that's where the national average will
25:34
Speaker 2: be if this conflict continues for an extended period of time,
25:38
Speaker 2: and I would define extended, you know, in the context
25:42
Speaker 2: of this, if we're still sitting here again in early
25:46
Speaker 2: May and this is still going on, you have a
25:49
Speaker 2: legit chance that gas prices are somewhere in that five
25:51
Speaker 2: fifty to six dollars a gallon range. I don't know
25:55
Speaker 2: that you know, we're actually going to get there. This
25:57
Speaker 2: could be over sooner, but I'm just putting it out there.
26:00
Speaker 2: If this is over in the next week or two,
26:03
Speaker 2: I think there is a path where gas prices can
26:05
Speaker 2: get back into the mid threes in the next six
26:10
Speaker 2: to nine months. But we're not heading back below three
26:13
Speaker 2: dollars a gallon anytime soon, simply because of the already
26:16
Speaker 2: existing supply disruption and the fact that you've had a
26:21
Speaker 2: bunch of production that's had to come offline and that's
26:23
Speaker 2: not just going to spool back up due to a
26:25
Speaker 2: number of different factors. So I think that when we
26:29
Speaker 2: look at this, there are paths where the price of
26:32
Speaker 2: gas can start to move down, you know, in the
26:35
Speaker 2: next month or two, but they require a complete cessation
26:38
Speaker 2: two hostilities in order to get there, and that's going
26:42
Speaker 2: to have to be something that you see in order
26:44
Speaker 2: to be convinced that gas prices are going to move
26:47
Speaker 2: down over any extended period of time.
26:49
Speaker 1: Here.
26:50
Speaker 3: Yes, it's tough applying the response of consumers and producers
26:56
Speaker 3: in past episodes to the current episode because the structure
26:59
Speaker 3: of the changed. Yeah, yeah, the economy evolves. As you
27:04
Speaker 3: pointed out, we do know that consumers consume about four
27:10
Speaker 3: hundred million barrels of gallons excuse me of gasoline a day.
27:14
Speaker 3: You can get that from the EIA. And I'm rounding
27:16
Speaker 3: up a little bit. So you know, a seventy five
27:21
Speaker 3: cent per gallon increase is a three hundred million dollar
27:24
Speaker 3: a day tax increase just back of the envelope. But
27:28
Speaker 3: as you point out, there are people who benefit from
27:29
Speaker 3: this too, that's not disputed. The question is how much
27:33
Speaker 3: out of an incremental dollar of income or do they
27:35
Speaker 3: spend versus everybody else?
27:38
Speaker 2: And also what remember when we talk about the people
27:41
Speaker 2: who benefit from this, those extra dollars have to pass
27:44
Speaker 2: through in some way. If Exon Mobile simply takes extra
27:49
Speaker 2: profits and says, okay, we're going to reinvest this in
27:52
Speaker 2: our business in Guyana or somewhere like that, it doesn't
27:56
Speaker 2: necessarily come back to their employees. If it's no, we
28:00
Speaker 2: can afford to pay you more, we need to do
28:01
Speaker 2: more work and so the demand is there, or hey,
28:04
Speaker 2: exce On Mobile shareholders, here's a bigger dividend that comes out,
28:07
Speaker 2: and that money can get into the US economy. Then
28:10
Speaker 2: then there's a clearer path there.
28:12
Speaker 3: Yeah, that's why you have to be specific and say
28:14
Speaker 3: how much will they spend out of every additional dollar,
28:16
Speaker 3: because as you point out, there are lots of other possibilities.
28:21
Speaker 3: The guy that did has done the most work on this,
28:23
Speaker 3: Jim Hamilton at you see San Diego. He wrote the
28:26
Speaker 3: seminal paper on this subject in nineteen eighty three and
28:29
Speaker 3: he's updated it since.
28:32
Speaker 2: What's his name, Jim James Hamilton.
28:34
Speaker 3: He's a famous econometrician, which is a fancy way of
28:38
Speaker 3: saying he works with data and tries to make inferences.
28:41
Speaker 2: He's a great nerd.
28:42
Speaker 3: Yeah he is.
28:42
Speaker 2: He's an awesome yeah, yeah, yeah.
28:44
Speaker 3: He is very useful in situations like this. You know,
28:48
Speaker 3: it's his view for what this is worth. And he's
28:52
Speaker 3: the guy who pointed out that when he wrote his
28:53
Speaker 3: initial paper, every recession there were nine of them at
28:56
Speaker 3: this point prior to nineteen eighty three, has been followed
28:58
Speaker 3: by a big run up in the price of oil.
29:00
Speaker 3: That hasn't always been that. There have only been a
29:01
Speaker 3: few since then, and two of the three since then
29:04
Speaker 3: the run up in the price of oil has coincided
29:06
Speaker 3: with the beginning of recession. They don't always cause each other.
29:09
Speaker 3: You know, the economy's hot before a recession by definition,
29:12
Speaker 3: because it peaks at a recession and then gets slower.
29:14
Speaker 3: The growth rate gets slower, but it certainly doesn't help.
29:17
Speaker 3: So it's his opinion for what it is worth. And
29:19
Speaker 3: this is sort of the last really smart person I
29:21
Speaker 3: read on this, so it's something I'm just regurgitating. This
29:25
Speaker 3: goes on in another couple of weeks, it's going to
29:26
Speaker 3: be a serious drag on GDP, and it's hard to
29:30
Speaker 3: see how it couldn't be.
29:32
Speaker 2: And worldwide, you're talking about a very different impact than
29:35
Speaker 2: the US. Like you're at the point where, quite honestly,
29:39
Speaker 2: it would be surprising to me if a lot of
29:40
Speaker 2: Southeast Asia is not in recession by the end of
29:43
Speaker 2: this year based on what we've seen already. I mean,
29:46
Speaker 2: like you go through just what some of these countries
29:48
Speaker 2: are putting in place, and again I should, I really
29:52
Speaker 2: should keep this list handy. There's one that has now
29:54
Speaker 2: moved to you. Remember back in the seventies the US
29:57
Speaker 2: went to the odd and even plates for filling up
30:01
Speaker 2: on any given day. Vague. Yeah, even before my time,
30:04
Speaker 2: I know, But like you, I've heard of this yes, uh,
30:07
Speaker 2: I forget which country it is in Southeast Asia they've
30:10
Speaker 2: gone to. Now you can only drive on the roads
30:13
Speaker 2: on these days based on odd and even plates. You
30:16
Speaker 2: have other ones that have said, hey, stop wearing long
30:20
Speaker 2: sleeves so that we don't have to air condition to
30:22
Speaker 2: play like indoor. You know as much there's countries that
30:26
Speaker 2: are saying stop taking elevators, take the stairs because we
30:29
Speaker 2: don't want to run the electricity for the elevators. Like
30:32
Speaker 2: this is the level of panic that they're at in
30:34
Speaker 2: Southeast Asia because they don't have the supplies to be
30:38
Speaker 2: able to handle this. So in the US, prices go up.
30:42
Speaker 2: In Southeast Asia, you're gonna see shortages like that is
30:45
Speaker 2: where we are heading at this point. So let's take
30:50
Speaker 2: a quick break. When we come back, we'll do a
30:53
Speaker 2: little bit of stack Roulette WI also talk. I do
30:55
Speaker 2: want to touch on private credit right after this as well.
30:58
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31:01
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31:21
Speaker 4: The Moneymatters mailbag debuts on the Financial Exchange tomorrow. It's
31:25
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31:27
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31:30
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31:53
Speaker 2: Bill Dudley is the former uh president of the Federal
31:57
Speaker 2: Reserve Bank of New York. He's got a piece in
31:58
Speaker 2: Bloomberg today. Private credit is bad, but not two thousand
32:01
Speaker 2: and eight bad, And I think that's probably right, not
32:06
Speaker 2: for the reasons that Bill mentions. Necessarily, you know, Bill
32:10
Speaker 2: talks about like, oh, like the funding mechanisms are different,
32:13
Speaker 2: and you know, the blah blah blah. Quite honestly, the
32:16
Speaker 2: biggest reason why private credit probably is in a two
32:19
Speaker 2: thousand and eight situation is that the market's not as
32:22
Speaker 2: big as the mortgage market was then, and it's tough
32:24
Speaker 2: for something that's smaller to have the same size impact,
32:27
Speaker 2: you need to have more that goes wrong. There still
32:29
Speaker 2: is a wide gulf between a two thousand and eight
32:32
Speaker 2: size impact and something that can cause problems in the
32:35
Speaker 2: broader economy. But I don't think we're heading for a
32:40
Speaker 2: two thousand and eight situation where the broader you know,
32:42
Speaker 2: financial plumbing locks up because no one wants to lend
32:46
Speaker 2: to anyone, and you know banks are going you know,
32:48
Speaker 2: down left and right. But I still think that there
32:51
Speaker 2: could be some problems related to private credit. It's just
32:54
Speaker 2: not a two thousand and eight situation. I think that
32:56
Speaker 2: that's a fair assessment for you know, different reasons.
32:58
Speaker 3: Yeah, I don't think this is gonna approximately. That's important.
33:02
Speaker 3: We don't know the channels that there are risk in
33:04
Speaker 3: these that these quakes are going to take. If there is,
33:08
Speaker 3: you know, we might know the epicenter, but you don't
33:10
Speaker 3: know how it's all going to shake out. Banks are
33:13
Speaker 3: not as exposed to this asset class, very little to
33:17
Speaker 3: no exposure that I'm aware of, relative to their exposure
33:20
Speaker 3: to mortgage. You so that the the problem in mortgage
33:24
Speaker 3: is threatened to take down the lifeblood of the finance
33:27
Speaker 3: or the banking thank you. Yeah, I should say, the
33:29
Speaker 3: banking system. There's that. Yeah, I've I I think I
33:35
Speaker 3: had another parallel in mind, but I'm not sure it's
33:38
Speaker 3: app so yeah, that that to me is what makes
33:40
Speaker 3: this different. But again, you don't know, you can't trace
33:43
Speaker 3: that you after a crisis, the channels are obvious. Why
33:46
Speaker 3: didn't we see that structural flaw that when this part
33:50
Speaker 3: of the structure responded this way, it would poort more
33:53
Speaker 3: force on that part of the structure. That part of
33:55
Speaker 3: the structure is not rated for that much force. And yeah,
33:58
Speaker 3: I'm using like a corny engineering analogy, but you get it.
34:00
Speaker 2: Yeah, it's always.
34:01
Speaker 3: Hard to see that beforehand. But it's it's not obvious
34:04
Speaker 3: to me, given who owns private credit and how diverse
34:07
Speaker 3: an asset class it is, that it could be the
34:09
Speaker 3: epicenter of some cataclysm like mortgages were in a eight.
34:12
Speaker 3: But I don't want to. I don't want that played
34:13
Speaker 3: back in a year if it does happen, and sound stupid,
34:15
Speaker 3: I'll qualify that with nobody really knows, Like Dudley says, sure.
34:18
Speaker 2: And I do think an interesting one that I saw
34:21
Speaker 2: this morning, and I hadn't thought of this, but I'm
34:23
Speaker 2: trying to find the exact quote on it, just because
34:27
Speaker 2: it's one that I had not come across, just kind
34:31
Speaker 2: of in terms of, you know, thinking about it. But
34:34
Speaker 2: someone mentioned, hey, isn't kind of an interesting comparison? You know,
34:40
Speaker 2: we're always trying to find like historical comps to where
34:42
Speaker 2: we are right now, And one of the ones that
34:45
Speaker 2: I finally saw brought up that I'm like, oh, that
34:47
Speaker 2: kind of that that could hit is nineteen ninety. Nineteen ninety,
34:51
Speaker 2: you had payrolls that were slowing down already coming out
34:53
Speaker 2: of the eighties. Then you add a surgeon oil prices
34:56
Speaker 2: with Gulf Wour one, and you also had a real
35:01
Speaker 2: estate cycle, a commercial real estate cycle that was kind
35:04
Speaker 2: of getting funky as well. And it's very possible that
35:08
Speaker 2: that could be similar to what we end up with,
35:10
Speaker 2: you know how twenty twenty six looks. So again, there's
35:14
Speaker 2: all kinds of different shapes that this can take. But
35:17
Speaker 2: I'm surprised that I hadn't like thought of, oh, like
35:19
Speaker 2: nineteen ninety, Like, why isn't that, you know, a valid
35:22
Speaker 2: comp It could be an interesting one to consider.
35:25
Speaker 3: Yeah, that recession was dated by the NBER, the arbiters
35:29
Speaker 3: of these things to July Saddam invaded Kuwait in August,
35:35
Speaker 3: so the recession was already already. We know that it
35:38
Speaker 3: wasn't called and we didn't know in the summer of
35:40
Speaker 3: ninety that the economy was in recession. That was called
35:43
Speaker 3: later because you never know when you're in it, other
35:45
Speaker 3: than self imposed ones like say twenty twenty.
35:48
Speaker 2: Yeah, what else you got for me? Mark anything?
35:50
Speaker 3: The cost of the did you see the story that
35:52
Speaker 3: Tucker pulled it? Cost of the AI boom? A trade
35:54
Speaker 3: deficit the President de tests. I want to make the
35:57
Speaker 3: simple point that more investment is good because it makes
36:00
Speaker 3: up for our deficient savings. We're a tremendous investment opportunity
36:05
Speaker 3: to the United States. Is we suck in a lot
36:07
Speaker 3: of capital. The unavoidable flip side of that is a
36:10
Speaker 3: trade deficit that capital. One way to think about it
36:12
Speaker 3: is the dollars we send abroad to buy a Sony
36:15
Speaker 3: get recirculated by Sony into either dollars in bank accounts
36:19
Speaker 3: where they could just hold them, or more likely into
36:21
Speaker 3: US investments.
36:22
Speaker 2: Which I mean the can't again. It can be either.
36:25
Speaker 2: Remember when we talk about US investments, it could be
36:28
Speaker 2: building a factory, it could be buying farmland. It could
36:31
Speaker 2: be buying US stocks, it could be buying US bonds.
36:35
Speaker 2: Any of those qualify as the investment.
36:37
Speaker 3: Think about when they buy when a foreign entity buys bonds,
36:40
Speaker 3: it helps keep our interest rates slower. That's one of
36:42
Speaker 3: the reasons why having the world reserve currency people needing
36:44
Speaker 3: to hold dollars or things that are very close to dollars,
36:47
Speaker 3: keeps cost of financing in the United States low. So
36:50
Speaker 3: you can't have a foreign financed investment boom without a
36:53
Speaker 3: big trade deficit. And that is a good way of
36:57
Speaker 3: making the point that a trade deficit is not inherently bad,
36:59
Speaker 3: nor is it an error good. But it's not inherently bad.
37:02
Speaker 2: They can be bad in some situations. It depends on
37:05
Speaker 2: mediums of exchange, like underlying you know where the imbalance
37:09
Speaker 2: isn't things like that. There are reasons why, like again,
37:13
Speaker 2: things that you get nervous about. Hey, if we are
37:16
Speaker 2: an island nation and have to import all of our
37:19
Speaker 2: energy and you know, all of a sudden, you know,
37:22
Speaker 2: that's got a structural deficit that we're dealing with there
37:24
Speaker 2: to begin with, and then you have higher energy prices,
37:26
Speaker 2: what does that due to the overall economy there's some
37:29
Speaker 2: real problems there in terms of then trying to balance
37:31
Speaker 2: that trade deficit with what's going on in the capital
37:35
Speaker 2: side of things, like you run into issues there. But again,
37:39
Speaker 2: trade deficits are not inherently good or bad. It's kind
37:42
Speaker 2: of like anything else, Like movies are not inherently good
37:45
Speaker 2: or bad. Some of them can be good, some of
37:48
Speaker 2: them can be bad, and there are reasons why, like
37:50
Speaker 2: you might choose not to go to a certain ones.
37:51
Speaker 3: Someday a politician is gonna come along and say, I
37:54
Speaker 3: hope the trade deficit explodes. That means we're a wonderful
37:57
Speaker 3: investment opportunity for now. It's your point or some weaknesses
38:00
Speaker 3: to that argument. But what's wrong with foreigner is wanting
38:03
Speaker 3: to buy our treasure, treasure bonds, et cetera.
38:05
Speaker 2: And the other part that we do get at with
38:07
Speaker 2: that is that investment is not often received anywhere near
38:12
Speaker 2: equally amongst US citizens then, and that has repercussion socialism.
38:16
Speaker 3: That's something we neglected.
38:17
Speaker 2: Yeah, quick break for the entire rest of the day,
38:19
Speaker 2: but we'll be back tomorrow.