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The Stock Market Is More Concentrated Than Ever · The Financial Exchange Show

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  Speaker 1: and Mike Armstrong.
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  Speaker 2: Hope y'all had a great weekend.
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  Speaker 3: It's Chuck, Mike, and it's Tucker with you here, and
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  Speaker 3: we'll kick things off with a little bit of a
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  Speaker 3: discussion about the stock market. We've talked about it a
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  Speaker 3: couple times before, but it's a place that people can
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  Speaker 3: put money into companies that are publicly traded and the
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  Speaker 3: value of them goes up or down on a daily basis.
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  Speaker 3: It's a pretty pretty cool thing. It's a pretty wild thing.
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  Speaker 3: And specifically this year, if we continue with the pace
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  Speaker 3: that we've been on for the first seven and fifty
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  Speaker 3: seven hundredths months of the year that we've been on,
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  Speaker 3: here's what we're gonna have. It'll be a fourth consecutive
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  Speaker 3: year of double digit gains. Not just four years of
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  Speaker 3: gains in a row for the stock market, but four
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  Speaker 3: consecutive years of double digit gains. It's only happened three
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  Speaker 3: times since nineteen twenty eight.
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  Speaker 2: It's, okay, pretty rare.
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  Speaker 3: The last time that we saw it actually was the
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  Speaker 3: only time that we ever saw five consecutive double digit years,
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  Speaker 3: and that was nineteen ninety five through nineteen ninety nine,
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  Speaker 3: which is the only string of five consecutive years in
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  Speaker 3: the last ninety eight years of the S and P
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  Speaker 3: five hundred. In fact, in that one it wasn't just
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  Speaker 3: double digits, it was five straight years of twenty percent
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  Speaker 3: or more. Now, subsequent to that, the S and P
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  Speaker 3: five hundred, it's more specifically, the NASDAK went through a
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  Speaker 3: serious bear market, with the Nasdaq not recouping its losses.
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  Speaker 3: For I think it was like a decade almost the NASDAK.
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  Speaker 4: No, I think it was more than it is. It
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  Speaker 4: is twelve years, I think I believe so. Yeah, the SMP.
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  Speaker 3: Got back there in like five or six before the
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  Speaker 3: financial crisis blew things up again.
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  Speaker 4: Yeah, I was gonna say, not only was it a
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  Speaker 4: terrible dot com crash, but you had one of the
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  Speaker 4: worst decades in stock market performance in history. Yes, from
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  Speaker 4: two thousand to two thousand and nine.
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  Speaker 3: Yes, Now, I will go on record actually and say,
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  Speaker 3: if you want to be serious about the causes of
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  Speaker 3: the dot com crash, I'll actually go so far to
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  Speaker 3: say it wasn't what was going on in the dot
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  Speaker 3: com sector. But I digress.
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  Speaker 2: You're not gonna digress. Let's go there. I'm gonna go there. Regress.
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  Speaker 2: I will regress and digress. I will just regress.
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  Speaker 3: I'm we're doing a little too much gressing right now,
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  Speaker 3: and we need to just progress if we can. I
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  Speaker 3: will make the case that what actually killed the late
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  Speaker 3: nineteen nineties economy was the fact that we ran a
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  Speaker 3: government surplus.
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  Speaker 2: Now.
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  Speaker 3: I know that people's heads are going to explode when
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  Speaker 3: I say that, but the reason why is that, ultimately,
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  Speaker 3: I'm a big believer in one of the main things
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  Speaker 3: that's made it really hard to have a recession right
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  Speaker 3: now is the fact that you're running huge government deficits.
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  Speaker 3: I'm not saying that they're good or bad. In fact,
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  Speaker 3: I think they're bad at the level that we're at,
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  Speaker 3: but it can still provide a stimulative effect to the
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  Speaker 3: US economy because you're pumping a whole bunch of money
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  Speaker 3: into it through borrowing.
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  Speaker 4: To be clear, we're running approximately six percent of GDP
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  Speaker 4: deficits right now. We have been throughout the Biden administration,
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  Speaker 4: now throughout Trump too, and no real signs of slowing
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  Speaker 4: down in any meaningful way.
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  Speaker 3: Yes, so I think that when you look at this,
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  Speaker 3: what really matters, in my opinion, is not specifically what
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  Speaker 3: the deficit is in any particular year, but rather what
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  Speaker 3: the change is from the year before, and what you
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  Speaker 3: saw was ultimately a case where you had rapidly shrinking
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  Speaker 3: annual deficits in the late nineteen nineties case in points
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  Speaker 3: in nineteen ninety five, there was I just want to
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  Speaker 3: make sure that they have this. Yes, here we go,
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  Speaker 3: what we have, Okay, So this is what we saw
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  Speaker 3: in the nineties. You had in nineteen ninety five the
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  Speaker 3: annual deficit was one hundred and sixty four billion dollars.
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  Speaker 3: Ninety six, it was one hundred and seven billion ninety seven,
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  Speaker 3: it was only twenty two and then we had surpluses
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  Speaker 3: for four years ninety eight through two thousand and one,
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  Speaker 3: with those surpluses growing every year ninety eight through two thousands.
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  Speaker 4: So, I know, we all like to compare this to
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  Speaker 4: like a household budget, which is a useful exercise.
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  Speaker 2: For understanding things. But what that could because you know, pretty.
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  Speaker 4: Nice in a household budget when you are taking in
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  Speaker 4: more income than you are pushing out in expenses. But
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  Speaker 4: when you talk about that at the government level, what
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  Speaker 4: you're talking about, in fact, is the government taxing its
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  Speaker 4: people to a higher degree than it is spending money.
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  Speaker 3: Correct, It's literally pulling money out of the economy, then
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  Speaker 3: the government isn't taxing you to the extent that it
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  Speaker 3: doesn't know what to do with the money.
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  Speaker 2: And that happened last time in the late nineties. Correct.
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  Speaker 3: Now there's a happy medium where you are able to
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  Speaker 3: run small to moderate government deficits that are even smaller
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  Speaker 3: than overall GDP growth, and so even if the deficit
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  Speaker 3: goes up, it still becomes easier to cover the cost
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  Speaker 3: of that deficit going forward. But what we had in
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  Speaker 3: the late nineties was a case where deficits went from
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  Speaker 3: four and a half percent of GDP in the early
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  Speaker 3: nineties to negative two point three in the late nineties,
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  Speaker 3: and so all of a sudden, you've got six percent
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  Speaker 3: spending relative to GDP that just gets sucked out of
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  Speaker 3: the economy and promptly ends up assisting with the death
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  Speaker 3: of the tech bubble. It's not to say that it
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  Speaker 3: wouldn't have died on its own at some point anyways,
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  Speaker 3: but it was very much exacerbated by that, and in
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  Speaker 3: my opinion, it contributed to it. So what I am saying,
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  Speaker 3: and again I know this is a huge digression from
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  Speaker 3: the actual piece here that we were discussed, but if
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  Speaker 3: we are going to be serious about reducing the annual
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  Speaker 3: deficit that we have, we do have to be cognitiss
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  Speaker 3: of the fact that it may cause and is likely
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  Speaker 3: to cause a slowdown in the economy in the short
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  Speaker 3: term when.
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  Speaker 2: We do so, well, good news, Chuck. We're not going
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  Speaker 2: to change that.
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  Speaker 4: The zero indication that any elected official is being serious
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  Speaker 4: about government deficits and how much we are spending versus taxing.
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  Speaker 3: No, we're talking about more tax cuts and more government
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  Speaker 3: spending right now. We've got the defense budget being increased
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  Speaker 3: by fifty percent and tax cuts being floated as well.
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  Speaker 3: So fear not, Americans.
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  Speaker 2: So instead we're going to socialize AI. Got it?
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  Speaker 3: This all sounds that would be a stack later. Don't worry,
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  Speaker 3: We'll get there.
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  Speaker 2: Honestly, Like this is.
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  Speaker 4: Just kind of like day should we fix our deficits
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  Speaker 4: or our security problems? No, but we want to own
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  Speaker 4: every AI company government does.
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  Speaker 3: Doesn't this just feel like what.
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  Speaker 2: Sounds good to me?
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  Speaker 5: Man?
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  Speaker 3: Oh, I'm just I don't know.
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  Speaker 4: This is a tough one away what you are alluding
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  Speaker 4: to without saying Chuck, So I will say it is.
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  Speaker 4: It seems like it might be tough to get a
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  Speaker 4: really bad recession when your government is spending hand over
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  Speaker 4: fist at paces that we have only really seen over
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  Speaker 4: the last six years and during wartime. And so without
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  Speaker 4: saying it out loud, that's what you're alluding to it,
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  Speaker 4: and I will say it out loud that you know,
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  Speaker 4: just looking at the big picture here, it's not impossible
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  Speaker 4: to get a market crash. We've seen market crashes during
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  Speaker 4: big spending periods, but it is kind of tough to
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  Speaker 4: see a recession happen when the government is spending so
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  Speaker 4: much ludicrous amounts of money.
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  Speaker 3: Well, there's two things happening that make it hard. The
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  Speaker 3: government spending is one. The other piece is when you
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  Speaker 3: have AI kapex ramping up as fast as it is.
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  Speaker 3: That's another huge spending impulse. Because what matters is the
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  Speaker 3: change in spending from before. And so when you've got
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  Speaker 3: you know, AI spending going from again three years ago,
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  Speaker 3: you know capex from the big hyperscalers was like five
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  Speaker 3: hundred billion dollars a year and no sorry, it was
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  Speaker 3: like one hundred and seventy billion dollars a year, and
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  Speaker 3: now you're going to a trillion plus next year. Yeah,
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  Speaker 3: well that's a huge spending impulse. So who cares if
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  Speaker 3: people aren't buying tacos the same way they were before.
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  Speaker 3: It doesn't matter when you've got this other huge spending
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  Speaker 3: impulse going on.
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  Speaker 2: So you get this brief further.
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  Speaker 4: Makes the case that the spending from the you know,
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  Speaker 4: bottom half of Americans is just irrelevance to the economy today.
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  Speaker 2: Yes it's sad, but yes, important to acknowledge.
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  Speaker 3: So we get to this piece where we have, you know,
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  Speaker 3: the question, Hey, the markets have been on a roll,
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  Speaker 3: is it time to hedge your bets? That's what The
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  Speaker 3: New York Times asks. We're gonna take a quick break
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  Speaker 3: and when we come back, we'll answer that question.
• 9:52
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  Speaker 3: All right, So the New York Times, the headline that
• 11:01
  Speaker 3: we're discussing is the markets have been on a roll?
• 11:03
  Speaker 2: Is it time to hedge your bets?
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  Speaker 3: And the problem is that this raises, not begs, an
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  Speaker 3: awful lot of questions.
• 11:11
  Speaker 2: The first question is, well, what are your bets?
• 11:14
  Speaker 3: Because if your bets are not crazy, then no, it's
• 11:18
  Speaker 3: probably not time to hedge your bets because you've invested
• 11:21
  Speaker 3: for the long run, and well, you understand that stocks
• 11:25
  Speaker 3: can go up or down and you don't know if
• 11:26
  Speaker 3: they're going to go up or down tomorrow, and so
• 11:28
  Speaker 3: you build a reliable, acid allocation of diversified portfolio that
• 11:32
  Speaker 3: allows you the comfort of riding through that up and
• 11:35
  Speaker 3: down while still generally seeing the long term upward drift
• 11:38
  Speaker 3: because companies in the US have tended over the last
• 11:41
  Speaker 3: ninety years to make more money in the future than
• 11:44
  Speaker 3: they did today.
• 11:45
  Speaker 4: I feel as though the New York Times assumes that
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  Speaker 4: you invest in a way that I've seen like three
• 11:50
  Speaker 4: people in my career invest.
• 11:52
  Speaker 3: Well, like a bunch of like tech traders in Korea
• 11:56
  Speaker 3: trying to like pile into leverage to like semiconductory.
• 11:59
  Speaker 4: Yes, like not your average trading experience so far as
• 12:02
  Speaker 4: I'm aware, vast majority of people listening right now, I mean,
• 12:05
  Speaker 4: you know, please text me if I'm wrong, But to
• 12:07
  Speaker 4: the vast majority.
• 12:08
  Speaker 2: Of people listening right.
• 12:09
  Speaker 3: Right again, all kinds of weird portfolio.
• 12:10
  Speaker 4: But I guess is that you have a bulk of
• 12:14
  Speaker 4: your funds in a retirement plan through your employer, the
• 12:18
  Speaker 4: bulk of which is in a target date retirement funds.
• 12:21
  Speaker 4: That's how like most Americans have their themselves set up
• 12:25
  Speaker 4: at the moment. And I'm sure that there are people
• 12:27
  Speaker 4: with different iterations of that. And it's not to say
• 12:30
  Speaker 4: you might not have a crypto portfolio or a few
• 12:33
  Speaker 4: individual stocks on the side, but For the vast majority
• 12:36
  Speaker 4: of Americans, the bulk of their investible wealth is in
• 12:40
  Speaker 4: a retirement plan through their employer, of which the options
• 12:42
  Speaker 4: are limited and most people get defaulted into a target.
• 12:45
  Speaker 3: Date plan sixe seven three six two thirteen eighty five.
• 12:48
  Speaker 3: If you have something different than that in your personal investments, specifically,
• 12:53
  Speaker 3: if you've got something wild, like you know, you're betting
• 12:55
  Speaker 3: on like ferret futures or something like that. They have those,
• 13:00
  Speaker 3: maybe minx I bet for, like the coats they probably have.
• 13:03
  Speaker 3: I would imagine there's mink futures somewhere in any case.
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  Speaker 4: Like, yeah, that's and if you invest, like I just mentioned,
• 13:10
  Speaker 4: with the bulk of your wealth through something like that,
• 13:13
  Speaker 4: then the entire idea of head your bets is kind
• 13:16
  Speaker 4: of preposterous because you might not even know how to
• 13:19
  Speaker 4: do so in the first place.
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  Speaker 3: Yeah. Look, here's the deal. We talked about this last
• 13:23
  Speaker 3: week a little bit. The market is not rigged in
• 13:25
  Speaker 3: the sense that most people think it is. Like if
• 13:28
  Speaker 3: you consider like playing basketball against Lebron Jordan rigged Lebron Jordan,
• 13:34
  Speaker 3: Lebron James, Lebron Jordan, that'd be a heck of a
• 13:37
  Speaker 3: basketball player. If you played basketball against Lebron James. You
• 13:40
  Speaker 3: wouldn't be like, oh, this is rigged. You'd be like, oh, no,
• 13:43
  Speaker 3: he's six foot eight, he's been training his entire career.
• 13:46
  Speaker 2: He's got like.
• 13:47
  Speaker 3: Eight nutritionists on staff. Yes, I'm going to get smoked. Likewise,
• 13:53
  Speaker 3: when you go into financial markets and you've got Stanley
• 13:57
  Speaker 3: Drunken Miller sitting across the table from you, or Paul
• 14:00
  Speaker 3: Tudor Jones sitting across the table from you, you don't
• 14:03
  Speaker 3: get to say this is rigged. No, they've been doing
• 14:07
  Speaker 3: this for forty or fifty years. They have, you know,
• 14:09
  Speaker 3: a trained staff that is specifically designed to make money
• 14:14
  Speaker 3: against unwinning market participants, and you're going to get smoked.
• 14:19
  Speaker 3: So for most people the answer is no, Like, don't
• 14:21
  Speaker 3: try to like trade markets because you're generally going to
• 14:25
  Speaker 3: lose in the long run, even if you have some
• 14:27
  Speaker 3: short term success. So I think, in you know, answering
• 14:32
  Speaker 3: this question, look the idea behind using financial markets to invest,
• 14:40
  Speaker 3: not to trade, because they're fundamentally different things. If you're
• 14:42
  Speaker 3: a trader, maybe it's time to hedge your bets. But
• 14:44
  Speaker 3: if you are an investor, the premise of it is
• 14:47
  Speaker 3: that you want to own companies that are going to
• 14:51
  Speaker 3: make more money ten years from now than they do today,
• 14:54
  Speaker 3: And through owning those companies, through the thick and thin,
• 14:58
  Speaker 3: you are going to participate in the growth in the
• 15:00
  Speaker 3: value of those companies because their earnings a decade from
• 15:03
  Speaker 3: now are higher than their earnings today.
• 15:05
  Speaker 2: Yeah, that haven't been said.
• 15:06
  Speaker 4: If you're making a bunch of concentrated bets, you should
• 15:09
  Speaker 4: beware that sometimes when markets crash, those concentrated bets either
• 15:12
  Speaker 4: never returned to their previous high or take an extraordinarily
• 15:15
  Speaker 4: a long time to do so, even if they're diversified.
• 15:18
  Speaker 4: The NASDAC we talked about this in the last segment,
• 15:20
  Speaker 4: but peaked March tenth of two thousand, plunged seventy eight percent,
• 15:27
  Speaker 4: did not make its money back until twenty fifteen.
• 15:29
  Speaker 2: So fifteen years not a long time. Yeah.
• 15:32
  Speaker 4: The financial sector, you were loaded up on, you know,
• 15:35
  Speaker 4: bank stocks prior to the Great Recession.
• 15:37
  Speaker 2: You peaked in seven.
• 15:38
  Speaker 4: You made your money back right before the COVID crisis
• 15:42
  Speaker 4: hit the beginning of twenty twenty, and then after that
• 15:44
  Speaker 4: it crashed again and you took a little bit longer.
• 15:46
  Speaker 2: You had to get back to like twenty twenty one.
• 15:48
  Speaker 4: So even in that case, a good twelve years if
• 15:51
  Speaker 4: all of your money was in financial stocks because you
• 15:54
  Speaker 4: were all in on the American mortgage bet. That's the
• 15:59
  Speaker 4: type of stuff that oh yeah, those are the types
• 16:02
  Speaker 4: of things where if you're doing that, you need to
• 16:05
  Speaker 4: have a plan in place for how you hedge those,
• 16:08
  Speaker 4: you know, how you exit them, how you do all
• 16:10
  Speaker 4: those things. But again, I don't think that's the way
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  Speaker 4: the majority of people invest.
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  Speaker 3: No, but let me raise this as a question. Then,
• 16:19
  Speaker 3: in the context of the broader market, the S and
• 16:22
  Speaker 3: P five hundred today as it sits right now, is
• 16:27
  Speaker 3: thirty nine percent in technology stocks. You can very much
• 16:32
  Speaker 3: make a case that the S and P five hundred
• 16:34
  Speaker 3: is a more concentrated bet on one sector, in one
• 16:38
  Speaker 3: technology than it's ever been. And so it does raise
• 16:42
  Speaker 3: an interesting question in that hey, for investors who previously
• 16:45
  Speaker 3: looked at the S and P five hundred as appropriate diversification,
• 16:51
  Speaker 3: now that and again just specifically, like I'm just looking at,
• 16:55
  Speaker 3: you know, companies that really have a focus on AI,
• 16:57
  Speaker 3: not just tech because like Apple's not AI.
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  Speaker 4: You're not using the SMP sectors to come up with
• 17:03
  Speaker 4: a number here, We're just talking about AI focused companies.
• 17:06
  Speaker 3: AI I've got Nvidia, I've got Microsoft, I've got Amazon,
• 17:10
  Speaker 3: I've got Alphabet, I've got Broadcom. I've got Alphabet's other
• 17:14
  Speaker 3: share class. I've got Meta, I've got Micron, I've got
• 17:18
  Speaker 3: I don't think I lump Tesla in there, would you.
• 17:21
  Speaker 3: Tesla's a whole separate elon premium. I'm gonna put that
• 17:23
  Speaker 3: somewhere else. I've got Amd, I've got Intel, I've got
• 17:31
  Speaker 3: I think that's good for now. I think that's good
• 17:34
  Speaker 3: just for what I'm doing. That is thirty one percent
• 17:37
  Speaker 3: of the S and P five hundred that is tied
• 17:39
  Speaker 3: up in the AI trade, just out of the top
• 17:41
  Speaker 3: twenty five companies. There's probably another like five to seven
• 17:45
  Speaker 3: percent overall, So like a third to forty percent of
• 17:48
  Speaker 3: the SMP is specifically AI and its success. I'm not
• 17:55
  Speaker 3: really sure what you do in that context, because it's
• 17:57
  Speaker 3: a problem that investors haven't had.
• 17:59
  Speaker 2: To deal with previously.
• 18:00
  Speaker 3: Like even if you go back to like the financial
• 18:02
  Speaker 3: crisis and like the bubble that was building there, financial
• 18:06
  Speaker 3: stocks never got above like I think we peaked at
• 18:08
  Speaker 3: like seventeen or eighteen percent, maybe like twenty.
• 18:12
  Speaker 4: That said, I do have to wonder how many tech
• 18:14
  Speaker 4: stocks back or what portion of the SP five hundred
• 18:16
  Speaker 4: back in nineteen ninety nine had some sort of similar
• 18:20
  Speaker 4: level of exposure to the Internet bubble. I don't I
• 18:24
  Speaker 4: sense that the moment right now is unique, but I
• 18:27
  Speaker 4: have it to have a tough time saying, yeah, this
• 18:31
  Speaker 4: is very different from ninety nine.
• 18:33
  Speaker 3: Hold please, I can get you two thousand and two,
• 18:37
  Speaker 3: which is not useful. Yeah, financials peaked it like twenty percent,
• 18:43
  Speaker 3: and that was that was as the tech bubble was bursting.
• 18:45
  Speaker 3: They were only like twelve during the financial crisis.
• 18:49
  Speaker 2: What was the big one?
• 18:50
  Speaker 3: It does communications services because of all the stuff that
• 18:53
  Speaker 3: get Yeah you forget, Yeah, you forget about telecoms and
• 18:56
  Speaker 3: how big they were back.
• 18:57
  Speaker 4: At It does seem as though there is a hyper
• 19:00
  Speaker 4: focus and hyper concentration on AI, the likes of which
• 19:04
  Speaker 4: we haven't seen during other market cycles. But yeah, as
• 19:08
  Speaker 4: to what that will do, if and when it pops,
• 19:10
  Speaker 4: and how long it'll take for markets to recover if
• 19:12
  Speaker 4: and when.
• 19:12
  Speaker 2: It pops, it's an open question because history does not
• 19:14
  Speaker 2: repeat itself.
• 19:15
  Speaker 3: Yeah, let's take a quick break here. When we come back,
• 19:18
  Speaker 3: we'll talk about how AI is not just influencing the
• 19:20
  Speaker 3: stock market. I don't know why I put the emphasis
• 19:23
  Speaker 3: on that syllable. We'll talk about why it's also influencing
• 19:27
  Speaker 3: the bond market in ways that you might not expect.
• 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, the data, and the headlines
• 19:54
  Speaker 1: driving markets so far today right here on the Financial
• 19:58
  Speaker 1: Exchange Radio Network.
• 20:00
  Speaker 5: No markets are beginning of the week dipping into negative
• 20:03
  Speaker 5: territory as traders ready for a flurry of retailer earnings,
• 20:06
  Speaker 5: including Home Depot tomorrow morning lows and Target on Wednesday,
• 20:10
  Speaker 5: follow by Walmart on Thursday. Right now, the dows down
• 20:14
  Speaker 5: a third of a percent or one hundred and seventy
• 20:16
  Speaker 5: one points, SMP five hundred down to tenth of percent
• 20:18
  Speaker 5: or ten points lower. Nasdaq is completely flat, could not
• 20:22
  Speaker 5: be more flat. RUSS two thousand is down about a
• 20:24
  Speaker 5: third of a percent. Ten year Treasury yield is not
• 20:27
  Speaker 5: loading for me. Looks like it's flat at four point
• 20:29
  Speaker 5: sixty nine percent, and oil is flat as well, trading
• 20:33
  Speaker 5: at eighty two dollars a barrel. Shares and several domestic
• 20:36
  Speaker 5: memory chip makers are seeing gains after US Commerce Secretary
• 20:40
  Speaker 5: Howard Lutnik told The Wall Street Journal the Trump administration
• 20:42
  Speaker 5: opposes Apple buying Chinese memory chips sand Disk, jumping eight percent,
• 20:47
  Speaker 5: Western Digital up seven percent, in Micron Technologies up by
• 20:51
  Speaker 5: four percent. Meanwhile, according to Reuters, not only Baba is
• 20:55
  Speaker 5: expected to unload its gaming developer unit two private equity
• 20:59
  Speaker 5: firm True Star Capital for more than two billion dollars.
• 21:03
  Speaker 5: Ali Baba stock is up about half a percent, and
• 21:07
  Speaker 5: Nvidia has agreed to provide a more one hundred billion
• 21:11
  Speaker 5: dollars for a massive new open AI data center in
• 21:15
  Speaker 5: Ohio that is being developed alongside a soft bet Bank
• 21:18
  Speaker 5: lead energy company in one of the biggest AI infrastructure
• 21:23
  Speaker 5: deals yet. Nvidia stock is up about half a percent
• 21:27
  Speaker 5: so far today. I'm Tucker Silva, that is Wall Street Watch.
• 21:33
  Speaker 3: Peace in Bloomberg. AI is driving up treasury yields, Quota
• 21:36
  Speaker 3: just touches everything. I'm calling bull Loani on this.
• 21:39
  Speaker 2: Yeah, yes, okay, talk to me. So here's the deal.
• 21:43
  Speaker 3: You've got a whole bunch of AI companies that are
• 21:48
  Speaker 3: issuing a whole bunch of debt. Okay, hyperscalers they're issuing
• 21:53
  Speaker 3: you know, twenty five billions of dollars at a time.
• 21:56
  Speaker 2: Uh, in debt and it it.
• 21:59
  Speaker 3: People are saying like, Okay, is this crowding out because
• 22:03
  Speaker 3: you know, money has to go and buy that debt.
• 22:06
  Speaker 3: Is this what's driving up treasury yields? And my answer
• 22:09
  Speaker 3: is no, it's not.
• 22:11
  Speaker 2: The government's borrowing. No, it's not.
• 22:13
  Speaker 3: It's not the government's borrowing either. Like everyone always wants
• 22:18
  Speaker 3: to be like definite problem. I'm the smartest guy in
• 22:20
  Speaker 3: the room. It's the deficit man. And then when yields
• 22:23
  Speaker 3: go down, it's like, oh, the deficit go down. Well no,
• 22:25
  Speaker 3: but it's still the deficit man. And it's like, well,
• 22:28
  Speaker 3: it's not the deficit. Then you can't just like have
• 22:31
  Speaker 3: your cake and eat it too. Here's the deal, Mike.
• 22:33
  Speaker 3: Are there lots of data centers being built in Japan?
• 22:36
  Speaker 2: Uh?
• 22:37
  Speaker 3: Not answer answers No, it's it's prohibitively expensive, and and
• 22:43
  Speaker 3: like well and also like electricity is kind of a
• 22:46
  Speaker 3: problem in Japan, Like you just can't keep you know, electrifying,
• 22:51
  Speaker 3: like they.
• 22:52
  Speaker 2: They will not leave the lights on for you.
• 22:53
  Speaker 3: They you know, kind of have a problem with nuclear
• 22:55
  Speaker 3: power following Fukushima. And other than that, there's not really
• 22:58
  Speaker 3: a great way to generate power in Japan because they
• 23:00
  Speaker 3: don't have a ton of you know, gnat gas and everything,
• 23:03
  Speaker 3: so they have to import it and that's kind of
• 23:05
  Speaker 3: been a problem this year. So no, there's not a
• 23:08
  Speaker 3: whole lot of data center construction going on in Japan.
• 23:11
  Speaker 2: Michael.
• 23:11
  Speaker 3: Have you've seen what's been happening with Japanese long term
• 23:14
  Speaker 3: treasury yields. Yeah, they've been going up, way up in
• 23:17
  Speaker 3: the last three years, even before, like you know, large
• 23:21
  Speaker 3: scale data center construction financing was a thing. This is
• 23:25
  Speaker 3: not a US story, and so it's not a US cause,
• 23:28
  Speaker 3: I know, we always have to be like the star
• 23:30
  Speaker 3: of the show, and it's like, you know, everything has
• 23:33
  Speaker 3: to be about us.
• 23:34
  Speaker 2: It's not.
• 23:34
  Speaker 3: Bondields are going up globally, and it's not because of
• 23:37
  Speaker 3: AI issuing a bunch of AI companies issuing a bunch
• 23:40
  Speaker 3: of debt. This has been happening even before twenty twenty six,
• 23:43
  Speaker 3: when none of them were issuing any additional debt to
• 23:46
  Speaker 3: build data centers. So I look at this in terms of, hey,
• 23:52
  Speaker 3: is there any substantive change in what's been going on
• 23:55
  Speaker 3: in yields this year versus you know, the last several
• 23:57
  Speaker 3: years and the answer is no. And so I get
• 24:02
  Speaker 3: to hey, if you want to prove to me that
• 24:06
  Speaker 3: the AI related debt is is actually driving up borrowing costs,
• 24:11
  Speaker 3: you're gonna have to do more than just what treasury
• 24:13
  Speaker 3: yields have gone up in the last month and AI
• 24:15
  Speaker 3: companies have issued debt.
• 24:17
  Speaker 2: Well, okay, like.
• 24:18
  Speaker 3: What about the couple months before? Like what are we
• 24:21
  Speaker 3: doing here?
• 24:22
  Speaker 2: So what do we have?
• 24:23
  Speaker 4: Just a bond market globally that's worried about inflation and
• 24:25
  Speaker 4: shortages we.
• 24:27
  Speaker 3: Have It's not even that's worried about what do you
• 24:29
  Speaker 3: mean shortages energy? I don't even think it's that, because again,
• 24:33
  Speaker 3: the cell off in the bond market predates any of
• 24:36
  Speaker 3: the horror move stuff. Like this is what I'm trying
• 24:39
  Speaker 3: to get at is ultimately no one trusts any of
• 24:43
  Speaker 3: these currencies as far as they can throw them.
• 24:47
  Speaker 2: Like they like, no one does.
• 24:49
  Speaker 3: Like you want to go and own the en right
• 24:51
  Speaker 3: now when you've had a Ministry of Finance and US
• 24:54
  Speaker 3: Treasury intervention and the end still is hovering around one
• 24:57
  Speaker 3: sixty because no one believes it, Like you want to
• 25:02
  Speaker 3: go and buy Euros with that economy seemingly not you know,
• 25:07
  Speaker 3: you want to go and buy like US dollars with
• 25:10
  Speaker 3: that deficit, what where are you gonna go? Who are
• 25:15
  Speaker 3: you gonna call aside from ghostbusters? And so like, this
• 25:18
  Speaker 3: is what's happening. It's a global currency sell off that
• 25:22
  Speaker 3: is going on. And if that's happening and you fear
• 25:25
  Speaker 3: loss of purchasing power, you say, Okay, I don't want
• 25:28
  Speaker 3: to own those long term bonds then, because they're gonna
• 25:31
  Speaker 3: do what every government always does when faced with the
• 25:35
  Speaker 3: question of like how do we deal with like covering
• 25:38
  Speaker 3: the cost of this, you screw the bondholders, not by
• 25:41
  Speaker 3: defaulting in nominal terms, but you default in real terms
• 25:44
  Speaker 3: by letting inflation run hotter.
• 25:46
  Speaker 2: Which is what we're seeing. So it's an inflation problem
• 25:51
  Speaker 2: round about.
• 25:51
  Speaker 4: You might be able to convince me that AI is
• 25:53
  Speaker 4: now a little bit contributing to the inflation problem and
• 25:57
  Speaker 4: might for the next few years. But that's a lot
• 25:59
  Speaker 4: different than saying, because Google borrowed twenty five billion dollars,
• 26:02
  Speaker 4: it's making it more expensive for the US government to borrow.
• 26:05
  Speaker 4: Like sure, yeah, all ilse eql if you said that, hey,
• 26:08
  Speaker 4: the government was cutting its deficit in half and these
• 26:13
  Speaker 4: companies weren't borrowing money, would interest rates maybe be lower?
• 26:16
  Speaker 2: Yeah, probably, But that's kind of a false premise to
• 26:20
  Speaker 2: start with.
• 26:20
  Speaker 3: Right So I don't know, Like I look at this
• 26:23
  Speaker 3: question and.
• 26:26
  Speaker 2: I don't know.
• 26:26
  Speaker 3: I'm very much.
• 26:28
  Speaker 4: Here's what Here's the other side of this question, or
• 26:34
  Speaker 4: the other side of this point that I just made,
• 26:36
  Speaker 4: is all the people calling out AI is going to
• 26:39
  Speaker 4: be productivity boosting in a way that makes inflation not concerning.
• 26:45
  Speaker 4: Like our current fitchair has alluded to this idea that hey,
• 26:48
  Speaker 4: AI is going to kind of fix our inflation problems.
• 26:53
  Speaker 2: I think that is crazy.
• 26:57
  Speaker 4: Why so you may see the productivity boost but right now,
• 27:03
  Speaker 4: I think the only argument you can make about an
• 27:04
  Speaker 4: I spending is that it is going to be inflationary
• 27:06
  Speaker 4: for the time being.
• 27:11
  Speaker 3: The place that I have always struggled with it is, Okay,
• 27:16
  Speaker 3: if AI makes things that much more productive, ultimately that
• 27:23
  Speaker 3: has to translate into real world alars. It's gotta be like, like,
• 27:30
  Speaker 3: what what is it going to make cheaper? Is the question? Like,
• 27:35
  Speaker 3: in real terms, what's it going to make labor?
• 27:39
  Speaker 2: Is seemingly the answer?
• 27:41
  Speaker 3: Okay, so good, So like we think labor is going
• 27:43
  Speaker 3: to be cheaper, then why do we expect people to
• 27:45
  Speaker 3: be able to buy the same amount that they could before.
• 27:47
  Speaker 3: If the cost of labor goes down, meaning your wage
• 27:51
  Speaker 3: goes down or aggregate wages go down, then you have
• 27:55
  Speaker 3: the question of okay, if there aren't as many people
• 27:57
  Speaker 3: to buy the products because they don't have as much income,
• 28:01
  Speaker 3: then does that does that accelerate how fast you lay
• 28:05
  Speaker 3: people off? In that like you end up in a spiral.
• 28:07
  Speaker 3: And this is how you get the you know, all
• 28:09
  Speaker 3: the tech people saying well, we need to have you know,
• 28:11
  Speaker 3: universal basic income. Then so like, I don't know what
• 28:15
  Speaker 3: the answer is on this, but I do know that
• 28:17
  Speaker 3: there's no free lunch. I've tried to. I love lunch.
• 28:21
  Speaker 3: I've looked for it and it's it's it's not free.
• 28:24
  Speaker 2: And there's a lot of people promising a lot of
• 28:25
  Speaker 2: free lunch right now.
• 28:26
  Speaker 3: There are, there are and and so that's Elon Musk keeps.
• 28:30
  Speaker 2: Telling me that there's no need to save for retirement.
• 28:32
  Speaker 2: I'm just not buying it.
• 28:34
  Speaker 1: Than what.
• 28:37
  Speaker 2: Right he does?
• 28:38
  Speaker 3: Maybe there's no need for him to save for retirement
• 28:40
  Speaker 3: since he had a trillion dollars at one point this year,
• 28:42
  Speaker 3: But for for us mere mortals who don't have a trillion.
• 28:48
  Speaker 3: You know, it's uh, it's it's a question, so I
• 28:51
  Speaker 3: don't know, but this is uh again the math I
• 28:56
  Speaker 3: always struggle to math with when we when we get
• 28:58
  Speaker 3: into the weeds on this, take a quick break. When
• 29:01
  Speaker 3: we come back, we'll talk about what we are seeing
• 29:03
  Speaker 3: in terms of wages versus inflation.
• 29:06
  Speaker 1: Next, breaking business news as it happens only here on
• 29:11
  Speaker 1: the Financial Exchange Radio Network. Miss the show. You can
• 29:15
  Speaker 1: find them on our YouTube page. The show streams live
• 29:18
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• 29:21
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• 29:25
  Speaker 1: the Financial Exchange Radio Show.
• 29:39
  Speaker 3: In the last ten days, we had a few different
• 29:42
  Speaker 3: government data releases, one of which showed that consumer prices
• 29:46
  Speaker 3: over the last year rose three point four percent, another
• 29:50
  Speaker 3: showing that over the last year, average hourly earnings rose
• 29:53
  Speaker 3: three point two percent. This means that on average, Americans
• 29:58
  Speaker 3: now are in a situation where for the last year
• 30:01
  Speaker 3: they're spending or the prices that they pay have risen
• 30:06
  Speaker 3: at a faster rate than their wages.
• 30:08
  Speaker 2: Now.
• 30:08
  Speaker 3: Remember, there is no like one person who's the average American.
• 30:12
  Speaker 3: Like you can't point to like Mike or Tucker or
• 30:16
  Speaker 3: anyone else and be like, hey, that person is the
• 30:19
  Speaker 3: average American financially, because they don't exist ultimately during the
• 30:24
  Speaker 3: last If you have a situation, even let's say that
• 30:27
  Speaker 3: on average, wages are keeping up with inflation, there's a
• 30:31
  Speaker 3: big chunk of people for whom it's not, and there's
• 30:34
  Speaker 3: a big chunk of people for whom wages are outpacing inflation.
• 30:37
  Speaker 3: Which is why, again, like over the last you know,
• 30:39
  Speaker 3: couple of years, it's been perfectly valid for people to say, hey,
• 30:44
  Speaker 3: my personal rate of inflation is higher than what's being documented,
• 30:47
  Speaker 3: or my wage growth is lower, and so I'm feeling
• 30:50
  Speaker 3: worse off totally by that. But what you don't want
• 30:53
  Speaker 3: to see is a bigger portion of workers that fall
• 30:56
  Speaker 3: behind in that race, and that is what the data
• 30:58
  Speaker 3: is indicating over the last year.
• 31:00
  Speaker 4: Now, Yeah, the big piece of the inflation piece that
• 31:02
  Speaker 4: we we tend to glaze over because it's really tough
• 31:06
  Speaker 4: to measure, is housing inflation.
• 31:08
  Speaker 2: You know, you think about the number of people who
• 31:10
  Speaker 2: own their home.
• 31:10
  Speaker 3: The medical ones impossible, The medical one is the medical one.
• 31:14
  Speaker 3: The BOS literally says, we can't actually calculate this, so
• 31:18
  Speaker 3: we do the best we can.
• 31:19
  Speaker 4: Yeah, With housing, what they're trying to do if you
• 31:21
  Speaker 4: own a home, they're trying to determine owner's equivalent rent,
• 31:25
  Speaker 4: which is just a nonsense, you know, way of measuring things.
• 31:28
  Speaker 4: It's it's a way of doing it. But they try
• 31:31
  Speaker 4: and figure out basically what it would cost to rent
• 31:34
  Speaker 4: your home if you didn't own it, because otherwise they're
• 31:37
  Speaker 4: just going to be looking at a fixed rate or mortgage.
• 31:39
  Speaker 4: Or what happened I think during the eighties was inflation
• 31:45
  Speaker 4: as measured took off because interest rates on mortgages went up,
• 31:48
  Speaker 4: and it's like, well, that's not really all that accurate either,
• 31:53
  Speaker 4: and so we came up to this new measurement. But
• 31:57
  Speaker 4: to your point, a lot of different experiences, how whoever,
• 32:00
  Speaker 4: whether you're measuring it this way or there's another way
• 32:03
  Speaker 4: of measuring, you know, income versus inflation. Personal income after taxes,
• 32:08
  Speaker 4: which takes into account things like retirement benefits and rental
• 32:12
  Speaker 4: income and things that you know, traditional income measures don't
• 32:14
  Speaker 4: look at. That fell and inflation adjusted terms for the
• 32:18
  Speaker 4: second quarter as well, and so you know, overall, I
• 32:21
  Speaker 4: think we can comfortably say that on average, wages and
• 32:25
  Speaker 4: other forms of income are simply not keeping pace with
• 32:27
  Speaker 4: these current rates of inflation.
• 32:29
  Speaker 5: One day you're living in your own home, the next
• 32:32
  Speaker 5: you can't return home after rehab. Now you're faced with
• 32:36
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• 33:26
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• 33:28
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• 33:30
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• 33:33
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• 33:37
  Speaker 3: Piece in the Wall Street Journal, The Hidden Advantages of
• 33:40
  Speaker 3: being a job hopper. So the subheadit kind of gets
• 33:44
  Speaker 3: at this. People switch employers a lot are often seen
• 33:46
  Speaker 3: as red flags. New evidence suggests they get up to
• 33:49
  Speaker 3: speed much faster than others. So first, the first thing
• 33:56
  Speaker 3: about this study that you have to know it hits
• 33:59
  Speaker 3: you a ton of bricks. Quote in a new study
• 34:02
  Speaker 3: of eighty seven hundred hedge fund managers. Okay, so everyday
• 34:07
  Speaker 3: man so, So first of all, gotta be honest, didn't
• 34:11
  Speaker 3: know that there were eighty seven hundred hedge fund managers
• 34:14
  Speaker 3: to begin with.
• 34:15
  Speaker 2: Probably shouldn't be feels like we got enough. That seems
• 34:18
  Speaker 2: like enough.
• 34:19
  Speaker 3: All else being equal, those who would switch jobs hit
• 34:21
  Speaker 3: the ground running much faster than other new hires. The
• 34:25
  Speaker 3: researchers say they could tell because they measured just how
• 34:27
  Speaker 3: much money they made. Okay, so what we're talking about
• 34:32
  Speaker 3: here is specifically again we're talking hedge fund managers, and
• 34:39
  Speaker 3: specifically are we talking about money they made for their
• 34:43
  Speaker 3: fund or the money they made in their pocket.
• 34:47
  Speaker 4: Presumably the fund, because I don't think that they would
• 34:50
  Speaker 4: be able to readily measure Yeah, maybe they could measure
• 34:54
  Speaker 4: wages too, if they had enough disclosure.
• 34:56
  Speaker 2: But it probably for the fund would be my guess.
• 34:58
  Speaker 3: Because like this piece, like I'm reading through it and
• 35:01
  Speaker 3: it doesn't specify like who the money was made for. Now,
• 35:07
  Speaker 3: I'm just trying to like think through like methodological issues
• 35:11
  Speaker 3: that could come up. Okay, is it possible that the
• 35:14
  Speaker 3: hedge fund managers that switch a lot just happen to
• 35:17
  Speaker 3: be more talented than other ones? Yes, you know, like
• 35:22
  Speaker 3: they're in demand and so they get a new offer
• 35:24
  Speaker 3: and they go somewhere else. Maybe yeah, or maybe they're
• 35:28
  Speaker 3: highly compensated enough where they are that that's not the case.
• 35:30
  Speaker 4: But so I'll be the first to admit applications coming
• 35:34
  Speaker 4: in on your resume, you have, you know, a decade
• 35:38
  Speaker 4: where you spent time at six different employers. I'm pretty
• 35:44
  Speaker 4: predisposed against that candidate.
• 35:46
  Speaker 3: Well, I think you're at least going to ask, like, hey,
• 35:48
  Speaker 3: what's the deal, like if I'm hiring a candidate. And again,
• 35:53
  Speaker 3: let's be like if we're being honest about this, like
• 35:56
  Speaker 3: no one expects.
• 35:57
  Speaker 2: A candidate to stick around forever.
• 35:58
  Speaker 3: True, or you're crazy, But I think realistically, hey, you
• 36:03
  Speaker 3: want to get three to five years out of an employee,
• 36:05
  Speaker 3: and you consider that a baseline for success. Anything more
• 36:08
  Speaker 3: than that's gravy quite honestly. Sure, it's it's just kind
• 36:12
  Speaker 3: of how it is.
• 36:13
  Speaker 4: So the point that they're making, I am with you
• 36:15
  Speaker 4: that I don't buy the results of the study, because one,
• 36:18
  Speaker 4: I don't know that hedge fund managers tell me much
• 36:22
  Speaker 4: about a mechanic or a you know, a tech worker,
• 36:29
  Speaker 4: a software designer, like I don't.
• 36:31
  Speaker 2: I don't know that they do.
• 36:34
  Speaker 4: But I would, I guess, hypothetically buy that somebody who
• 36:37
  Speaker 4: is switching jobs quite a bit maybe better at adapting
• 36:42
  Speaker 4: to your new firm's culture and learning the role faster
• 36:45
  Speaker 4: than somebody that's worked for one company for twenty years. Yes,
• 36:47
  Speaker 4: like I buy that in theory, but I would have
• 36:51
  Speaker 4: to weigh that against great they got up and running
• 36:55
  Speaker 4: in three months as opposed to six and then left
• 36:58
  Speaker 4: six months later. That's still not terribly valuable to me, right,
• 37:02
  Speaker 4: I would much rather take the employee that takes six
• 37:05
  Speaker 4: months to get up to speed and stays for five
• 37:08
  Speaker 4: years then the one that takes three months to get
• 37:10
  Speaker 4: up to speed and leaves after one year. So I'm
• 37:14
  Speaker 4: not sure this study really moves in the direction of this, Richard,
• 37:18
  Speaker 4: But I think perhaps if you can be open minded
• 37:22
  Speaker 4: to finding that person and incentivizing them to actually stay
• 37:26
  Speaker 4: in the role, then you know, that's something to be.
• 37:29
  Speaker 2: Said for it.
• 37:30
  Speaker 4: But for employees, I will say, hey, big benefit by jumping.
• 37:36
  Speaker 2: Just beware of beware of the.
• 37:38
  Speaker 4: Reputational risk you do to yourself by hopping from place
• 37:41
  Speaker 4: to place to place, because there's a lot of places
• 37:43
  Speaker 4: that will.
• 37:43
  Speaker 2: Just throw out that resume.
• 37:44
  Speaker 3: I think in general, as long as it's like you've
• 37:47
  Speaker 3: stayed at least eighteen plus months.
• 37:49
  Speaker 4: Somewhere, yeah, I don't see that as a problem then,
• 37:52
  Speaker 4: you know, but if you've got three jobs on your
• 37:54
  Speaker 4: resume where you lasted less than a year, I would
• 37:56
  Speaker 4: have some serious question.
• 37:57
  Speaker 3: It's kind of like, okay, like what's going on here
• 38:00
  Speaker 3: that you no? It's all of them, It's always okay, Well, respect,
• 38:08
  Speaker 3: let's take a quick break here. We got our two
• 38:10
  Speaker 3: coming up in just a little bit.