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Why the Fed May Be Losing Control of Inflation · The Financial Exchange Show

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  Speaker 1: 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 a Tuesday where markets
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  Speaker 2: are in selloff mode after spending the last week around
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  Speaker 2: or near their all time highs. This S and P
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  Speaker 2: five hundred off now three quarters of a percent, fifty
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  Speaker 2: four points a NASDAC off one and a quarter three
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  Speaker 2: hundred and twenty nine points now. Jones Industrial Average off
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  Speaker 2: about half a percent two hundred and seventy one points.
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  Speaker 2: All of this on the back of an inflation report
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  Speaker 2: that we got this morning at eight thirty am, confirming
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  Speaker 2: what we all kind of knew, which is inflation sucks
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  Speaker 2: right now. Prices overall, from a headline perspective where you'll
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  Speaker 2: see it quoted, came in at a three point eight
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  Speaker 2: percent year over year increase six tens a percent. If
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  Speaker 2: you look at the month over month that fo follows
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  Speaker 2: a pretty robust price increase for the month of March
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  Speaker 2: as well, and it's now spreading beyond just the energy component.
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  Speaker 3: In March, when you took a look at the.
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  Speaker 2: Month over month numbers, really where you saw a surge
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  Speaker 2: was energy prices. You continue to see that in April,
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  Speaker 2: with energy prices overall up an additional three point eight
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  Speaker 2: percent in the month of April, however, you saw food
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  Speaker 2: prices increase half percent and shelter prices increase six tenths
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  Speaker 2: of a percent in the month of April, all contributing
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  Speaker 2: to an inflation report that was worse than anticipated. When
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  Speaker 2: you strip out that food and energy component, which is
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  Speaker 2: what some at the FED like to do when trying
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  Speaker 2: to get at a sense of core inflation or trend
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  Speaker 2: inflation that you know, takes out some of those big
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  Speaker 2: one off price spikes, you did see that increase at
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  Speaker 2: a pretty uncomfortable rate here. So in April compared to March,
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  Speaker 2: you saw at a four tenths percent increase month over
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  Speaker 2: month two point eight percent year over year. And you know,
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  Speaker 2: whether you want to annualize the April figure or just
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  Speaker 2: look at the year over year numbers, what you can
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  Speaker 2: get a sense of is that even excluding the price
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  Speaker 2: shock from energy, we're facing an a inflation report here
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  Speaker 2: that is hotter than expected and puts the FED in
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  Speaker 2: a diff pretty difficult position for incoming chair Kevin worsh
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  Speaker 2: The FED Fund's target rate right now is sitting at
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  Speaker 2: three and a half to three point seven five percent.
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  Speaker 2: And what's important about that and this inflation report is
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  Speaker 2: it is now lower than.
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  Speaker 3: The year over year inflation number.
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  Speaker 2: Now some might say that that's not the perfect comparison,
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  Speaker 2: but when you talk about high inflation, what you want
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  Speaker 2: is restrictive federal reserve policy that is designed to bring
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  Speaker 2: that inflation back down. Or I think that's what most
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  Speaker 2: would agree that you want from a federal reserve. And
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  Speaker 2: you can make the argument now that you know, while
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  Speaker 2: the FED had these dreams of bringing interest rates down
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  Speaker 2: to further economic growth and ensure that we don't dip
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  Speaker 2: into recession, you can now make an argument that the
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  Speaker 2: Fed's policy is stimulative. And that is a problem when
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  Speaker 2: you have an inflationary environment that has not been fully
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  Speaker 2: defeated over the last four years. Right, this has been
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  Speaker 2: this ongoing battle since twenty twenty two to bring inflation
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  Speaker 2: back down to that two percent target. We've never gotten there,
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  Speaker 2: and now we're heading back in the wrong direction.
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  Speaker 4: Yeah, the FED is certainly not responsible for the oil
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  Speaker 4: price spikes. That was true in the seventies two, although
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  Speaker 4: some researchers argued that easy monetary policy contributed to the
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  Speaker 4: magnitude of the spike. That's probably not the case this time.
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  Speaker 4: I mean, you don't need any rigorous analysis of this episode.
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  Speaker 4: It's directly attributable to the conflict in Iran. So what
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  Speaker 4: does the FED do about it? Given that the FED
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  Speaker 4: is responsible for long term inflation, which is which the
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  Speaker 4: FED targets at two percent, or about half the prior
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  Speaker 4: twelve month inflation rate, So inflation is running at about
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  Speaker 4: twice the Fed's target if you use headline CPI as
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  Speaker 4: your measure, does the Fed hike rates and impose some
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  Speaker 4: economic suffering on the economy in order to keep inflation
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  Speaker 4: to reduce the rate of inflation? Or does the Fed accommodate,
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  Speaker 4: so to speak, the shock do nothing? Let real interest
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  Speaker 4: rates potentially go negative. Real interest rates if you use
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  Speaker 4: either future inflation or as you just did, past twelve
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  Speaker 4: months inflation, they're zero and zero's being generous. They're probably
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  Speaker 4: negative right now, Which is itself stimulative? That should all
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  Speaker 4: lse will contribute to inflation. It's it's a huge pickle
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  Speaker 4: mic and that's an understatement. And it couldn't come at
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  Speaker 4: a worst worse time for the FED, given even if
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  Speaker 4: Warsh weren't perceived as the president's puppet, and the burden
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  Speaker 4: is on him to prove that he isn't. But even
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  Speaker 4: if he weren't perceived as that that which deprives the
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  Speaker 4: FED of credibility and makes fighting inflation harder, it would
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  Speaker 4: be a challenge even if Warsh didn't come into this
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  Speaker 4: impaired by that perception.
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  Speaker 2: When we go take a look at FED funds futures,
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  Speaker 2: which anybody can do, there's a free tool at the
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  Speaker 2: Chicago Mercantile Exchange where you can look at where markets
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  Speaker 2: are pricing in interest rates. This is not indicative of
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  Speaker 2: where interest rates will actually go. They're frequently wrong about
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  Speaker 2: any of this, but it does give you a sense
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  Speaker 2: of where investors are laying out their bets. When I
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  Speaker 2: take a look at the next upcoming meeting, which is
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  Speaker 2: you know, only a month away now, there is basically
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  Speaker 2: being priced in no possibility of a rate cut. What's
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  Speaker 2: interesting to me is when I fast forward all the
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  Speaker 2: way to December. At that point, you know a few
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  Speaker 2: months ago, before the conflict in Iran, there is a
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  Speaker 2: very high likelihood of rates being cut by that December meeting.
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  Speaker 2: You know, not at that December meeting, but you know
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  Speaker 2: a cumulative number of cuts by that December meeting. We
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  Speaker 2: are now looking at today a three percent chance that
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  Speaker 2: rates are lower by December than they are now, and
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  Speaker 2: a ninety seven percent chance rates are at least as
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  Speaker 2: high as they are now, if not higher.
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  Speaker 4: Yeah, looks oil prices could come down and that'll bring
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  Speaker 4: down headline inflation. The question is what's going on with
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  Speaker 4: underlying inflation core as a proxy for that. There are
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  Speaker 4: other measures that trim outliers, trim mean measures, one of
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  Speaker 4: which is the media and that'll be released soon by
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  Speaker 4: the Cleveland Fed. It's not an official statistic, but it's
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  Speaker 4: a useful way to get at trend inflation. Is there
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  Speaker 4: excess demand in the economy? That's something the FED can
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  Speaker 4: do something about.
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  Speaker 3: Well.
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  Speaker 2: I think part of the problem here is I think
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  Speaker 2: that expectations around the Strait of Hormuz are beginning to change.
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  Speaker 2: And some of the best case scenarios that I'm hearing
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  Speaker 2: laid out by geopolitical experts it's hey, traffic returns to
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  Speaker 2: a high degree of normalcy, but Iran is collecting some
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  Speaker 2: sort of toll and periodically shuts it down in order
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  Speaker 2: to show how influential they are. On the flow of
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  Speaker 2: traffic or that doesn't happen. But the US is far
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  Speaker 2: more militarily involved in Iran for a longer period of
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  Speaker 2: time time and those are pretty ugly scenarios for inflation
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  Speaker 2: either way. Last year we had the somewhat humorous taco
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  Speaker 2: trade is what people were talking about in the months
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  Speaker 2: after the layout of tariffs, when the president would, you know,
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  Speaker 2: kind of bring the markets to the precipice and then
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  Speaker 2: back down from the tariff plans, or negotiate with the
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  Speaker 2: country and then back down at the last second. Now
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  Speaker 2: we've got the nacho trade is what people are talking
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  Speaker 2: about on Wall Street.
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  Speaker 3: The not a chance.
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  Speaker 2: Horror moves opens. Interesting acronym, kind of funny acronym. I
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  Speaker 2: don't know that I see that reflected in markets, quite honestly.
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  Speaker 2: I mean, you can go take a look at a
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  Speaker 2: few well, I guess it depends on your perspective. But
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  Speaker 2: if you genuinely did not believe that Hormuves was going
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  Speaker 2: to reopen this year, then oil prices don't belong anywhere
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  Speaker 2: near one hundred dollars a bar.
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  Speaker 4: I don't know what the right price is. It depends
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  Speaker 4: on your assumptions about how sensitive or not demand is
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  Speaker 4: and how quickly are the sources of supply can come
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  Speaker 4: on line? I guess, but I do know that there
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  Speaker 4: should be a risk premium now on everything that wasn't
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  Speaker 4: there before we gave or Ran a blueprint for holding
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  Speaker 4: the world hostage.
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  Speaker 3: Whoops.
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  Speaker 4: Now they're going to exercise they have optionality, as finance
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  Speaker 4: dudes like to say Iran as optionality they didn't have before.
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  Speaker 4: The price for that optionality is being We gave them
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  Speaker 4: that option, by the way normally have to pay to
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  Speaker 4: acquire it. We gave it to them, and they will
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  Speaker 4: exercise that presumably from time to time. And the price.
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  Speaker 3: Unless we completely remove the influence of that group.
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  Speaker 4: And what takeover a country what three or four times
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  Speaker 4: the size of California with ninety million people, a two
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  Speaker 4: thousand year old civilization, I mean, forget about it. That's
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  Speaker 4: the political environment here. I don't think we'll brook that,
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  Speaker 4: we'll tolerate that. So we're going to have to live
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  Speaker 4: with this sword hanging over our heads for the foreseeable future. Ever,
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  Speaker 4: Ran just sort of shutting off the spicket when something
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  Speaker 4: irritates them. By the way we showed them how to
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  Speaker 4: do it.
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  Speaker 2: There is a bet that you can place on polymarket,
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  Speaker 2: which again I don't view polymarket betting as predictive for
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  Speaker 2: what is going to happen, but clearly put people are
• 10:05
  Speaker 2: wagering on things like this over there, and there's a
• 10:07
  Speaker 2: bet on polymarket as to whether or not the Straight
• 10:09
  Speaker 2: of Hormuz traffic will return to normal by end of June.
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  Speaker 2: And they have a definition of normal here as a
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  Speaker 2: seven day moving average of transit calls for the Straight.
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  Speaker 3: Equal to or above sixty.
• 10:22
  Speaker 2: For any day between now and June thirtieth, So that's
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  Speaker 2: how they're measuring the yes or no of this bet.
• 10:28
  Speaker 2: And back on April seventeenth, when negotiations we're seeming playing
• 10:33
  Speaker 2: out and talking about ceasefire, there was an eighty eight
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  Speaker 2: percent chance that people were betting that, yeah, the Strait
• 10:39
  Speaker 2: of Hormze traffic would return to normal.
• 10:41
  Speaker 3: Today we're sitting at thirty three.
• 10:45
  Speaker 2: So again, where people are putting their money right now
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  Speaker 2: is that there is a one in three chance that
• 10:50
  Speaker 2: traffic returns to normal in the Strait of Hormuz by
• 10:53
  Speaker 2: the end of June. And I don't think I need
• 10:55
  Speaker 2: to go into the details of how ugly a scenario
• 10:58
  Speaker 2: that looks like for er G aluminum fertilizer supplies globally
• 11:05
  Speaker 2: and prices here domestically for gasoline. If that traffic has
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  Speaker 2: not returned to normal by the end of JUNEY, it
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  Speaker 2: is immensely problematic for the global economy.
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  Speaker 4: I think is yeah, the next several years will be
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  Speaker 4: challenging as we source supply from elsewhere or build pipelines
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  Speaker 4: around it and continue the move to alternative energy. I
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  Speaker 4: assume that this shock, like the first and second shocks
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  Speaker 4: of the seventies, the Opek and then the Iran Revolution
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  Speaker 4: shock motivated changes in behavior. This shock will too motivate
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  Speaker 4: changes in behavior, but it took years for things to
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  Speaker 4: sort of recalibrate.
• 11:40
  Speaker 3: Let's take a quick break. When we come back.
• 11:42
  Speaker 2: Michael Burry's got a warning out there for stock investors,
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  Speaker 5: All right, Sam, for sure you here on the Financial
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  Speaker 5: Exchange and on this day. In nineteen ninety four, Pulp
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  Speaker 2: Well, Michael Burry is out with another warning for stock
• 13:26
  Speaker 2: investors as he compares today's markets to the two thousand's peak.
• 13:32
  Speaker 2: And I want, actually, I want to spend a minute
• 13:35
  Speaker 2: on Michael Burry here, because it's been a hot minute
• 13:39
  Speaker 2: since we've talked about him, and the guy was incredibly successful.
• 13:43
  Speaker 2: If you've seen the film Big Short, which now came
• 13:45
  Speaker 2: out eleven years ago, dear God. He was portrayed by
• 13:48
  Speaker 2: Christian Bale in that film, So if you can think
• 13:50
  Speaker 2: back to that film, that's who portrayed him. If you
• 13:54
  Speaker 2: read the book, then you might remember it a little
• 13:55
  Speaker 2: bit better. But he very early on in the mid
• 14:00
  Speaker 2: two thousands, identified what he estimated to be a massive
• 14:04
  Speaker 2: problem with the housing sector and specifically the mortgage market
• 14:08
  Speaker 2: involved in the housing sector, and effectively created the financial
• 14:12
  Speaker 2: products that allowed himself and other investors to short that
• 14:16
  Speaker 2: market via via his hedge fund.
• 14:22
  Speaker 3: The Few Things.
• 14:23
  Speaker 2: So he was one correct and made his investors in
• 14:26
  Speaker 2: absolute fortune in that fund. And I think most people
• 14:30
  Speaker 2: are kind of aware of that that, hey, he successfully
• 14:33
  Speaker 2: bet against the housing market and made these investors a fortune.
• 14:36
  Speaker 2: What people, I think failed to realize. And the book
• 14:39
  Speaker 2: itself actually makes this point. He started shorting the housing
• 14:42
  Speaker 2: market in two thousand and five, his investors attempted to
• 14:47
  Speaker 2: bail out on him and completely exit his fund. He
• 14:50
  Speaker 2: had to restrict withdrawals, he had to stand up to
• 14:53
  Speaker 2: his investors and basically tell them they were wrong for
• 14:56
  Speaker 2: three years before finally getting that massive payoff after the
• 15:01
  Speaker 2: thing all fell apart, and since then, maybe he would disagree,
• 15:06
  Speaker 2: but I don't think you can point to any massive
• 15:08
  Speaker 2: successes in calling a big macro trend like the one
• 15:12
  Speaker 2: that we experienced in two thousand and eight. It's not
• 15:14
  Speaker 2: to say he's a bad investor. It's just to say
• 15:16
  Speaker 2: that he has issued plenty of other warnings, one about
• 15:18
  Speaker 2: the ETF industry back in twenty nineteen, several since twenty
• 15:22
  Speaker 2: twenty about meme stocks and other concerning areas of the market.
• 15:27
  Speaker 2: And honestly, at this stage, I guess my point.
• 15:31
  Speaker 3: Would be a fewfold.
• 15:32
  Speaker 2: He'll probably be right about some big thing again in
• 15:35
  Speaker 2: the future because he makes a lot of big, bold predictions.
• 15:38
  Speaker 2: But most people cannot invest like Michael Burry does, Meaning
• 15:44
  Speaker 2: most people can't afford to sit on the sideline of
• 15:47
  Speaker 2: a market for three years and lose money while the
• 15:49
  Speaker 2: rest of the stock market is making tremendous amounts of
• 15:52
  Speaker 2: money and stick with that all the way through seeing
• 15:55
  Speaker 2: the biggest financial crisis that we've ever seen in history.
• 15:58
  Speaker 2: And so here's my overall take with this, Michael Berry,
• 16:02
  Speaker 2: you know, an important role in calling the financial crisis
• 16:06
  Speaker 2: and bringing it to light and being able to successfully
• 16:09
  Speaker 2: explain it to investors. Unclear that he has any predictive
• 16:13
  Speaker 2: value for the future, or that even if he does,
• 16:16
  Speaker 2: anybody else should listen to his advice and invest the
• 16:19
  Speaker 2: way that he does.
• 16:22
  Speaker 4: Yeah, I mean certain segments of the market are at
• 16:24
  Speaker 4: extreme values, whether you prefer fundamental analysis like the price book,
• 16:28
  Speaker 4: price sales.
• 16:29
  Speaker 2: And that's where I struggle is because a lot of
• 16:31
  Speaker 2: his points that he's making right now I tend to
• 16:33
  Speaker 2: agree with, like, sure, the market does well, that's in
• 16:34
  Speaker 2: a lot of ways looks similar to Yeah.
• 16:36
  Speaker 4: But that's that's that's circular. If if you think of
• 16:40
  Speaker 4: value in excess of X is extreme, then by definition
• 16:45
  Speaker 4: the market is extreme. Is priced for extreme outcomes that
• 16:50
  Speaker 4: are unlikely to So I don't love that because it's
• 16:53
  Speaker 4: in the eye of the beholder. Sure, but okay, So
• 16:55
  Speaker 4: that's the fundamental approach. It's a technical approach. Some people
• 16:57
  Speaker 4: like to create a two hundred day or whatever moving
• 17:01
  Speaker 4: average series and compare that to the current price, or
• 17:03
  Speaker 4: compare that to the fifty day moving average series. Technicians
• 17:07
  Speaker 4: do all kind they contort themselves in all kinds of
• 17:11
  Speaker 4: different ways to arrive at and I'm not I actually
• 17:14
  Speaker 4: think there's a lot to it because those prophecies can
• 17:16
  Speaker 4: become self fulfilling. So it's almost undeniable that the market
• 17:20
  Speaker 4: that market valuation or technical measures of market fundamental or
• 17:24
  Speaker 4: technical are at extremes. The question is do the investments
• 17:29
  Speaker 4: being made today by technology companies generate the income to
• 17:33
  Speaker 4: provide the free cash flow? And I'm missing a lot
• 17:35
  Speaker 4: of steps between net income and free cash flow and
• 17:37
  Speaker 4: my little in my little monologue here, but to justify
• 17:43
  Speaker 4: these investments. I happen to think that Bury's probably right
• 17:47
  Speaker 4: because big periods of overinvestment of investment, excuse me, have
• 17:50
  Speaker 4: generally resulted in over capacity. Free cash flow doesn't bounce back,
• 17:56
  Speaker 4: a lot of companies will go out of business. So
• 17:58
  Speaker 4: from that perspective, if that's what his thesis is, I
• 18:01
  Speaker 4: think he's probably right. But I think you made the
• 18:04
  Speaker 4: mom I'm going on and on here, please jump it. Okay, Well,
• 18:06
  Speaker 4: so how do you bet against it. In five four
• 18:09
  Speaker 4: oh five, he went to Goldman and Deutsche Bank and
• 18:12
  Speaker 4: others and said, I want to bet against these very
• 18:14
  Speaker 4: particular slices of these complex portfolios of mortgages you have.
• 18:19
  Speaker 3: How do I do that?
• 18:20
  Speaker 4: And they said, well, you can create something called a
• 18:23
  Speaker 4: credit default swap CDs. That's like an insurance policy. That'd
• 18:28
  Speaker 4: be like me buying an insurance policy on you. Like
• 18:29
  Speaker 4: I've seen Mike eating lately, He's up to like three
• 18:32
  Speaker 4: whoppers a day. Can I buy an insurance policy on him?
• 18:35
  Speaker 4: And Goldman, Sachs or whatever.
• 18:37
  Speaker 3: Saying yeah, okay, I mean we'll do it.
• 18:38
  Speaker 4: Not an interested party, but yeah, we agree he's a
• 18:41
  Speaker 4: time bomb.
• 18:43
  Speaker 3: So he bought. They actually didn't have to agree.
• 18:44
  Speaker 2: They just said, yeah, we'll create the product for you,
• 18:46
  Speaker 2: and we'll make money by selling the other side of
• 18:48
  Speaker 2: that trade to somebody else.
• 18:49
  Speaker 3: Yeah.
• 18:49
  Speaker 4: But at my point, it all had to come together,
• 18:52
  Speaker 4: so there was no marketable instrument for him to express
• 18:55
  Speaker 4: his views. He right at the time, as I understand it,
• 18:59
  Speaker 4: the credit of false swaps, they're not you had to
• 19:01
  Speaker 4: createtly trade it. He and the bankers had to get
• 19:03
  Speaker 4: together and agree that it made sens as you point
• 19:05
  Speaker 4: out for both sides.
• 19:06
  Speaker 2: Yeah today, I mean, if he really stands by this,
• 19:09
  Speaker 2: I guess there's two ways to do it. Exit the
• 19:11
  Speaker 2: positions or bet against them. It's a lot more. It's
• 19:14
  Speaker 2: a completely let what your do do today than back
• 19:16
  Speaker 2: in two thousand and eight, So who knows if he's
• 19:18
  Speaker 2: actually expressing all that is the other piece of this.
• 19:21
  Speaker 2: Let's take a quick break when we come back. Full
• 19:23
  Speaker 2: market update on a sell off day due to inflation concerns.
• 19:26
  Speaker 2: That's next on the Financial Exchange.
• 19:40
  Speaker 1: Bringing the latest financial news straight to your radio. Every day.
• 19:44
  Speaker 1: It's the Financial Exchange on the Financial Exchange Radio Network.
• 19:51
  Speaker 1: Tell you out full Wall Street Watch, treking the stocks,
• 19:54
  Speaker 1: the data, and the headlines driving markets so far today
• 19:57
  Speaker 1: right here on the Financial Exchange Radio Network.
• 20:01
  Speaker 5: Well, markets are selling off by midday after the April
• 20:04
  Speaker 5: Consumer Price Index revealed consumer prices rose three point eight
• 20:08
  Speaker 5: percent from a year ago, marking inflation's highest level in
• 20:12
  Speaker 5: three years, driven by higher gas prices. Right now, the
• 20:16
  Speaker 5: Dow is down nearly half a percent, or two hundred
• 20:19
  Speaker 5: and eighteen points, SMP five hundred down nearly nine tens
• 20:22
  Speaker 5: of a percent, Nasdaq selling off over one and a
• 20:25
  Speaker 5: half percent or three hundred and ninety nine points lower,
• 20:28
  Speaker 5: Rusted two thousand, selling off two point three percent, Tenure
• 20:32
  Speaker 5: Treasure reeled up three basis points at four point four
• 20:35
  Speaker 5: to five to one percent, and Oil jumping four percent,
• 20:39
  Speaker 5: trading at one hundred and two dollars a barrel well.
• 20:43
  Speaker 5: eBay said it has rejected video game retailer Game stops
• 20:46
  Speaker 5: unsolicited fifty six billion dollar takeover proposal, saying it was
• 20:51
  Speaker 5: neither credible nor attractive. Game Stop down by over one percent,
• 20:55
  Speaker 5: while eBay's stock is down modestly. Meanwhile, The Financial Times
• 20:58
  Speaker 5: reported that Nelson Peltz is Treon Fund Management is seeking
• 21:02
  Speaker 5: investor backing for a bid to take fast food chain
• 21:05
  Speaker 5: Wendy's private, after the restaurant operator shares have fallen more
• 21:08
  Speaker 5: than forty percent over the past year. Wendy stock is
• 21:11
  Speaker 5: rallying nearly sixteen percent on the day. Elsewhere, Hymns and
• 21:14
  Speaker 5: Hers sinking fourteen percent after it swung to a quarterly
• 21:18
  Speaker 5: loss after the telehealth Companies moved to alter its weight
• 21:22
  Speaker 5: loss offerings drove up costs, and under Armour stock is
• 21:26
  Speaker 5: dropping eighteen percent after the athletic apparel company posted a
• 21:30
  Speaker 5: fall in quarterly revenue I'm Tucker Silvan. That is Wall
• 21:34
  Speaker 5: Street Watching. In the previous segment, we asked you the
• 21:36
  Speaker 5: trivia question which movie beat pulp Fiction for the Best
• 21:40
  Speaker 5: Picture Academy Award back in what nineteen ninety four? That
• 21:43
  Speaker 5: would be Forrest Gump and Raymond from Cumberland, Rhode Island.
• 21:47
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• 21:50
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• 21:53
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• 21:56
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• 21:59
  Speaker 2: Well, we just got wrapped up talking about one bankrupt
• 22:03
  Speaker 2: government trust fund. Why don't we skip over to another one,
• 22:06
  Speaker 2: which is the Social Security Trust Fund, which is not
• 22:09
  Speaker 2: bankrupt today like the Highway Trust Fund is. But let's
• 22:14
  Speaker 2: kind of go through because we have two pieces from
• 22:16
  Speaker 2: Barons today on proposals for how to solve all of
• 22:19
  Speaker 2: our problems and fix the Social Security Trust Fund. One
• 22:23
  Speaker 2: of them is arguing that you got to just cut
• 22:27
  Speaker 2: benefits for everybody, because otherwise you start getting into a
• 22:31
  Speaker 2: program that's just a welfare program, which is not how
• 22:33
  Speaker 2: social Security was designed.
• 22:35
  Speaker 3: The other is.
• 22:38
  Speaker 2: Do exactly that, which is tax the rich more or
• 22:40
  Speaker 2: cut the benefits for the rich.
• 22:41
  Speaker 3: Only and maintain them for lower class people because.
• 22:45
  Speaker 2: They need that money more and it's getting at the
• 22:48
  Speaker 2: fairness piece of it, and.
• 22:53
  Speaker 3: All reasonable proposals. I don't know.
• 22:55
  Speaker 2: By the way, their proposal is that you place a
• 22:57
  Speaker 2: hard five percent limit on draw down the Retirement Trust
• 23:00
  Speaker 2: Fund this year, which would equate to a roughly six
• 23:03
  Speaker 2: percent cut in annual benefits for all Social Security recipients.
• 23:08
  Speaker 2: I'm not convinced that would actually permanently solve the problem.
• 23:11
  Speaker 2: May just kind of slow it down and kick it
• 23:14
  Speaker 2: down the kick the can down the road further. But
• 23:16
  Speaker 2: I guess that's better than just, you know, driving off
• 23:20
  Speaker 2: the cliff with no plan in place. The other proposals
• 23:23
  Speaker 2: that are out there include, you know, raising the tax limit,
• 23:26
  Speaker 2: cutting benefits for those who already have over one hundred
• 23:29
  Speaker 2: thousand dollars in benefits. Look, any combination of these might
• 23:34
  Speaker 2: be able to fix the problem, but the reality is
• 23:39
  Speaker 2: that we keep just driving towards a cliff with no
• 23:42
  Speaker 2: actual plan in place. And listen, if you're listening right
• 23:45
  Speaker 2: now and you are lamenting the fact that the program
• 23:49
  Speaker 2: was designed poorly, or the changes that were made over
• 23:52
  Speaker 2: the last few years regarding inflation and regarding you know,
• 23:58
  Speaker 2: the benefits for the web provision, and those are unfair
• 24:03
  Speaker 2: and benefited other people and made the system more bankrupt,
• 24:05
  Speaker 2: or that you know, government officials borrowing from the trust
• 24:07
  Speaker 2: Fund and then you know, bankrupting that way. You're welcome
• 24:12
  Speaker 2: to your opinion on that, but it's not constructive, right,
• 24:15
  Speaker 2: Like I do hear people complaining about that all the time.
• 24:18
  Speaker 2: But the fact of the matter is, however it happened,
• 24:21
  Speaker 2: the Trust Fund is going belly up in about five years,
• 24:24
  Speaker 2: and we are not holding our lawmaker's feet to the
• 24:26
  Speaker 2: fire to actually fix the problem. And that's I mean
• 24:29
  Speaker 2: partly our lawmaker's fault. It's kind of all our faults too,
• 24:33
  Speaker 2: Like we're far more interested in talking about these exciting
• 24:37
  Speaker 2: things like war in Iran and you know, you know
• 24:41
  Speaker 2: which president is going to give us a bigger tax
• 24:43
  Speaker 2: cut instead of saying, hey, we have this failing system
• 24:46
  Speaker 2: that our oldest and most vulnerable population rely upon, and
• 24:51
  Speaker 2: you are doing absolutely nothing to fix the problem.
• 24:54
  Speaker 3: So I wave us in part.
• 24:56
  Speaker 4: Yeah, it's it's not gonna happen. We'll fix it when
• 24:59
  Speaker 4: the crisis is at our doorstep. That's kind of our.
• 25:02
  Speaker 2: Nature, which is so frustrating because what that means is
• 25:05
  Speaker 2: that probably we're just going to print the money and
• 25:08
  Speaker 2: increase the deficit.
• 25:11
  Speaker 4: Okay, yeah, so there's a few ways to finance it.
• 25:13
  Speaker 4: Tax that you can inflate it in a way, you
• 25:15
  Speaker 4: can inflate the expenses away, but the latter would be
• 25:20
  Speaker 4: economically disruptive. The former could sap demand. So you're sacrificing
• 25:25
  Speaker 4: economic growth today in exchange for call it future social.
• 25:30
  Speaker 2: I like a good tax cut as anybody, as much
• 25:32
  Speaker 2: as anybody else, But we continue to vote in politicians
• 25:36
  Speaker 2: who all they want to do is increase spending or
• 25:38
  Speaker 2: cut taxes and not actually solve our nation's real problem.
• 25:42
  Speaker 4: Like we've got terrible fiscal policy right now. We've had
• 25:45
  Speaker 4: terrible fiscal policy for the past couple of administrations. The
• 25:49
  Speaker 4: deficit has not come down since Obama, and I don't
• 25:53
  Speaker 4: think it was a big priority of his. Of course,
• 25:55
  Speaker 4: Congress has a lot to do with it, and I
• 25:57
  Speaker 4: think we just have to resign to the fact that,
• 26:02
  Speaker 4: much like with the consequences of the Strait of Horn
• 26:05
  Speaker 4: Moves being if not closed indefinitely, faced with a threat
• 26:09
  Speaker 4: of closure indefinitely, that is a fact of life. We
• 26:12
  Speaker 4: have to live with. That's going to mean higher prices
• 26:15
  Speaker 4: probably for everything, slightly higher prices, higher risk premia.
• 26:19
  Speaker 1: Go ahead.
• 26:20
  Speaker 2: I was going to say that, whether you are a
• 26:22
  Speaker 2: Democrat or a Republican, just in the last five no,
• 26:26
  Speaker 2: forget about last five just in the last two years,
• 26:28
  Speaker 2: you have had a president from each party successfully put
• 26:32
  Speaker 2: into place policy that made the social security problem worse.
• 26:35
  Speaker 2: The Social Security Fairness Act passed by Biden made the
• 26:38
  Speaker 2: problem worse. The tax cuts, the One Big Beautiful Bill
• 26:42
  Speaker 2: Act that gave an additional tax credit to sixty five
• 26:45
  Speaker 2: and older individuals made the Social Security Trust Fund problem worse.
• 26:48
  Speaker 2: Both of them took money directly out of the fundraising
• 26:51
  Speaker 2: mechanism for that trust fund. So plenty of blame to go.
• 26:55
  Speaker 3: Give me.
• 26:56
  Speaker 4: All these things, the war and the Middle East and this,
• 26:59
  Speaker 4: and just stepping back, they all point to a world
• 27:03
  Speaker 4: of more volatile economic growth and lower more recessions because
• 27:07
  Speaker 4: if it's more volatile and lower, you dip below trend
• 27:10
  Speaker 4: or zero more frequently. Higher interest rates because of higher
• 27:14
  Speaker 4: inflation and more volatile interest rates. This ain't going to
• 27:17
  Speaker 4: be like the halcyon days of the eighties, the first
• 27:21
  Speaker 4: half of which were a little bit rocky for a
• 27:23
  Speaker 4: while and before they leveled out. The eighties until the
• 27:26
  Speaker 4: Great Recession were a true golden era. That term gets
• 27:30
  Speaker 4: thrown a lot, thrown around a lot now by people
• 27:32
  Speaker 4: who think they can will one into existence because they're
• 27:35
  Speaker 4: so great. But the fact is you don't know till
• 27:37
  Speaker 4: long after the fact. Relative to that, we're in for
• 27:42
  Speaker 4: just a much more volatile period, a future period, no
• 27:45
  Speaker 4: matter how you want to measure.
• 27:46
  Speaker 2: It, regardless of how and in what way we resolve
• 27:50
  Speaker 2: the social Security problem, it is going to remain a
• 27:53
  Speaker 2: critical component of Americans retirements for decades to come. And
• 27:56
  Speaker 2: if you are planning out your retirement and trying to
• 27:59
  Speaker 2: fact duran, what do I do about this program that
• 28:03
  Speaker 2: very likely will see changes early on in my retirement,
• 28:07
  Speaker 2: and you want to understand how those changes could affect
• 28:09
  Speaker 2: the success of your retirement. Give the folks at Armstrong
• 28:12
  Speaker 2: Advisory Group call. We actively test this out with our
• 28:16
  Speaker 2: clients on how it would impact their overall retirement success
• 28:20
  Speaker 2: should changes to Social Security or taxation or other factors
• 28:24
  Speaker 2: play into their retirement future. If you have questions like
• 28:28
  Speaker 2: that you want to learn more, give us call at
• 28:30
  Speaker 2: Armstrong eight hundred three nine three for zero zero one.
• 28:33
  Speaker 2: You can book a time for us to call you
• 28:35
  Speaker 2: back at Armstrong Advisory dot Com. But that phone number
• 28:38
  Speaker 2: again eight hundred three nine three for zero zero one.
• 28:42
  Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
• 28:44
  Speaker 1: registered investment advisor. Nothing in the ad or in any
• 28:47
  Speaker 1: Armstrong guide a specific financial, legal or tax advice. Consult
• 28:50
  Speaker 1: your own financial tax and to state planning advisors before
• 28:52
  Speaker 1: making any investment decisions. Armstrong may contact you to offer
• 28:55
  Speaker 1: investment advisory services.
• 28:57
  Speaker 2: Markets have gotten a little bit worse since we last covered.
• 28:59
  Speaker 2: The NASA now down three hundred and ninety five points
• 29:02
  Speaker 2: or one and a half percent. We're gonna take quick
• 29:04
  Speaker 2: break when we come back. Stack Roulette is next on
• 29:07
  Speaker 2: the Financial Exchange.
• 29:09
  Speaker 1: Okay, real time financial insight as news breaks. The Financial
• 29:12
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• 29:16
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• 29:18
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• 29:23
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• 29:27
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• 29:33
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• 29:47
  Speaker 3: Time for good of stack Roulette. What do you have
• 29:49
  Speaker 3: for us today.
• 29:50
  Speaker 4: Mark, we talked earlier about measures of underlying inflation that
• 29:55
  Speaker 4: get at what inflation is really doing, because headline is
• 29:59
  Speaker 4: can be noisy, can be distorted by one offs, as
• 30:01
  Speaker 4: you put it. One measure of underlying inflation is core
• 30:05
  Speaker 4: that the federal government reports, which strips out food and energy.
• 30:09
  Speaker 4: Another strips out now this is not calculated by the
• 30:12
  Speaker 4: federal government, but rather by a federal Reserve bank. This
• 30:15
  Speaker 4: strips out big movements no matter what sector they come from,
• 30:18
  Speaker 4: the thinking being those are probably fleeting and not representative
• 30:22
  Speaker 4: of underlying inflation, which arguably the Fed controls Median. The
• 30:28
  Speaker 4: median figure, the one in the middle, literally is a
• 30:32
  Speaker 4: measure that researchers like yep for that reason. And we
• 30:34
  Speaker 4: just got a read on median inflation. It came in
• 30:37
  Speaker 4: at point four percent month over month.
• 30:39
  Speaker 3: That's you have a sense of the last time we
• 30:41
  Speaker 3: saw reading like that.
• 30:42
  Speaker 4: It's been Yeah, I don't have the full series in
• 30:44
  Speaker 4: front of me. IT'SO point four is where this sucker
• 30:47
  Speaker 4: was running when inflation was high. Now, Mike, this could
• 30:50
  Speaker 4: be a fluke, but median is not. Median doesn't get
• 30:55
  Speaker 4: headfaked by one offs in this or that component of inflation.
• 31:03
  Speaker 4: It's a pretty robust measure of the tendency of anything,
• 31:09
  Speaker 4: which is why they talk about median salaries in median
• 31:11
  Speaker 4: home prices. So, I think for those like me that
• 31:14
  Speaker 4: are becoming a little bit alarmist about inflation, given that
• 31:17
  Speaker 4: we just came off a mini great inflation that ended
• 31:20
  Speaker 4: in two thousand and late twenty twenty three or so,
• 31:25
  Speaker 4: this argues for more rather than less alarmism.
• 31:30
  Speaker 2: Yeah, I'm trying to take a look at the series
• 31:32
  Speaker 2: here to see the last time we appear to have
• 31:36
  Speaker 2: gotten at that annualized rate. It looks like it was
• 31:40
  Speaker 2: early twenty twenty four, the last time we've seen anything.
• 31:44
  Speaker 3: Quite Yeah, we need to see a few months, yeah, to.
• 31:47
  Speaker 4: Be to have the interpretation that this is pointing to.
• 31:51
  Speaker 4: Now this will be like demand driven inflation, because this
• 31:54
  Speaker 4: is core. This is something arguably the FED has control.
• 31:56
  Speaker 4: So I'm not really sure how to interpret this. I
• 31:58
  Speaker 4: don't I cannot imagine the energy price shock seeping in
• 32:03
  Speaker 4: to so called I know I'm using all these terms change.
• 32:06
  Speaker 4: When I say core, I say underlying, I say trend.
• 32:08
  Speaker 4: That we basically mean the same thing.
• 32:09
  Speaker 3: It'd be surprising to see it happen that poickly.
• 32:12
  Speaker 2: Again, the main thing that I'm looking at with this
• 32:14
  Speaker 2: inflation report that threw me off was that that number
• 32:18
  Speaker 2: on shelter costs jumping up so much, And I have
• 32:22
  Speaker 2: seen others argue, I don't know how qualified they are
• 32:25
  Speaker 2: to point it out, but I've seen others argue that
• 32:28
  Speaker 2: this is a phenomenon from the government shut down, where
• 32:31
  Speaker 2: in October they attributed shelter costs increase at a zero
• 32:34
  Speaker 2: percent rate because the government was shut down and they
• 32:36
  Speaker 2: didn't actually measure it. And for some reason, they do
• 32:40
  Speaker 2: that measurement every six months, and now we're catching up
• 32:43
  Speaker 2: to that artificially low shelter inflation number over the course
• 32:48
  Speaker 2: of the last six months. So maybe that is also
• 32:51
  Speaker 2: playing a role in this overall inflation report at the
• 32:54
  Speaker 2: same time that energy price spikes are.
• 32:56
  Speaker 3: But suffice to.
• 32:59
  Speaker 2: Say, very obviously inflation at this rate is immensely problematic
• 33:06
  Speaker 2: for the FED, it's problematic for consumers, and it is
• 33:09
  Speaker 2: problematic for the US economy as a whole should it
• 33:12
  Speaker 2: take hold and stay there for a period of time.
• 33:16
  Speaker 2: Speaking of inflation problem, piece from Bloomberg today, AI's big
• 33:19
  Speaker 2: guns have a serious inflation problem what they're referring to
• 33:23
  Speaker 2: is the fact that the giant behemoth spenders in the
• 33:27
  Speaker 2: space right now, which you would consider Microsoft, Amazon, Facebook's
• 33:31
  Speaker 2: parent Meta, and Google's parent Alphabet to be part of,
• 33:34
  Speaker 2: are now on trend to spend seven hundred plus billion
• 33:38
  Speaker 2: dollars on capital expenditures in twenty twenty six, and I've
• 33:41
  Speaker 2: seen some estimates of over a trillion dollars in twenty
• 33:44
  Speaker 2: twenty seven. And what they're also telling you at the
• 33:46
  Speaker 2: same time is that a lot of that increase that
• 33:48
  Speaker 2: you're seeing, because this was only five hundred something a
• 33:51
  Speaker 2: few months ago, is not due to them saying, hey,
• 33:55
  Speaker 2: we need even more capacity than we realized. It's hey,
• 33:58
  Speaker 2: we want to build out the same capacity, but the
• 34:00
  Speaker 2: prices for all of this stuff has absolutely ballooned, and
• 34:04
  Speaker 2: so therefore we are facing a much higher price tag.
• 34:08
  Speaker 2: Some of this is actually logical to me, because in
• 34:11
  Speaker 2: some of these areas of say building models or having
• 34:15
  Speaker 2: the most reliable and fastest infrastructure that can be relied
• 34:19
  Speaker 2: upon for this stuff, it might end up being some
• 34:23
  Speaker 2: form of a first to market winner take all scenario.
• 34:26
  Speaker 2: I think about a company like Google who has search
• 34:29
  Speaker 2: absolutely cornered, not that they were the first ones there.
• 34:33
  Speaker 3: But having that advantage.
• 34:35
  Speaker 2: In a market like this where you are the go
• 34:38
  Speaker 2: to clearly has a bunch of advantages.
• 34:40
  Speaker 1: Right.
• 34:41
  Speaker 2: Was Facebook the absolute best social media platform?
• 34:44
  Speaker 3: Well maybe maybe not, but they.
• 34:46
  Speaker 2: Got the most users and that's where everybody wanted to
• 34:48
  Speaker 2: be and they now maintain a lot of that dominance.
• 34:50
  Speaker 2: For that reason, Google, likewise and search has been able
• 34:54
  Speaker 2: to do so because that's how you conduct a search today.
• 34:57
  Speaker 2: Maybe there's a first mover advantage for some of the companies.
• 35:01
  Speaker 2: Where I see that, where I see that argument as
• 35:04
  Speaker 2: problematic is that it seems to be going in every
• 35:07
  Speaker 2: single area of AI. So when I, you know, go
• 35:11
  Speaker 2: to when I attend conferences of financial advisors, there seems
• 35:15
  Speaker 2: to be this attitude of we need to rush out
• 35:18
  Speaker 2: there and be the very first one to adapt AI
• 35:21
  Speaker 2: in our practice, because if we don't, then the big
• 35:23
  Speaker 2: guys are and they're going to beat us to market,
• 35:25
  Speaker 2: and they're going to come up with something that's just
• 35:26
  Speaker 2: absolutely uh, you know, killer and put us out of business.
• 35:31
  Speaker 1: Uh.
• 35:31
  Speaker 2: Those who are developing the models are saying, hey, we
• 35:34
  Speaker 2: have to rush to get the very best model out
• 35:36
  Speaker 2: the door every month and be the best in the first,
• 35:39
  Speaker 2: because otherwise, you know, CHATCHBT will get all the users.
• 35:42
  Speaker 2: And when I see the data center construction, they're all saying, Hey,
• 35:46
  Speaker 2: we've got to get these data centers up and running
• 35:48
  Speaker 2: as quickly as possible for no matter the price, because
• 35:51
  Speaker 2: if we don't, then somebody else will and it's going
• 35:53
  Speaker 2: to be to you know, beat us to market and win.
• 35:55
  Speaker 3: All this stuff.
• 35:55
  Speaker 4: Of course, they can't all win.
• 35:57
  Speaker 2: They won't all win, And I just wonder the exact
• 36:00
  Speaker 2: opposite approach seems to be getting taken by Apple right now.
• 36:04
  Speaker 4: Look, if you're an investor, you care about free cash flow,
• 36:07
  Speaker 4: right because that's what's used to pay dividends and.
• 36:09
  Speaker 3: Repay that's that's over the long term.
• 36:11
  Speaker 4: Yeah, that's that's the bottom line.
• 36:12
  Speaker 3: Yeah.
• 36:13
  Speaker 4: So what is free cash flow? Well, it's it's the
• 36:15
  Speaker 4: I'm sorry to be like a CFA level one person
• 36:18
  Speaker 4: here or wherever they introduced these concepts.
• 36:20
  Speaker 3: Maybe it was level two. Uh, that's this.
• 36:22
  Speaker 4: You get operating cash flow and you take off your
• 36:24
  Speaker 4: capital expenditures. If this The point of this article that
• 36:27
  Speaker 4: hit home for me is what if there's there's permanent
• 36:34
  Speaker 4: sort of elevated prices for these things and your future
• 36:36
  Speaker 4: capex is high relative to whatever the rate was that
• 36:41
  Speaker 4: made your free cash flow such that it made you
• 36:45
  Speaker 4: a very attractive company to own. What if you're just
• 36:48
  Speaker 4: spending a lot more to just to just to stand still,
• 36:50
  Speaker 4: the so called red queen problem. What if cap future
• 36:53
  Speaker 4: capex is going to be high because of this? Like,
• 36:55
  Speaker 4: as a shareholder, that doesn't sit well with me. I'm
• 36:58
  Speaker 4: interested only in free cash flow. Forget about operating cash flow,
• 37:00
  Speaker 4: forget about net income and all that other stuff. I
• 37:03
  Speaker 4: just want to know what's available to either buy my
• 37:05
  Speaker 4: stockback or pay dividends. But if we have to run
• 37:08
  Speaker 4: really fast just to stay in place, that's not particularly
• 37:12
  Speaker 4: attractive for me as an investor. I don't think this
• 37:16
  Speaker 4: is I'm just a generalist.
• 37:18
  Speaker 3: Yeah, I hear it, But I think that's a question.
• 37:20
  Speaker 4: That's a question that I would demand i've answered, and
• 37:22
  Speaker 4: that nobody can answer.
• 37:23
  Speaker 2: What's fascinating to me is, you know, there's four companies
• 37:25
  Speaker 2: that I mentioned to Amazon, Meta Alphabet, and Microsoft have
• 37:30
  Speaker 2: spent at least.
• 37:32
  Speaker 3: A decade, all of them now as these.
• 37:37
  Speaker 2: Capital unintensive, high profitable, highly profitable, and high growth businesses,
• 37:42
  Speaker 2: and they are very quickly trying to transform themselves into
• 37:47
  Speaker 2: capital intensive, high growth businesses that are on the cutting
• 37:51
  Speaker 2: edge of a new technology.
• 37:52
  Speaker 4: And yeah, you're generating a lot of free cash flow
• 37:57
  Speaker 4: as it is. Unless you think this is going to
• 38:00
  Speaker 4: put you out of business. I mean, that's a pretty
• 38:03
  Speaker 4: good mom. I know this sounds horribly naive. These guys
• 38:05
  Speaker 4: know their business is far better than I do. I'm
• 38:08
  Speaker 4: not even scratching the surface, but I'm just not sure
• 38:10
  Speaker 4: I get this.
• 38:12
  Speaker 2: We've got to take a quick break for the next
• 38:13
  Speaker 2: twenty two hours. Markets are down s and p off
• 38:16
  Speaker 2: eight tens of percent as we close out the show.
• 38:18
  Speaker 2: We'll be back at it tomorrow with a full recap
• 38:20
  Speaker 2: and more. Have a great rest of your day, folks,