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Will Trump's tariff rollback save the US from a recession? · The Financial Exchange Show

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Speaker 1: Armstrong and Mark Vandetti.
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Speaker 2: Good morning, Welcome back to the Financial Exchange. It's Mike,
1:13
Speaker 2: Mark and Tucker with you here on a Tuesday and
1:15
Speaker 2: on the dock at today We've got home depot earnings
1:18
Speaker 2: to report on a first trading of a battery supplier
1:23
Speaker 2: to Tesla out in Hong Kong. Is going on, but
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Speaker 2: you know, the big background on the overall US financial
1:30
Speaker 2: situation continues to be trade tariffs, the tax bill making
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Speaker 2: its way through Congress, and then on Friday of last week,
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Speaker 2: the downgrade of the US government debt and contextualizing all
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Speaker 2: of this, I want to start, I guess tangentially attached
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Speaker 2: to that downgrade of the US debt, which we talked
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Speaker 2: a fair bit about yesterday. And look, I think the
1:55
Speaker 2: timing of the downgrade and whether or not Moody's is
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Speaker 2: actually representative of anything that's going to happen in the
2:01
Speaker 2: future fully up for debate. But I think it's worth
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Speaker 2: going through again the kind of system of deficits in
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Speaker 2: the United States, how they have worked, how big they
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Speaker 2: have gotten, and just kind of the trade off that
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Speaker 2: Americans have been making and our lawmakers have been making
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Speaker 2: over the last quarter century or so. When it comes
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Speaker 2: to the global financial system. If that's all right with you, Mark,
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Speaker 2: and I'm probably going to rely on you to fill
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Speaker 2: in some of the blanks here, But if you go
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Speaker 2: take a look at the data here, we've been running
2:36
Speaker 2: deficits in this country compared to I like taking a
2:41
Speaker 2: look at it. You know, the federal surplus or deficit
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Speaker 2: as a percentage of gross domestic product is how it's
2:46
Speaker 2: usually phrased, and we've talked at length about how over
2:50
Speaker 2: the last few years that number has been you know,
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Speaker 2: five six percent even during a relatively stable economy, and
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Speaker 2: that's abnormal. During real times of crisis, where the economy
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Speaker 2: is falling apart, we're in war, these numbers have expanded greatly. So,
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Speaker 2: for example, in twenty twenty, the federal deficit as a
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Speaker 2: percentage of GDP ran fourteen point seven percent. In two
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Speaker 2: thousand and nine it ran nine and three quarters. Heck,
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Speaker 2: in nineteen forty three it ran thirty percent. So this
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Speaker 2: is normal. But what's somewhat abnormal it has been the
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Speaker 2: continued trend line of this getting more significant year after
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Speaker 2: year really since the late nineties early two thousands, which
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Speaker 2: was the last time the United States ran a budget
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Speaker 2: surplus of any sort in the United States. So I
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Speaker 2: guess the question that I want to try and answer
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Speaker 2: is why does this exist? How did we kind of
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Speaker 2: get here with policy and just by decision making on
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Speaker 2: the part of Americans. And now that we're attempting to
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Speaker 2: kind of correct some of this issue, either buy cutting
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Speaker 2: spending or changing the trade imbalances with other countries, how
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Speaker 2: does it all relate together? I guess is the big
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Speaker 2: question that I have here market, And let's start at
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Speaker 2: the very basics. Because Americans have pretty low savings rates,
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Speaker 2: and so when we pull an income, we tend to
4:18
Speaker 2: not put it away in savings accounts or investments. We
4:20
Speaker 2: tend to spend it. That's a common theme on our program.
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Speaker 2: So we tend to spend that money. Some of it
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Speaker 2: ends up in US companies coffers as profits. A lot
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Speaker 2: of it ends up in foreign companies coffers because we
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Speaker 2: buy toys and cars and all sorts of stuff. What
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Speaker 2: then happens with those dollars?
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Speaker 3: I praise the question a little bit different, Yeah, please
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Speaker 3: do what are interest rates? It's the price of time.
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Speaker 3: It's what you're compensated for a time, sacrificing, consuming today
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Speaker 3: in exchange for consuming tomorrow. It's a reward. What determines
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Speaker 3: interest rates, They're globally determined by the balance of supply
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Speaker 3: and demand for savings. So the reason for the just
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Speaker 3: starting with that basic precept, the reason for the concern
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Speaker 3: over the federal deficit, which is the difference between revenue
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Speaker 3: what the government takes in and spending what the government
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Speaker 3: well spends, and the concern over the deficit and the debt,
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Speaker 3: which is the cumulative deficit plus interest. It's useful to
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Speaker 3: just keep these basic ideas in mind. Is that government
5:26
Speaker 3: competes with us. For us I say, it's mostly we
5:31
Speaker 3: borrow for homes mainly, but some in small businesses borrow.
5:36
Speaker 3: Government's competing with US for loanable funds. That competition all
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Speaker 3: LSEQL pushes up the price of borrowering pushes up interest rates.
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Speaker 2: So example, here would be the US government is issuing
5:49
Speaker 2: a ten year bond, Apple is offering. Here you go,
5:53
Speaker 2: You've got a which one should I buy? Which one's
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Speaker 2: riskier given this er?
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Speaker 3: Yeah, there are other considerations too. I'm stripping out risk,
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Speaker 3: premium and other stuff and liquidity. Treasury market is deep.
6:04
Speaker 3: Treasuries are in theory, risk free debt can be inflated
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Speaker 3: away or even defaulted on, but we call them risk free.
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Speaker 3: Corporate bonds don't have those characteristics. Corporate bonds are callable,
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Speaker 3: so they are all kinds of sure. People can quibble
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Speaker 3: on the specifics, but look, the bottom line is, at
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Speaker 3: some point the debt of the federal government relative to
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Speaker 3: the annual flow of goods and services that we produce,
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Speaker 3: which we call gross domestic product or GDP, will get
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Speaker 3: so big. This has happened in other countries, and researchers
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Speaker 3: famously looked at this in the two thousands, so big
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Speaker 3: that the premium that people will require then there is
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Speaker 3: a risk premium. They people start to think, maybe they're
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Speaker 3: going to inflate this debt away, Maybe they'll impose I
6:47
Speaker 3: don't know, a fee for transacting in treasuries, as the
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Speaker 3: current administration was toying with imposing on foreigners a few
6:54
Speaker 3: weeks ago. That's that's that's an implicit default. As US
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Speaker 3: debt becomes large relative to our ability to support it,
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Speaker 3: that's where the debt to GDP ratio measures. At some point,
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Speaker 3: people might start demanding more to hold US debt i e.
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Speaker 3: Push up interest rates, and that will flow through to
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Speaker 3: interest rates throughout the not just US, but world economy.
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Speaker 2: And this is where it kind of breaks down for
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Speaker 2: a lot of folks, I think, because it's tempting to
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Speaker 2: look at the US debt situation in the US spending
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Speaker 2: situation as a household budget and I get that it's
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Speaker 2: the easiest comparison, right, and there are plenty of true
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Speaker 2: comparisons that in some ways it doesn't right. In the US.
7:37
Speaker 2: In the household budget scenario, you get to a point
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Speaker 2: where Okay, I can't pay my bills anymore, and then
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Speaker 2: you get sent to collections and everything you have gets taken.
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Speaker 2: You go to bankruptcy, and that's how that gets resolved
7:49
Speaker 2: in the US government situation. It is different in the
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Speaker 2: US government situation. If you continue to run big deficits,
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Speaker 2: i EU spend more than you are taking, then you
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Speaker 2: print more money in order to satisfy that, you issue
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Speaker 2: more debt, and instead of ultimately having a bankruptcy moment,
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Speaker 2: you more likely have a outcome eventually which has not
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Speaker 2: occurred to be clear of the last twenty.
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Speaker 3: Year War two is a good example. Okay, go debt
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Speaker 3: to GDP well over one hundred percent pretty damn good investment,
8:19
Speaker 3: though no one's going to argue. Now, government was very
8:22
Speaker 3: small before the World Wars one and two. It gradually
8:26
Speaker 3: grew to nearly half the economy. I'm just ballparking it
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Speaker 3: during World War Two. After World War Two, the economy
8:34
Speaker 3: grew very not immediately after, but once we cleared out
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Speaker 3: the fiscal problems created by, for example, the Korean War,
8:43
Speaker 3: US economy grew very quickly, and inflation was somewhat elevated
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Speaker 3: in the late forties, very very early fifties. So a
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Speaker 3: combination of high inflation and fast economic growth gout debt
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Speaker 3: to GDP, that critical ratio if you're talking about fiscal policy,
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Speaker 3: and the government's a bild ultimately to borrow to tap
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Speaker 3: capital markets brought that ratio way down to call it
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Speaker 3: the twenties, where it stayed for decades and decades until
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Speaker 3: the nineteen eighties.
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Speaker 2: So the part of the trade off here that I
9:13
Speaker 2: think a lot of people don't fully understand or are
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Speaker 2: ignoring I don't know, which is the reason the United
9:20
Speaker 2: States has been able to run these big deficits, which
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Speaker 2: I'm not saying are a good thing to be doing.
9:25
Speaker 2: I'm just saying that they have happened over the last
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Speaker 2: twenty five years. The reason that we've been able to
9:29
Speaker 2: do so while not facing fifteen percent mortgage rates, for example,
9:34
Speaker 2: is in part, at least, as I'm understanding, is at
9:37
Speaker 2: least in part due to the fact that we have
9:39
Speaker 2: trade imbalances with all these countries. That we send a
9:42
Speaker 2: whole bunch of dollars to China, Japan, Europe, and then
9:46
Speaker 2: they turn around and what do they do with them, Well,
9:48
Speaker 2: they might invest in US companies. They also might buy
9:51
Speaker 2: our debt, therefore keeping those rates low for all of
9:54
Speaker 2: US America.
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Speaker 3: So, for example, in addition to the two trillion or
9:57
Speaker 3: so that we're going to borrow this year, because the
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Speaker 3: revenues will again exceed receipts at the federal level and
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Speaker 3: those expenses are only going up as you know, we
10:07
Speaker 3: need to roll over about nine trillion dollars in existing
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Speaker 3: treasury debt. Who's going to buy that? Well, insurance companies
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Speaker 3: will buy some of it. US insurance companies, Thanks, people
10:16
Speaker 3: are our clients here at Armstrong Advisor goupled buy some
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Speaker 3: of it. Foreigners own about a third of US debt.
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Speaker 2: Where do they get the dollars? This is what you're get.
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Speaker 3: Now, where do you get the cars to buy that?
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Speaker 3: Go ahead, you're enough already said they get it from
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Speaker 3: the dollars we send abroad. When we told some of it,
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Speaker 3: they they can. You can buy dollars on the open market.
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Speaker 3: So this isn't there's some leakage in the little system.
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Speaker 3: As I'm explaining it here, it's not a perfect description,
10:40
Speaker 3: but they get that because we send dollars abroad. So
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Speaker 3: the trade deficit, which politicians love to wring their hands about,
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Speaker 3: and we could get, I could get and we could
10:49
Speaker 3: get on another tangent about that, but it is what
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Speaker 3: it is, Mike. As you said, the flip side of
10:54
Speaker 3: the trade deficit is a capital account surplus. All those
10:58
Speaker 3: dollars we send abroad by Sony stuff and what have
11:02
Speaker 3: you gets recycled by in to continue with the example
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Speaker 3: Sony into say US treasuries. It must come back. It's
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Speaker 3: called the balance of payments and it must balance.
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Speaker 2: So again I'm not trying to put judgment on this system,
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Speaker 2: whether or not it's pretty good, or.
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Speaker 3: I would argue that it has been awesome for American
11:20
Speaker 3: series of Living by the way, but guds, so.
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Speaker 2: You know, it's been a trade off. Right, you've had
11:24
Speaker 2: fewer manufacturing jobs in the United States, but you've also
11:28
Speaker 2: had the ability to buy homes at really low interest rates,
11:31
Speaker 2: You've had companies able to borrow money. A lot of
11:33
Speaker 2: different trade offs here. And my point with all of this,
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Speaker 2: and it coincides with Moody's downgrade on Friday, And I
11:39
Speaker 2: don't think that they explicitly were calling any of these
11:42
Speaker 2: things out, But hey, these deficits are still growing. We
11:46
Speaker 2: are facing down another big tax cut that will be
11:49
Speaker 2: partly offset, presumably by tariffs. But if your overall goal
11:53
Speaker 2: here is to continue to run big deficits while at
11:56
Speaker 2: the same time challenging the system by which foreigner has
12:00
Speaker 2: bought this US government debt, it's a potential recipe for
12:04
Speaker 2: red flags and smoke. And I don't think we're really
12:07
Speaker 2: seeing any of that smoke. We haven't seen any that
12:09
Speaker 2: smoke for the last twenty five years, and these theories
12:13
Speaker 2: of rising interest rates because of deficits have not come
12:15
Speaker 2: true yet. But I think understanding that context is really
12:19
Speaker 2: fundamental to understanding, Hey, what's happening with interest rates today?
12:22
Speaker 2: Why are yields touching five percent Etca's area. It's all
12:26
Speaker 2: that global system of trade and dollars coming back into
12:29
Speaker 2: the United State.
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Speaker 3: If you tried to close off the US economy, Unlike Japan,
12:32
Speaker 3: where they have very high savings rates, they buy most
12:34
Speaker 3: of their own debt, you try to close off the
12:36
Speaker 3: US economy, our interest rates would be much much higher.
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Speaker 2: Let's take a quick break. When we come back, I
12:41
Speaker 2: want to talk a little bit more about that big
12:43
Speaker 2: financial system. But there's a piece from Financial Times today.
12:46
Speaker 2: Will Trump's tariff climb down save the US from recession?
12:49
Speaker 2: We'll be covering that next here on the Financial Exchange.
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13:54
Speaker 2: Market. It was only two to three short weeks ago
13:57
Speaker 2: that I feel as though every financial journalist out there
14:01
Speaker 2: was finding someone to interview calling for a ninety percent
14:04
Speaker 2: probability of recession or a coin toss. I myself said,
14:08
Speaker 2: you know, hey, coin toss in terms of recession probabilities.
14:12
Speaker 2: Earlier this year, with the massive face of tariffs looming
14:17
Speaker 2: on the horizon, those have obviously been backed off substantially.
14:21
Speaker 2: It's not to say that there won't come again, but
14:26
Speaker 2: I do get the sense that investors at least are
14:29
Speaker 2: perceiving a lot more certainty around trade policy for this
14:32
Speaker 2: year than they were just a few weeks ago. And
14:35
Speaker 2: I would generally agree there's more certainty around all of that.
14:39
Speaker 2: What's surprising to me and I saw Jamie Diamond once
14:42
Speaker 2: again stepping out there and talking about markets in a
14:46
Speaker 2: negative fashion the other day was compared to what we
14:50
Speaker 2: expected on January first, The trade terror situation is substantially,
14:57
Speaker 2: I guess, worse from an investor perspective than any would
15:00
Speaker 2: anyone would have bet. And yet here we are, you know,
15:03
Speaker 2: marking near all time highs on the stock market and
15:06
Speaker 2: really waving away I think any real risk of recession.
15:10
Speaker 2: And I guess the question is where, ultimately, where do
15:14
Speaker 2: things go. Nobody knows whether or not we're going to
15:16
Speaker 2: have recession. Trying to call it is like trying to
15:18
Speaker 2: guess where oil prices are going to be. So good luck,
15:21
Speaker 2: but I would generally agree, Hey, the likelihood of recession
15:24
Speaker 2: has to come down the fewer these less these tariffs
15:28
Speaker 2: are in the limelight. And then just you know, other
15:31
Speaker 2: piece of this, if you do get a big tax bill,
15:33
Speaker 2: it just becomes economically difficult to get a recession if
15:37
Speaker 2: you're running deficits to GDP of five six seven percent,
15:41
Speaker 2: which seems entirely possible.
15:42
Speaker 3: I don't know about that. It depends on what, well,
15:45
Speaker 3: not much in this tax bill is likely to stimulate
15:48
Speaker 3: economic activity. We'll get on this tax bill and why
15:52
Speaker 3: it's deeply, deeply flawed from an economic growth point of
15:55
Speaker 3: view at another point, I guess, But so I don't
15:57
Speaker 3: want to get on that tangent right now. With respect
16:00
Speaker 3: to recession calls. I think you're right. Serious people don't
16:02
Speaker 3: make recession calls for the most part. They talk in
16:04
Speaker 3: terms of likelihoods and well, on balance all l sequel.
16:08
Speaker 2: Yeah, does this feel like it's real economy or a
16:11
Speaker 2: more contraction you know, you could wear?
16:13
Speaker 3: Yeah, you could distinguish the armchair kind of dabblers from
16:18
Speaker 3: the serious researchers by how much conviction they have in
16:22
Speaker 3: their own ability to foretell the future. And recessions are
16:27
Speaker 3: not absent a few couple of really a glaring counterexamples,
16:33
Speaker 3: like the COVID recession where the economy was shut down. Well, yeah, okay,
16:37
Speaker 3: then of course of course it's going to contract. Other
16:39
Speaker 3: than that, very hard to tell, as you said, uh,
16:42
Speaker 3: and it was. It's very hard to get unemployment numbers
16:46
Speaker 3: resulting from some of the supply chains snarl ups that
16:49
Speaker 3: Craig Fuller talked about on this show. He said something
16:52
Speaker 3: like five hundred thousand jobs. You plug that into a
16:55
Speaker 3: standard mini model, I'll call it into a little back
16:58
Speaker 3: of the envelope. It's very hard to starting with GDP
17:01
Speaker 3: running somewhere around two percent, where it appears to be
17:04
Speaker 3: today using the Atlanta Fed's a real time tracker, very
17:09
Speaker 3: hard to get to an unemployment number big enough using
17:12
Speaker 3: the fuller estimate to justify a recession call.
17:18
Speaker 2: And so you're not I think that's well summarized, and
17:20
Speaker 2: I think I think a writer an OpEd and Bloomberg
17:23
Speaker 2: put it the same way, which is, you're very likely
17:26
Speaker 2: to get some sort of slow down as a result
17:28
Speaker 2: of tariff uncertainty. You know, businesses are not making the
17:31
Speaker 2: same investments that they were. They might not be hiring
17:34
Speaker 2: at the same pace they might have considered. They're not
17:37
Speaker 2: going to expand that big manufacturing plant here or there
17:40
Speaker 2: or anywhere else. They're going to wait and see in
17:43
Speaker 2: the face of a lot of these tariffs, and the
17:46
Speaker 2: fewer uncertainties there are, the more of those decisions they
17:49
Speaker 2: will make. But when you're already at such a strong
17:52
Speaker 2: starting point, I think is the way that yeah, which is.
17:55
Speaker 3: Look, this is where I ran into problems with my
17:57
Speaker 3: mini model. How strong are we at? How as wrong
18:00
Speaker 3: is the starting point? Should I have assumed, Well, let's
18:02
Speaker 3: look at just two percent GDP growth. This is where
18:05
Speaker 3: I got a little.
18:06
Speaker 2: So let's look at the two items that the FED
18:09
Speaker 2: focuses most on, and because those two I think are
18:12
Speaker 2: I'm data mining here, but pretty compelling stories in terms
18:15
Speaker 2: of strength unemployment at four point two percent and PCE
18:19
Speaker 2: inflation around two and a half.
18:21
Speaker 3: Is that Yeah, those don't factor into the approach though. Unfortunately,
18:26
Speaker 3: I need estimate of where the GDP is right now,
18:29
Speaker 3: so I used Atlanta Fed's I even took a percentage
18:32
Speaker 3: point off of that. I even doubled Craig Fuller's jobs number, like,
18:36
Speaker 3: can you get me to negative? And you get to
18:38
Speaker 3: barely negative GDP growth under very aggressive assumptions. But that's
18:41
Speaker 3: where we were in the first quarter. Let's not forget.
18:44
Speaker 3: Everybody is kind of dismissed that as a blip. But
18:47
Speaker 3: GDP contracted. The economy's output of goods and services gross
18:51
Speaker 3: domestic brought at GDP contracted in the first quarter. There's
18:54
Speaker 3: momentum in that, and that worries me a little bit.
18:57
Speaker 3: I wouldn't again go so far as to claim our
19:00
Speaker 3: recession was around the corner. That's a risky and kind
19:04
Speaker 3: of misguided business to be in. But it's very hard
19:07
Speaker 3: to get there. Just based on what we know today
19:10
Speaker 3: is all I can say.
19:11
Speaker 2: Yeah, and so as we've said before, you know, I
19:13
Speaker 2: think a lot of this direction is heavily dependent on
19:17
Speaker 2: how much are we talking about tax cuts three months
19:19
Speaker 2: from now versus how much are we talking about terriff
19:21
Speaker 2: increases three months from now? And I genuinely don't know,
19:24
Speaker 2: and I'm not sure many people do. Quick Break Wall
19:26
Speaker 2: Street Watch is coming up, and then we're talking Home
19:28
Speaker 2: Depot when we return.
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Speaker 1: far today right here on the Financial Exchange Radio Network.
20:00
Speaker 4: Well, market's mostly shrugged off Moody's downgrade of the US
20:03
Speaker 4: government's credit rating yesterday, extending the S and P five
20:07
Speaker 4: hundreds winning streak to six. Today, markets are in negative
20:11
Speaker 4: territories investors digest more retailer earnings from Home Depot Right now,
20:18
Speaker 4: Dow is down by about a quarter percent, or ninety
20:20
Speaker 4: nine points, S and P five hundred is down just
20:23
Speaker 4: over a third of a percent, or twenty one points,
20:25
Speaker 4: and the Nasdaq is down just over half a percent lower,
20:28
Speaker 4: or one hundred and two points. Rusted two thousand, dipping
20:32
Speaker 4: three points lower. Ten year Treasure reeled up one basis point,
20:35
Speaker 4: now at four point four to nine percent, and crude
20:38
Speaker 4: oil is off about two thirds of a percent, rating
20:41
Speaker 4: at sixty two dollars in twenty seven cents a barrel.
20:44
Speaker 4: Home Depot up by about two thirds of a percent
20:47
Speaker 4: after the home improvement retailer maintained its full year guidance
20:51
Speaker 4: for the first court of the company, shares climb more
20:53
Speaker 4: than expected as customers continue to spend on smaller projects.
20:58
Speaker 4: In addition, Home Depots signaled it plans to hold its
21:01
Speaker 4: price is steady despite terrors. Mike and Mark will have
21:04
Speaker 4: more on home Depot coming up. Meanwhile, United Health shares
21:08
Speaker 4: continue to rebound from last week's plunge, jumping eight percent yesterday,
21:13
Speaker 4: driven by securities filing showing returning Chief executive Steven Hemsley
21:17
Speaker 4: and other company insiders buying shares. Today, United Health shares
21:22
Speaker 4: are dipping slightly into negative territory. Elsewhere, Levi Strauss agreed
21:27
Speaker 4: to sell Dockers to brand management firm Authentic Brands Group
21:31
Speaker 4: for three hundred and eleven million dollars. Levi is up
21:35
Speaker 4: two and a half percent. Cruise operator Viking posted better
21:38
Speaker 4: than expected first quarter results, however, however, that stock is
21:42
Speaker 4: retreating by five percent. Uber up by about one percent
21:46
Speaker 4: following news that Uber and Waimo will partner to foster
21:49
Speaker 4: autonomous ride sharing in Atlanta. D Wave Quantum shares jumping
21:54
Speaker 4: by twenty eight percent after the company's latest quantum computing system,
21:59
Speaker 4: Advantaged two, hit the market. And after today's closing bill,
22:03
Speaker 4: we'll see earnings from Palo Alto Networks and Toll Brothers.
22:08
Speaker 4: I'm Tucker Silva. That's Wall Street Watch.
22:10
Speaker 2: Tucker mentioned it briefly, but Home Depot is out with
22:12
Speaker 2: earnings this morning, and they were fine. I think they
22:17
Speaker 2: were just fine is the only way to describe. But
22:19
Speaker 2: this is a company that saw massive sales growth during
22:23
Speaker 2: the COVID pandemic when everyone was putting on a deck
22:25
Speaker 2: and buying a hot tub and a solo stove. The
22:29
Speaker 2: most recent quarter they saw their same store sales declined
22:32
Speaker 2: by three tenths of one percentage points. So again, why
22:35
Speaker 2: I describe it this fine is basically, you did the
22:37
Speaker 2: exact same thing you did last year. I think two
22:40
Speaker 2: things are moving the stock higher or maybe moving the
22:45
Speaker 2: stock higher today, One would be they maintained their forecast.
22:48
Speaker 2: Many companies, especially in the retail space, have just been
22:50
Speaker 2: pulling any sort of guidance that they have about the
22:53
Speaker 2: future state of their business based on concerns about tariff,
22:57
Speaker 2: concerns about recession. Maybe home Depot has a better outlook.
23:01
Speaker 2: Maybe that narrative is dead and companies are not going
23:05
Speaker 2: to keep doing that. I'm not sure which, but they
23:07
Speaker 2: did maintain their forecast for the rest of the year.
23:10
Speaker 2: The other thing that, again I don't know this is
23:12
Speaker 2: driving to the stock one direction or another, but I
23:14
Speaker 2: just found compelling and interesting is home Depot did not
23:17
Speaker 2: use the Walmart cover to say we're raising prices. We
23:20
Speaker 2: talked a lot about this last week when Walmart came
23:23
Speaker 2: out and said, yeah, tariffs are going to cause us
23:25
Speaker 2: to raise prices. Home Depot explicitly asked the question and said, no,
23:30
Speaker 2: we do not see tariffs raising prices for our customers,
23:33
Speaker 2: and that is probably a welcome sign from investors. But also,
23:39
Speaker 2: wait a.
23:39
Speaker 3: Minute, why would that be a welcome sign. Doesn't that
23:41
Speaker 3: mean they eat the increases.
23:43
Speaker 2: I think it's more that we don't source enough stuff
23:45
Speaker 2: from China to need to is the welcome. So I
23:49
Speaker 2: was looking for some indication of where this is one.
23:51
Speaker 2: They did say that in their earnings call. They said,
23:54
Speaker 2: by this time next year, no single country will represent
23:58
Speaker 2: more than ten percent of our products that we sell
23:59
Speaker 2: in store other than the United States. So that's a
24:02
Speaker 2: compelling story, right, if you have that level of diversification, Hey,
24:06
Speaker 2: you know, I'm sure that a good chunk of it
24:08
Speaker 2: is made in the US. But of everything else that
24:11
Speaker 2: we sell, no more than ten percent comes from any
24:13
Speaker 2: one country, or at least it won't by this time
24:15
Speaker 2: next year. I was trying to get some indication of, Hey,
24:18
Speaker 2: how much of this stuff used to come from China?
24:21
Speaker 2: Did they intentionally diversify away? The only report that I
24:24
Speaker 2: could find was printed in MarketWatch several years ago. DA Davidson,
24:29
Speaker 2: which is an analyst company, noted that in the eighteen
24:32
Speaker 2: to nineteen timeframe about thirty percent of their goods were
24:36
Speaker 2: supplied from China. If that ends up being true, that's
24:39
Speaker 2: a pretty impressive diversification away, right to take a number
24:44
Speaker 2: that was thirty percent in twenty eighteen down to less
24:47
Speaker 2: than ten percents by twenty twenty six, especially when it's China.
24:51
Speaker 2: I find that interesting. If these data points are correct, yea.
24:56
Speaker 3: Does that help we started a trade war, not just
24:59
Speaker 3: with China, but with the whole world. A company, you
25:04
Speaker 3: can either have one of two things. You can have
25:07
Speaker 3: companies pass the costs through and consumers then substitute away
25:12
Speaker 3: from foreign made goods into US goods, which I thought
25:15
Speaker 3: was the whole point of this, but that changes, like
25:17
Speaker 3: every day, the whole point of this. I don't know
25:19
Speaker 3: what the point of this trade war is.
25:21
Speaker 2: By the way, it's becoming more and more compelled to
25:23
Speaker 2: believe that it's about raising tax revenue.
25:25
Speaker 3: But okay, so even it's even more important that those
25:30
Speaker 3: costs get passed through and that they stick with it.
25:34
Speaker 3: If it's about raising revenue, you don't change the rate
25:36
Speaker 3: every day. Imagine if they change your tax rate every day,
25:39
Speaker 3: or your state change the sales tax every day, you'd
25:43
Speaker 3: wonder about their sanity, the policymaker sanity, that is. But
25:47
Speaker 3: you can't have both high profits and a high stock market,
25:51
Speaker 3: which is just publicly traded companies, but home Depot and
25:54
Speaker 3: Lows and others that stock goods that you would normally
25:57
Speaker 3: associate being made abroad because they're cheap companies that you
26:01
Speaker 3: would associate with those practices. You can't have both high
26:03
Speaker 3: stock prices and no pass through, right because if they're
26:06
Speaker 3: not passing through, they're eating it. Why their suppliers are
26:09
Speaker 3: eating it, So somebody's gonna get the shaft.
26:12
Speaker 2: That was the comment that I made yesterday in regard
26:16
Speaker 2: to Walmart, was, you know what kind of company I
26:18
Speaker 2: don't want to own is one that capitulates to the
26:22
Speaker 2: White House and eats a bunch of expenses to shrink margins.
26:27
Speaker 2: That's not a terribly attractive investment for any time else
26:30
Speaker 2: out there. And that's what the pressure is that if.
26:32
Speaker 3: You were doing that, you were not getting consumers to
26:36
Speaker 3: change their habits. Because now I'm indifferent again between the
26:39
Speaker 3: cheap Chinese made thing and say, the domestically made alternative,
26:44
Speaker 3: although in many cases there is no domestically made alternative
26:47
Speaker 3: to some of the cheaper stuff. I see all these
26:50
Speaker 3: goals being they're not really goals. All these potential objectives
26:55
Speaker 3: basically the same thing. A little sounds a little softer
26:56
Speaker 3: to me. They're all intention Mike, yep, And you're not
27:00
Speaker 3: going to achieve any of that.
27:01
Speaker 2: I don't know what they're not only intentions, sometimes they're
27:03
Speaker 2: directly opposed to one another.
27:04
Speaker 3: Yeah, I guess I'm You're given a little.
27:06
Speaker 2: Bit of leeway.
27:07
Speaker 1: Right.
27:08
Speaker 2: The idea of making more stuff in America is diametrically
27:13
Speaker 2: opposed to raising tax revenue from tariffs.
27:17
Speaker 3: Right period.
27:19
Speaker 2: It's not attention, it's just they can't both exist at
27:21
Speaker 2: the same time, at least not long term. They might
27:24
Speaker 2: be able to exist, you know, together for a couple
27:26
Speaker 2: of years, but generally speaking, you cannot have a bunch
27:30
Speaker 2: of new revenue raised from tariffs in order to offset
27:33
Speaker 2: tax cuts while at the same time saying and then
27:37
Speaker 2: it's going to make everyone bring their manufacturing jobs back
27:40
Speaker 2: to the United States. No, that doesn't really work. And
27:43
Speaker 2: so I'm with you there. And my general conclusion, and
27:46
Speaker 2: we talked about this yesterday in the program too, is
27:49
Speaker 2: based on recent comments we are seeing, based on the
27:52
Speaker 2: trip to the Middle East, where you know, clearly one
27:55
Speaker 2: of the main goals there was incentivizing investment back into
27:59
Speaker 2: the United States buying treasury debt. It seems to me
28:02
Speaker 2: that the administration is focusing on two things. One, where
28:05
Speaker 2: is the next dollar of the US government debt going
28:07
Speaker 2: to come. Where's the next buyer of the US government
28:10
Speaker 2: debt going to come from? And the answer might be
28:13
Speaker 2: the Middle East to some degree. And then also, how
28:16
Speaker 2: are we going to raise enough revenue to pay for
28:19
Speaker 2: some of these tax cuts without blowing out the deficits
28:22
Speaker 2: to higher levels. And so, at least most recently, that's
28:25
Speaker 2: where I'm landing, which would argue for relatively low deficits
28:29
Speaker 2: compared to what we have talked about in previous days.
28:32
Speaker 2: Right as we talked about, if you're putting one hundred
28:35
Speaker 2: and forty five percent tariffs on China, you're not going
28:37
Speaker 2: to raise any revenue because no trade is going to occur.
28:40
Speaker 2: If you're leveling ten percent tariffs on China permanently, you
28:46
Speaker 2: might have decrease in consumption, but you're probably going to
28:48
Speaker 2: raise some revenue ultimately.
28:50
Speaker 3: On that that'll come at the expense of importers.
28:53
Speaker 2: Yeah, importers and therefore consumers agreed on all fronts, it's
28:57
Speaker 2: a tax increase. But that's kind of where I've been
29:00
Speaker 2: landing over the last two weeks. And I'm sure my
29:03
Speaker 2: opinion on that will change next time the tariff's change,
29:06
Speaker 2: But in any case, home depot earnings relatively stable. They
29:09
Speaker 2: face I think a challenging market because people aren't buying homes.
29:13
Speaker 2: There's not a whole lot of transactions hitting the market.
29:16
Speaker 2: And importantly too, some of the areas of the country
29:20
Speaker 2: that historically over the last decade have meant a lot
29:23
Speaker 2: of home building Florida, Texas are slowing dramatically and there's
29:28
Speaker 2: not really a whole lot of other parts of the
29:29
Speaker 2: country that are going to pick up that slack. Let's
29:32
Speaker 2: take a quick break. When we come back, we'll finally
29:34
Speaker 2: get to that tax bill that's making its way through Congress.
29:36
Speaker 2: That's next year.
29:37
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30:31
Speaker 2: The tax bill continues to make its way through the House.
30:35
Speaker 2: At the moment, I would mention details of it, and
30:40
Speaker 2: we can go through a few of them, but quite honestly,
30:42
Speaker 2: here's what's going to happen is the House is going
30:44
Speaker 2: to likely pass a bill I think in the next
30:47
Speaker 2: few days here because deals cape getting made. Any of
30:51
Speaker 2: the any of the real deficit hawks have been kind
30:55
Speaker 2: of pushed to the side at this point, and there's
30:58
Speaker 2: a new proposal out for the more middle of the
31:02
Speaker 2: road GOP members in liberal states for the salt proposal
31:06
Speaker 2: that the latest here is they're going to bump that
31:08
Speaker 2: up to forty thousand dollars with a income cap of
31:11
Speaker 2: three quarters of a million dollars. So I tend to
31:13
Speaker 2: think that this is going to pass the House. The
31:15
Speaker 2: problem is that the Senate has basically said, we're not
31:18
Speaker 2: even going to consider this, and we're going to write
31:19
Speaker 2: our own bill on taxes and then send it back
31:22
Speaker 2: to the House. So I don't know where a lot
31:24
Speaker 2: of these things are going to land, but a few
31:26
Speaker 2: things seem likely at this stage. One of them is
31:30
Speaker 2: that salt deduction cap increasing from the current ten thousand
31:35
Speaker 2: dollars limit which was put into the first Trump tax cuts.
31:38
Speaker 2: Likely going to bump that up somewhere I think between
31:40
Speaker 2: thirty and forty thousand. The other piece continues to be
31:43
Speaker 2: this tax on tips fight, and it's really tricky to
31:48
Speaker 2: see how it's going to work, but it's got more
31:52
Speaker 2: legs than I thought that it would at this stage.
31:54
Speaker 2: And the New York Times actually has a pretty good
31:56
Speaker 2: piece on who's coming out to oppose this, which is
32:01
Speaker 2: an interesting group of different people. But for instance, a
32:03
Speaker 2: lot of restaurant owners are saying, hey, this doesn't really
32:06
Speaker 2: work for our business because we're not gonna be able
32:08
Speaker 2: to hire any bus boys, dishwashers or cook staff because
32:12
Speaker 2: they're all gonna want to be work in front of
32:14
Speaker 2: the house where they can pay no taxes on a
32:17
Speaker 2: big portion of their wages. And so I'll be really
32:20
Speaker 2: interested to see where that one piece.
32:22
Speaker 3: You think people will tip more or less if they
32:24
Speaker 3: know those tips won't be taxed you as a customer,
32:27
Speaker 3: you're on the you're on the bubble fifteen average service.
32:32
Speaker 2: The taxation of it, honestly would not factor into my decision.
32:35
Speaker 2: But here's what would. If they actually roll out no
32:39
Speaker 2: taxes on tips, then the annoying situation of needing to
32:42
Speaker 2: tip everyone you meet is going to get so much
32:45
Speaker 2: worse that I will naturally pull back on tipping because
32:48
Speaker 2: of it. Because whether I go to a Starbucks, which
32:51
Speaker 2: you can tip now added you know, my local coffee shop,
32:53
Speaker 2: if I go to my hardware store, everyone's going to
32:56
Speaker 2: be holding out their hands for a tip because of
32:58
Speaker 2: these new rules. And so for that reason alone, I
33:01
Speaker 2: think the natural rate at which we tip is going
33:03
Speaker 2: to come down because you're just going to feel test I.
33:06
Speaker 3: Can't think of a good argument for no, and I
33:07
Speaker 3: know both presidential candidates advocated it. I can't think of
33:11
Speaker 3: a good economic argument. Number one, I'm not sure how
33:13
Speaker 3: it's going to change behavior of customers. Right, they may
33:16
Speaker 3: end up tipping a little bit less. Just my theory
33:19
Speaker 3: and maybe maybe some others.
33:21
Speaker 2: My theory is the only reason that this is even
33:23
Speaker 2: being proposed, and I think I've mentioned this to you before.
33:26
Speaker 2: I think the only reason that this is even being
33:27
Speaker 2: proposed is because in decades past, you would tip with cash,
33:31
Speaker 2: and a whole bunch of people never declared the cash
33:33
Speaker 2: as income. They just perpetuated fraud and didn't declare it.
33:37
Speaker 2: Now the system's changed. I would be willing to bet
33:39
Speaker 2: that ninety percent of tips are done with digital transactions,
33:43
Speaker 2: and therefore you have no choice but to declare the income.
33:46
Speaker 2: And so compared to where you were thirty years ago,
33:47
Speaker 2: you feel like you're getting kind of ripped off as
33:49
Speaker 2: a server.
33:50
Speaker 3: I also wonder about what it does for the behavior
33:54
Speaker 3: of weight staff. Would you work more or less if
33:58
Speaker 3: tips were.
33:59
Speaker 2: Not tag Yeah, we've had this discussion. I don't know.
34:02
Speaker 3: This is this is this is something that you're you
34:05
Speaker 3: learn in your first like economics. It's microeconomics specifically, which
34:09
Speaker 3: not everybody takes. But there are income effects. Yeah, uh, well,
34:13
Speaker 3: I'm richer, so I don't have to do any I
34:16
Speaker 3: don't have to work that additional five hours a week
34:18
Speaker 3: to meet my savings goals. And then there are substitution effects. Well,
34:23
Speaker 3: this income is now relatively more favorable after taxes. There
34:28
Speaker 3: are no taxes in fact, so I will do more
34:30
Speaker 3: of that activity. And it's not always clear whether the
34:34
Speaker 3: net effect, when you consider the changes in behavior that
34:38
Speaker 3: result from income and substitution effects, whether or not this
34:41
Speaker 3: will induce people to work more. I just don't know
34:43
Speaker 3: what the economic rationale is for no taxes on tips.
34:46
Speaker 3: I don't know what the economics for Well, okay.
34:50
Speaker 2: I think there's a the only rationale that I have.
34:53
Speaker 3: You want the wage staff vote. Okay, great and equally
34:56
Speaker 3: stupid forgive me, but we're just we're talking non analytically here.
34:59
Speaker 3: I'll just call it stupid because I can't explain it
35:01
Speaker 3: is no is expensing car loan interest. It does nothing
35:07
Speaker 3: about the affordability problem. It's not going to push car
35:09
Speaker 3: prices down. It probably does the opposite. And why why
35:12
Speaker 3: are we favoring auto loan interest over other types of interest?
35:16
Speaker 3: I know they all used to be expensable.
35:18
Speaker 2: Back that one, I can explain a little bit better.
35:21
Speaker 2: It's we want to manufacturing more cars here, so we're
35:24
Speaker 2: only going to allow you to duct the interest if
35:25
Speaker 2: it's an American made car, I can at least explain.
35:29
Speaker 2: I don't know that it's a good idea. I can
35:31
Speaker 2: at least explain though, why I think it's happening incentivize
35:35
Speaker 2: more people to buy American made cars by allowing them
35:37
Speaker 2: to duct the interest on those American made cars and
35:40
Speaker 2: not the foreign ones. Okay, so that's where I land.
35:44
Speaker 2: Here's what you need to think about if you're listening
35:47
Speaker 2: to this right now. In my opinion, at least, it's
35:50
Speaker 2: very likely that the tax code is going to look
35:51
Speaker 2: somewhat different six months from now than it does today.
35:56
Speaker 2: Right now, you know, tax planners, financial advisors of all
36:00
Speaker 2: are planning on potentially tax rates going up in twenty
36:04
Speaker 2: twenty six. I don't think they likely do, but there
36:06
Speaker 2: are likely to be more changes than just taxes on tips,
36:10
Speaker 2: taxes on Social Security, taxes on local income, and the
36:15
Speaker 2: deductibility of all of that. Taxes, like it or not,
36:18
Speaker 2: are an integral part of everyone's financial plan, and if
36:22
Speaker 2: you're not thinking about where tax rates could be a
36:25
Speaker 2: decade from now, you're likely not taking the steps in
36:28
Speaker 2: your plan today to either take advantage of that, or
36:32
Speaker 2: you know, and even in some cases, make decisions that
36:35
Speaker 2: would cause you to pay more taxes today to avoid
36:37
Speaker 2: them in the future. If you are not doing that
36:41
Speaker 2: type of long term planning. If you're not getting that
36:43
Speaker 2: type of full, all encompassing planning, please give the folks
36:46
Speaker 2: at Armstrong Advisory Group a call to talk to us
36:49
Speaker 2: about your financial scenario. The numbers eight hundred three nine
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Speaker 2: three for zero zero one again Armstrong Advisory Group at
36:56
Speaker 2: eight hundred three nine three for zero zero one.
37:00
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37:03
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37:05
Speaker 1: Armstrong guide a specific financial, legal, or tax advice. Consult
37:08
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37:11
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37:14
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37:16
Speaker 2: Mark. The other big looming point about this tax bill
37:18
Speaker 2: that we didn't even get to because frankly, the debate
37:22
Speaker 2: around what taxes get in and what gets cut from
37:24
Speaker 2: the bill is more interesting is will bond investors tolerate
37:29
Speaker 2: the tax bill? I think that's I think they are
37:33
Speaker 2: likely to do so, And by that I mean are
37:35
Speaker 2: investors likely to dump US bonds because of concerns about
37:38
Speaker 2: the deficit increase? My answers, I don't think so, but
37:41
Speaker 2: it would be a much bigger deal than any of
37:42
Speaker 2: the details the tax bill is they.
37:44
Speaker 3: Are to say, look, if this administration just came out
37:47
Speaker 3: in favor definitively of FED independence, I think they do
37:51
Speaker 3: themselves a huge favor. That would at least remove one
37:54
Speaker 3: big risk, the risk of out of control inflation, from
37:57
Speaker 3: people's calculus. Will they swallow this along with the nine
38:02
Speaker 3: or so trillion that needs to be rolled over, plus
38:04
Speaker 3: the two plus trillion that that where the government was
38:07
Speaker 3: going to hit the treasury market up before. I really
38:09
Speaker 3: don't know.
38:10
Speaker 2: Quick break markets remain in negative territory, will have a
38:14
Speaker 2: full recap when we come back, and more. That's next
38:16
Speaker 2: to the financial exchange