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AI Exuberance Lifts Markets Toward a Familiar Risk · The Financial Exchange Show

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  Speaker 1: Face is the Financial Exchange with Mike Armstrong and Mark Vandetti.
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  Speaker 2: Good morning, Welcome back to the Financial Exchange. It's Mike,
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  Speaker 2: Mark and Tucker with you on the Monday ahead of
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  Speaker 2: the July fourth holiday. Will be shutting things down on Friday,
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  Speaker 2: and everybody will be out there enjoying the one hundred
• 1:26
  Speaker 2: and three degree heat trying to watch some fireworks this weekend.
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  Speaker 3: I'm heading out to.
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  Speaker 2: The Rocky Mountains where there will be no fireworks because
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  Speaker 2: of wildfires all across Utah and Colorado.
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  Speaker 3: Right now.
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  Speaker 2: Acture if your firefighters died over the weekend out in Colorado.
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  Speaker 2: And we've got markets optimistic heading into a heavy data
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  Speaker 2: week here where we're going to get a jobs report
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  Speaker 2: and at least some initial recovery from last week's tech
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  Speaker 2: sell off that was relatively my We have like four
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  Speaker 2: percent downward on the NASDAC I think it was two
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  Speaker 2: percent on the S and P five hundred.
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  Speaker 3: It was relatively muted.
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  Speaker 2: Generally, but it did not seem to be signifying or
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  Speaker 2: giving us any sense for why it was happening, and
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  Speaker 2: so caught our attention.
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  Speaker 3: We've got some fed talk.
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  Speaker 2: We've got new numbers on the total level, sorry, total
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  Speaker 2: degree of leverage in equity markets today and then a
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  Speaker 2: new AI model released out of China that we'll have
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  Speaker 2: to discuss later on, but again busy week for a
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  Speaker 2: shortened trading week. So tomorrow we will get the case
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  Speaker 2: Shiller Home Price Index. We'll also get the Jolts Survey
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  Speaker 2: the job Openings labor Turnover, giving us sense of job
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  Speaker 2: openings and willingness to.
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  Speaker 3: Move from employees as at the end of May.
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  Speaker 2: On Wednesday we'll be getting that ADP Employment report as
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  Speaker 2: well as ISM manufacturing construction spending, and then Thursday we
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  Speaker 2: will get the Jobs Report. Early usually comes out on
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  Speaker 2: a Friday, they've moved it up to Thursday, July second,
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  Speaker 2: which nice of them, so that we can cover it
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  Speaker 2: live here on the well not live. It gets released
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  Speaker 2: at eight thirty, so soon thereafter we'll be covering it
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  Speaker 2: on the show. Markets in positive territories so far Nasdak
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  Speaker 2: leading the way up about two thirds of eight percent,
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  Speaker 2: and the SMP and now following along here towards the upside.
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  Speaker 2: And we'll start off with oil prices into Iran because
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  Speaker 2: I find it interesting that if you don't want to
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  Speaker 2: hear anything about tensions in the Middle East, all you
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  Speaker 2: have to do is just tune into the news cycle
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  Speaker 2: Monday through Friday during trading hours, and there will be
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  Speaker 2: no news about Iran and the Middle East. But if
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  Speaker 2: you paid attention over the weekend, you know that there
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  Speaker 2: were strikes in Iran. There was Iranian defense systems shutting
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  Speaker 2: down traffic in the Straight of Horn moves last week,
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  Speaker 2: and a whole bunch of tensions during this quote unquote
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  Speaker 2: ceasefire and negotiated period. The indications at least this morning,
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  Speaker 2: unconfirmed as of this morning by the Iranians, were that
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  Speaker 2: we were heading back to peace talks and negotiations on
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  Speaker 2: at least traffic in the Strait. It sounded like any
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  Speaker 2: discussions of the nuclear program were being kicked down the
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  Speaker 2: road and instead we were just focusing for now on
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  Speaker 2: traffic through the Strait of Hormuz. So we will see
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  Speaker 2: precisely what happens there. But I don't know that I
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  Speaker 2: have a lot to add on this mark. I mean,
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  Speaker 2: oil prices obviously have cratered. We're down to seventy bucks
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  Speaker 2: of barrels. So all of those US producers who were
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  Speaker 2: getting you talked about in the press of hey, these
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  Speaker 2: guys need to go pump more oil, well they've all
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  Speaker 2: been proven right, you know, their decision to hold off
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  Speaker 2: and just sell everything while they could at one hundred
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  Speaker 2: bucks a barrel and not produce anything more, not higher people,
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  Speaker 2: and not put new pumps in the ground has been
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  Speaker 2: proven correct so far.
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  Speaker 3: And we I don't know.
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  Speaker 2: We don't seem noticeably different from where we were a
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  Speaker 2: couple of weeks ago in terms of tensions and around,
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  Speaker 2: but clearly a lot of optimism and just a lot
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  Speaker 2: of willingness to look through.
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  Speaker 3: This event on the part of investors at the moment. Yeah,
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  Speaker 3: which might be the right decision. I don't I'm not.
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  Speaker 4: We gave Iran an economic nuclear weapon. We showed them
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  Speaker 4: how to close the straight and they seem to understand
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  Speaker 4: the leverage that they now have. Maybe it was a mistake,
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  Speaker 4: maybe it was intended. Excuse me, I won't speculate. I
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  Speaker 4: don't think we need to speculate. Obviously it was botched.
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  Speaker 4: They're going to use that weapon, and that means a
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  Speaker 4: risk premium on shipping insurance. That is a literal premium
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  Speaker 4: where they go up, insurance rates go up. That means
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  Speaker 4: a premium or risk premium on the price of oil.
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  Speaker 4: Oil will be somewhat more expensive. It may be small
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  Speaker 4: this premium, so you can't actually measure it, but it's
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  Speaker 4: got to be there. So we have to live with
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  Speaker 4: this new reality indefinitely. Iran can exercise their leverage whenever
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  Speaker 4: they choose. They've put the developed world in I guess
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  Speaker 4: you could just say a bad position. And it's unfortunate
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  Speaker 4: because the develop rule was not in this position prior
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  Speaker 4: to February twenty eighth. It's regrettable that it wasn't thought.
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  Speaker 3: About in any case. I mean, we will have to
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  Speaker 3: see where it goes.
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  Speaker 2: But I think there's one point that is abundantly clear,
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  Speaker 2: which is the Iranians are the ones controlling the traffic
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  Speaker 2: flowing through the strait. They are the ones that are
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  Speaker 2: willing to fire upon vessels. They are the ones that
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  Speaker 2: are effectively saying whether or not it gets shut down.
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  Speaker 2: I think very Obviously the United States has the military
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  Speaker 2: capability to change that, but it would mean boots on
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  Speaker 2: the ground, it would mean, you know, big, big change
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  Speaker 2: regime change in Iran, which we've done a few times.
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  Speaker 2: We don't seem to be big fans of voters don't,
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  Speaker 2: so I don't think that the status quote changes a lot.
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  Speaker 2: The question becomes what sort of negotiation needs to happen
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  Speaker 2: for oil and other products to free flow through the
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  Speaker 2: strait of horror moves, and do we actually get some
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  Speaker 2: sort of good deal on all of that. And obviously
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  Speaker 2: that's what the President will be pushing his negotiators for.
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  Speaker 3: But I don't.
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  Speaker 2: Really I don't really see much such of an incentive
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  Speaker 2: on the part of Iranians to do anything other than
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  Speaker 2: collect a whole bunch of money and go back to
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  Speaker 2: what they want to do, which is developing their nuclear weapons.
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  Speaker 4: They're very good at dragging things out, if you've ever
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  Speaker 4: had I have a lot of spare time. So if
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  Speaker 4: you read about the conflicts between go on you read
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  Speaker 4: about the old the conflicts the ancient world conflicts between
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  Speaker 4: Rome and Persia. Persia was not what modern ren is,
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  Speaker 4: but it was close. They agreed to one hundred year
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  Speaker 4: treaties of friendship. The Romans and then later the Eastern
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  Speaker 4: Romans after the West fell, would pay them thousands and
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  Speaker 4: thousands of pounds of gold every year, and then the
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  Speaker 4: Persians would break the treaty. This went back and forth
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  Speaker 4: for hundreds of years until the rise of Islam, and
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  Speaker 4: that effectively ended the Persian Empire. And almost ended the
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  Speaker 4: Eastern Roman Empire too. Okay, I'm not qualified to give
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  Speaker 4: a history lesson, but my point is the history of
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  Speaker 4: Persia and of that region generally is very long conflicts
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  Speaker 4: punctuated by intervals of peace and treaties of friendship, and
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  Speaker 4: they're steeped in that history. We are a new country,
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  Speaker 4: obviously by comparison to Western Europe, never mind the Far East.
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  Speaker 4: This feels familiar to anybody who's read a little bit.
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  Speaker 4: And I don't claim to know anything about it other
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  Speaker 4: than to have read casually about it. Who knows anything
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  Speaker 4: about that region. I guess what I'm trying to say,
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  Speaker 4: Mike is that these people play the.
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  Speaker 2: Long game, always mired in conflicts. Yeah, and I think,
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  Speaker 2: yeah right. I don't mean to paint this as entirely
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  Speaker 2: one sided. And the short term, the Iranians seem to
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  Speaker 2: be exercise and control over what flows through the Strait
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  Speaker 2: of Horror.
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  Speaker 3: Moves over the next five years.
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  Speaker 2: It's pretty clear that every neighboring country in the area
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  Speaker 2: is building contingency plans of how do we ship our
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  Speaker 2: stuff so that Iran cannot influence and so they have
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  Speaker 2: some risk in this game too, which is if you
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  Speaker 2: just piss off everyone. Then they'll just find alternatives to
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  Speaker 2: move their stuff through, you know, other aas.
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  Speaker 4: More expensive and those will be at risk too, presumely.
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  Speaker 2: Of more expensive, more expensive, no doubt, but very big
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  Speaker 2: upfront cost and then probably pretty.
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  Speaker 4: Similar Ran will probably try to stymy those as Ukraine
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  Speaker 4: is proving it's it's I was going to say easy,
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  Speaker 4: that's the wrong word. But you can using drones disrupt
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  Speaker 4: efforts at re routing supply.
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  Speaker 3: And so deep into enemy.
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  Speaker 4: And the RAND struck last week, correct me if I'm wrong.
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  Speaker 4: In not really my area, but they struck last week
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  Speaker 4: because they were worried about traffic being pushed to the
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  Speaker 4: Oman side of the strait of hormones. They understand the
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  Speaker 4: importance of monopolizing it, I guess.
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  Speaker 2: In any case, you know, I'm not seeing any sort
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  Speaker 2: of disruption to investor appetite for US stocks because of
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  Speaker 2: all of this oil price.
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  Speaker 4: There are all drunk on AI right now.
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  Speaker 3: Yeah, I think I think that's the point is.
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  Speaker 2: You know, even in the event that this blows up again,
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  Speaker 2: I don't see a big reason for it to start
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  Speaker 2: affecting US equity markets unless we actually get to shortage
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  Speaker 2: areas and six dollars a gallon gas, and we don't
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  Speaker 2: seem anywhere near that right now. So we will continue
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  Speaker 2: to monitor and continue to discuss what is going on
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  Speaker 2: in the strait of horror movies, but its ability right
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  Speaker 2: now to shake investor optimism just does not seem to exist,
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  Speaker 2: and we will see where negotiations go this week.
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  Speaker 3: Let's take quick break. When we come back.
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  Speaker 2: I want to talk a little bit more about that
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  Speaker 2: investor optimism, because there's a piece from the Wall Street
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  Speaker 2: Journal today about just that optimism on behalf of investors
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  Speaker 2: and what it's causing them to do, largely lever up
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  Speaker 2: their portfolios to a degree we haven't seen a little while,
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  Speaker 2: and I want to talk about functionally what that might
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  Speaker 2: mean for equity markets, or at least what it means
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  Speaker 2: in the what it meant in the past when investors
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  Speaker 2: started borrowing a lot of money to buy stocks. Quick
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  Speaker 2: Break that's NAXT on the Financial Exchange.
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• 11:22
  Speaker 2: We have a number of Supreme Court releases today, including
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  Speaker 2: one on Fed Governor Lisa Cook. I haven't seen anything
• 11:29
  Speaker 2: come across yet, but it's expected to be released today,
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  Speaker 2: so we'll be covering that if it does come across again.
• 11:35
  Speaker 2: Lisa Cook, the Fed governor that President Trump attempted to remove,
• 11:39
  Speaker 2: who has been fighting the case all the way now
• 11:41
  Speaker 2: to the Supreme Court. And you know, a real question
• 11:45
  Speaker 2: of Federal Reserve independence. There can a sitting governor be
• 11:49
  Speaker 2: removed for cause. And what signifies, you see is the
• 11:52
  Speaker 2: question did.
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  Speaker 4: You see the yes? Do you see the Bloomberg snippet?
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  Speaker 2: I see that expanded the power to firetop officials.
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  Speaker 3: But there are two k is one.
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  Speaker 4: Revolt, so he can't remove Cook for now.
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  Speaker 3: He cannot. Yeah, that's at.
• 12:05
  Speaker 4: The same time, for now, I guess ultimately you may
• 12:08
  Speaker 4: have the authority to do so.
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  Speaker 3: Interesting, so I will have to die.
• 12:13
  Speaker 2: I'm guessing they're ruling on what constitutes cause in this instance.
• 12:17
  Speaker 2: So yeah, more to come on that front, but clearly,
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  Speaker 2: you know it's what J Powell.
• 12:24
  Speaker 3: The whole reason J Powell has stayed on the board.
• 12:26
  Speaker 2: Was his conversation about independence and that important factor there.
• 12:30
  Speaker 2: So we shall see another piece that caught my eye
• 12:34
  Speaker 2: this morning while Street Journal reporting about the trillion dollar
• 12:38
  Speaker 2: borrowing binge that's been lifting the stock market to new heights,
• 12:42
  Speaker 2: and specifically what they're talking about here is that US
• 12:45
  Speaker 2: margin debt, which is what investors are allowed to borrow
• 12:50
  Speaker 2: from their brokerage firms. So if you've got an investment account,
• 12:53
  Speaker 2: a non retirement account, add a big investment firm, you
• 12:56
  Speaker 2: may be familiar with something called margin. Traditional margin used
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  Speaker 2: to borrow against those securities that you own and buy
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  Speaker 2: more securities. You can also hypothetically use it for other reasons.
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  Speaker 2: You can use it to buy a home, a car.
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  Speaker 2: There's other types of loans you can get against your
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  Speaker 2: portfolio for those same purposes.
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  Speaker 3: But margin debt historically been looked at with.
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  Speaker 2: Like any other debt, sometimes with a cautious eye of
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  Speaker 2: signifying something. Hey, when people are borrowing a whole boatload
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  Speaker 2: of money against their portfolios, could it signify something riskier
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  Speaker 2: about markets? And that rose fifty four percent to a
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  Speaker 2: record one point four trillion dollars in May from a
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  Speaker 2: year earlier, which is a pretty rapid pace of increase.
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  Speaker 2: I think the question that I've had a tough time.
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  Speaker 3: Answering on my end mark, and I know you.
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  Speaker 2: Did some quick looking at this is one point four
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  Speaker 2: trillion dollars sounds like a lot of money.
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  Speaker 3: It is a lot of money.
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  Speaker 2: Is it a lot of money in the context of
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  Speaker 2: where the stock market is right now? Because ultimately, how
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  Speaker 2: much you can borrow against a portfolio of stocks, bonds,
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  Speaker 2: and other securities is a formula of what are those stocks, bonds,
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  Speaker 2: and other securities worth at the time that you do
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  Speaker 2: the borrowing. So what's your take on the context around
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  Speaker 2: this record?
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  Speaker 3: I don't give the credit card debt. Is that a
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  Speaker 3: record all sorts of stuff? Is that a record?
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  Speaker 4: We we uncharacteristically, we did some show prep today and
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  Speaker 4: you sorry, okay, I posited not knowing any better. Well,
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  Speaker 4: maybe the right way to look at it as relative
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  Speaker 4: to the overall value of the stock market that would
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  Speaker 4: seem to be a relevant denominator, I think, or you
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  Speaker 4: maybe you suggested that I forget, and it's not unusually
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  Speaker 4: high relative to overall value of stocks. It's less than
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  Speaker 4: two percent right now. That is the value of debt
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  Speaker 4: outstanding on secure. So, like like you said, Mike, can
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  Speaker 4: you explain at the individual level how that works. I
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  Speaker 4: own stock A. Stock A is worth fifty thousand dollars,
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  Speaker 4: I don't I don't intend to sell it, and I
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  Speaker 4: can actually use a little cash.
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  Speaker 2: So you know, I've got stock A in my portfolio
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  Speaker 2: and it's worth, like you said, fifty thousand dollars. Schwab, Fidelity, Vanguard,
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  Speaker 2: whoever might be, will let me borrow money against that security.
• 15:09
  Speaker 2: They then get to do some extra stuff with that
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  Speaker 2: security in terms of lending it out for other purposes.
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  Speaker 2: And I can use that cash for whatever purpose I want.
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  Speaker 2: But traditionally it is buying more stocks, sometimes in the
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  Speaker 2: same company, sometimes in other areas.
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  Speaker 3: But it's a way of getting.
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  Speaker 2: Access to cash when those levers, when those levels reach
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  Speaker 2: tremendously high periods of time. It's sometimes marked volatile periods
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  Speaker 2: for stocks because what can happen here is something called
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  Speaker 2: a margin call. So think about this in terms of
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  Speaker 2: your home, right Your home does not get marked to
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  Speaker 2: the market every single day.
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  Speaker 3: Your stock portfolio does.
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  Speaker 2: And so what these brokerage firms will do is they
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  Speaker 2: will say, hey, we're gonna be willing to lend you,
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  Speaker 2: let's call it thirty thousand dollars on this stock that's
• 15:55
  Speaker 2: worth fifty thousand dollars. But if that thing starts moving
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  Speaker 2: down in value, we don't want to be underwater on
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  Speaker 2: a loan. That that's no good. We can't, you know,
• 16:05
  Speaker 2: have lent you more money than what the underlying borrowable
• 16:09
  Speaker 2: security is worth. And so they'll do what's called a
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  Speaker 2: margin call, and that what will happen is they will
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  Speaker 2: literally sell your stocks for you without asking you to
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  Speaker 2: cover the loan. And so, as you can imagine here,
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  Speaker 2: what a bunch of leverage in the market can functionally
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  Speaker 2: do is exacerbate downturns.
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  Speaker 3: Right, Hey, stocks are falling.
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  Speaker 2: Now, I'm getting called out of my loan because the
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  Speaker 2: underlying thing that I borrowed against fell in value. So
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  Speaker 2: I have to sell that thing that's already down, and
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  Speaker 2: it can push stocks down from.
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  Speaker 4: We're sell something else, we're something else unrelated to meet
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  Speaker 4: the margin call, right yep.
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  Speaker 2: Yeah, So we have sometimes you know, theorized that, hey,
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  Speaker 2: maybe what's going on when tech stocks take a big
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  Speaker 2: dip and crypto markets follow is, hey, I need to
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  Speaker 2: go cover some cash in my portfolio somewhere. Uh, maybe
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  Speaker 2: I sell my crypto, maybe I sell my tech stocks.
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  Speaker 2: They tend to move closely together for that reason. It's
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  Speaker 2: all a theory, but we don't precisely know. To your point,
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  Speaker 2: the total lever a level of leverage right now is
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  Speaker 2: not substantially higher than it's been for the last decade
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  Speaker 2: or so compared to the overall market capitalization of the
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  Speaker 2: stock market, And so I'm unsure if it's concerning.
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  Speaker 4: Should we point out that the that the jargon we're using,
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  Speaker 4: leverage just means borrowing to increase your exposure.
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  Speaker 2: Yeah, and the way that we track it is through
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  Speaker 2: borrowing through the portfolio. But hypothetically you could be borrowing
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  Speaker 2: against your home to buy more exposure.
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  Speaker 4: Yeah, we say leverage.
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  Speaker 3: Think of a lever.
• 17:38
  Speaker 4: Long lever means less forced to lift a heavier object.
• 17:42
  Speaker 4: We've all done it. You got to got a pry bar,
• 17:45
  Speaker 4: you get something big and heavy, you can move it,
• 17:47
  Speaker 4: a rock, whatever. So just just just to clarify, because
• 17:50
  Speaker 4: that always.
• 17:50
  Speaker 3: Confused to me. That's fair.
• 17:52
  Speaker 4: That's what we mean by leverage. So it amplifies gains
• 17:55
  Speaker 4: potentially and losses.
• 17:57
  Speaker 2: Though the other piece of this that I have scratched.
• 18:01
  Speaker 2: I'm scratched my head a little bit. On Like, we
• 18:03
  Speaker 2: can measure the total margin debt we get reporting on
• 18:06
  Speaker 2: that fit.
• 18:07
  Speaker 4: It's like one and a half trillion right now. We
• 18:09
  Speaker 4: know it's gone up a lot in the past year.
• 18:11
  Speaker 4: By the way, it's up almost fifty percent. It's up
• 18:13
  Speaker 4: excuse me, yeah, I'll just call it fifty percent.
• 18:16
  Speaker 2: The geniuses on Wall Street, however, have made a lot
• 18:18
  Speaker 2: of innovations over the course of the last few decades,
• 18:21
  Speaker 2: and so one thing that gets brought up in this
• 18:24
  Speaker 2: piece is, yeah, you do have this degree of leverage,
• 18:28
  Speaker 2: but what happens if you're then using that borrowed money
• 18:32
  Speaker 2: to buy a leveraged ETF. That product didn't exist twenty
• 18:37
  Speaker 2: years ago, or at least I don't think it did.
• 18:41
  Speaker 2: What if you're then buying options on leveraged ETFs, therefore
• 18:45
  Speaker 2: amplifying your total degree of leverage like four x in some.
• 18:49
  Speaker 3: Cases these types of things. You know, options of.
• 18:52
  Speaker 2: Course existed twenty years ago, but the cost of trading
• 18:55
  Speaker 2: them was sometimes burdensome and most people didn't do it. Today,
• 18:59
  Speaker 2: it's really easy to do, so it's free to buy
• 19:01
  Speaker 2: the ETFs. It's very cheap to buy the options on them.
• 19:04
  Speaker 2: And so I'm not convinced that just looking at margin
• 19:08
  Speaker 2: debt to s and P five hundred market cap, No,
• 19:10
  Speaker 2: I agree, gives me any degree of certainty around how
• 19:13
  Speaker 2: much actual leverage is built up into markets when we
• 19:16
  Speaker 2: look at the function of them today that because of
• 19:19
  Speaker 2: you know, these really innovative products that have come out
• 19:21
  Speaker 2: that uh sometimes amplify risk two three.
• 19:25
  Speaker 3: Four fold quick break.
• 19:27
  Speaker 2: We've got a full market recap coming up next with
• 19:29
  Speaker 2: Wall Street Watch.
• 19:39
  Speaker 1: Like us on Facebook and follow us on Twitter at
• 19:41
  Speaker 1: TFE show. Breaking business news is always first right here
• 19:46
  Speaker 1: on the Financial Exchange Radio Network. Time out full Wall
• 19:51
  Speaker 1: Street Watch tracking the stocks FDATO and the headlines driving
• 19:55
  Speaker 1: markets so far today. Right here on the Financial Exchange
• 19:58
  Speaker 1: Radio Network.
• 19:59
  Speaker 5: Market's looking his snap their five day losing street to
• 20:02
  Speaker 5: begin the shortened holiday trading week after the US on
• 20:04
  Speaker 5: a run agreed to holidays at fighting over the straight
• 20:07
  Speaker 5: of four moves. Investors also looking ahead to the June
• 20:10
  Speaker 5: jobs report on Thursday. Right now, the Dow is up
• 20:13
  Speaker 5: three quarters of a percent, SMP five hundred, up over
• 20:16
  Speaker 5: two thirds of a percent, NASDAC now up over one percent,
• 20:20
  Speaker 5: or two hundred and seventy three points, RUSS two thousand
• 20:22
  Speaker 5: selling off one point two percent, Tenure Treasreel is flat
• 20:26
  Speaker 5: at four point three seven percent, and Oil up about
• 20:30
  Speaker 5: one and a half percent, trading at seventy dollars a barrel.
• 20:34
  Speaker 5: Some major media news this morning after Comcasts said it
• 20:37
  Speaker 5: plans to separate its media and connectivity businesses into two
• 20:42
  Speaker 5: publicly traded companies, spinning off NBC Universal and sky Comcast
• 20:47
  Speaker 5: shares are up eight percent on the news. Meanwhile, rocket
• 20:51
  Speaker 5: Lab agreed to buy a Ridium and a cash and
• 20:54
  Speaker 5: stock deal that would give a control over a satellite
• 20:57
  Speaker 5: fleet and access to wireless resources it could use to
• 21:01
  Speaker 5: compete with SpaceX rack. Rocket Lab stock is up by
• 21:06
  Speaker 5: nine percent, while Rideum shares are surging by twenty two percent. Elsewhere,
• 21:11
  Speaker 5: Charter Communications seeing its stock jump twelve percent after Bloomberg
• 21:15
  Speaker 5: reported on Friday that the company in SpaceX held exclusive
• 21:19
  Speaker 5: talks on a consumer phone product. In Verizon said it
• 21:23
  Speaker 5: projected second quarter losses of between seven hundred and eight
• 21:27
  Speaker 5: hundred million dollars, Verizon shares sinking by seven percent. I'm
• 21:33
  Speaker 5: Tucker Silvan, that is Wall Street Watch all.
• 21:35
  Speaker 2: Right, So Supreme Court rulings have been released today and
• 21:38
  Speaker 2: for the time being, it means that Lisa Cook is
• 21:42
  Speaker 2: going to remain in her job at the FED. Although
• 21:45
  Speaker 2: the Supreme Court did not They did not rule on
• 21:48
  Speaker 2: the facts in the in the case of whether or
• 21:52
  Speaker 2: not she should be removed, only that while her appeal
• 21:56
  Speaker 2: is being filed, she can't be removed. So for little
• 22:00
  Speaker 2: bit of context here, Lisa Cook, a voting member of
• 22:02
  Speaker 2: the Federal Reserve who was not supportive of lower interest rates,
• 22:07
  Speaker 2: was accused by the fhf A Director Bill Poulty of
• 22:12
  Speaker 2: mortgage fraud.
• 22:14
  Speaker 3: Basically from what we saw she had.
• 22:16
  Speaker 2: The allegations are that she applied for mortgages on multiple
• 22:21
  Speaker 2: properties as her primary residence. That's the allegation. I don't
• 22:26
  Speaker 2: know if it's true or not. It's being worked through
• 22:28
  Speaker 2: at the at the court level. She was removed by
• 22:31
  Speaker 2: the President for cause following that accusation, and then filed
• 22:35
  Speaker 2: law filed lawsuits against the administration saying that one, this
• 22:40
  Speaker 2: didn't happen, and two you know, you need to prove
• 22:44
  Speaker 2: that it happened in order to remove me effectively.
• 22:47
  Speaker 3: That that's my reading of it.
• 22:48
  Speaker 2: And as part of that lawsuit, the lower courts said, now,
• 22:53
  Speaker 2: while this is being appealed. You can still serve in
• 22:56
  Speaker 2: your job as governor of the Federal Reserve. The Trump
• 23:00
  Speaker 2: administration brought to the Supreme Court asking for the authority
• 23:03
  Speaker 2: to remove her, wallets being worked through, and in a
• 23:06
  Speaker 2: five to four ruling, so pretty close, they said no.
• 23:10
  Speaker 2: So that's where things stand for now. It does not
• 23:13
  Speaker 2: mean that Lisa Cook won't ultimately be removed. I would
• 23:16
  Speaker 2: especially assume that that's the case if she's charged with
• 23:18
  Speaker 2: a crime. But to this point, I don't believe she
• 23:21
  Speaker 2: has been charged with any crime, and she has just
• 23:24
  Speaker 2: simply been challenging the removal through the lower court system.
• 23:28
  Speaker 4: So yeah, possibly she committed mortgage fraud. Like you said,
• 23:31
  Speaker 4: let it be adjudicated. But when viewed in the context
• 23:34
  Speaker 4: of everything the president has done to try to control
• 23:36
  Speaker 4: the money supply, it is suspicious. We'll just leave it.
• 23:39
  Speaker 4: He tried to throw Powell in jail, he's trying to
• 23:41
  Speaker 4: throw Cook in jail, and he wants to control the
• 23:43
  Speaker 4: money supply. Fortunately, he's appointed a terrific All indications are
• 23:49
  Speaker 4: and I'm being a little bit premature, but I'm excited
• 23:51
  Speaker 4: about Kevin Warsh and he may end up undoing his
• 23:55
  Speaker 4: own intentions with the Warship appointment. I e. Worsh made
• 23:59
  Speaker 4: his appoint him.
• 24:00
  Speaker 3: Yeah, we will see.
• 24:01
  Speaker 2: I mean, Warsh is clearly not shaken markets, he's not
• 24:05
  Speaker 2: disappointed investors. He's not given any semblance of a hint
• 24:10
  Speaker 2: that he will be anything but independent. And time will
• 24:13
  Speaker 2: tell on that front. But for the time being, at
• 24:17
  Speaker 2: least the Supreme Court backing up some degree of the
• 24:20
  Speaker 2: independence of the FED and you know, putting some checks
• 24:23
  Speaker 2: on the White House's ability to remove sitting members there.
• 24:27
  Speaker 2: I want to move over to Warsh and you know
• 24:31
  Speaker 2: where things seem to be going, because to your point
• 24:35
  Speaker 2: at the press conference, it seemed that he was very
• 24:37
  Speaker 2: serious about inflation. He was not tiptoeing around the idea.
• 24:43
  Speaker 2: But he is also marking himself as an agent of
• 24:46
  Speaker 2: change for the Federal Reserve. If there's one thing that
• 24:50
  Speaker 2: stuck with me from that press conference, it was that
• 24:53
  Speaker 2: he wants to change a lot about how the FED works.
• 24:58
  Speaker 2: And I think I think the most uncomfortable party with
• 25:02
  Speaker 2: all of that seems to be the press, who loves
• 25:04
  Speaker 2: to cover it and get in.
• 25:05
  Speaker 4: They don't understand, forgive me, they don't understand monetary policy.
• 25:08
  Speaker 2: Agreed, I'm not saying that that's a yeah, they don't
• 25:10
  Speaker 2: get a reason to disagree with it.
• 25:12
  Speaker 4: We all know the FED has not met it's two
• 25:14
  Speaker 4: percent long term inflation target in over five years.
• 25:18
  Speaker 3: Exhibit a state of fact. Yep.
• 25:21
  Speaker 4: Moreover, the FED has already blown by its inflation target
• 25:24
  Speaker 4: in the first five months of this year. Cumulative, cumulatively,
• 25:28
  Speaker 4: prices have grown two point The price level as measured
• 25:30
  Speaker 4: by CPI has increased by over two percent so far
• 25:33
  Speaker 4: this year.
• 25:34
  Speaker 2: So we could have I mean, oh, just through multiplying that.
• 25:39
  Speaker 4: Yeah, yeah, so if we had zero inflation from here
• 25:41
  Speaker 4: on in, the FED would still have failed. Now that
• 25:44
  Speaker 4: zero inflation would point to obviously that would be auspicious
• 25:49
  Speaker 4: for future inflation, so you wouldn't conclude that we were
• 25:51
  Speaker 4: on the wrong track there. But still it shows how
• 25:54
  Speaker 4: difficult it is to rein in inflation once you once
• 25:58
  Speaker 4: it becomes persistent embedded. Now, this is not one episode here.
• 26:02
  Speaker 4: I'm talking about the last several years, and there were
• 26:04
  Speaker 4: various factors pushing it above its trend goal. Warsh is
• 26:12
  Speaker 4: trying to estel to the extent that the regime change
• 26:15
  Speaker 4: he likes to talk about facilitates price stability. It's all good.
• 26:19
  Speaker 4: If it doesn't, nobody's going to care. If less chatter
• 26:25
  Speaker 4: allows people to form clear inflation expectations, thereby making inflation
• 26:30
  Speaker 4: easier to tame when it gets out of control, and
• 26:33
  Speaker 4: that's the only reason you want to manage expectations. If
• 26:37
  Speaker 4: refinement of the Fed's models, which he's going to need
• 26:40
  Speaker 4: a lot of help with because he's a lawyer, not
• 26:42
  Speaker 4: an economist, but if that leads to better out in
• 26:45
  Speaker 4: other words, the proof is I'll just stop babbling and
• 26:47
  Speaker 4: say the proof is in the pudding here. If this
• 26:49
  Speaker 4: leads to price stability, then whatever he does will have
• 26:52
  Speaker 4: been viewed as self evidently good.
• 26:55
  Speaker 2: I tend to agree, and just selfishly, I found the
• 27:00
  Speaker 2: number of speeches given by FED governors and just you know,
• 27:03
  Speaker 2: big public statements about the direction of policy to be
• 27:07
  Speaker 2: confusing and not terribly helpful. And it got to the
• 27:10
  Speaker 2: point where even folks like you and I, who spend
• 27:15
  Speaker 2: most of our days thinking about the FED and talking
• 27:17
  Speaker 2: about interest rate policy and economic policy, we weren't paying attention.
• 27:22
  Speaker 3: To those speeches.
• 27:23
  Speaker 2: And so you know, what is the point if even
• 27:25
  Speaker 2: the closest economic and market followers aren't really paying attention.
• 27:29
  Speaker 3: So I agree there.
• 27:32
  Speaker 2: The question is what happens there. And I there's this
• 27:37
  Speaker 2: piece from the Wall Street Journal that I just kind
• 27:39
  Speaker 2: of vehemently disagree with. It's titled how a tight liped
• 27:42
  Speaker 2: Fed could lead to higher mortgage rates, and I suppose
• 27:46
  Speaker 2: anything could lead to higher mortgage rates. But they bring
• 27:50
  Speaker 2: up that, hey, if you don't really know what the
• 27:51
  Speaker 2: path is going to.
• 27:52
  Speaker 3: Be, that there could be more volatility in bond markets.
• 27:56
  Speaker 2: And my counterpoint would be that, yeah, that could lead
• 27:59
  Speaker 2: to higher or lower rates depending on the direction of
• 28:02
  Speaker 2: things if you don't have as much clarity as you
• 28:04
  Speaker 2: used to. And furthermore, it's really unclear to me that
• 28:09
  Speaker 2: the number of speeches and forward guidance that was given
• 28:12
  Speaker 2: actually did satisfy anybody in terms of the direction of
• 28:15
  Speaker 2: interest rates.
• 28:17
  Speaker 4: Yeah, forward guidance should only be used when you're at
• 28:19
  Speaker 4: the zero lower bound. It's a theoretical idea, so there's
• 28:23
  Speaker 4: nothing wrong with invoking theory here. Zero lower bound means
• 28:26
  Speaker 4: you can't lower interest rates anymore. Literally, you're at zero.
• 28:29
  Speaker 4: If inflation starts at two, you go into a deep percession.
• 28:33
  Speaker 4: You cut rates to zero. The real Fed funds rate
• 28:35
  Speaker 4: is minus two. That's as low as you can go
• 28:38
  Speaker 4: if inflation starts at four, you go into a bad recession.
• 28:41
  Speaker 4: You cut rates to zero. Real FED funds is minus four.
• 28:43
  Speaker 4: That's more stimulative. This is where those proposals for negative
• 28:47
  Speaker 4: interest rates came into play during the Great Recession. Second
• 28:51
  Speaker 4: best solution there is forward guidance, convincing markets that you
• 28:55
  Speaker 4: won't raise rates even if inflation picks up. That raises
• 28:57
  Speaker 4: inflation expectations, thereby lowering real interest rates. I know what
• 29:01
  Speaker 4: I just said was a confusing word salad, but it
• 29:04
  Speaker 4: was the most concise explanation I can come up with
• 29:06
  Speaker 4: for the theory behind the way modern central bankers do
• 29:09
  Speaker 4: their job. So we should just put for Warsh's right,
• 29:12
  Speaker 4: we should put forward guidance aside, except for the cases
• 29:16
  Speaker 4: and they are edge cases. I hate that sort of jargon,
• 29:19
  Speaker 4: but it applies when forward guidance is probably useful. He's
• 29:24
  Speaker 4: right in that you don't need to be forward guiding
• 29:26
  Speaker 4: markets all the time.
• 29:27
  Speaker 2: The Wall Street journals, What do you point to in
• 29:29
  Speaker 2: terms of historical things that the Fed has done where
• 29:32
  Speaker 2: you say ford guidance has been necessary? The main things
• 29:34
  Speaker 2: that I can think of during the Great Recession, Yeah,
• 29:36
  Speaker 2: Great Recession and March of twenty twenty when Powell is
• 29:40
  Speaker 2: look what.
• 29:40
  Speaker 4: Forward guy, Yeah, we were against the zero lower bound.
• 29:42
  Speaker 4: There again, fancy way of saying, FED can't cut rates anymore,
• 29:46
  Speaker 4: can't get real rates any lower than minus whatever the
• 29:48
  Speaker 4: inflation was going into it, if you want to think
• 29:50
  Speaker 4: about it that way. So there's a case for it there. Unfortunately,
• 29:55
  Speaker 4: in twenty twenty one, they tied their forward guidance, tied
• 30:00
  Speaker 4: their hands. They said. Remember at the time they said
• 30:02
  Speaker 4: something to the effective we're not going to raise rates
• 30:04
  Speaker 4: for four or five years. It was really dramatic. They
• 30:07
  Speaker 4: were using forward guidance there to get inflation expectations up
• 30:12
  Speaker 4: thereby lower reel interest rates and stimulate the economy. Unfortunately,
• 30:15
  Speaker 4: they were too true to their word. They were afraid
• 30:19
  Speaker 4: if they then went back in twenty twenty two and
• 30:21
  Speaker 4: twenty one, excuse me, it started raising rates a lot
• 30:24
  Speaker 4: to keep up with inflation, which in retrospect and at
• 30:26
  Speaker 4: the time a lot of people pointed this out they
• 30:28
  Speaker 4: should have been doing that they would be viewed as
• 30:30
  Speaker 4: less credible in the future. What I just said also
• 30:33
  Speaker 4: sounds confusing even to me, but suffice to say, forward
• 30:37
  Speaker 4: guidance can also tie your hands, and it did in
• 30:39
  Speaker 4: twenty twenty one.
• 30:40
  Speaker 2: Let's take a quick break when we come back. The
• 30:43
  Speaker 2: AI exuberance that is leading to a huge investment in
• 30:47
  Speaker 2: the United States. Where is it coming from, where might
• 30:50
  Speaker 2: it go? And what does it mean long term? That's
• 30:52
  Speaker 2: next year on the Financial Exchange.
• 30:54
  Speaker 3: Miss the show.
• 30:55
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• 31:17
  Speaker 1: Face is the Financial Exchange.
• 31:31
  Speaker 2: See Financial Times has a piece this morning on the
• 31:34
  Speaker 2: AI exuberance, and really the point that they are making is, Hey,
• 31:39
  Speaker 2: all of this AI exuberance risks ending in a lengthy
• 31:43
  Speaker 2: investment bust, to which I would say, it doesn't risk it.
• 31:47
  Speaker 3: It's almost a certainty.
• 31:48
  Speaker 2: When you have a new technology driving massive new investment
• 31:54
  Speaker 2: into every aspect of the AI trade, there's only really
• 31:59
  Speaker 2: one thing can happen, which is ultimately a bust.
• 32:03
  Speaker 3: It's purely a question of how big.
• 32:05
  Speaker 2: That bust ends up being it's a lot of alliteration
• 32:09
  Speaker 2: there for the moment, but to put it plainly, they're
• 32:13
  Speaker 2: expected to spend about are we expected in the United
• 32:16
  Speaker 2: States spend about a trillion dollars in twenty twenty six
• 32:21
  Speaker 2: on capital expenditures related to artificial intelligence, And my conclusion
• 32:26
  Speaker 2: on this is that not every dollar of that is
• 32:29
  Speaker 2: going to be spent intelligently. Sorry for using the word
• 32:32
  Speaker 2: intelligence when describing AI intelligence AI build out, but there's
• 32:37
  Speaker 2: no way that when you're trying to spend a trillion
• 32:40
  Speaker 2: dollars in a year that it's all done efficiently with
• 32:43
  Speaker 2: the right contractors who know what they are doing, and
• 32:47
  Speaker 2: what you're going to have is probably a whole bunch
• 32:49
  Speaker 2: of waste, because these companies are basically just saying, I
• 32:53
  Speaker 2: don't care what it costs, build it as quickly as
• 32:56
  Speaker 2: humanly possible, and you know, consequences be damned.
• 33:01
  Speaker 3: We want this built yesterday, and.
• 33:03
  Speaker 2: So I don't My problem is I don't know which
• 33:06
  Speaker 2: ones are going to be good at this and which
• 33:07
  Speaker 2: ones are going to.
• 33:08
  Speaker 3: Be bad at this.
• 33:09
  Speaker 2: But I can assure you that not every single company
• 33:12
  Speaker 2: that has been tasked with some part of the AI
• 33:15
  Speaker 2: supply chain is going to end up being a winner
• 33:17
  Speaker 2: in artificial intelligence twenty years from now, and unfortunately for investors,
• 33:22
  Speaker 2: that's kind of how markets are pricing them all right now.
• 33:25
  Speaker 3: Not universally.
• 33:26
  Speaker 2: I know that a bunch of companies fell pretty big
• 33:28
  Speaker 2: last week on renewed AI concerns, but by and large,
• 33:33
  Speaker 2: that's my read on the stock market right now at least,
• 33:36
  Speaker 2: is most companies, if they are willing to, if they're
• 33:41
  Speaker 2: able to legitimately point to something in their business model
• 33:44
  Speaker 2: that has to do with supplying artificial intelligence to you, me,
• 33:48
  Speaker 2: and everyone's mother, then their stock price gets a giant bid,
• 33:52
  Speaker 2: regardless of the fundamental surrounding it and how important they
• 33:55
  Speaker 2: are to that overall trade.
• 33:57
  Speaker 4: Yeah, this report, there's a lot of editorializing, and it
• 34:01
  Speaker 4: comes from the Bank for International Settlements a Bank of
• 34:06
  Speaker 4: or Bank four Bank four International Settlements. Probably never heard
• 34:09
  Speaker 4: of it. It's the central bankers central bank, so the Fed,
• 34:13
  Speaker 4: boj whatever. They have agreed that they need coordination for
• 34:20
  Speaker 4: certain banking services, Economic research, which is the group that
• 34:23
  Speaker 4: this comes out of. Stuff like that. So that's who
• 34:25
  Speaker 4: they are. They tend to be. What is it, a
• 34:30
  Speaker 4: Cassandra that worries a lot. Yeah, I think from thought,
• 34:34
  Speaker 4: I know if someone's like because I don't I don't
• 34:36
  Speaker 4: know mythology, but you know what, they tend to be warriors.
• 34:40
  Speaker 4: They handring about a lot of things. But this piece
• 34:43
  Speaker 4: has some wonderful little nuggets including they cite past episodes railroads,
• 34:51
  Speaker 4: canal construction, and railroads which occurred I guess about the
• 34:54
  Speaker 4: same time. Maybe Canal's came a little bit Yeah, canals
• 34:56
  Speaker 4: came a little bit sooner, and then railroads out of business.
• 34:59
  Speaker 4: Right electric dot com boom periods of massive exuberance excitement
• 35:04
  Speaker 4: over investment followed by a bus a bust. Bis says
• 35:08
  Speaker 4: these episodes ended with an eventual reversal in investment, inducing
• 35:12
  Speaker 4: economy wide recessions. The scale and pace of the current
• 35:14
  Speaker 4: AI investment boom, accompanied by expectations of large, large productivity payoffs,
• 35:20
  Speaker 4: bear resemblance to these precedents, highlighting potential downside risks in
• 35:25
  Speaker 4: the near term. Yeah it sounds like you on any
• 35:27
  Speaker 4: given day.
• 35:28
  Speaker 3: Yeah it does. I do not disagree.
• 35:30
  Speaker 2: And again, I think the important thing to recognize, because
• 35:34
  Speaker 2: we forget, is there's a lot of historical precedents.
• 35:37
  Speaker 3: For what we are experiencing right now in the US economy.
• 35:40
  Speaker 2: And it's exciting, it's fun, but historically it hasn't ended
• 35:45
  Speaker 2: terribly well.
• 35:46
  Speaker 4: Yeah, what a wonderful little list here, And if you
• 35:48
  Speaker 4: want to sound smarter to party, you say it's going
• 35:49
  Speaker 4: to And just like canals and railways, electrification in the
• 35:52
  Speaker 4: dot com boom, you covered like two hundred years in
• 35:55
  Speaker 4: five seconds.
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  Speaker 5: Cushing and Dolan has created a new guide called Demystifying
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  Speaker 1: The proceeding was paid for and the views expressed are
• 36:57
  Speaker 1: solely those of Cushing and Dolan. Cushing and Dolan and
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  Speaker 1: Cushing and Armstrong did not endorse each other and are
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  Speaker 1: not affiliated.
• 37:06
  Speaker 2: Analysts say that auto sales could fall by more than
• 37:09
  Speaker 2: two million units by twenty forty due to a wide
• 37:12
  Speaker 2: array of things here in the United States, including falling
• 37:15
  Speaker 2: birth rates, behavioral changes, high car prices, and then alternatives
• 37:19
  Speaker 2: such as self driving, robotaxes and things like that, which
• 37:21
  Speaker 2: all sound plausible to me.
• 37:23
  Speaker 3: But I was reading this piece and it just.
• 37:27
  Speaker 2: It's basically describing the end of America as we know
• 37:30
  Speaker 2: it through the eyes of an auto executive. Yeah, we're
• 37:33
  Speaker 2: not having any babies anymore, and we pretty much don't
• 37:37
  Speaker 2: allow migration to this country, and so it's gonna be
• 37:40
  Speaker 2: tough to sell cars. And I can't help but focus
• 37:43
  Speaker 2: on the things that are going to matter a little
• 37:44
  Speaker 2: bit more in those scenarios, like we won't be able
• 37:47
  Speaker 2: to afford social Security or Medicare or things.
• 37:52
  Speaker 4: He might be right by the way, and that's actually
• 37:54
  Speaker 4: a fairly plausible prognosis, don't you sure?
• 37:56
  Speaker 3: Yeah. I mean, if there's fewer people to buy cars,
• 37:58
  Speaker 3: there's gonna be fewer.
• 37:59
  Speaker 4: Cars, less need for cars. Maybe AI allows for more.
• 38:02
  Speaker 2: I don't disagree it's accurate. I just think there are
• 38:04
  Speaker 2: bigger problems that we have to face. Let's create take
• 38:07
  Speaker 2: a quick break. Marcu's strongly in positive territory, but they've
• 38:10
  Speaker 2: been volatile this morning. We'll have a full recap and
• 38:13
  Speaker 2: more for you next on the Financial Exchange.