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Private credit has some ugly cracks in the foundation · The Financial Exchange Show

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Speaker 2: Good morning, Welcome back to the Financial Exchange. Top story
1:12
Speaker 2: of our day today continues to be the market sell
1:15
Speaker 2: off that we've been witnessing for the last five days
1:18
Speaker 2: or so. NASDAK currently off two percent, four intred and
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Speaker 2: fifty points SMP down one point four percent off also
1:25
Speaker 2: off one point four percent. Taking a look around at
1:28
Speaker 2: other markets here, you have crypto actually moving upwards today.
1:34
Speaker 2: That's after several weeks of a pretty abysmal performance on
1:39
Speaker 2: that front. Price of oil is about flat off slightly,
1:42
Speaker 2: Gold prices moving off about half a percent, down to
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Speaker 2: four thou fifty six dollars per ounce, and in the
1:50
Speaker 2: bond market, you've got the yield on the ten year
1:52
Speaker 2: treasury moving down a bit to four point one percent.
1:56
Speaker 2: But a pretty traditional risk off type day here, and
2:01
Speaker 2: we've been seeing a number of measures of the course
2:03
Speaker 2: the last few days, intensifying pressure on the overall I
2:09
Speaker 2: think it's just really the overall AI trade. I don't
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Speaker 2: really know of many other ways to describe them.
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Speaker 3: Dollars not really moving, goals not really moving. We know
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Speaker 3: those two are inly related. We talk about that a
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Speaker 3: lot internally, So there is no there's no thread pointing
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Speaker 3: excuse me, to a larger fear. Right, It's more this
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Speaker 3: continued gelling of this notion that maybe AI, the AI
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Speaker 3: will not be able to I'll say, pay for itself
2:35
Speaker 3: right as quickly as investors have priced into AI stocks,
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Speaker 3: say adjacent stocks.
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Speaker 1: Excuse me.
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Speaker 2: We've been talking about this market this morning, and you know,
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Speaker 2: one of the notable pieces we mentioned is that there
2:45
Speaker 2: haven't hasn't been a direct catalyst. I think you can
2:47
Speaker 2: name in point twos. Oh wow, that sure is concerning
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Speaker 2: for the overall market. This company went belly up, this
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Speaker 2: bank failed, YadA, YadA, YadA. One area that though, that
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Speaker 2: we have been attached to and focusing on that. I
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Speaker 2: you know, I don't think you can draw the connection
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Speaker 2: between AI trade and this next story, so I don't
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Speaker 2: intend to do so. But Blue Oul Capital we briefly
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Speaker 2: described what happened here yesterday on the program, but I
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Speaker 2: want to dive in here and just give some context
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Speaker 2: around what we're seeing in private credit specifically, So again
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Speaker 2: quick synopsis. Private credit the stepchild of private equity. It's
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Speaker 2: just private loans being made to companies, and those loans
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Speaker 2: rather than being done by a big bank that might
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Speaker 2: put them out on the publicly traded markets and trade
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Speaker 2: in bond markets. They'll usually package them together and sell
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Speaker 2: these packaged loans to investors of some sort. Generally institutional
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Speaker 2: investors are the largest buyers of this type of stuff.
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Speaker 2: Insurance companies, pensions.
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Speaker 3: Yeah, they're actual funds. They don't even package they keep service.
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Speaker 2: These are Yeah, some of those funds are even now
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Speaker 2: publicly traded, although most of them, you know, maintain again private,
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Speaker 2: being that private equity pists and has attracted a lot
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Speaker 2: of investment and has expanded dramatically over the course of
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Speaker 2: the last fixed company years, and seeing some ugly cracks
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Speaker 2: in the foundation. So talk to us about the position
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Speaker 2: that Blue Owl occupies there. What do they do and
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Speaker 2: what did they do over.
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Speaker 3: Well, they're a big private debt or credit I'll use
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Speaker 3: those terms interchangeably. Manager. They may not be a household name,
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Speaker 3: as the expression goes, but they manage a lot of
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Speaker 3: household assets. If you have a pension, some of your
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Speaker 3: pension fund, the assets that are used to pay your
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Speaker 3: monthly benefit, are probably invested in private credit sure and
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Speaker 3: there's a good chance some of that is in a
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Speaker 3: Blue Owl sure fund. Blue owl is in the news
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Speaker 3: because they have a fund, a small publicly traded version
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Speaker 3: or potentially publicly traded version, a so called business development corporation,
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Speaker 3: a fund that just never got traction. So they're going
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Speaker 3: to effectively close it by merging it with a larger fund.
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Speaker 3: When this merger happens, the investors in the smaller fund
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Speaker 3: that never got traction who happened behind that worth investors,
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Speaker 3: not the very sophisticated pension and institutional insurance company et
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Speaker 3: cetera investors we're talking about earlier. They're gonna take a
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Speaker 3: big aircut because their fund is effectively valued at less
5:13
Speaker 3: because it is so marked to so called market.
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Speaker 2: And effectively what happened here is they got hit with
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Speaker 2: a bunch of redemption requests, meaning a bunch of of
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Speaker 2: their investors tried to cash out of this fund all
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Speaker 2: at once, and they froze it right. They said, sorry,
5:29
Speaker 2: we're not going to process these redemptions right now. We're
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Speaker 2: pausing all redemptions. And their solution was, Hey, take this
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Speaker 2: fund that is clearly seeing some pressure and merge it
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Speaker 2: with some other asset that we have. That's that okay.
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Speaker 3: So that's slightly different than than the rationale I had
5:45
Speaker 3: attributed to the merger. Okay, your information is probably more
5:48
Speaker 3: correct than mine, but either way, it shows what can
5:51
Speaker 3: happen if you get into a new vehicle that represents
5:54
Speaker 3: it does the same thing as all their flagship products.
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Speaker 3: If the new vehicle does I said, doesn't take off.
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Speaker 3: Maybe that's too vague a way to put it, but
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Speaker 3: I for whatever reason, they have to close it in
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Speaker 3: this case, merge it. Uh, there's the potential that your investments.
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Speaker 3: One of the nice things about private markets, equity and
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Speaker 3: credit is that investments are not mark to market every
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Speaker 3: day like a stock is. If new information comes out
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Speaker 3: about a say IBM, that's priced in right away.
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Speaker 2: I like, I just you said one of the nice
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Speaker 2: things about that.
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Speaker 3: Well, from an investor for looking to reduce volatility, it
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Speaker 3: is a nice thing. It's it's a it's a little
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Speaker 3: bit phony, but it is a positive attribute from.
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Speaker 2: A So the positive attribute that you're described, I know,
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Speaker 2: I know, just because investors is that we have imperfect
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Speaker 2: information about what we own.
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Speaker 3: Well, no, it's that I'm a Companies are allowed to
6:42
Speaker 3: assign valuations based on independent internal audits of the assets worth. YEP,
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Speaker 3: I wouldn't call it imperfect unless you think markets maybe
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Speaker 3: some people do, it's definitely not. It's a way. It's
6:56
Speaker 3: it's it's a it's an artificial way to suppress volatility,
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Speaker 3: but it's still one of the reasons that illiquidity associated
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Speaker 3: with private equity and debt is one of the things
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Speaker 3: that allowed has allowed it historically to outperform public market
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Speaker 3: okay analogs.
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Speaker 2: So we have this Blue Owl fund that had to
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Speaker 2: pause redemptions and is now merging with this other one,
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Speaker 2: and investors in that first one are going to be
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Speaker 2: taking a big haircut. Blue Owl stock down forty two
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Speaker 2: percent so far this year, probably out of concerns about
7:23
Speaker 2: their core business model and whether it is that they
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Speaker 2: do this. All ties now to this US government probe
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Speaker 2: into in a series of firms that borrowed some four
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Speaker 2: hundred million dollars from another private credit.
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Speaker 3: Ties into in the sense that it's the same asset
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Speaker 3: class generally, blue out has nothing to do with it
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Speaker 3: what we're about to talk about.
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Speaker 2: Correct Thank as far as we know, the US government
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Speaker 2: is probing this firm that borrowed some four hundred million
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Speaker 2: dollars from private credit, Giant HPS, which is now owned
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Speaker 2: by Blackrock. And what we're learning here is that this
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Speaker 2: lesser known telecom company borrowed some four hundred million dollars
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Speaker 2: and is now being accused of pretty much fabricating and
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Speaker 2: inventing all of the revenue that was borrowed.
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Speaker 3: The borrowers committed fraud. They said they're nateral. They said,
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Speaker 3: you excuse me, have have alleged, reputedly committed fraud. Thank
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Speaker 3: you to all your lawyers listening out there. Yes, allegedly
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Speaker 3: committed fraud.
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Speaker 2: Uh.
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Speaker 3: Not uncommon when financial conditions are so I'm gonna blame
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Speaker 3: the FED. You Tucker and Mike Canna be shocked. I
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Speaker 3: blame the Fed. Financial conditions have been too easy for
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Speaker 3: too long. This type of behavior becomes inevitable in that
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Speaker 3: when you are pushed to seek higher yields. If you're
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Speaker 3: an analyst looking at the if you're an underwriter, an
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Speaker 3: analyst looking at these deals, you're under pressure from your
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Speaker 3: manager to bring big, juicy yield deals to the fund manager,
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Speaker 3: you can get sloppy, You can your standards.
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Speaker 2: I'll be willing to blame the perpetrator of fraud in
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Speaker 2: this case, but maybe you know, maybe the FED would
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Speaker 2: be three. But are there are.
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Speaker 3: There are societal conditions what I'm calling sidal conditions here.
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Speaker 3: I'm trying to draw parallel to people who talk about crime.
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Speaker 3: Monetary conditions here facilitate the urge to commit fraud. It's
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Speaker 3: far more prevalent when conditions are too easy for too long.
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Speaker 2: The other absolutely fascinating piece of this story, so the
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Speaker 2: HPS funds began lending to these companies that are controlled
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Speaker 2: by the person what was his name again, it was.
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Speaker 3: A you're going to trying to pronounce that.
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Speaker 2: Good for you, Ben Kim Brombat. Yeah, we're gonna go
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Speaker 2: with that. The companies began lending to the companies controlled
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Speaker 2: by this individual in twenty twenty According to the Delaware
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Speaker 2: court filings, in June of twenty twenty five, HPS, who
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Speaker 2: was doing the origination of these loans.
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Speaker 3: HPS was the manager at the time. They're the private
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Speaker 3: credit manager for.
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Speaker 2: The first time, began requesting copies of underlying email confirmations
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Speaker 2: verify the receivables five years after making the loan.
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Speaker 3: Okay, So this is like you hire somebody to rent
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Speaker 3: your house out and they don't do the credit check
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Speaker 3: on the tenant.
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Speaker 2: It's worse than that.
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Speaker 3: Well, I'm just I know it's worse than that, Like
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Speaker 3: it's four hundred million. I'm just trying to make it relatable. Yeah,
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Speaker 3: and you asked your manager, did you look at the background?
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Speaker 3: I think I did. I don't know. I hired an
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Speaker 3: intern to do that. Let me check with them. That's
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Speaker 3: more or less what happened here, Mike.
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Speaker 2: So you have this massive fraud for potential fraud four
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Speaker 2: hundred million dollars that's seemingly gone up in smoke one
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Speaker 2: Black Rocks probably asking some questions of this new manager
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Speaker 2: that they purchased just this year.
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Speaker 3: Well, they missed this too. They did extend, they hired
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Speaker 3: you know, I'm gonna stop naming parties. They had somebody
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Speaker 3: do due diligence. So you're gonna be hearing this term
10:46
Speaker 3: a lot over the next few years if we're entering
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Speaker 3: a purging period, which will ultimately be healthy but painful
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Speaker 3: in the short term. They didn't do their due diligence.
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Speaker 3: They hired someone else to do their an auditor, a
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Speaker 3: very well known one. They evidently didn't do their due diligence,
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Speaker 3: so no one was watching the watcher. This is not
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Speaker 3: an uncommon story.
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Speaker 2: So why it matters. Everyone is now asking their private
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Speaker 2: credit managers out there, whether it's Blue Owl, HPS, Blackstone, KKR,
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Speaker 2: these are big, big names in this space. What was
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Speaker 2: your diligence like? Well, first of all, that you have
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Speaker 2: that loan that I own, did you check receivables for
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Speaker 2: the last five hours?
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Speaker 3: You're never going to do that degree of due diligence
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Speaker 3: on a private market manager. That is way too granular.
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Speaker 3: The first question you ask is do we have any
11:31
Speaker 3: exposure to this? No, I looked at those deals I passed,
11:34
Speaker 3: and then you're going to get into that. What made
11:36
Speaker 3: you pass on this fella? Well, I saw he had
11:40
Speaker 3: a criminal record. Oh, that is the best predictor of
11:43
Speaker 3: future criminal behavior is or even sure skirting the line
11:48
Speaker 3: is whether or not they've been accused of it in
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Speaker 3: the past. That's where the questioning goes here.
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Speaker 2: Again. I always try and bring this back home why
11:54
Speaker 2: this matters to you? If you own no private credit one,
11:59
Speaker 2: you may own some of it in a pension that
12:01
Speaker 2: you know is paying your benefits to your insurance provider
12:04
Speaker 2: that provides you homeowners insurance. May own a very.
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Speaker 3: Large this time they started the practice.
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Speaker 2: And you know, frankly who knows how bad this could be.
12:14
Speaker 2: But you know, hypothetically, could there be enough bad loans
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Speaker 2: out there that it sinks an insurer. Two. Yes, I'm
12:21
Speaker 2: going to say that that is always a possibility.
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Speaker 3: It's it's it's it's the erosion of trust, which is
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Speaker 3: what happened in O eight.
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Speaker 2: O nine, And that's the biggest point of all of this.
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Speaker 2: If there is an erosion of trust in credit markets,
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Speaker 2: it means that credit drives up. And when there is
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Speaker 2: not credit to be had, whether it's a business trying
12:40
Speaker 2: to take out a loan or whether it is somebody
12:43
Speaker 2: trying to buy a car, because again, private credit was
12:46
Speaker 2: involved in both of those transactions and varying degrees, you
12:51
Speaker 2: begin to have a real problem for the economy. Credit
12:55
Speaker 2: is the is the I don't know, lifeblood, the lifeblood,
12:58
Speaker 2: the WD forty whatever. You want to to make the
13:01
Speaker 2: gears keep going. You need it to exist, you need
13:04
Speaker 2: it to be prevalent. And if it starts to dry
13:06
Speaker 2: up because of these concerns, yeah, that can lead to
13:10
Speaker 2: some serious issues for the overall economy. And this is
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Speaker 2: not a story that leads you to believe that that
13:16
Speaker 2: is pervasive. But I keep going back to this comparison
13:21
Speaker 2: like back in twenty twenty three when we had a
13:23
Speaker 2: couple of banks that were caught off sides, and we're
13:25
Speaker 2: just kind of wondering, like how big is the bank
13:27
Speaker 2: run going to be? Are there going to be more
13:29
Speaker 2: of these? We're finding ourselves in a similar position now
13:31
Speaker 2: with private credit, and I think it's going to take
13:33
Speaker 2: some time to find out. Quick Break Trivias next on
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16:04
Speaker 2: Mark got a couple of housing stories today. Would you
16:06
Speaker 2: rather cover the fifty year mortgage first? Or how the
16:10
Speaker 2: housing market is being ruined by big corporations?
16:13
Speaker 3: They were both interesting, But we've talked a lot about
16:15
Speaker 3: the fifty year and it's still a concept.
16:17
Speaker 2: So let's talk about what I'd difer to you this
16:20
Speaker 2: piece from the Financial Times on corporations apparently being the
16:24
Speaker 2: cause of all of the problems on the housing market.
16:28
Speaker 2: So the argument Dr Horton Lenar told Brothers these companies
16:34
Speaker 2: are so big that, like any other company that's beholding
16:36
Speaker 2: to shareholders instead of borrowers and their customers, that a
16:41
Speaker 2: lot of their free cash flow goes to share buybacks,
16:45
Speaker 2: and they need to do whatever they would do to
16:47
Speaker 2: keep margins high. That can include things like buying large
16:51
Speaker 2: parcels of land and not developing it until it's opportunity
16:55
Speaker 2: to do so. And so the author points out that,
16:58
Speaker 2: you know, if we just had more company tition and housing,
17:01
Speaker 2: then things would be better for the American housing system.
17:06
Speaker 3: That's an interesting take. This is a an editorial, it is.
17:09
Speaker 2: It's not from the Financial Times journalist staff. It's an
17:13
Speaker 2: editorial it's but.
17:14
Speaker 3: It's done by a respected writer. I just I assume
17:16
Speaker 3: the facts are.
17:18
Speaker 2: I don't know that breaking up these housing builders, well,
17:20
Speaker 2: I just fixed the problem.
17:21
Speaker 3: I've not seen any serious work on the subject, which concludes.
17:25
Speaker 3: So to study this unique data on two different markets,
17:29
Speaker 3: one that was concentrated, dominated by big builders backed by
17:33
Speaker 3: big lenders, in another that was more fragmented, smaller. She
17:38
Speaker 3: makes the point about Bailey savings and loan from what
17:43
Speaker 3: the hell's it called?
17:44
Speaker 2: Prote Wonderful life?
17:45
Speaker 3: Thank you, A wonderful life, sorry, it's been a while
17:47
Speaker 3: since I've seen it. She makes the point that that's
17:50
Speaker 3: not how mortgages are made anymore. They're made by a
17:53
Speaker 3: big bank, which is comfortable because it's got relationships with
17:56
Speaker 3: one of the big builders, and then it securitizes those mortgages.
17:59
Speaker 1: Et cetera.
18:00
Speaker 3: Soo would a more fragmented market function better? If you're
18:04
Speaker 3: objected by function specifically, we mean bring increased supply. I'm
18:08
Speaker 3: just noting I have not seen any evidence as the
18:09
Speaker 3: point I was trying to get.
18:10
Speaker 2: And by the way, I debate that the market is
18:12
Speaker 2: so concentrated. D R Horton, the largest one out there
18:14
Speaker 2: in twenty twenty two, represented thirteen percent of new homes.
18:18
Speaker 2: Lenar was ten point seven, Paul t was four point five.
18:21
Speaker 2: That doesn't seem like a monopolistic market to me. I'm
18:24
Speaker 2: sure there are some metro areas where that's the case,
18:26
Speaker 2: but that doesn't seem like a monopoly to me. The
18:30
Speaker 2: other proposals that are out there. I mean, again, I.
18:32
Speaker 3: Had sales or I'm sorry I didn't.
18:36
Speaker 2: I just looked this up. This was in terms of
18:39
Speaker 2: total total builder volume in forty seven metro areas.
18:43
Speaker 3: Okay, so that number of homes.
18:45
Speaker 2: Yeah, so I mean volume wise is thirteen percent market
18:49
Speaker 2: share up?
18:49
Speaker 3: Okay, So the way to study if you were going
18:51
Speaker 3: to if you're gonna study this, and we're not, it's
18:53
Speaker 3: not what we do. I need data on different markets
18:55
Speaker 3: where the concentration is different, and then look at the
18:59
Speaker 3: supply however you want to measure it, or the price
19:01
Speaker 3: is relative to the I mean, there's a way to
19:04
Speaker 3: get at this. I don't have the data. Maybe someone has.
19:06
Speaker 2: I think other policies out there. Again, I think you
19:09
Speaker 2: have to go after the supply side. I think policies
19:12
Speaker 2: like rent control are just very clearly stupid and not
19:16
Speaker 2: going to work well. But if you want to fix it,
19:19
Speaker 2: you got to go after supply. To go after supply,
19:22
Speaker 2: I really think the only way to do it is
19:24
Speaker 2: loosen restrictions around home buildings so that it is more
19:27
Speaker 2: profitable to build homes for large and small home builders alike.
19:31
Speaker 2: And if you want to pair that with something like
19:33
Speaker 2: the author mentions a land value tax mainly discouraging entities
19:39
Speaker 2: from just owning undeveloped land by taxing it more, maybe
19:43
Speaker 2: that would help too. I'm not really sure, but those
19:46
Speaker 2: two to me are the only policies that actually fix
19:48
Speaker 2: the problem. A fifty year mortgage doesn't, breaking up big
19:51
Speaker 2: home builders doesn't. And I don't know. Everyone's looking for
19:55
Speaker 2: the magic bullet, and I don't think it exists. Quick
19:57
Speaker 2: Break Wall Street watched next.
20:08
Speaker 1: Bringing the latest financial news straight to your radio. Every day.
20:13
Speaker 1: It's the Financial Exchange on the Financial Exchange Radio Network.
20:19
Speaker 1: Time now for Wall Street. Watch a complete look at
20:22
Speaker 1: what's moving markets so far today right here on the
20:25
Speaker 1: Financial Exchange Radio Network.
20:27
Speaker 5: Markets again in negative territory following yesterday's pullback as concerns
20:33
Speaker 5: circulated around high tech valuations. Wall Street's also digesting the
20:37
Speaker 5: first batch of retail earnings this morning from Home Depot.
20:40
Speaker 5: Right now, the Dow is down by nearly nine tenths
20:43
Speaker 5: of one percent or four hundred and three points s
20:46
Speaker 5: and P five hundred down six tenths of one percent,
20:49
Speaker 5: Nasdaq down nine tenths one percent or two hundred and
20:52
Speaker 5: four points lower, RUSS two thousands down about a quarter percent, ten,
20:56
Speaker 5: Your treasure Reil flat now at four point one two
20:58
Speaker 5: nine percent, and rude oil up about a third of
21:01
Speaker 5: a percent, rating just above sixty dollars a barrel. Home
21:05
Speaker 5: Depot falling over three percent after the home improvement retailer
21:09
Speaker 5: missed third quarter earnings expectations, marketing its third consecutive miss.
21:13
Speaker 5: Home Depot also cut its full year profit outload breaking
21:17
Speaker 5: news this morning after Microsoft announced new strategic partnerships with
21:22
Speaker 5: Nvidia and ais startup Inthropic. Microsoft and Nvidia will invest
21:26
Speaker 5: a combined fifteen billion dollars in Anthropic, while Anthropic committed
21:30
Speaker 5: to purchase thirty billion dollars of computing capacity from Microsoft's
21:34
Speaker 5: Azero cloud service. Both Microsoft and Nvidia are down about
21:39
Speaker 5: two percent.
21:40
Speaker 1: Meanwhile, we have.
21:41
Speaker 5: Another major Internet outage to report, this time stemming from
21:44
Speaker 5: cloud Fare. The outage was affecting several major websites and
21:48
Speaker 5: services offline, including open ais Chat, GPT, and social media
21:52
Speaker 5: platform x However, the outage reportedly has been as resolved
21:58
Speaker 5: cloud Fir stock is now down over one percent, and
22:02
Speaker 5: according to The Financial Times, activist investor Elliott Management has
22:05
Speaker 5: built a large steak in Barrack where Elliott here is
22:08
Speaker 5: encouraged by the idea that the gold miner could be
22:11
Speaker 5: split into two companies. Barrackstock is up over one percent.
22:16
Speaker 5: I'm Tucker Silvan, that is Wall Street Watch and in
22:18
Speaker 5: the previous segment, we asked you the trivia question what
22:22
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22:25
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22:38
Speaker 2: Mark, we're talking about housing in the last segment, I
22:40
Speaker 2: want to continue that with a discussion of the fifty
22:42
Speaker 2: year mortgage, So removing the conversation about is this a
22:46
Speaker 2: fix for housing affordability, which I do not believe it is.
22:51
Speaker 2: I want to just talk about this car affordability right,
22:53
Speaker 2: Like you know, you extend the duration of the loans,
22:56
Speaker 2: it's not going to make the underlying asset more affordable
23:00
Speaker 2: on the surface though, like terrible idea, good, you know,
23:04
Speaker 2: fantastic idea. I've already laid my claim. I don't think
23:07
Speaker 2: it's a fix to the overall housing affordability piece, But
23:12
Speaker 2: is it substantially a worse idea than the thirty year mortgage,
23:16
Speaker 2: which I think everyone you know in the US looks
23:18
Speaker 2: at as kind of the holy grail of good opportunities.
23:23
Speaker 2: I don't know that I look at it as substantially
23:26
Speaker 2: more dangerous or worse than a thirty year mortgage.
23:30
Speaker 3: Well, aside from the obvious criticisms of a longer mortgage,
23:34
Speaker 3: which you could also levy at the thirty versus the
23:37
Speaker 3: twenty versus, they all apply. Sure, you could take a
23:40
Speaker 3: fifteen or twenty year fixed rate when you buy a
23:42
Speaker 3: house versus a thirty, and the same arguments of the
23:47
Speaker 3: thirty versus the fifty apply. It's going to take you
23:49
Speaker 3: longer to build positive equity. You'll have negative equity. Said differently,
23:53
Speaker 3: for a longer period of housing prices drop.
23:58
Speaker 2: The biggest criticism that I have of it is that
24:01
Speaker 2: it's further government invention into the housing market, right like.
24:05
Speaker 3: Yeah, it's not some innocent let's let the market find
24:08
Speaker 3: the right.
24:09
Speaker 2: No, it's not. Because the only reason that a bank
24:11
Speaker 2: is going to issue a fifty year mortgage.
24:13
Speaker 3: We'll need the way to the government is because.
24:15
Speaker 2: The government will buy that mortgage from you. So that's
24:18
Speaker 2: my biggest criticism. And by the way, that exists for
24:20
Speaker 2: the thirty year there's no bank out there that is
24:22
Speaker 2: willing to lend Mike Armstrong money for thirty years at
24:25
Speaker 2: three and a quarter percent to buy a home. The
24:28
Speaker 2: only reason that exists is because the government says, yeah,
24:30
Speaker 2: we'll buy that off of you. That sounds like a
24:32
Speaker 2: pretty good deal. And so the government actively supports the
24:36
Speaker 2: housing market. And so my biggest criticism is, yeah, if
24:38
Speaker 2: you're doing fifty year loans, then we are the ones
24:41
Speaker 2: paying for it, the American taxpayer, to basically fund that
24:46
Speaker 2: tool to feed into the housing market. I guess the
24:50
Speaker 2: other big criticism is the reason the thirty year mortgage
24:52
Speaker 2: has worked so well is because housing prices have appreciated
24:58
Speaker 2: over fifty sixty years to the tune of two to
25:00
Speaker 2: three percent per year. I have no reason to believe
25:04
Speaker 2: that that is about to reverse itself. But if we
25:06
Speaker 2: went on a fifty year time period where housing prices
25:09
Speaker 2: depreciated or did not appreciate it by two percent, then
25:14
Speaker 2: that fifty year mortgage looks a lot less attractively.
25:16
Speaker 3: Going to take you longer to build equity, right, I mean,
25:20
Speaker 3: I'm not opposed to experimenting with different combinations in an
25:24
Speaker 3: unfettered in an environment where the degree of government intervention
25:34
Speaker 3: is modest or non existent. But here they're talking about
25:37
Speaker 3: throwing the weight of the government behind it, which makes
25:40
Speaker 3: me uncomfortable, like it makes you uncomfortable. But the theoretical
25:43
Speaker 3: arguments against it to me aren't that compelling because you
25:45
Speaker 3: could make them unless I'm missing something, correct me if
25:48
Speaker 3: I am make them against the thirty verses twenty or
25:50
Speaker 3: the fifteen.
25:51
Speaker 2: Yeah, I guess, but I can't of see them.
25:54
Speaker 1: Mike.
25:54
Speaker 2: I feel like it's been this. It's been just this
25:58
Speaker 2: big issue because of who proposed at President Trump, and
26:02
Speaker 2: either people love the idea or hate the idea, and
26:04
Speaker 2: there hasn't been a lot of judging of it on
26:06
Speaker 2: its merits, and I think on its merits, I don't
26:09
Speaker 2: see it as something that's going to ruin or fix
26:11
Speaker 2: that house.
26:11
Speaker 3: Of all the economic ideas that have come out of
26:13
Speaker 3: this administration over the past six months, this is the
26:15
Speaker 3: least flaky thing. Yeah, no offense, but the trade policy
26:18
Speaker 3: has been erradic and counterproductive. We're not going to talk
26:20
Speaker 3: about trade today, maybe we will later in the week.
26:23
Speaker 3: Monetary policy has been the interference with in meddling and
26:27
Speaker 3: monetary policy has been horrendous and will will pay negative
26:30
Speaker 3: dividends for years to come. As anyone who's looked at
26:34
Speaker 3: the issue as concluded this is like the least potentially harmful.
26:38
Speaker 2: If you have your own thoughts on the fifty year mortgage,
26:40
Speaker 2: I'd be interested to hear them, just you know it,
26:41
Speaker 2: questions or thoughts. You can text the show at sixty
26:43
Speaker 2: one seven, three six two thirteen eighty five. But it
26:46
Speaker 2: is just a story that has got a lot of
26:48
Speaker 2: attention because you know, the thirty year mortgage is applicable
26:52
Speaker 2: to just about everybody. Almost everyone's lives have been touched
26:55
Speaker 2: by a thirty year mortgage in some way or another,
26:56
Speaker 2: and so it's been getting a lot of attention. Teking
27:00
Speaker 2: of owning real estate and mortgages, we have a guide
27:03
Speaker 2: out from the Armstrong Advisory Group this month for November
27:07
Speaker 2: on owning real estate and retirement. Now, a lot of
27:10
Speaker 2: retirees obviously get to that stage in their sixties and
27:13
Speaker 2: they own a piece of real estate. But this guide
27:15
Speaker 2: is really about how to assess that real estate, how
27:18
Speaker 2: to assess the cost of that real estate over time.
27:21
Speaker 2: Obviously we've all seen things like taxes and insurance go up,
27:24
Speaker 2: but you know the cost of maintaining your home, just
27:28
Speaker 2: naturally through life, also goes up as you age. Maybe
27:32
Speaker 2: you're thinking about snowbirding in a certain part of the country,
27:36
Speaker 2: the idea of owning versus renting there, What are the upsides,
27:39
Speaker 2: what are the downsides to taking those different approaches where
27:43
Speaker 2: you're making your primary residence, how those taxes play into
27:47
Speaker 2: your overall tax situation over the course of your retirement,
27:51
Speaker 2: and then those massive cost of living differences depending on
27:54
Speaker 2: where you live, right. I mean, everybody talks about the
27:56
Speaker 2: cheaper real estate outside of New England, but there are
27:59
Speaker 2: real costs on the other side for doing so. If
28:01
Speaker 2: you'd like your free copy of our brand new guide
28:04
Speaker 2: Owning Real Estate in Retirement, give us a call at
28:07
Speaker 2: eight hundred three nine three for zero zero one to
28:10
Speaker 2: request your copy. You can get it online Armstrong Advisory
28:13
Speaker 2: dot Com request your copy there as well, but the
28:15
Speaker 2: phone number for the Armstrong Advisory Group requesting our new
28:18
Speaker 2: guide Owning Real Estate in Retirement. It is free and
28:21
Speaker 2: you can get it by calling eight hundred three nine
28:24
Speaker 2: three four zero zero one.
28:26
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
28:29
Speaker 1: registered investment advisor. Nothing in the ad or in any
28:31
Speaker 1: Armstrong Guide a specific financial, legal or tax advice. Consult
28:34
Speaker 1: your own financial tax into state planning advisors before making
28:37
Speaker 1: any investment decisions. Armstrong make contact you to offer investment
28:40
Speaker 1: advisory services.
28:42
Speaker 2: Mark. Last week, the White House announced they'll be waiving
28:44
Speaker 2: some tariffs on agricultural goods sold at the grocery store
28:48
Speaker 2: that we do not largely grow in the United States. Coffee,
28:53
Speaker 2: What was else on the list? Avocados, bananas were all
28:56
Speaker 2: on the list. And we're starting to see that piece
28:59
Speaker 2: from Jonathan Bloomberg not going to fix the overall inflation problem.
29:05
Speaker 2: He's right, Waving tariffs on these products are not going
29:08
Speaker 2: to fix the overall inflation problem. You're gonna, you know,
29:14
Speaker 2: put this in the terms of the Fed and monetary policy.
29:17
Speaker 2: I'm going to try and put it. I guess a
29:20
Speaker 2: little bit differently, which is.
29:22
Speaker 3: What do you think about inflation? If not in terms
29:25
Speaker 3: of monetary place.
29:26
Speaker 2: You do have to let you I'm talking about the
29:30
Speaker 2: sec the seeming trend that we have away from globalism,
29:33
Speaker 2: and the last fifty years have been defined by goods
29:37
Speaker 2: prices coming down or staying cheap because of globalism, trading technology,
29:43
Speaker 2: trading technology and manufacturing stuff in China. And if we
29:46
Speaker 2: are getting away from a more global society, I have
29:49
Speaker 2: a tough time believing that prices can do what they
29:52
Speaker 2: did for the last fifty years. Yes, you know monetary policy,
29:55
Speaker 2: so you.
29:55
Speaker 3: Say last so since the Great Modern since vulk are
29:58
Speaker 3: going to handle on inflation causing a big recession which
30:01
Speaker 3: Troft in nineteen economy Troft bottomed out in nineteen eighty two.
30:05
Speaker 3: Since then, inflation has for the most part been low
30:08
Speaker 3: and stable, with the exception of the COVID inflation. We
30:11
Speaker 3: don't need to get into the causes of the co
30:13
Speaker 3: COVID inflation. They're still debated. But what causes inflation in
30:17
Speaker 3: the short term is that some prices don't move you
30:20
Speaker 3: could say they're rigid or sticky, while other prices do.
30:23
Speaker 3: That pushes the average up. Question is does that persist.
30:26
Speaker 3: The answer to that question is, I'm just reciting modern
30:30
Speaker 3: macro here. This is the consensus. You ask any economist,
30:32
Speaker 3: this is what they're going to tell you, for the
30:33
Speaker 3: most part, unless they're sort of fringy monitorists or something.
30:38
Speaker 3: Some prices are sticky, they don't change. Other Look, let
30:41
Speaker 3: me be more concrete. Oil goes up by a lot.
30:43
Speaker 3: I own a store. I'm not going to go through
30:45
Speaker 3: and resticker everything. I'm going to wait, so the average
30:47
Speaker 3: price is going to go up under that scenario. Similarly,
30:50
Speaker 3: you can have a negative supply so called supply shock.
30:53
Speaker 3: I'm using oil as an example here that brings the
30:55
Speaker 3: average down. So in the short term, inflation is a
30:58
Speaker 3: result of these nominal rigidities. To use a term, economists
31:02
Speaker 3: would use price stickiness coupled with various prices. It could
31:05
Speaker 3: be insurance one month, oil the next, avocados the following,
31:10
Speaker 3: couple with some prices that move by a lot, changing
31:14
Speaker 3: the average. That's short run inflation. Long run, it's a
31:17
Speaker 3: function every virtually every economist degrees of how much money
31:21
Speaker 3: the FED prints relative to money demand. And that's why
31:24
Speaker 3: we say the FED, or at least I do say
31:25
Speaker 3: the Fed's job is to act like them, like the
31:27
Speaker 3: economy's thermostat.
31:29
Speaker 2: And for now we are still running three percent inflation.
31:32
Speaker 2: We haven't got inflation, but inflation remains.
31:35
Speaker 3: So do you want to turn the thermostat down when
31:37
Speaker 3: the room temperature is I'm gonna watch this. Should the
31:41
Speaker 3: FED be turning should be? Should the FED be turning
31:44
Speaker 3: up the heat? Should the FED be heating up the
31:46
Speaker 3: labor market when it's already seventy eight degrees. I don't
31:50
Speaker 3: know if that analogy works.
31:52
Speaker 2: But not convinced, or does the FED just say, oh,
31:55
Speaker 2: you know what, our new price target is actually three
31:57
Speaker 2: percent annual inflation. But then you lose credit.
32:00
Speaker 3: Credibility is the key. If there's one word that comes
32:03
Speaker 3: out of the FED, the experience of the FED misreading
32:05
Speaker 3: the state of the economy and misreading their own ability
32:08
Speaker 3: to control inflation in the nineteen seventies, it is credibility.
32:11
Speaker 3: They lost it. It took the biggest recession since the
32:13
Speaker 3: Great Depression in nineteen eighty one eighty two to get
32:16
Speaker 3: that credibility back. I don't know that they've gotten it backs.
32:20
Speaker 3: I don't know that they've recovered it since the COVID inflation.
32:23
Speaker 3: My guess is no. If you look at inflation expectations,
32:25
Speaker 3: which are also elevated, which is why the Fed's eagerness
32:30
Speaker 3: to cut rates here seeming eagerness is a bit of
32:32
Speaker 3: a puzzle.
32:33
Speaker 2: Let's say a quick break. When we come back. Stack
32:35
Speaker 2: Roulette is next.
32:37
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33:34
Speaker 2: Wall Street Journal today writing about the AI revolution. Here's
33:39
Speaker 2: the subject line, which I kind of like the most
33:41
Speaker 2: joyless tech revolution ever. AI is making us rich and unhappy. Yeah,
33:47
Speaker 2: we'll see how long the rich part lasts, but the
33:49
Speaker 2: unhappy piece is pretty interesting to me, and I wonder
33:52
Speaker 2: if you do detect this mark. I definitely hear the
33:57
Speaker 2: fear and skepticism from some about AI and how they
34:01
Speaker 2: feel it's coming for their job and it's going to
34:03
Speaker 2: be this terrible thing. I definitely hear the fear, but
34:07
Speaker 2: I also do see some joy from AI, like I
34:10
Speaker 2: see people making stupid Okay, perfect example, my wife most
34:17
Speaker 2: useless usage of AI that I can think of. Our
34:21
Speaker 2: dog and cat hate each other and shows so she
34:23
Speaker 2: had AI put together a picture of the two of
34:26
Speaker 2: them snuggling by uploading pictures of the two animals separately.
34:30
Speaker 2: Totally useless, but not doable without artificial intelligence. She does
34:35
Speaker 2: not have the editing skills to be able to make
34:38
Speaker 2: that happen. I'm not saying it delivered her a great
34:40
Speaker 2: degree of joy, but like I see those silly and
34:44
Speaker 2: kind of whimsical uses of artificial intelligence all over the place.
34:48
Speaker 3: She used more electricity than a third world village. Yes,
34:52
Speaker 3: uses in a day to do that.
34:53
Speaker 2: One hundred percent.
34:53
Speaker 3: Yes right, yes, we all do it.
34:55
Speaker 2: Yeah, Like I've used it to write like silly sounding
35:01
Speaker 2: poems to my daughters. Like I do see the whimsical
35:06
Speaker 2: uses of AI and people and people enjoying it.
35:08
Speaker 3: Excuse me, I have to short a bunch of companies.
35:10
Speaker 2: Yeah again, Like, this is my concern about the industry
35:14
Speaker 2: is that the use cases that I'm seeing of this
35:16
Speaker 2: technology are dumb and unpropp Compare.
35:19
Speaker 3: That to what we used to do in the nineties.
35:21
Speaker 3: Like one day we're doing spreadsheets and lotus one two three,
35:24
Speaker 3: pretty primitive. The next day, I'm mocking something up and
35:27
Speaker 3: Excel and emailing it to a colleague across the country.
35:30
Speaker 3: That was life changing, That was productivity enhancing. I'm just
35:34
Speaker 3: feeling it with AI. Yet, Mike, you're being a little facetious.
35:37
Speaker 2: For every one of those, there were, you know, three
35:39
Speaker 2: thousand pets dot com that were just complete idiot ideas
35:44
Speaker 2: of how we were going to make money on the Internet.
35:46
Speaker 2: So you know, I'm not I'm not poop pooing the differences,
35:50
Speaker 2: but there were plenty of bad use cases for the
35:52
Speaker 2: Internet back in then.
35:54
Speaker 3: That wasn't really an Internet point. It was more of
35:56
Speaker 3: a an IT point about tools that enhanced people's productivity
36:03
Speaker 3: and allowed people to move on to higher value added things.
36:06
Speaker 3: You didn't have to spend all day if you were
36:08
Speaker 3: an admin an administrative assistant typing, for example, the goofball
36:13
Speaker 3: like me who developed the content could put it right
36:16
Speaker 3: into a word processor and get a pretty clean copy
36:19
Speaker 3: to the end user.
36:21
Speaker 2: Okay, fair, but you have specifically told me that you
36:24
Speaker 2: do not see why any investment firm would need to
36:27
Speaker 2: hire an entry level analyst anymore.
36:28
Speaker 3: No, I've said I could see needing far fewer if
36:34
Speaker 3: you still need someone with experienced overse The case I
36:37
Speaker 3: was bringing up specifically, is build me a table of
36:41
Speaker 3: the top ten stocks by price to book value in
36:46
Speaker 3: reverse order for one, three, and five. I could do
36:49
Speaker 3: that myself in factset or something, or I could tell
36:52
Speaker 3: their AI chatbot to do it. Oh that's great. I
36:55
Speaker 3: don't need We're not going to need to hire someone
36:58
Speaker 3: to do the grunt work for me.
37:00
Speaker 2: It should.
37:02
Speaker 5: It?
37:02
Speaker 3: Should it not? Look this is my sort of narrow perspective.
37:08
Speaker 3: There are plenty of people who say it has been
37:10
Speaker 3: life changing for them, just not enough to convince me
37:14
Speaker 3: that it will meet the growth expectations required to justify
37:18
Speaker 3: the investments. And I think that is a healthy attitude,
37:20
Speaker 3: particularly when you're a fiduciary. Is we are in our
37:23
Speaker 3: day jobs?
37:23
Speaker 2: Yeah, I don't know. Like the the debate around is
37:29
Speaker 2: AI going to make us happy or unhappy? I don't
37:32
Speaker 2: know that.
37:33
Speaker 1: What is that?
37:33
Speaker 3: Who asked that question?
37:36
Speaker 2: Sorry? I just I don't. I don't know. Like that
37:40
Speaker 2: doesn't seem like the most relevant detail to me. It's
37:44
Speaker 2: going to make some people miserable, it's going to make
37:46
Speaker 2: some people really happy. The Internet, you know, what did
37:48
Speaker 2: the Internet do it? Brought vast amounts of information to
37:53
Speaker 2: all parts of the world that didn't previously have access
37:55
Speaker 2: to it, and it also created the opportunity for terrible
37:59
Speaker 2: disinformation that has impacted all sorts of horrible things. It's
38:03
Speaker 2: allowed for distribution of terrible content online. So AI is
38:08
Speaker 2: going to have the same positives and negatives too.
38:11
Speaker 3: If you look at their happiness, you know, don't go puppy, Yeah,
38:16
Speaker 3: don't go for a walk in the park. I don't
38:18
Speaker 3: think you're not going to find it in yours in
38:20
Speaker 3: your computer terminal.
38:21
Speaker 2: Yeah. I tend to agree, but nobody thinks that.
38:23
Speaker 3: Nobody know this new computer is going to make me happier.
38:25
Speaker 1: Nobody?
38:27
Speaker 3: Oh really? Okay, sorry?
38:28
Speaker 2: Why do people line up at the store for the
38:30
Speaker 2: next iPhone? Right? I mean yeah, I think people do.
38:33
Speaker 2: Markets are in negativetory territory, but substantially better than when
38:37
Speaker 2: we started the show. SMP off a little bit more
38:39
Speaker 2: than six tens of percent now and Nasdaq off nine
38:42
Speaker 2: tens of a percent. We'll have a full recap for
38:44
Speaker 2: you and more on the day of Nvidia's earnings tomorrow
38:47
Speaker 2: on the Financial Exchange