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Jobs Report Sends Mixed Signal on Fed Rates · The Financial Exchange Show

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Speaker 1: donation today. This is the Financial Exchange with Chuck Zada,
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Speaker 1: and Mike Armstrong.
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Speaker 2: Chuck, Mike, and Ben with you here today and as
1:19
Speaker 2: we kick things off, we got a job support this
1:23
Speaker 2: morning and we saw some pretty good UH data come
1:27
Speaker 2: out on one side of the ledger, some pretty bad
1:30
Speaker 2: on the other side of the ledger. So the question
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Speaker 2: when you get that is, well, what does it actually mean?
1:36
Speaker 2: So here's what we saw. On the good side of things.
1:39
Speaker 2: The unemployment rate dropped from four point two percent down
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Speaker 2: to four point one percent. It's good, that's what do
1:45
Speaker 2: you like to see. You like to see a lower
1:47
Speaker 2: unemployment rate. The confusing piece, Michael, is that the job
1:51
Speaker 2: growth was actually negative twenty three thousand jobs lost for
1:56
Speaker 2: the month of July, and we we had negative revisions
2:01
Speaker 2: for the previous two months, May being revised down from
2:03
Speaker 2: one hundred and twenty nine thousand jobs created to sixty
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Speaker 2: three thousand, and June from fifty seven thousand down to
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Speaker 2: twenty thousand, So one hundred thousand jobs one hundred thousand
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Speaker 2: fewer jobs created in the prior two months than initially anticipated.
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Speaker 3: What do you make of this?
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Speaker 4: So?
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Speaker 3: I think I can textualize it in which survey should
2:28
Speaker 3: we pay more attention to this month? The previous fed
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Speaker 3: regime was very focused on that unemployment rate signifying tightness
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Speaker 3: and what they are going to need to do.
2:40
Speaker 4: With interest rate policy.
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Speaker 3: I think when you get a report like this, it's
2:46
Speaker 3: not just the twenty three thousand job loss and that
2:49
Speaker 3: you got in July, right, you can take a look
2:51
Speaker 3: at that and say, okay, one month data, Let's see
2:54
Speaker 3: what the next few months.
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Speaker 4: Do when you get those revisions.
2:59
Speaker 3: The down word revisions here is where I think you
3:03
Speaker 3: take a look at that and put a little bit
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Speaker 3: more weight on the establishment survey to say, okay, this,
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Speaker 3: this could be something.
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Speaker 4: To take seriously here, and so I don't know.
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Speaker 3: My overall takeaway is while this labor market is still
3:18
Speaker 3: significantly stronger than it was for most of twenty twenty five,
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Speaker 3: we've got a bad month of data here, and it's
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Speaker 3: something to pay attention to if it should continue.
3:30
Speaker 2: I don't think it's a bad month. I'm gonna throw
3:31
Speaker 2: it out, just throw it away. I think it is
3:34
Speaker 2: worth throwing out. And the reason I think it's worth
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Speaker 2: throwing out, or at least, look, you can throw it
3:38
Speaker 2: into the pile, but don't wait it too much. Let's
3:41
Speaker 2: look at the other jobs data that we've been getting Mike.
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Speaker 2: When we look at what's going on with initial claims,
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Speaker 2: any signs of weakness.
3:47
Speaker 4: No.
3:48
Speaker 2: When we look at what's going on with continuing claims,
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Speaker 2: any signs of weakness, yep. When we look at job openings,
3:53
Speaker 2: any sign of weakness.
3:55
Speaker 5: No.
3:56
Speaker 2: It's you go through, you know, kind of all the
3:59
Speaker 2: different pieces that are out there, and I don't think
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Speaker 2: it paints any convincing picture to me that there is
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Speaker 2: meaningful weakness in the labor market. In particular, I want
4:11
Speaker 2: to look at one item here in the establishment data.
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Speaker 2: The Establishment survey is the one where they go out
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Speaker 2: and they ask companies, hey, you know what happened from
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Speaker 2: a hiring perspective, And this is the one that showed
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Speaker 2: the twenty three thousand jobs being lost. About halfway down
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Speaker 2: the page they break it down by sector, and halfway
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Speaker 2: down the page they have a government sector which showed
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Speaker 2: fifty three thousand government jobs lost in the month of July,
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Speaker 2: which means that if you net that against the total,
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Speaker 2: thirty thousand was the private sector job growth, which, given
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Speaker 2: the overall low rate of labor force growth or actually
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Speaker 2: labor force shrinking that we are seeing, to me indicates, hey,
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Speaker 2: like private sector job growth was just fine. It was,
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Speaker 2: in fact, the exact same as it was in June,
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Speaker 2: and in May we saw sixty thousand private sector jobs
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Speaker 2: created based on the fact that the labor force probably
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Speaker 2: isn't growing.
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Speaker 3: That's perfectly fine.
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Speaker 4: M hm.
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Speaker 3: I think what I will land with is, you know, again,
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Speaker 3: one bad month of data, if not confirmed from other sources,
5:19
Speaker 3: is nothing to get terribly concerned about. When I do
5:22
Speaker 3: chart out the pace of job creation this year, we
5:28
Speaker 3: are now seeing a slow down since March, right, so
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Speaker 3: some really robust hiring month over month in in you know,
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Speaker 3: the early stages, and it's been good, but slowing since then.
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Speaker 4: And so that could be a few things.
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Speaker 3: One that could just be you know, recovering from a
5:47
Speaker 3: very fast pace after companies got used to the tariffs
5:51
Speaker 3: and you know, hired quickly at the beginning of the
5:53
Speaker 3: year and the end of last year. It could also
5:56
Speaker 3: be signifying, like you said, there's just not a ton
5:59
Speaker 3: of employees to go around, and companies are slowing their
6:03
Speaker 3: hiring plans. Like you said, I don't see that confirmed
6:06
Speaker 3: really anywhere else, So we could see this reverse pretty quickly.
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Speaker 3: But you know, the month over month job changes now
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Speaker 3: for March through Now we're two hundred and fourteen one, eight,
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Speaker 3: sixty three, twenty and now negative twenty three thousand. Those
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Speaker 3: were all numbers in thousands, so you can see some
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Speaker 3: degree of a trend there that I think is worth
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Speaker 3: looking at.
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Speaker 2: I think this is entirely a labor supply situation, and
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Speaker 2: labor demand is fine. The piece of data that I
6:40
Speaker 2: find interesting for telling me this is one that I
6:45
Speaker 2: just started paying attention to, like in the last couple
6:48
Speaker 2: of months, just because there's been a pronounced shift in
6:50
Speaker 2: the last couple of months. But the labor force, you
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Speaker 2: can slice and dice it anyway that you want in
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Speaker 2: terms of of you know, different demographics and things like that.
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Speaker 2: And so when we look at some of the different
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Speaker 2: slicing and dicing that you can do, here couple that
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Speaker 2: I want to point out. The first we often talk
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Speaker 2: about the age twenty five to fifty four labor force,
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Speaker 2: the prime age labor force participation rate right yep. In
7:25
Speaker 2: terms of what we are seeing on in this demou
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Speaker 2: prime age labor force participation rate is currently at eighty
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Speaker 2: three point four percent. That's down from eighty three to
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Speaker 2: nine earlier in the year, which again is like pretty
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Speaker 2: much within sniffing distance of the record highs that we
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Speaker 2: hit in the late nineties when we got up to
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Speaker 2: like the low eighty fours. So like, okay, that wasn't sustainable.
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Speaker 2: But let's look beyond the participation rate, because if it's
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Speaker 2: a labor supply story, the participation rate is only telling
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Speaker 2: part of it. It's not telling us the whole thing.
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Speaker 2: And for this, the other piece that we get is, hey,
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Speaker 2: what's the what's the actual number of people in the
8:05
Speaker 2: civilian labor force? No, remember, these are all estimates, Like
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Speaker 2: the federal government is not out there counting, like, Okay,
8:11
Speaker 2: we got Jimmy, we got Susan, we got Hank, Mike,
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Speaker 2: where's no, no, no, Mike's missing. Let's let's see where
8:18
Speaker 2: they don't do that. They it's a it's a survey,
8:21
Speaker 2: and they estimate these things. But here's the point that
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Speaker 2: I will make. Uh, the civilian labor force between age
8:27
Speaker 2: twenty five and fifty four peaked at one hundred and
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Speaker 2: ten point twenty seven eight million in November of twenty five.
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Speaker 2: As of right now, it's one hundred and eight point
8:37
Speaker 2: zero seven to six million, meaning we've seen a two
8:40
Speaker 2: million person contraction in the civilian labor force since November
8:47
Speaker 2: of last year two million people. Is that a small
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Speaker 2: number of people?
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Speaker 3: Michael, uh No, that's a big chunk of the labor force.
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Speaker 3: That's that is that is three Bostons. Three Bostons have
8:58
Speaker 3: disappeared out of the labor force. So you see that
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Speaker 3: and I say, okay, like, what what gives? Like what's
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Speaker 3: going on here? And look, occasionally you see like little
9:07
Speaker 3: wiggles in the civilian labor force. The only time that
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Speaker 3: we've seen a consistent downward pressure on the civilian labor
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Speaker 3: force since we have had the data in that began
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Speaker 3: in like nineteen forty seven was the period from twenty
9:25
Speaker 3: eight to twenty fourteen, And there you had people dropping
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Speaker 3: out of the labor force because they were unemployed for
9:30
Speaker 3: so long that they just they weren't counted anymore. They like,
9:33
Speaker 3: there's there's rules about like how they actually count these people.
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Speaker 3: So this is not that because long term unemployment is
9:41
Speaker 3: not at those levels, we're not seeing it. So you
9:45
Speaker 3: ask yourself, okay, like what gives why is the civilian
9:48
Speaker 3: labor force down by two million people since November of
9:51
Speaker 3: twenty five And to this, I take us over to
9:55
Speaker 3: another subset of that, which is, I'm sorry, that was
9:59
Speaker 3: the prime age labor force, which is, let's look at
10:02
Speaker 3: foreign born labor. Okay, foreign born labor back in March
10:08
Speaker 3: of twenty twenty five was thirty three point seven million people.
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Speaker 3: That's what the Bureau of Labor Statistics said. Okay, Like,
10:15
Speaker 3: these are the number of foreign born workers in the
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Speaker 3: labor force today, it's thirty one point five million. Michael.
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Speaker 2: What is thirty three point seven minus thirty one point
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Speaker 2: five I was told there would be no math two
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Speaker 2: point two million, Mike. This is entirely a labor labor
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Speaker 2: supply story.
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Speaker 3: In my opinion.
10:36
Speaker 2: You've had two million foreign born workers on a net
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Speaker 2: basis exit the United States in the last sixteen months.
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Speaker 2: That has been the corresponding drop that we have seen
10:47
Speaker 2: in the civilian labor force. H That's the story in
10:51
Speaker 2: my opinion.
10:52
Speaker 3: So I buy it. Are we seeing what we would
10:55
Speaker 3: anticipate then on wages?
10:58
Speaker 4: No?
10:59
Speaker 3: Because that that that's the part that I am.
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Speaker 2: Well, yes, I'll say yes we are, because the data
11:07
Speaker 2: that we are seeing indicates that buy and large, Remember,
11:11
Speaker 2: foreign born workers buy and large tend to occupy lower
11:14
Speaker 2: income jobs than many Americans. Yep, what we are seeing
11:18
Speaker 2: this year, and this is what Bank of America has
11:20
Speaker 2: told us, It's what P and C Bank has told us,
11:23
Speaker 2: is that lower wage jobs this year are now seeing
11:26
Speaker 2: faster wage growth than higher wage jobs.
11:28
Speaker 3: So maybe you can't detect it in the overall average
11:31
Speaker 3: hourly earnings, but if you're looking at some sort of
11:34
Speaker 3: breakdown of gains by income sector, then yeah, maybe you
11:38
Speaker 3: can detect it there.
11:40
Speaker 2: So I think this is a labor supply issue. It
11:44
Speaker 2: does if you're looking at this in the aggregate, it
11:47
Speaker 2: does tell you look that there's not really any sign
11:49
Speaker 2: of inflationary pressure in the labor market. Like if the
11:54
Speaker 2: Fed wants to use this as an excuse to not
11:57
Speaker 2: hike in September, I think they could, depending on what
12:02
Speaker 2: the August data shows in a month. But I look
12:06
Speaker 2: at this job's report and I think, given what we're
12:09
Speaker 2: seeing in terms of labor supply, I can't believe I'm
12:14
Speaker 2: saying this because I feel like I'm just like off
12:17
Speaker 2: my rocker. I think it's possible in this environment to
12:23
Speaker 2: have a modestly declining number of jobs and the labor
12:29
Speaker 2: force is still okay.
12:31
Speaker 3: I mean, if you are seeing that many people actually
12:33
Speaker 3: disappear from the labor force. Then, combined with retirees, that
12:37
Speaker 3: is entirely possible. I do I think we should take
12:40
Speaker 3: a break, But then I do want to speak a
12:41
Speaker 3: little bit more about what the market thinks this means
12:45
Speaker 3: to the FED and what Kevin Worsh might think it
12:48
Speaker 3: means for the FED and their policy. Quick break, We'll
12:50
Speaker 3: be right back.
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13:24
Speaker 2: Like we were talking about the jobs report that we
13:27
Speaker 2: saw this morning, what else do we wanted to get
13:29
Speaker 2: into on that?
13:30
Speaker 3: So reaction from the markets a week ago after Worsh's
13:36
Speaker 3: speech was a week ago after Worshi's speech.
13:39
Speaker 4: When was his speech?
13:41
Speaker 3: His speech was on Wednesday, So yes, a week ago.
13:44
Speaker 3: This was the market action. Markets were pricing in a
13:48
Speaker 3: week ago about a one in three chance that the
13:52
Speaker 3: FED does not move on interest rates at the next meeting.
13:56
Speaker 3: It's now moved to basically, you know, a coin flip
14:00
Speaker 3: fifty six percent probability that the FED does not move
14:03
Speaker 3: at all now at that next meeting.
14:05
Speaker 4: So how to interpret this?
14:08
Speaker 3: Markets are saying, this is the job's report that's going
14:10
Speaker 3: to justify Kevin Worsh continuing to keep interest rates where
14:14
Speaker 3: they are and let the markets do what they will
14:16
Speaker 3: with that. Given everything that we just talked about. You know,
14:21
Speaker 3: if this is truly a labor supply issue, I'm not
14:25
Speaker 3: sure that it justifies that. And the previous FED was
14:28
Speaker 3: much more interested in what the unemployment rate was telling
14:31
Speaker 3: us about the labor market than the pace of job creation.
14:35
Speaker 3: I'm not confident that Worshs these things the same way,
14:38
Speaker 3: but I'm guessing that his voting members do. And so
14:41
Speaker 3: I have no idea how how the FED is going
14:44
Speaker 3: to respond to this job's report, giving everything we just
14:48
Speaker 3: laid out about yes week job creation, but it's week
14:53
Speaker 3: job creation in the context of a shrinking labor force
14:57
Speaker 3: that is able to actually uh supply the market right now.
15:02
Speaker 2: Yeah, And I think look that we can well get
15:05
Speaker 2: you know, the September projections. I think that the ten
15:08
Speaker 2: yure Treasury is telling like a more consistent story in
15:12
Speaker 2: my opinion, the day after or the day of Worsh's
15:16
Speaker 2: press conference, it closed at four point six two two percent. Yep,
15:21
Speaker 2: right now it's at four point six three five percent.
15:23
Speaker 2: Basically hasn't moved like it's it's moved one basis point
15:27
Speaker 2: in the last week. This despite going up to like
15:29
Speaker 2: four seven five and then back down to four to six.
15:31
Speaker 2: But it's it's basically where it was when his press
15:34
Speaker 2: conference ended. And I think it gets to where I
15:39
Speaker 2: stand on the FED, which is, Mike, is there any
15:42
Speaker 2: sense from the FED that, like even from the people
15:45
Speaker 2: that are talking more hawkishly, you know that the people
15:48
Speaker 2: that probably were in favor of hiking rates, like some
15:51
Speaker 2: of those three descents at the last meeting. Yeah, do
15:55
Speaker 2: you get any sense that any of them are like, hey,
15:57
Speaker 2: FED funds is at like three five now we need
16:00
Speaker 2: to take it up to six.
16:01
Speaker 4: Now.
16:01
Speaker 3: All of them are of the opinion that all of
16:04
Speaker 3: those who are in favor of hiking seem to be
16:06
Speaker 3: the opinion that we need to get started on maybe
16:09
Speaker 3: raising rates a.
16:11
Speaker 4: Little bit at the moment.
16:13
Speaker 3: But yeah, none of them feel none of them are
16:16
Speaker 3: at least voicing concerns that the FED is way behind
16:20
Speaker 3: the eight ball on interest rates right now.
16:24
Speaker 2: If the FED hikes twice this year or three times
16:28
Speaker 2: by Q one of next year, does that have any
16:32
Speaker 2: material impact on asset prices?
16:34
Speaker 4: Probably not.
16:35
Speaker 3: It's gonna be not far more guided by what they
16:37
Speaker 3: have to say or don't say.
16:39
Speaker 2: So even like what they say, like ultimately, like we
16:42
Speaker 2: trust what they say, because okay, if they say they're
16:44
Speaker 2: still concerned about this, then they're gonna keep hiking. Like
16:47
Speaker 2: if FED funds goes back up to four and a quarter,
16:50
Speaker 2: it doesn't make a material difference to this economy. Remember
16:53
Speaker 2: we we saw the FED hike five percent over the
16:55
Speaker 2: course of twenty twenty two into twenty three, and you
16:58
Speaker 2: still didn't get a recession there. Now, granted you were
17:03
Speaker 2: coming off a hotter economy, But I just I the
17:07
Speaker 2: way that everyone fixates on, like, oh, like, if the
17:09
Speaker 2: FED hikes, it's going to be a huge mistake.
17:12
Speaker 3: If they hike a quarter percent or half a percenter,
17:14
Speaker 3: three quarters, nobody cares.
17:16
Speaker 2: It's not going to move the market in a meaningful
17:19
Speaker 2: way because remember, Fed hikes affect the economy by no
17:25
Speaker 2: one borrows overnight, you know, like when you go buy
17:29
Speaker 2: a house. Mic does the bank lend you money for
17:31
Speaker 2: thirty days, No, they do it for thirty years. What
17:35
Speaker 2: the FED does the interest rates doesn't affect the borrowing
17:38
Speaker 2: on your mortgage. We know this, by the way, because
17:41
Speaker 2: the last two times the FED has cut interest rates,
17:45
Speaker 2: mortgage rates have moved up while they've been cutting.
17:49
Speaker 3: So I'm of the.
17:51
Speaker 2: Opinion here that if you want, like if you want
17:56
Speaker 2: to pay attention to, like what the Fed's doing, like
17:58
Speaker 2: everyone just hyper focus is on.
18:00
Speaker 3: Like, oh, the Fed, the Fed, the Fed.
18:04
Speaker 2: It doesn't matter what they do at anyone meeting. Pay
18:06
Speaker 2: attention to what they're gonna do over like a twelve
18:08
Speaker 2: to eighteen month period, and if it's not more than
18:10
Speaker 2: one percent in either direction, probably doesn't matter.
18:13
Speaker 3: Yeah, it's just not enough to move.
18:16
Speaker 2: Again, we've talked at LENTA the last three to four
18:19
Speaker 2: years what the FED has done. We're not sure that
18:22
Speaker 2: the transmission into the real economy is as effective as
18:25
Speaker 2: it used to be. So I kind of look at
18:29
Speaker 2: it and you know, all of the well, are they
18:32
Speaker 2: gonna hike this meeting or is it gonna be next?
18:35
Speaker 2: Forget about it. Like what I'm concerned about is, Hey,
18:39
Speaker 2: is there's something out there that is going to force
18:41
Speaker 2: the Fed to hike from three and a half percent
18:44
Speaker 2: to five and a half. And if there is, then
18:49
Speaker 2: that has my attention. If it's well, we're gonna fine
18:52
Speaker 2: tune things by going from three and a half to
18:54
Speaker 2: four wake me up a couple months from then.
18:57
Speaker 3: Yeah, Because to your point, Chuck, those bigger magnitude hikes
19:02
Speaker 3: back in twenty twenty two, while they didn't sink us
19:05
Speaker 3: into recession, did contribute to one of the worst markets
19:08
Speaker 3: that we've seen in quite some time.
19:10
Speaker 2: Yes, but that's relevant. But that's the magnitude that you had. Remember,
19:14
Speaker 2: a five percent hike in interest rates got us like
19:17
Speaker 2: a twenty five percent drop in markets. Let's take a
19:21
Speaker 2: quick break. When we return, We've got Wall Street Watch.
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20:00
Speaker 5: Well, markets are reacting to the job s data that
20:02
Speaker 5: came out this morning, which showed an unexpected loss of
20:05
Speaker 5: twenty three thousand jobs. Meanwhile, the Dow Jones is up
20:09
Speaker 5: over one hundred and fifty points or three tenths of a percent.
20:12
Speaker 5: S and P five hundreds up half a percent, while
20:15
Speaker 5: the Nasdaq is up over one percent.
20:18
Speaker 3: Oil is up.
20:19
Speaker 5: Thirty four cents or excuse me, thirty four points a
20:22
Speaker 5: point four percent. Brent crude is up point two percent.
20:27
Speaker 5: Gold surging again today, up one hundred and ten dollars
20:30
Speaker 5: or two and a half percent, Silver up three point
20:34
Speaker 5: eight six percent. Whendy shares pop two percent this morning
20:38
Speaker 5: after reported global sales a global sales decrease by more
20:41
Speaker 5: than six percent, which was driven by an eight point
20:44
Speaker 5: two percent decline in the US. The company also withdrew
20:47
Speaker 5: its twenty twenty six financial outlook, but did beat fact
20:50
Speaker 5: set consensus on earnings, revenue, and adjusted EBITA. Shares for
20:54
Speaker 5: solar stocks increase after President Donald Trump imposed tariffs on
20:58
Speaker 5: products that are important to make solar panms First Solar
21:01
Speaker 5: jump more than three percent, Invesco Solar rows two percent,
21:04
Speaker 5: and Solar Edge Technologies gained one percent. Airbnb share surged
21:09
Speaker 5: over fifteen percent after Airbnb posted second quarter earnings of
21:13
Speaker 5: a dollar thirty seven per share on revenue of three
21:15
Speaker 5: point six to one billion that outpaced the earnings of
21:18
Speaker 5: a dollar twenty five on revenues and three point five
21:21
Speaker 5: to eight billion forecast by analysts, and finally, cloud Flare
21:25
Speaker 5: jumped more than ten percent after issuing solid guidance for
21:28
Speaker 5: the full year. In current quarter, cloud Flare expects adjusted
21:32
Speaker 5: earnings of thirty four cents per share on revenue of
21:35
Speaker 5: seven hundred and thirty six million to seven hundred and
21:38
Speaker 5: thirty seven million in the third quarter. Second quarter results
21:41
Speaker 5: also surpassed estimates on the top and bottom lines. I
21:44
Speaker 5: am ben Kitchen and that was Wall Street.
21:46
Speaker 3: Watch try it go ahead, Nope, all you before you can.
21:50
Speaker 3: We just talk about fast food for a moment here.
21:53
Speaker 3: I love talking about fast I'd meet too. I think
21:56
Speaker 3: this might be mainly because my stomach don.
21:58
Speaker 2: Convinced me to get a burrito yesterday from oh yeah yeah,
22:00
Speaker 2: I remember, not fast food but fast casual.
22:03
Speaker 3: So we've got earnings now for McDonald's, Burger King, and Wendy's,
22:08
Speaker 3: and I just want to draw out the wild divergence
22:11
Speaker 3: in sales. So all of these retail companies break out
22:15
Speaker 3: their sales with a metric that we refer to as
22:17
Speaker 3: same store sales. It's looking at how did your sales
22:21
Speaker 3: do specifically at locations that were open the same time
22:26
Speaker 3: last year, so it washes out. Hey, we opened fifteen
22:29
Speaker 3: new stores and they performed really well or poorly. McDonald's
22:34
Speaker 3: was basically flat. They saw same store sales increase in
22:37
Speaker 3: the US less than one percent. Wendy's has ben just
22:40
Speaker 3: mentioned same store sales down seven percent, Burger King up
22:45
Speaker 3: eight and a half percent. The divergence there, the swing
22:48
Speaker 3: is kind of wild in a single quarter. To see
22:53
Speaker 3: these three companies who effectively, I'm sorry to all the
22:56
Speaker 3: you know, passionate fast food fans out there, they do.
22:59
Speaker 4: The same thing.
23:00
Speaker 3: And one saw same store sales down seven percent, another
23:05
Speaker 3: saw them up eight and a half percent.
23:07
Speaker 4: That is a massive swing in execution.
23:09
Speaker 3: It is.
23:10
Speaker 2: It's an execution story, not a low income consumer story,
23:15
Speaker 2: right right, So yeah, yeah, I mean, anybody looking for
23:18
Speaker 2: a trend here and how the US consumer is doing
23:20
Speaker 2: from looking at from looking at fast food sales, you're
23:24
Speaker 2: not gonna get it.
23:25
Speaker 3: But just pretty wild and incommendable to the what is
23:29
Speaker 3: it restaurant brands, folks who own Burger thing quite a
23:33
Speaker 3: turn around.
23:33
Speaker 2: I want to continue talking fed just because we kind
23:36
Speaker 2: of segued into that. We get a couple of pieces here,
23:38
Speaker 2: one from Bloomberg Trump says rates should drop, but it's
23:40
Speaker 2: not entirely up to Warsh and then another piece from
23:43
Speaker 2: mohammedel Area and former PIMCO.
23:45
Speaker 3: What was he the president of PIMCO. Yeah, and one
23:49
Speaker 3: of the most famous pond traders.
23:51
Speaker 4: And that's true.
23:52
Speaker 2: Yeah, mohamedel Arian's got a piece of the Financial Times
23:55
Speaker 2: titled Warsh is being misread.
23:57
Speaker 3: So a couple things.
23:58
Speaker 2: And then there was another piece, by the way, in
24:00
Speaker 2: the Financial Times from Claire Jones saying yesterday that Worsh
24:04
Speaker 2: is actually open to a.
24:07
Speaker 3: September rate hike. So I have a few takeaways here, Okay,
24:10
Speaker 3: from the Bloomberg piece, I think that this is by
24:14
Speaker 3: and large President Trump saying, hey, I'm giving you a
24:19
Speaker 3: mulligan because the committee might do what the Committee does,
24:23
Speaker 3: but I still want et to lower rates. Sure, So,
24:25
Speaker 3: same message that he's sent for the last several years,
24:30
Speaker 3: but a little bit nicer because he has Worsh in place.
24:34
Speaker 2: Simple message from Muhammed el Aarrian. Muhammed el Arian has
24:39
Speaker 2: been like really critical of the FED for the last
24:42
Speaker 2: couple of years and has been very pro Worsh Basically,
24:44
Speaker 2: since like Worsh, I mean, you know't announce your candidacy
24:48
Speaker 2: for the FED chair. It's not like, you know, you
24:50
Speaker 2: don't have to like file like you're not running in
24:52
Speaker 2: an election. But basically, since Worsh, you know, made it
24:56
Speaker 2: clear that he wanted to be FED chair, El Aarian
24:58
Speaker 2: has very much been support him, So it's not surprising
25:01
Speaker 2: to me that he's kind.
25:02
Speaker 3: Of doubling down on that here. Sure again, totally fine.
25:06
Speaker 2: The piece that's interesting to me is what we are
25:10
Speaker 2: getting from Claire Jones in the Financial Times, because forward
25:16
Speaker 2: guidance is a very specific thing. It's not telling people, hey,
25:20
Speaker 2: if X happens, here's how we'll react. It's saying, here
25:25
Speaker 2: is what our policy is going to be. When you
25:29
Speaker 2: simultaneously or when someone close to you says, hey, like
25:35
Speaker 2: Nick tim Ros is just you know, a glorified stenographer.
25:39
Speaker 2: But then you get Claire Jones saying, well, Worsh might
25:42
Speaker 2: be open to, you know, a FED rad hike in September,
25:49
Speaker 2: it becomes apparent that it's not necessarily forward guidance that
25:53
Speaker 2: you are opposed to, because you are engaging in the
25:56
Speaker 2: same forward guidance that Nick Tim Rose used to do
25:58
Speaker 2: for Jerome Powell. But it's just you want it to
26:02
Speaker 2: be in a different venue.
26:06
Speaker 3: That is an interpretation like that, That's what it is.
26:10
Speaker 3: Isn't publishing that without Kevin Worsh wanting her to? I
26:13
Speaker 3: take your point, but for that to be the case,
26:17
Speaker 3: we need to see it repeated a few times, not
26:20
Speaker 3: really like it just happened. Do you think it's an accident.
26:28
Speaker 3: I think there's a small possibility that it wasn't directed
26:30
Speaker 3: by Worsh, and you would see that proven out if
26:34
Speaker 3: if it never happened, and Claire Jones.
26:36
Speaker 2: Answer me, answered me a question, then how does Claire
26:40
Speaker 2: Jones get information saying, hey, Kevin Worsh might be open
26:45
Speaker 2: to a rate hike in September.
26:47
Speaker 3: If it's not coming from Worsh But you know somebody
26:54
Speaker 3: close to Worsh instead of him.
26:56
Speaker 2: And that person's just authorized to speak on his behalf
26:59
Speaker 2: without him saying anything.
27:01
Speaker 3: There's been a few people that have been speaking to
27:03
Speaker 3: the press that clearly weren't authorized by Worse to speak
27:05
Speaker 3: to the press. So possibly, but unlikely. I'm with you.
27:10
Speaker 3: I'm just trying to.
27:10
Speaker 4: Play devil's advocate for a moment.
27:12
Speaker 3: It's a very new fed chair that's trying to do
27:14
Speaker 3: things very differently, and so I'm just not My point.
27:17
Speaker 2: Is that I don't know if he's actually doing them
27:18
Speaker 2: that differently. Yeah, maybe he is, maybe he isn't. Again,
27:22
Speaker 2: but this is the thing. When you don't tell people anything,
27:26
Speaker 2: they're going to speculate. Like it's just if you want
27:31
Speaker 2: to tamp down on speculation, you give more access, and
27:34
Speaker 2: if you don't, then people are going to speculate about, well,
27:37
Speaker 2: where's this coming from? Is this actually like how forward?
27:40
Speaker 2: Guidance is going to be disseminated going forward? These are
27:43
Speaker 2: the things that.
27:44
Speaker 3: People wonder about, and it's going to be part Like
27:48
Speaker 3: you're not going to get rid of that by saying, Okay,
27:50
Speaker 3: we're gonna talk about it less.
27:53
Speaker 4: Yeah, it's the.
27:55
Speaker 3: Same reason why so and a bad segue. I'm not
27:59
Speaker 3: gonna get into that.
28:00
Speaker 2: But sometimes I see a landmine coming and I'm like, no,
28:04
Speaker 2: we're gonna avoid that one before we get there.
28:07
Speaker 6: Not often, but sometimes no. Usually I'm like, oh, I
28:10
Speaker 6: let's touch this and see what happens. And that's it
28:13
Speaker 6: usually blows up. That's that's how it goes. This time,
28:15
Speaker 6: it's like, no, stay away, like don't don't touch that one.
28:19
Speaker 6: So let's talk about what we saw yesterday on the
28:22
Speaker 6: bond side of things.
28:23
Speaker 2: Ten year yields moved up for US treasuries, and a
28:26
Speaker 2: couple different things were going on here today that could.
28:28
Speaker 3: Have caused it.
28:29
Speaker 2: On one hand, we got very very good jobbles claims
28:32
Speaker 2: one hundred and ninety nine thousand on the initial side
28:35
Speaker 2: and continuing claims that are now the same level they
28:37
Speaker 2: were at in twenty twenty three. So you look at
28:40
Speaker 2: that and it makes sense. Okay, if the economic data
28:43
Speaker 2: continues to be good, then maybe it puts more pressure
28:46
Speaker 2: on the FED to you know, engage in a series
28:48
Speaker 2: of hikes and so rates rise. The other piece that
28:51
Speaker 2: you got was we're continuing just to see more and
28:56
Speaker 2: more underwriting of, more and more offerings of from these
29:01
Speaker 2: big AI hyperscalers. There's a piece here in Bloomberg about,
29:05
Speaker 2: you know, some of the the.
29:07
Speaker 3: Ones that have happened over the course of the year.
29:09
Speaker 2: But yesterday we had was it Google that was putting
29:11
Speaker 2: out a big one?
29:13
Speaker 4: I think it was Google.
29:15
Speaker 3: I'm having a tough time keeping them all straight at
29:17
Speaker 3: this point, given how much they're all quick. Yes, here
29:20
Speaker 3: we go.
29:20
Speaker 2: Alphabet returns to bond market with new debt offerings. So
29:23
Speaker 2: it's twenty five billion dollars in debt.
29:26
Speaker 4: That they offer. Again, Amazon did twenty five billion in
29:28
Speaker 4: early July.
29:29
Speaker 3: It's like table stakes. Now it's twenty five billion a quarter. Yeah,
29:33
Speaker 3: SpaceX was doing it. Yeah, I mean all of these
29:37
Speaker 3: giant Here's what you have to kind of contextualize. I
29:41
Speaker 3: know a lot of people think about the stock market
29:44
Speaker 3: and can pretty quickly and easily understand it. The bond
29:47
Speaker 3: market is massive, but you have these giants now issuing
29:54
Speaker 3: record amounts of debt at the same time that the
29:56
Speaker 3: US government needs to do the same thing, right, So
29:59
Speaker 3: you have all of these different entities competing four dollars,
30:03
Speaker 3: and the trend has been that it's raising interest rates
30:07
Speaker 3: for everybody because when you have more debt issuance by giant,
30:12
Speaker 3: generally pretty credit worthy institutions. Sure they're not treated the same, right,
30:17
Speaker 3: the US government is not treated the same as Amazon,
30:20
Speaker 3: but they're treated pretty similarly when looking at their Debt's
30:25
Speaker 3: take a quick break here.
30:27
Speaker 2: When we return, I guess we're talking about AI next.
30:36
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31:04
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31:08
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31:46
Speaker 3: Mike, I want to talk about this piece in the
31:47
Speaker 3: Wall Street Journal.
31:48
Speaker 2: It's titled Facing AI apocalypse once hot, software companies race
31:53
Speaker 2: to reinvent themselves. So the software space has been.
32:00
Speaker 3: End of wild this year.
32:03
Speaker 2: From like end of November last year, early November last
32:08
Speaker 2: year through late February, software got bludgeed late go ahead,
32:14
Speaker 2: software as a whole was down like forty to fifty
32:17
Speaker 2: percent amongst big names, and we talked a lot.
32:18
Speaker 3: About it on the program as the reasons why we
32:21
Speaker 3: thought that might be happening. The going consensus was AI
32:25
Speaker 3: makes writing software a heck of a lot easier, and
32:29
Speaker 3: so increase competition, tougher time differentiating yourselves as a software
32:34
Speaker 3: as a service company.
32:35
Speaker 2: Okay, logical, So it software falls like forty fifty percent,
32:39
Speaker 2: kind of chops around there in February and March, and
32:42
Speaker 2: then in early April wakes up and is like, hey,
32:47
Speaker 2: I'll get up off the mat. Software is a category.
32:50
Speaker 2: Then rallies like forty percent from the bod. Remember if
32:53
Speaker 2: you lose fifty and then make forty back, you're not
32:54
Speaker 2: down ten, You're still down you know, fifteen twenty from there,
32:59
Speaker 2: So like allies back strongly, pukes most of that back
33:03
Speaker 2: then over the course of June, and then rallies again
33:07
Speaker 2: like twenty five percent in the last you know, couple
33:11
Speaker 2: of weeks.
33:12
Speaker 3: So it's just been an insane.
33:14
Speaker 2: Ride for the category as a whole, and the individual
33:17
Speaker 2: names in the sector are just seeing like it's not
33:20
Speaker 2: uncommon to be seeing like twenty five to thirty percent
33:22
Speaker 2: moves on earnings depending on whether or not the market
33:26
Speaker 2: likes them. Right now, so you get this piece here again,
33:28
Speaker 2: it's tight. It's talking about these software companies and hey,
33:33
Speaker 2: the ones that have been built conventionally using you know,
33:36
Speaker 2: employees and and you know, everything that we know to
33:39
Speaker 2: be you know, historically true about building software are trying
33:43
Speaker 2: to deal with this influx of upstarts that are, hey,
33:48
Speaker 2: we've got two employees and here's our product at a
33:51
Speaker 2: fraction of the cost of what yours does.
33:55
Speaker 3: Who wants to you know, use our software? Right The
33:59
Speaker 3: going theme that I'm hearing from executives at software companies is,
34:05
Speaker 3: regardless of whether or not it's true, I'm going to
34:08
Speaker 3: try and convince the public that AI is going to
34:11
Speaker 3: be a huge benefit to my company. I bring you
34:13
Speaker 3: to a quote from Brian Chesky, the CEO of Airbnb,
34:17
Speaker 3: during his earnings call yesterday. Yea quote, AI is the
34:20
Speaker 3: best thing to ever happen to Airbnb.
34:23
Speaker 4: I doubt it.
34:25
Speaker 3: I'd like, I very much doubt that AI is the
34:28
Speaker 3: best thing that is probably the best thing that's ever happened,
34:32
Speaker 3: Like the development of the middle class globally. Uh, you know,
34:35
Speaker 3: becoming wealthier is probably the best thing to ever happen
34:37
Speaker 3: to Airbnb.
34:38
Speaker 4: AI is not.
34:39
Speaker 3: AI is going to potentially breed new challengers to your software,
34:43
Speaker 3: to your company. But every CEO's job in the space
34:48
Speaker 3: right now is to convince us that they are so
34:51
Speaker 3: good at AI that it's going to dramatically increase sales
34:54
Speaker 3: sites a few things, you know, making it easier for
34:57
Speaker 3: property owners to redesign their landing p to make it
35:00
Speaker 3: look more attractive and target customers better, which all could
35:04
Speaker 3: be true on the margins, but doesn't negate the fact
35:08
Speaker 3: that Airbnb is likely to face more competition because of
35:12
Speaker 3: artificial intelligence.
35:14
Speaker 2: Yeah, it's I just I think it's gonna be Look,
35:20
Speaker 2: we've talked about this a couple times on the show.
35:23
Speaker 2: The risk to software companies is not that, you know,
35:27
Speaker 2: a random law firm says, hey, like, we're gonna use
35:31
Speaker 2: artificial intelligence to develop like our own, you know, systems
35:35
Speaker 2: for like running ourselves internally. The reason that you hire
35:39
Speaker 2: software companies, there's two of them. They provide you a service,
35:43
Speaker 2: and they take a bunch of like thinking and liability
35:47
Speaker 2: off your plate, like you don't have to deal with it.
35:49
Speaker 2: So like a car wash is not gonna be like, hey,
35:52
Speaker 2: let's develop our own AI because they're not good at it.
35:56
Speaker 2: Same with the law firm, same with a construction company,
35:59
Speaker 2: same with a whiffle ball tournament, like, no, you're not
36:02
Speaker 2: gonna do that. The risk is that someone else, probably
36:08
Speaker 2: from a software company, says hey, I can build something
36:12
Speaker 2: better and cheaper using AI, and then cheaper software with
36:16
Speaker 2: lower margins or with the same margins but just a
36:19
Speaker 2: cheaper price comes in and eats lunch. But remember, margins
36:23
Speaker 2: are always an opportunity for someone to come in these
36:27
Speaker 2: software as a service companies. The reason why they've had
36:29
Speaker 2: fat margins is because there are big modes to changing them.
36:34
Speaker 2: Like if if you run a database and you're using Oracle,
36:41
Speaker 2: or you're using sales Force, or you're using whoever might
36:44
Speaker 2: be out there. Even if someone offers you something marginally cheaper,
36:49
Speaker 2: like if someone comes in and it's like, hey, I
36:51
Speaker 2: can save you ten percent, You're like, no, did a
36:54
Speaker 2: database move ten years ago, never doing it again. But
36:58
Speaker 2: if someone comes in as like I can save you
37:01
Speaker 2: seventy percent, you're like, okay, now we'll talk.
37:05
Speaker 3: Yeah, And that's the risk. Or if you're a new
37:08
Speaker 3: business right and you haven't selected a software you line
37:11
Speaker 3: up yet yeh, then that's that's the other risk. By
37:13
Speaker 3: the way, I mentioned Airbnb, I'd be remiss to not
37:16
Speaker 3: mention what's happening today in spite of my criticism of
37:19
Speaker 3: his commentary around AI that cooking stalks up sixteen percent
37:23
Speaker 3: on a killer earnings quarter. So not to poo poo
37:27
Speaker 3: any of their execution. I just have some doubts that
37:29
Speaker 3: AI is the best thing to ever happen to your company.
37:32
Speaker 2: Yeah it's fair, Yeah it's fair. Let's see piece of
37:36
Speaker 2: Financial Times. To fix education, fix the economy first? What
37:39
Speaker 2: does that mean, Michael?
37:41
Speaker 3: So, first things first, it's not about the United States.
37:43
Speaker 3: They're talking about the UK economy, which has been a
37:45
Speaker 3: dumpster fire for the better part of the last decades.
37:47
Speaker 3: So I might agree in the context of the UK
37:50
Speaker 3: that instead of an education problem, they have an economy problem.
37:55
Speaker 3: I don't know that the same thing applies here. We
37:57
Speaker 3: seem to have some problems with education here in the
38:00
Speaker 3: United States, and the economy is doing just fine. Let's
38:03
Speaker 3: take a quick break.
38:03
Speaker 2: We still have a whole nother hour to go, though,
38:06
Speaker 2: so uh yeah, it'll be pretty great and you should
38:11
Speaker 2: have listened to what we have going on then