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What if this time really is different for investors? · The Financial Exchange Show

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Speaker 2: Chuck, Mark and Tucker with you here.
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Speaker 3: And top story today is that yesterday afternoon, over the
1:17
Speaker 3: course of a period of several hours, the Trump administration
1:21
Speaker 3: sent out a number of letters to different countries telling
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Speaker 3: them the new tariff rates that they are going to
1:28
Speaker 3: be facing on August first. And so Mark, I can't
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Speaker 3: help but be feeling a little bit of deja vu.
1:36
Speaker 3: It's like we hopped in our time machine and went
1:38
Speaker 3: back in time three months to April second, because well,
1:43
Speaker 3: a couple things.
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Speaker 2: First, the rates don't really differ.
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Speaker 3: Very much from the announced rates that we saw on
1:49
Speaker 3: April second, to begin with. In some cases they're the same,
1:51
Speaker 3: in some cases they are a percentage or two higher
1:53
Speaker 3: or lower. And the only difference, I guess is the medium.
1:58
Speaker 3: It's a letter instead of a big poster board. But
2:02
Speaker 3: markets sold off very modestly yesterday, less than a one
2:05
Speaker 3: percent drop across all three major US indices. And so
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Speaker 3: I think, in my opinion, markets and my own personal
2:14
Speaker 3: view at this point is hey, like, unless proven otherwise,
2:19
Speaker 3: you kind of have to assume that this is like
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Speaker 3: an opening volley, and then things are going to move
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Speaker 3: down from there, because that's basically what we've seen over
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Speaker 3: the first six months of this Trump term.
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Speaker 4: Surprised at how or maybe I shouldn't be at how
2:32
Speaker 4: little markets are reacting today. We've gotten not much new
2:37
Speaker 4: detail over the past twenty four hours. But you think
2:41
Speaker 4: that because of the level and breadth of these things,
2:47
Speaker 4: they're clearly going to have an economic impact on inflation,
2:50
Speaker 4: short term, maybe long term, on output, maybe long term.
2:53
Speaker 4: You think stocks would have reacted with more urgency, but
2:58
Speaker 4: they don't seem to have. Do you. Would you chuck
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Speaker 4: that up to markets not taking him that seriously, or
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Speaker 4: the fact that there's an escape clause in these in
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Speaker 4: these letters.
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Speaker 3: I do, and even the fact that I think it
3:10
Speaker 3: was after hours it was around maybe six or six fifteen.
3:14
Speaker 3: The President even said, look, August first is not a
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Speaker 3: hard deadline like that could even change. And so I
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Speaker 3: think that by and large, if you look at the
3:24
Speaker 3: major tariff negotiations or announcements and things like that, the
3:30
Speaker 3: trend in every single one has been, hey, we're starting
3:33
Speaker 3: from this point, and then whether it's within a period
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Speaker 3: of hours in some cases days or weeks, you see
3:42
Speaker 3: those levels, you know, come down, and they have not
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Speaker 3: stayed at the announced levels. I can't think of one
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Speaker 3: area of one country that has you know, actually ended
3:53
Speaker 3: up paying the original you know, announced levels of tariff's.
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Speaker 3: The only place where you have I've seen that happen
4:01
Speaker 3: is on the sector related tariffs. Those you have not
4:04
Speaker 3: seen any significant movement on. The one place where you
4:07
Speaker 3: have is in the auto sector, where they made some
4:10
Speaker 3: changes based on you know, the imports of parts and
4:12
Speaker 3: things like that. But by and large, the trend in
4:17
Speaker 3: all of these other country based tariff announcements has been
4:22
Speaker 3: initial number is high, and then they subsequently come down,
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Speaker 3: and so for better or for worse, I think that
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Speaker 3: is what the market is conditioned for, and so you're
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Speaker 3: not seeing the response on the announcement. I think ultimately
4:36
Speaker 3: it's going to be is their implementation. And the other
4:40
Speaker 3: thing that I think we're really just transitioning towards at
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Speaker 3: this point is Okay, there's you know, certain baseline level
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Speaker 3: of tariffs that are in place at the moment. Show
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Speaker 3: me how this is actually going to affect the US
4:51
Speaker 3: economy because to this point, while we have started to
4:54
Speaker 3: see some slowing, there has not been a meaningful significant
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Speaker 3: down shift that has happened in the US economic data.
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Speaker 3: Broadly at this point that you can point to tariff's
5:05
Speaker 3: as being the main cause.
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Speaker 4: Of Yeah, I just don't know how you model the
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Speaker 4: impact of these things, given how fluid it all is.
5:13
Speaker 4: And I understand that's part of the negotiation. Negotiations usually
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Speaker 4: have an aim an objective. I still don't understand what
5:23
Speaker 4: that is. Do we want them are our trading partners
5:27
Speaker 4: to lower barriers to our imports? Do we want to
5:31
Speaker 4: onshore manufacturing, in which case you need to keep the
5:35
Speaker 4: tariffs in place and they need to be high, And
5:38
Speaker 4: those two objectives are intentioned, you can't have both. I
5:42
Speaker 4: don't understand what the objective is on top of not
5:45
Speaker 4: knowing whether or not to take the threat seriously. And
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Speaker 4: I imagine our trading partners, well, it's been reported, so
5:51
Speaker 4: I'm pretty sure our trading partners feel the same way.
5:54
Speaker 4: They don't know what we want.
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Speaker 3: So I think in looking at this, and again, there
5:59
Speaker 3: have been a number of different items that have been discussed.
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Speaker 3: As far as you know the reasons for this, Uh,
6:05
Speaker 3: it can be again, I'm just gonna throw these out
6:07
Speaker 3: there as things that different people from the Trump administration
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Speaker 3: have mentioned. You have the idea of raising revenue. You
6:13
Speaker 3: have the idea of bringing manufacturing jobs back. You have
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Speaker 3: the idea, you know, with the original Mexico and Canada ones. Hey,
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Speaker 3: we want to use this to you know, as a
6:24
Speaker 3: as a you know, as you know, a stick to
6:27
Speaker 3: get Canada and Mexico to stop fentanyl trafficking again. I'm
6:31
Speaker 3: just kind of going through the list of things that
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Speaker 3: we've seen, the big ones that I think are apparent
6:38
Speaker 3: right now, and I want to let's look at the
6:41
Speaker 3: the Vietnam announcement from last week, because the Vietnam deal
6:49
Speaker 3: came through and it was a twenty percent tariff on
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Speaker 3: Vietnamese imports with a forty tariff on transshipped goods meaning
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Speaker 3: goods that came from another entry through Vietnam in order
7:02
Speaker 3: to you know, miss other tariffs to try to avoid them.
7:06
Speaker 3: And so I think that this temple gives us a
7:08
Speaker 3: few different insights into what is going on. Because I'm
7:14
Speaker 3: a big believer, especially when it comes to like how
7:16
Speaker 3: this is all played out publicly. Don't pay attention to
7:19
Speaker 3: what people are saying, pay attention to what people are doing,
7:22
Speaker 3: and this is something that is being executed now. So
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Speaker 3: the twenty percent tariff, the first thing that I look
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Speaker 3: at there is I say, okay, there is a clear
7:32
Speaker 3: desire to raise revenue from that. I think that has
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Speaker 3: to be very very clear, because if the idea is, hey,
7:39
Speaker 3: we don't want people to be buying as much stuff
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Speaker 3: from China, we want them to be buying from other places,
7:45
Speaker 3: if you really wanted it to just be hey, buy
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Speaker 3: whatever you want from Vietnam, then you wouldn't have any
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Speaker 3: tariff in there. You'd have a free trade green where
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Speaker 3: you say, no, we're not gonna have any tariff barriers.
7:55
Speaker 3: And that's that's just what it's going to be. The
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Speaker 3: trans meant peace in there gets it what I think
8:02
Speaker 3: is ultimately a major goal of the Trump administration, which is, hey,
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Speaker 3: we don't just want to put a tariff on China
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Speaker 3: and then have a bunch of Chinese stuff ship through
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Speaker 3: other Southeast Asian countries that you know, they add one
8:14
Speaker 3: bolt onto it and then they send it our way
8:16
Speaker 3: and they say, oh, it's made in Vietnam, are made
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Speaker 3: in Thailand, and you pay a.
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Speaker 2: Lower tariff rate.
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Speaker 3: So I think that gets it A big piece there,
8:24
Speaker 3: which is the Trump administration, I suspect is not just
8:28
Speaker 3: asking for countries to buy more US stuff, but also
8:31
Speaker 3: to buy less stuff and be less helpful to the
8:34
Speaker 3: Chinese government in accomplishing Chinese economic games. And I think
8:39
Speaker 3: that that is a big piece of what is being
8:42
Speaker 3: talked about and negotiated here, and that's at least what
8:46
Speaker 3: I gather from the Vietnam agreement. The other piece that
8:50
Speaker 3: I guess I look at is, and that makes this challenging,
8:54
Speaker 3: is you kind of look at the numbers and you're like,
8:57
Speaker 3: let's say that I'm Japan right now, who just got
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Speaker 3: a letter saying, hey, you're gonna be paying you know,
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Speaker 3: companies that are importing from Japan are gonna be paying
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Speaker 3: a twenty five percent tariff on Japanese imports. If I
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Speaker 3: look at Vietnam at twenty percent and I'm Japan saying, okay,
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Speaker 3: my exports are gonna be you know, taxed at a
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Speaker 3: rate of you know, twenty.
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Speaker 2: Five percent to the US, do I even.
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Speaker 3: Really want to play ballg Is that enough of a
9:22
Speaker 3: difference for me to upend my whole world and just
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Speaker 3: be like, oh, I need to bend over backwards to
9:26
Speaker 3: do this and that and everything, and all I get
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Speaker 3: is a easingly like five percent lower rate, Like you
9:32
Speaker 3: got to offer me more than that.
9:34
Speaker 2: I can't just be there.
9:36
Speaker 3: So part of me wonders, you know, hey, what's the
9:38
Speaker 3: actual range of rates that the Trump administration is willing
9:42
Speaker 3: to impose? And is there enough meat there for negotiation?
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Speaker 3: Because the lowest that we've seen and the lowest you're
9:47
Speaker 3: gonna get is the ten percent that the UK has
9:51
Speaker 3: if Vietnam's at twenty, Like, what what's the actual range?
9:54
Speaker 1: Like?
9:54
Speaker 3: What what incentive is there for me to negotiate if
9:58
Speaker 3: I'm not really getting that much better of a deal?
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Speaker 2: Well, I guess is one of the questions that I
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Speaker 2: do have out there. I threw a lot at you
10:04
Speaker 2: mark your.
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Speaker 4: Thoughts with respect to your first point. That's a laudable,
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Speaker 4: maybe at least to me, objective containing if you will
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Speaker 4: China economically? Are there better ways to do it than
10:16
Speaker 4: pissing off the whole world and subjecting us all to
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Speaker 4: this helter skelter erratic stop go trade policy. Six months
10:23
Speaker 4: into it, I'm exhausted, I imagine most Americans are, so
10:26
Speaker 4: that my first question is are there better ways to
10:29
Speaker 4: achieve that objective? If that is the objective? And by
10:31
Speaker 4: the way, if that is the objective, why not just
10:33
Speaker 4: say it. China is a threat to our national and
10:37
Speaker 4: economic security. We'll find common ground deal with them when
10:40
Speaker 4: we can when they're playing by the rules of Western civilization. Sorry,
10:44
Speaker 4: that's a chauvinists way to think about it, but it's
10:48
Speaker 4: the way things are. With respect to the second point,
10:52
Speaker 4: optimal rate of tariffs, A lot of work's been done
10:55
Speaker 4: on optimal tariffs, and not surprisingly, they depend on the
10:58
Speaker 4: objective you're trying to achieve. Given what we've seen as
11:02
Speaker 4: to how the present suite of tariffs that was rolled
11:05
Speaker 4: out were derived that much mocked formula with a lot
11:10
Speaker 4: of arcane Greek symbols in it that just kind of
11:14
Speaker 4: cancel each other out, meaning they don't actually factor into
11:17
Speaker 4: the ratio. I don't have a lot of confidence that
11:20
Speaker 4: these tariffs were optimally arrived at based on what we've
11:22
Speaker 4: seen so far.
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Speaker 2: Just take a quick break.
11:24
Speaker 3: I want to dig in a little bit more to
11:27
Speaker 3: how this may affect businesses as they go into the
11:30
Speaker 3: second half of the year. So let's take a quick
11:32
Speaker 3: break and then we'll discuss that when we return.
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Speaker 2: So Mark.
12:44
Speaker 3: Continuing on with the discussion of the new country specific
12:48
Speaker 3: tariffs that were unveiled yesterday, fourteen different countries set to
12:54
Speaker 3: have tariff rates move up from the base ten percent
12:57
Speaker 3: to higher rates as of August. First President also said
13:01
Speaker 3: that that is not a hard deadline and that could change.
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Speaker 3: So what I'm what I'm trying to do right now
13:07
Speaker 3: is put myself in the mind of someone who runs
13:12
Speaker 3: a business where they import a bunch of stuff that
13:15
Speaker 3: you either can't or won't make in the US just
13:17
Speaker 3: because it's too expensive too. I've talked at length about
13:20
Speaker 3: a buddy of mine who runs a board game company
13:23
Speaker 3: as an example, and one of the things that he
13:25
Speaker 3: spent the last couple of months doing was saying, Okay, like,
13:29
Speaker 3: I'm going to get my stuff out of China. I'm
13:32
Speaker 3: not going to make it there anymore. And He's done
13:36
Speaker 3: this at you know, pretty significant expense to do so,
13:40
Speaker 3: just because one of the things that he learned, not
13:43
Speaker 3: just this time, but as he was trying to even
13:44
Speaker 3: in the past move away from China is hey, if
13:47
Speaker 3: you have a manufacturer in Vietnam says they can make stuff,
13:50
Speaker 3: oftentimes they just say that they're going to make it,
13:53
Speaker 3: and then they buy it from a factory in China. Anyways,
13:55
Speaker 3: add a couple of things on and they say they're
13:57
Speaker 3: making it like it's It's just kind of how it works.
14:00
Speaker 3: So he spent a bunch of time over the last
14:03
Speaker 3: few months looking into new production specifically in Vietnam, Thailand,
14:12
Speaker 3: and think it might have been Malaysia, but maybe it
14:14
Speaker 3: was Bangladesh. I can't remember offhand, and so I haven't
14:18
Speaker 3: talked to him in the last couple of days, and
14:22
Speaker 3: I'm just wondering now and I will chat with him
14:25
Speaker 3: at some point. He spent all this time and effort
14:28
Speaker 3: moving production out of China, and now we're sitting there saying,
14:32
Speaker 3: in three weeks, instead of paying a ten percent tax
14:36
Speaker 3: when I import these goods, I might have to pay
14:39
Speaker 3: twenty five percent in the case of Malaysia, thirty five
14:42
Speaker 3: percent in the case of Bangladesh, you know, thirty six
14:45
Speaker 3: in the case of Thailand, and twenty in the case
14:48
Speaker 3: of Vietnam. And I don't know where he eventually decided
14:52
Speaker 3: to move his production too, I can't remember offhand, but
14:55
Speaker 3: imagine spending all this money to move that production, and wow,
15:00
Speaker 3: the terrif rates that you're paying maybe two to three
15:02
Speaker 3: and a half times what you thought you were paying
15:04
Speaker 3: when you started moving that production. All I know is
15:08
Speaker 3: that if I were that person, my view at this
15:11
Speaker 3: point would be I'm not doing anything else because I've
15:16
Speaker 3: spent all this money, and I might have just gotten
15:19
Speaker 3: hit with a higher tax than even what I would
15:22
Speaker 3: be paying in China Chrya, remember moved up from moved,
15:26
Speaker 3: it's thirty four percent. Now there's a baseline twenty on
15:28
Speaker 3: some other stuff that was before, but it didn't include this.
15:31
Speaker 3: So if you look at the rates, you're paying more
15:34
Speaker 3: if you're importing from Thailand than you are from China.
15:38
Speaker 3: Why did I just go through this whole? You know,
15:40
Speaker 3: horse and pony show, Dog and pony show, whatever.
15:42
Speaker 2: Pony show.
15:44
Speaker 4: Yeah, I think the bigger lesson for me anyway, Just
15:46
Speaker 4: backing up from all of the terror of I was
15:51
Speaker 4: gonna say chaos, but that's cliche. The fluid terror of situation,
15:55
Speaker 4: which nobody can get their arms fully around, is the
15:58
Speaker 4: importance of certainty and economic policy. Imagine if tax rates
16:02
Speaker 4: changed every week, your marginal income tax rate, and you
16:05
Speaker 4: had to set your withholding accordingly, and you were penalized
16:08
Speaker 4: if you under withheld, and penalized if you over withheld
16:11
Speaker 4: too because your foregoing interest. Imagine them, the crazy machinations
16:16
Speaker 4: and unproductive attention you'd have to devote to deciding how
16:20
Speaker 4: much your withholding should because they were changing marginal tax
16:23
Speaker 4: rates every week. You'd pull your hair out what's left
16:26
Speaker 4: of it in my case. In my case, I wasn't
16:30
Speaker 4: talking about you.
16:31
Speaker 2: No, mine's already gone. You have your head shave.
16:33
Speaker 4: Nobody can tell so uck. I always think about because
16:38
Speaker 4: I can't relate to purchasers at companies who have to
16:44
Speaker 4: buy a lot of inputs or whatever the example is,
16:46
Speaker 4: I can't relate to that. But I can relate to
16:48
Speaker 4: somebody changing my marginal tax rate every week, changing the
16:52
Speaker 4: speed limit on my way into work. Sometimes it's thirty,
16:55
Speaker 4: sometimes it's forty, sometimes it's twenty. I have no I'm
16:57
Speaker 4: just gonna say screw it. I'm just gonna go thirty
16:59
Speaker 4: every day and get ticketed half the time. My guess
17:02
Speaker 4: is that's where a lot of these folks are gonna
17:03
Speaker 4: end up. They're going to say, the heck with it.
17:05
Speaker 4: I need what I need. I'm going to continue to
17:07
Speaker 4: import it from vendors I know produce good stuff that
17:11
Speaker 4: I can rely on, they ship on time, etc. And
17:15
Speaker 4: I'll pass these prices along if I have to. This
17:17
Speaker 4: is an act of God at this point. That's why
17:20
Speaker 4: economists are worried about the impact on inflation.
17:23
Speaker 2: And beyond that.
17:24
Speaker 3: Beyond the inflation piece, the part that I start to
17:27
Speaker 3: get nervous about is when you talk about economic growth.
17:30
Speaker 3: One of the ways that by and large we generate
17:33
Speaker 3: economic growth is through the use of leverage. We borrow
17:36
Speaker 3: money to expand produce more stuff, and in doing so
17:40
Speaker 3: we can achieve economies of scale and get costs down
17:42
Speaker 3: and things like that.
17:43
Speaker 2: If you're a.
17:44
Speaker 3: Business right now that imports a lot of stuff, do
17:47
Speaker 3: you have any confidence that the numbers that you put
17:49
Speaker 3: into your spreadsheet are going to be accurate? And does
17:52
Speaker 3: that make you just say, yeah, I'll continue to do
17:54
Speaker 3: my business, but I'm not going to grow and expand
17:57
Speaker 3: the way I was previously because I'm nervous about what
18:01
Speaker 3: the tariff rate could be in the future and how
18:04
Speaker 3: it could be different from what it is today. The
18:07
Speaker 3: thing that I worry about is that you know, stuff
18:09
Speaker 3: like CAPEX do you do you look at it and say, okay,
18:13
Speaker 3: I'm trying to let's say I do want to build
18:16
Speaker 3: a factory or a facility. It's some kind of facility
18:19
Speaker 3: here in the United States. We know that all of
18:22
Speaker 3: the stuff that goes into building, you know, a building
18:25
Speaker 3: is not produced here. It's just not We don't make
18:29
Speaker 3: all of that stuff here. We might have some of
18:31
Speaker 3: the raw materials and this and that, but electric meters
18:35
Speaker 3: often are not made in the United States, you know,
18:37
Speaker 3: PVC piping not made in the United States. How much
18:41
Speaker 3: extra cost do you have to add to your projections
18:44
Speaker 3: And at some point you just say, hey, this doesn't
18:47
Speaker 3: make sense. We're just not going to undertake the project
18:49
Speaker 3: because there's too much uncertainty or the cost is too high.
18:52
Speaker 3: And those are the things that I wonder about. And this,
18:55
Speaker 3: by the way, is starting to show up again in
18:57
Speaker 3: some of the soft data now, but when you look
19:00
Speaker 3: at it. The nfib came out with a report this
19:06
Speaker 3: morning's National Federation of Independent Businesses and one of the
19:11
Speaker 3: things we saw is that capec's intentions for the next
19:14
Speaker 3: twelve months fell to the lowest level since twenty twenty.
19:18
Speaker 3: So we'll see how this actually ends up playing out.
19:22
Speaker 3: But this is some of the stuff that you worry about,
19:24
Speaker 3: as far as hey, could it slow the economy, will
19:27
Speaker 3: inflation bumps?
19:29
Speaker 2: Maybe we haven't seen that yet.
19:30
Speaker 3: To this point, it's been fine, but we'll have to
19:33
Speaker 3: see what the second half shows.
19:34
Speaker 2: Quick break, We've got Wall Street Watch next.
19:42
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19:45
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19:49
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19:55
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19:58
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20:01
Speaker 5: Following Monday's modest selloff, markets today are mostly quiet. Yesterday,
20:07
Speaker 5: President Trump sent letters to several nations outlining terraff rates
20:11
Speaker 5: they would pay if trade deals were not agreed upon,
20:14
Speaker 5: and extended the tariff deadline from July ninth to August first.
20:19
Speaker 5: Right now, Dow is off by seventy two points, SMP
20:23
Speaker 5: five hundred is up only one point at the moment,
20:26
Speaker 5: Nasdaq is up by only twenty six points, Russell two thousand,
20:30
Speaker 5: up just over half a percent. Ten year Treasure reeled
20:34
Speaker 5: up three basis points now at four point four to
20:36
Speaker 5: two percent, and crude oil is flat, trading right around
20:40
Speaker 5: sixty eight dollars a barrel. Several solar stocks, including Sun Run,
20:45
Speaker 5: En Phase Energy, and First Solar, seeing losses on the
20:48
Speaker 5: day after the White House said it would enforce the
20:51
Speaker 5: halt to clean electricity tax credits faster than expected. Sun
20:57
Speaker 5: runs sinking ten percent, while both in Phase Energy and
21:00
Speaker 5: First Solar are down over three percent. Meanwhile, Amazon Prime
21:04
Speaker 5: Day is officially begun and this year will extend to
21:07
Speaker 5: four days instead of two. According to eMarketer, the sale
21:11
Speaker 5: is expected to bring in a record twelve point nine
21:14
Speaker 5: billion dollars in the US, up from fifty three percent
21:18
Speaker 5: last year. Amazon stock is pulling back by one percent today. Elsewhere,
21:23
Speaker 5: Meta continuing their aggressive artificial intelligence recruitment for its super
21:28
Speaker 5: intelligence division, now hiring a top AI researcher from Apple.
21:34
Speaker 5: Both Meta and Apple stocks are flat today. HSBC downgraded
21:39
Speaker 5: major banks JP, Morgan Chase, Goldman, Sachs, and Bank of
21:43
Speaker 5: America ahead of their second quarter earnings next week. Those
21:47
Speaker 5: stocks are down by about two percent today. And Wendy's
21:51
Speaker 5: CEO Kirk Tanner has been named the new chief executive
21:54
Speaker 5: of the Hershey Company. Tanner joined Wendy's in twenty twenty
21:58
Speaker 5: four after more than thirty years at Peta. See Hershey
22:01
Speaker 5: is down by two percent today. I'm Tucker Silva and
22:04
Speaker 5: that is Wall Street watch Mark.
22:06
Speaker 3: We got a piece in Bloomberg Opinion today. It's titled
22:09
Speaker 3: what if this time really is different?
22:13
Speaker 2: For investors? What? What? What? What are they?
22:16
Speaker 3: What are they talking about here? When they're talking about
22:17
Speaker 3: this time being different in this.
22:20
Speaker 4: Piece well to me, and this is something we've talked
22:24
Speaker 4: about a lot. Uh Firstly, buying the dip, that is,
22:28
Speaker 4: buying stocks when they've gone down has paid off over
22:31
Speaker 4: the past roughly generation, maybe because the Federal Reserve has
22:35
Speaker 4: become more energetic and trying to stabilize output as opposed
22:40
Speaker 4: to focusing strictly on inflation as they did in earlier
22:44
Speaker 4: in an earlier era in the in the eighties, specifically,
22:48
Speaker 4: so buying when stock sell off has paid off, and
22:53
Speaker 4: that buy the dip mentality, so to speak, is pretty
22:57
Speaker 4: well documented and is not something investors felt the need
23:00
Speaker 4: to sort of deviate from. Question is what if the
23:03
Speaker 4: This is how I would phrase it. It's not how
23:04
Speaker 4: Schreger puts it. This is how I would phrase it.
23:06
Speaker 4: What if the regime is changed. We're trying to shift
23:09
Speaker 4: from services to back to manufacturing. Most economists think the
23:13
Speaker 4: shift from manufacturing to services resulted in more stable and
23:16
Speaker 4: higher on average output. You can lament the loss of
23:20
Speaker 4: manufacturing jobs, but there's been an effect on volatility of
23:23
Speaker 4: output as measured by the ups and downs and GDP.
23:26
Speaker 4: The path has been smoother since the nineteen eighties economists
23:29
Speaker 4: even have a name for it, the great moderation. What
23:32
Speaker 4: if you reverse that, well, great moderation might come undone.
23:35
Speaker 4: FED policy making has been a little bit more predictable
23:39
Speaker 4: since the nineteen eighties. FED policy makers became more aware
23:43
Speaker 4: of the importance of inflation expectations. They became stricter inflation targeters,
23:49
Speaker 4: not pure inflation targeters in an academic sense, but stricter
23:52
Speaker 4: inflation targeters. After the experience of the nineteen seventies, What
23:55
Speaker 4: if that sort of unravels because the FED becomes more
23:58
Speaker 4: politically attentive less independent. Said differently, that too, could change
24:03
Speaker 4: the policy regime. All these things could change the relationship
24:07
Speaker 4: between stock draw downs and the length of those draw downs.
24:12
Speaker 4: Said differently, we might be in for a rockier ride
24:15
Speaker 4: both for output and a consequently for stocks. Not quite
24:20
Speaker 4: the way Schreger puts it, but that's how I think
24:22
Speaker 4: about it.
24:22
Speaker 3: Yeah, it's I think we are at a really unique
24:27
Speaker 3: inflection point that if I'm being honest, I don't know
24:30
Speaker 3: exactly how things are going to progress over you know,
24:34
Speaker 3: a ten to fifteen year peer This is not something
24:36
Speaker 3: when I say inflection point, I'm not talking about like
24:38
Speaker 3: how the next couple months are going to go. I'm
24:40
Speaker 3: talking in terms of, you know, bigger trends and bigger
24:44
Speaker 3: shifts that we may see. There are paths where you
24:49
Speaker 3: can easily map out, and we've talked about them quite
24:51
Speaker 3: a bit. Hey, could the next ten to fifteen years
24:54
Speaker 3: have you know, much higher inflation and lower growth because
24:56
Speaker 3: of you know what you just talked about, you know,
24:58
Speaker 3: less trade and more or you know, insular policies and
25:02
Speaker 3: things like that, less overall immigration and things like that
25:06
Speaker 3: leading to less population growth in the United States. There's
25:09
Speaker 3: a lot that you can look at and say, oh, like,
25:12
Speaker 3: this could be really concerning. And then on the other hand,
25:15
Speaker 3: I look at some of the stuff that is potentially
25:18
Speaker 3: happening with robotics over the next couple of years or so,
25:21
Speaker 3: and look, I very much was a skeptic on this
25:25
Speaker 3: until the last few months, and now I'm starting to
25:27
Speaker 3: kind of get a little bit of a b under
25:29
Speaker 3: my bonnet about it. But I look at some of
25:31
Speaker 3: the things that could happen there, and I go, there's
25:34
Speaker 3: some really interesting possibilities here, but also ones that could
25:38
Speaker 3: dramatically upend industries and jobs that we previously said couldn't be.
25:47
Speaker 3: And I think that those are things that then become
25:50
Speaker 3: interesting considerations for you know, how what does society look
25:54
Speaker 3: like by the time we get to you know, twenty
25:56
Speaker 3: forty twenty forty five, and how different is it from today?
26:00
Speaker 3: If these can in fact play out the way that
26:03
Speaker 3: they potentially you could. So I have more questions than
26:08
Speaker 3: answers right now about this stuff. I don't think it's
26:12
Speaker 3: anything where I look at it and say this is
26:14
Speaker 3: definitively how this is or is not going to go.
26:17
Speaker 3: But it kind of brings you back then, Okay, if
26:20
Speaker 3: you have all of this uncertainty from a portfolio construction standpoint,
26:27
Speaker 3: what do you.
26:27
Speaker 2: Do with it?
26:28
Speaker 3: Not for next week, but like, how do you approach that?
26:30
Speaker 3: And I think it's a real question mark is to
26:34
Speaker 3: you know exactly what the best approach is going to be?
26:37
Speaker 3: Other than hey, if you don't know what to do,
26:40
Speaker 3: the best thing often is just to diversify so that
26:43
Speaker 3: you don't have all your eggs in the wrong basket
26:45
Speaker 3: by a mistake.
26:46
Speaker 2: Is that wrong? Oh yeah?
26:48
Speaker 4: I just point out that the so called equity risk premium,
26:51
Speaker 4: the difference whether you're estimating it beforehand or looking backwards
26:55
Speaker 4: The difference between the returns on risky stocks and theoretically
26:59
Speaker 4: say have in bonds has always been positive. It's just
27:02
Speaker 4: a question of how big. I would expect that gap
27:05
Speaker 4: to continue to be positive. Again, it's a question of
27:09
Speaker 4: how big. And that is a remarkably durable phenomenon, with
27:14
Speaker 4: some notable exceptions stocks over long enough periods of time.
27:17
Speaker 4: We all know this. If you've ever sat through a
27:19
Speaker 4: four to one K education session, you've seen the charts,
27:22
Speaker 4: the same charts we all use about the the wealth
27:26
Speaker 4: generating and accumulating power of equities relative to other things.
27:30
Speaker 4: That relationship should hold up through all the types of
27:32
Speaker 4: shifts that you described, because it's held up through past
27:36
Speaker 4: regime changes in policy. We didn't always have a FED.
27:40
Speaker 4: FED wasn't always independent government, didn't always engage in active
27:44
Speaker 4: fiscal policy. That's a ie. Spending more or taxing less
27:49
Speaker 4: to goose the economy, for example. That's a post World
27:52
Speaker 4: War two or post Great Depression phenomenon. So there's been
27:56
Speaker 4: lots of different economic and consequence the market regimes over
28:01
Speaker 4: the past couple of centuries, century and a half really
28:04
Speaker 4: for which we have good data on capital markets. But
28:07
Speaker 4: the one enduring factor is the equity risk premium, the
28:11
Speaker 4: fact that stocks have paid off if you hold them
28:14
Speaker 4: long enough, and unless the structure of the economy changes dramatically,
28:18
Speaker 4: I would expect that premium to continue to be delivered
28:21
Speaker 4: to investors.
28:22
Speaker 3: Is that something that is true throughout other major developed
28:26
Speaker 3: markets as well, or is that just a US base?
28:29
Speaker 2: Now it is.
28:29
Speaker 4: There's a great book and paper, Triumph of the Optimists,
28:35
Speaker 4: Triumph of the Optimists, written by a few researchers. They
28:39
Speaker 4: publish a study based on it every year, And yeah,
28:42
Speaker 4: you make a good point. Before you declare something to
28:45
Speaker 4: be some sort of near law of finance or economics,
28:49
Speaker 4: you better make sure that it prevails across time and
28:53
Speaker 4: countries too. And indeed, again with some exceptions, and those
28:56
Speaker 4: exceptions can be uncomfortably long, but they're weird exceptions that
29:01
Speaker 4: arguably resulted from extreme geopolitical events or policy mistakes. So
29:07
Speaker 4: I'm pretty comfortable with saying that a portfolio of stock
29:10
Speaker 4: should beat a portfolio of bonds over a long enough
29:12
Speaker 4: period of time. Otherwise why would somebody hold stocks. That's
29:15
Speaker 4: a little bit circular, but that's the way the thinking goes.
29:18
Speaker 3: To take a quick break here when we come back,
29:20
Speaker 3: we'll talk a little bit about interest rates and the President.
29:23
Speaker 3: Obviously President Trump been pushing for j. Powell and the
29:26
Speaker 3: Federal Reserve to lower interest rates. We'll talk a little
29:29
Speaker 3: bit about whether that is the right approach to actually
29:32
Speaker 3: get rates down on the things that matter to most Americans.
29:36
Speaker 1: Breaking business news as it happens only here on the
29:40
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29:46
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29:49
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29:52
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30:02
Speaker 2: Mark. One of the things that we have heard quite
30:05
Speaker 2: a bit about.
30:06
Speaker 3: Is the Trump administration wanting the Federal Reserve to begin
30:10
Speaker 3: lowering interest rates. In fact, Jay Powley even came out,
30:12
Speaker 3: I think it was a couple of weeks ago and said, look,
30:15
Speaker 3: if it weren't for these tariffs, we probably would be
30:19
Speaker 3: in a position where we could be lowering interest rates,
30:21
Speaker 3: but we need to, you know, see what the effect
30:24
Speaker 3: is here. So I don't think that there's a huge
30:26
Speaker 3: disagreement from the Fed that there's some stuff out there
30:30
Speaker 3: that otherwise would be pushing the Fed to start, you know,
30:33
Speaker 3: cutting interest rates. But a piece from Bill Dudley, who
30:39
Speaker 3: used to run the New York Fed. It's in Bloomberg Opinion,
30:43
Speaker 3: basically says, look, you need to be careful with what
30:48
Speaker 3: you're doing based on, you know, all these different things
30:53
Speaker 3: that you're trying to move at once, because if you
30:56
Speaker 3: do too much too quickly, not just with interest rates,
30:59
Speaker 3: but some of these plans about how you want to
31:01
Speaker 3: issue more short term debt versus long term and this
31:05
Speaker 3: and that, you could upset the balance of what makes
31:08
Speaker 3: the financial system work the way that it does, and
31:11
Speaker 3: that could actually end up leading to higher rates for
31:13
Speaker 3: the stuff that actually matters to Americans.
31:16
Speaker 4: Yeah, the FED could, in theory, either through independent judgment
31:20
Speaker 4: or as a result of political pressure or Trump putting
31:23
Speaker 4: a puppet as FED chair. Although they'd have this puppet
31:26
Speaker 4: would have to get the rest of the FMC to
31:28
Speaker 4: go along. It's not clear that they could. At least initially,
31:31
Speaker 4: they could push short term rates to zero or one
31:34
Speaker 4: wherever the President said they should be based on his
31:37
Speaker 4: I'm sure very rigorous and sophisticated analysis. That won't necessarily
31:42
Speaker 4: result in lower mortgage rates, though they might go up
31:44
Speaker 4: if investors expect future inflation to be higher or growth
31:47
Speaker 4: to be stronger As a result of lower short term
31:50
Speaker 4: rates absent an attempt to control rates at the so
31:53
Speaker 4: called longer end of the YU curve, which the Fed
31:55
Speaker 4: can do, but that might have inflationary consequences too. You
31:59
Speaker 4: can control rates, but you won't be able to control inflation.
32:02
Speaker 2: Right, Let's can we can we talk about this a
32:04
Speaker 2: little because I think that there's.
32:06
Speaker 3: A lot of meat here and I think it's something
32:08
Speaker 3: that gets overlooked quite a bit.
32:10
Speaker 2: So let's do a couple thought experiments. Mark.
32:13
Speaker 3: Let's say that the FED comes out tomorrow and J.
32:16
Speaker 3: Powell wakes up and says, you know what, I'm not
32:19
Speaker 3: gonna be purple tie J.
32:20
Speaker 1: Powell.
32:21
Speaker 3: I'm gonna be green tie J. Powell because I just
32:24
Speaker 3: want to print some money. And Powell says, you know what,
32:28
Speaker 3: I'm cutting the FED funds rate down to two percent.
32:31
Speaker 2: I know he's not gonna do this, but let's say
32:33
Speaker 2: that he does.
32:34
Speaker 3: What actually happens if he does that, Like, how does
32:38
Speaker 3: the rest of the yield curve move, and what thoughts
32:42
Speaker 3: go into why it moves the way it does?
32:45
Speaker 4: Well, The yield curve one theory, And when we say
32:48
Speaker 4: the yel curve, we mean the interest rate on various
32:51
Speaker 4: treasuries of different maturities, so six month, one year, three year,
32:56
Speaker 4: five year. If you put a dot at each one
32:59
Speaker 4: of those interest rates and you connect the dots, you
33:02
Speaker 4: usually get a curve. Sometimes it slopes upward, that is,
33:05
Speaker 4: longer term rates are higher than shorter term rates. Sometimes
33:08
Speaker 4: it slopes downward. It's inverted. Investors expect future short term
33:12
Speaker 4: rates to come down, which they did a couple of
33:15
Speaker 4: years ago after the FEDI raise short term rates to
33:17
Speaker 4: a very high level in terms of recent history. So
33:20
Speaker 4: you get an inverted or downward slope yel curve. So
33:22
Speaker 4: that's what we mean when we say yeal curve. I
33:25
Speaker 4: give you that setup because you asked, what happens to
33:27
Speaker 4: the yield curve if the short end, which the FED
33:30
Speaker 4: can exert more or less perfect control over, if that
33:33
Speaker 4: goes down. And the answer is really in what I
33:35
Speaker 4: just said. Longer term rates are the sum of expected
33:40
Speaker 4: shorter term rates. I'm not going to buy a ten
33:42
Speaker 4: year treasury and get only four percent. If I expect
33:45
Speaker 4: future short term rates to be five or six percent,
33:48
Speaker 4: I will just buy a short term bond. When it matures,
33:51
Speaker 4: I will buy another short term bond, and my average
33:55
Speaker 4: rate over that ten year period through that strategy of
33:58
Speaker 4: rolling over stuff when it matures is going to be
34:00
Speaker 4: about five percent. That calculus forces longer term rates up.
34:05
Speaker 4: They're a function of again, expected short term rates. So
34:08
Speaker 4: if the FED decided to go pedal to the metal
34:10
Speaker 4: today to play cad a politician, doesn't necessarily mean long
34:13
Speaker 4: term rates would follow short term rates down. That depends
34:16
Speaker 4: on expectations of future short term rates. Said differently, you're
34:19
Speaker 4: gonna have to pay the piper at some point.
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35:25
Speaker 3: Now, Mark, let's say that the Federal Reserve does what
35:29
Speaker 3: some other central banks generally and you know, less stable
35:33
Speaker 3: monetary environments have done in other scenarios, and they say,
35:38
Speaker 3: you know what, We're not just gonna take the short
35:40
Speaker 3: term FED funds rate down. We want to go out
35:43
Speaker 3: and we want to start buying that long into the
35:45
Speaker 3: ILK curve. We want to we want to go out
35:47
Speaker 3: and control. We want to target a three percent yield
35:51
Speaker 3: for the ten year treasury. What happens in that scenario.
35:56
Speaker 4: Well, they can do it because they can print money
35:58
Speaker 4: and buy them.
35:59
Speaker 2: And then what happens, I guess is my question.
36:01
Speaker 4: You know, maybe what happened in nineteen between when the
36:04
Speaker 4: FED effectively financed the.
36:07
Speaker 2: Korean War War.
36:08
Speaker 4: Yeah, we had a lot of inflation after World War two,
36:10
Speaker 4: not as much as other countries. We had a lot
36:12
Speaker 4: of inflation, as you know. Here in the North after
36:14
Speaker 4: the Civil War we had one hundred percent inflation roughly,
36:16
Speaker 4: I think over that four year period, not as much
36:18
Speaker 4: as the Confederacy they had four thousand percent inflation. They
36:21
Speaker 4: financed it entirely by printing money, which of course became worthless.
36:25
Speaker 4: So the short answer is, Chuck, sure, you can control
36:27
Speaker 4: the long or the short end. I think you can
36:30
Speaker 4: control both because you can print an unlimited amount of money.
36:32
Speaker 4: What you can't control, though, is inflation. You lose control
36:35
Speaker 4: of inflation. You also lose control of output volatility. If
36:39
Speaker 4: you're targeting rates, you can't target output. It's there's no
36:44
Speaker 4: succinct way to describe it, but basically there are trade offs,
36:47
Speaker 4: and you can't have your cake and eat it too.
36:49
Speaker 4: So I don't know exactly what would happen, Chuck. I'd
36:52
Speaker 4: love to read about it as a non citizen of
36:54
Speaker 4: the country that tried it, but I worry that we're
36:57
Speaker 4: going to be living through it sometime in the next
36:59
Speaker 4: few years.
36:59
Speaker 2: So I think the big thing is.
37:03
Speaker 3: Just because the FED lowers interest rates that it controls,
37:08
Speaker 3: it doesn't necessarily mean that borrowing costs end up going
37:12
Speaker 3: down for individuals. And by the way, we saw this
37:16
Speaker 3: last year where I remember the FED was cutting interest
37:18
Speaker 3: rates during the fall and mortgage rates were actually moving
37:22
Speaker 3: up during the time, and it was because the long
37:25
Speaker 3: end is a separate animal from what the FED controls.
37:28
Speaker 3: So just something to keep in mind when we talk
37:30
Speaker 3: about the Federal Reserve lowering interest rates, it doesn't necessarily
37:35
Speaker 3: reflect in the instruments that you, me and the rest
37:39
Speaker 3: of the world use on a daily basis, because the
37:43
Speaker 3: FED only controls that short overnight rate directly there. So
37:49
Speaker 3: that's something that I just again like to discuss because
37:52
Speaker 3: I think it sometimes gets missed in the conversation here
37:56
Speaker 3: or to take a quick break, but we got a
37:59
Speaker 3: whole nother hour were coming up with more financial exchange.
38:05
Speaker 3: H