Latest / The Financial Exchange Show / Trump picks Kevin Warsh as Fed Chair. Is he the right pick?

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Trump picks Kevin Warsh as Fed Chair. Is he the right pick? · The Financial Exchange Show

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Speaker 1: a donation today. This is the Financial Exchange with Chuck
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Speaker 1: Zada and Mike Armstrong.
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Speaker 2: Chuck, Mike and Soccer with you here and ladies and gentlemen,
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Speaker 2: we have a new nominee for Chair of the Federal Reserve.
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Speaker 2: It is one of the Kevins. Kevin Walsh is the
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Speaker 2: new nominee from President Trump to run the Federal Reserve
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Speaker 2: beginning in May. And so we're going to spend a
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Speaker 2: little bit of time talking about who Kevin is, what
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Speaker 2: he generally thinks about monetary policy, some of the things
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Speaker 2: that he said recently, and then talk a little bit
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Speaker 2: about the path for him to be confirmed, since there's
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Speaker 2: a little bit of drama on that side. But you know,
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Speaker 2: ultimately I think where I land on this, Mike is
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Speaker 2: I've a couple thoughts that again I contradict myself a
1:59
Speaker 2: little bit in how I think about this, in that
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Speaker 2: I'm a pretty big believer that regardless of you know,
2:06
Speaker 2: who ended up in this positions, as long as you
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Speaker 2: know it wasn't someone entirely unexpected, I don't really think
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Speaker 2: it's going to have too much impact on markets just
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Speaker 2: because a the Federal Reserve chair is just one member
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Speaker 2: of the voting committee. Yes, they try to kind of
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Speaker 2: corral people into you know, their own view, but ultimately,
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Speaker 2: every person on that committee is pretty smart to begin with.
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Speaker 2: Every person on that committee has their own career that
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Speaker 2: they're thinking about and looking out for, and everyone on
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Speaker 2: that committee is ultimately not wanting to be remembered as
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Speaker 2: the next Arthur Burns, and so they generally tend to
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Speaker 2: do this safe thing, which for the last forty years
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Speaker 2: has been let's be dubbish, yeah, because pretty much, Look,
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Speaker 2: let's be honest here, there hasn't been a FED since
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Speaker 2: the early nineteen eighties that has actually been hawkish in
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Speaker 2: any way, shape or form when push came to shove again,
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Speaker 2: devish here just means in favor of lower interest rates,
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Speaker 2: and especially when there's any sign of economic turmoil, pushing
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Speaker 2: for those lower rates and buying, you know, in this
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Speaker 2: day and age at least expansion of the balance sheet
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Speaker 2: to bring longer term rates lower too.
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Speaker 3: You know.
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Speaker 2: So it's it's just been a case that that's been
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Speaker 2: the kind of standard operating procedure. So let's look at
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Speaker 2: this then in the context of Kevin Walsh, who, if
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Speaker 2: you don't know anything about Kevin Warsh worsh is someone
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Speaker 2: who is familiar with the workings of the FED at
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Speaker 2: this point.
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Speaker 3: He's an insider.
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Speaker 2: Listen, He's as insidery as you can get. He grew
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Speaker 2: up in New York. He went to Stanford and Harvard.
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Speaker 2: He spent seven or eight years at Morgan Stanley, and
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Speaker 2: then President George W. Bush nominated him to the FED
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Speaker 2: in two thousand and six and he's basically been in
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Speaker 2: that orbit ever since. And I would say that he
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Speaker 2: served at the FED in.
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Speaker 4: Arguably the most interesting and transformative time for the Federal
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Speaker 4: Reserve in its history.
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Speaker 2: Yeah.
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Speaker 4: I mean, again, there's probably a few other times where
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Speaker 4: you can argue it, but he's served as a member
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Speaker 4: of the FED during the Great Recession, and there's probably
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Speaker 4: no time in history where the role and responsibilities that the
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Speaker 4: Federal Reserve changed more than that period of time.
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Speaker 2: Yes, Now, if you want to talk about Warrish's tenure
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Speaker 2: at the FED during that period, it's one where he
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Speaker 2: generally was about as hawkish and as as you know,
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Speaker 2: as as I'm trying to again think of the right
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Speaker 2: word there, because hawkish is you know, kind of reductive.
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Speaker 2: It's he general believed that inflation was the greater threat
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Speaker 2: during the period he was at the FED than weakness
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Speaker 2: in the labor market. And unfortunately he was basically wrong
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Speaker 2: all along. And fortunately Wikipedia like grab some of these
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Speaker 2: quotes so I don't have to pull him from a
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Speaker 2: bunch of different places. But this is these are all
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Speaker 2: quotes from two thousand and eight. On the inflation front,
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Speaker 2: there's a little reason to be confident that inflation will decline.
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Speaker 2: There are reasons to believe that our inflation problems will
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Speaker 2: become more pronounced and more persistent. So that was early
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Speaker 2: in two thousand and eight, when energy prices were going
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Speaker 2: up understandable. September of two thousand and eight, I'm still
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Speaker 2: not ready to relinquish my concerns on the inflation front.
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Speaker 2: Unfortunately you should have been, because the entire economy fell
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Speaker 2: apart the next month. So this is something where I think,
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Speaker 2: in looking at worsh again, all of us are wrong
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Speaker 2: at some points. I'm not like trying to be like, oh, like,
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Speaker 2: he's wrong, he's dumb. It's more like, no, he was
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Speaker 2: someone who was very hawkish, even in the face of
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Speaker 2: the greatest threat to the labor market that we have
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Speaker 2: seen in one hundred years. Agreed, And so I think
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Speaker 2: the question that's an open one is for the last year.
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Speaker 2: He has written in a number of op eds and
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Speaker 2: given a number of interviews, basically doing a complete one
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Speaker 2: to eighty from there and being as douvish as possible.
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Speaker 4: Yep, lower rates, they need to come down now. They
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Speaker 4: are fed as behind the eight ball. There are threats
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Speaker 4: to the labor market lower rates today.
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Speaker 2: And so I think the question that is a couple
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Speaker 2: questions worth asking, Like if I were on the Senate
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Speaker 2: Banking Committee, or if I were, you know, a senator
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Speaker 2: looking to confirm him, the question that I would ask,
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Speaker 2: like number one is, hey, when you were actually serving
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Speaker 2: on the Board of Governors, you were very hawkish and
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Speaker 2: consistently viewed inflation as the greatest threat, despite inflation never
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Speaker 2: reaching you know, levels that most Americans considered to be problematic.
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Speaker 4: And I'll also say that's not the only time, Just
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Speaker 4: like it's one thing for you to be wrong fifteen
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Speaker 4: years ago and change your viewpoint on things.
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Speaker 2: Through the twenty tens, this was the same thing.
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Speaker 4: And then as recently as twenty twenty four, Yes, he
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Speaker 4: was criticizing J. Powell in the FED for lowering rates
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Speaker 4: during the Biden administration when they were saying, hey, the
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Speaker 4: labor market's showing signs of weakness, and so he has
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Speaker 4: held this view very consistently that rates need to be
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Speaker 4: higher and inflation is the bigger threat until President Trump
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Speaker 4: took office the second time.
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Speaker 2: So I think the question that I would ask is, look,
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Speaker 2: given your track record, both in terms of what you've
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Speaker 2: said and how you've actually acted and voted on the
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Speaker 2: Open Market Committee in the past, talk to me about
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Speaker 2: how your views have evolved to get you to the
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Speaker 2: point where you are now. Yeah, because I think it's
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Speaker 2: important to understand. Having said all that, I all like again,
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Speaker 2: I keep coming back to my original point, which is
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Speaker 2: I don't think that a warsh fed is going to
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Speaker 2: manage things that differently from a Waller, or from a
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Speaker 2: Rick Ryder fed, or from a Scott Bessen fed, because
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Speaker 2: when you get into that chair, you basically sit there
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Speaker 2: and the first thing that goes through your head and
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Speaker 2: this is by the way, in any job, if you're
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Speaker 2: anything like me, first thing that goes through head when
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Speaker 2: you're given any kind of responsibility is gosh, I hope
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Speaker 2: I don't screw this up. And especially in that role,
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Speaker 2: it's you know, no one wants to be Arthur Burns,
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Speaker 2: because what everyone remembers about Arthur Burns was that under
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Speaker 2: his tenure in the seventies, inflation rose to you know,
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Speaker 2: incredibly high levels, not once but twice, and the economy
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Speaker 2: generally sucked during that time as a result of it.
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Speaker 2: What people don't remember about Arthur Burns was that he
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Speaker 2: was actually a brilliant researcher who many of the ideas
8:48
Speaker 2: that we talk about today, you know, he helped develop in
8:52
Speaker 2: the fifties and sixties. And that's not really something that
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Speaker 2: we discussed because all people want to talk about when
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Speaker 2: they think about Arthur Burns is, oh, like you were
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Speaker 2: the guy who let inflation get out of control. It's
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Speaker 2: kind of like Bill Buckner. No one remembers that Bill
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Speaker 2: Buckner was a pretty good hitter and actually a really
9:13
Speaker 2: good fielder. They remember the ball going through his legs,
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Speaker 2: and unfortunately that's like his legacy saying with Arthur Burns.
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Speaker 2: So I think that when we look at the actual
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Speaker 2: impact that a worsh chairmanship is that the word sure
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Speaker 2: it is now if it wasn't that a worst chairmanship
9:34
Speaker 2: would have I think, ultimately I'm not sure it's that
9:39
Speaker 2: different from anyone else. And here is the way that
9:42
Speaker 2: I get to this. If we look at the end
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Speaker 2: of this year, the last FED meeting is on December ninth.
9:53
Speaker 2: We know that prediction markets, which by the way, have
9:55
Speaker 2: been completely wrong about this for the last couple of weeks. Okay,
9:58
Speaker 2: prediction markets didn't pick up on worsh being the favorite
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Speaker 2: until last night.
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Speaker 4: Yeah, last night it was about eighty percent odds. So
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Speaker 4: here's what we've got. A week ago, there was a
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Speaker 4: thirty two percent chance that the Fed funds rate would
10:10
Speaker 4: be cut by half a percent by the end of
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Speaker 4: this year. As of today, it's thirty three, a one
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Speaker 4: percent shift. There was a seventeen percent chance that the
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Speaker 4: Fed funds rate would be cut by.
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Speaker 2: Seventy five basis points by the end of this year.
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Speaker 2: It's up to twenty two, so a five percent shift.
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Speaker 2: There was a five and a half percent chance that
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Speaker 2: the Fed funds rate would be cut by was this
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Speaker 2: by one hundred basis points by the end of the year,
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Speaker 2: It's up to eight point six. There's no meaningful repricing
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Speaker 2: of you know, lower interest rates. It's like, okay, maybe
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Speaker 2: there's like a five to ten percent chance that rates
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Speaker 2: go a little bit lower, but the market is telling you, Hey,
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Speaker 2: we don't think that Warsh's nomination is going to result
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Speaker 2: in the FED actually cutting more because he's just one person.
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Speaker 2: And I think that's where I come back to, which is, look,
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Speaker 2: regardless of Canada, X, Y or Z, I'm just not
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Speaker 2: sure it makes that much of a difference in how
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Speaker 2: the FED is actually going to operate with what is
11:16
Speaker 2: most important here quick break. When we come back, do
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Speaker 2: we want to do any more worsh talk.
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Speaker 4: I think there's a little bit more there just in
11:25
Speaker 4: terms of what you're getting here, So I'd like to
11:27
Speaker 4: continue with a little bit more worsh talk in terms
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Speaker 4: of his history, his his viewpoints on monetary policy, the
11:33
Speaker 4: Federal Reserve, what it is that they do, what is
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Speaker 4: they should be doing in mistakes that they've made of
11:37
Speaker 4: the course the last two decades.
11:39
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12:37
Speaker 2: So we're talking about Kevin Warsh being nominated by President
12:40
Speaker 2: Trump to be the new head of the Federal Reserve. Mike,
12:43
Speaker 2: you said you had a few other things that you
12:45
Speaker 2: wanted to cover as we discussed this.
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Speaker 4: Yes, like I said before, he was active in the
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Speaker 4: FED during the financial crisis, and so because of that,
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Speaker 4: I mean, like I said, he was active there during
12:55
Speaker 4: one of the most interesting times in history at the
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Speaker 4: Federal Reserve, where there was a massive leadership vacuum about
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Speaker 4: the economy and BERNANKI filled that gap, and I mean,
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Speaker 4: the guy was on TV like every other day trying
13:09
Speaker 4: to reassure the American public that everything was going to
13:11
Speaker 4: be okay. And one of Warsha's opinions is that the
13:15
Speaker 4: FED really let Congress off the hook when it came
13:20
Speaker 4: to the actions that they took during the Great Financial
13:22
Speaker 4: Crisis in terms of expanding their responsibilities and you know,
13:27
Speaker 4: buying bonds. And he viewed that as a mistake. Even
13:31
Speaker 4: though he did end up voting with Bernanki on a
13:33
Speaker 4: bunch of the measures, he really criticized it immediately afterwards,
13:37
Speaker 4: and it's brought up in Bernanki's own book and many
13:40
Speaker 4: other places. But I find that argument to be fascinating.
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Speaker 4: I think it's undoubtedly true that had the FED not
13:47
Speaker 4: taken the actions they did in two thoy ten, the
13:52
Speaker 4: economy would have stayed much worse for longer. I don't
13:55
Speaker 4: think there's much of an argument against that. I also
13:58
Speaker 4: do think that letting Congress kind of off the hook
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Speaker 4: now in two of the last big financial crises, I
14:04
Speaker 4: really do view the FED as allowing Congress off the
14:07
Speaker 4: hook to some large degree, both in twenty twenty and
14:10
Speaker 4: in two thousand and eight. By doing the things that
14:13
Speaker 4: they did, right by the FED going in there and saying, hey,
14:15
Speaker 4: we are going to backstop the corporate bond market during
14:18
Speaker 4: twenty twenty in two thousand and eight, by dramatically expanding
14:21
Speaker 4: its violence sheet, it made it so that Congress didn't
14:24
Speaker 4: need to pass laws to shore things up in a
14:27
Speaker 4: bigger way. And I see that expansion as having been
14:30
Speaker 4: pretty consistent over the last two decades of Congress kind
14:33
Speaker 4: of abdicating economic responsibility in favor of just making the
14:38
Speaker 4: FED deal with it. And I get why you want
14:40
Speaker 4: to do that, because it's really tough to get reelected
14:42
Speaker 4: after bailing out banks and doing those things. But the
14:46
Speaker 4: reason that the FED is so prolific is because of
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Speaker 4: this expansion over the course of the last two decades.
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Speaker 4: And I'm curious as to whether you think that's a
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Speaker 4: good or bad thing.
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Speaker 2: Okay, I got to think about this, because there's a
14:58
Speaker 2: lot to digest there, and I'm just you know, it's
15:02
Speaker 2: working its way through the lower intestines. So I think
15:06
Speaker 2: that as I look at it, I think two things
15:11
Speaker 2: are are true. The first is that Congress has, by
15:15
Speaker 2: the way, not just with anything related to the economy,
15:18
Speaker 2: but with a whole bunch of things. It's kind of
15:20
Speaker 2: abviegated responsibility over the last like twenty to thirty years.
15:23
Speaker 3: Either to the executive branch or to.
15:26
Speaker 2: Correct. So I don't think this is unique to that piece.
15:30
Speaker 2: It's generally like a nice place to work, you know,
15:32
Speaker 2: six months out of the year you get some cushy
15:34
Speaker 2: days off and everything, nice pension. You can still trade
15:39
Speaker 2: stocks with insider information and stuff like that if you're
15:41
Speaker 2: a congressman to hear about everything, but make any decision
15:44
Speaker 2: what a gig like who wouldn't want to be there.
15:47
Speaker 2: But with regards to the FED, you know, kind of
15:50
Speaker 2: exceeding its authority.
15:53
Speaker 4: And I'm not saying they exceeded it necessary because nothing
15:56
Speaker 4: that they've done has been determined to be illegal, but
15:58
Speaker 4: they certainly expanded the authority.
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Speaker 2: They've expanded it. Yes, I think that it is something
16:05
Speaker 2: where if you view what financial markets are today, and
16:09
Speaker 2: this is not my uh you know, word creation. Unfortunately
16:14
Speaker 2: I wish it were, but it's it's not mine. Financial
16:16
Speaker 2: markets have become political utilities today, and what I mean
16:20
Speaker 2: by that is the main use of financial markets now
16:24
Speaker 2: is to talk about how well financial markets are doing. Okay,
16:29
Speaker 2: it's it's it's no longer just about you know, price discovery.
16:32
Speaker 2: I know, is this doing well or it's that it's no.
16:34
Speaker 2: We want to have a good stock market, and I'm
16:37
Speaker 2: not saying we should like want bad ones, but occasionally,
16:40
Speaker 2: like you have to like let the crap go out
16:43
Speaker 2: in order to you know, actually have you know, good
16:48
Speaker 2: investments that are producing better you know, productivity and things
16:51
Speaker 2: for people. You don't want to just like support things
16:55
Speaker 2: that are unprofitable in perpetuity. That's not useful for anyone,
17:00
Speaker 2: you know.
17:00
Speaker 3: You mean capitalizing gains and socializing losses.
17:03
Speaker 2: Yeah, generally, like that stuff kind of sucks. It's kind
17:05
Speaker 2: of what everyone hated from two thousand and eight. It's like, hey,
17:07
Speaker 2: all of the gains accrue to all the people on
17:09
Speaker 2: Wall Street, but now you're gonna kick us out of
17:10
Speaker 2: our homes. Like that sucks, Like, no, how come no
17:13
Speaker 2: one bailed us out? And the problem is that the
17:15
Speaker 2: FED does. Unfortunately, when they take action, it's often in
17:22
Speaker 2: that fashion. It's, hey, like a bunch of stuff is
17:25
Speaker 2: kind of blown up, and we're going to keep the
17:29
Speaker 2: financial system together in order to prevent the people that
17:31
Speaker 2: cause this blowing up from you know, kind of going
17:35
Speaker 2: under because if they went under, the whole thing would
17:37
Speaker 2: go bad.
17:38
Speaker 4: Whereas Congress wouldn't have to make that specific no.
17:40
Speaker 2: To be fair, look, Congress can throw in twenty twenty.
17:43
Speaker 2: I kind of disagree with one of your premises because
17:45
Speaker 2: Congress threw like four trillion dollars at the problem then,
17:48
Speaker 2: and arguably through too much money at the problem, which
17:51
Speaker 2: is why we got at least some of the inflation
17:53
Speaker 2: that we got, but it was at least money coming
17:56
Speaker 2: out to the average person and not just going to
18:00
Speaker 2: you know, bailing out giant banks.
18:01
Speaker 4: Right, there was not as much of a vacuum as
18:04
Speaker 4: there was no eight where you know again in O eight,
18:07
Speaker 4: I don't think lawmakers did enough.
18:10
Speaker 3: Or had enough.
18:10
Speaker 2: Well, remember the vote on TARP failed, and that's like
18:13
Speaker 2: and then markets crashed and they had to like come
18:15
Speaker 2: back and pretty much BURNANKI and Geitner had to come
18:18
Speaker 2: in and be like, get the you guys, if you
18:19
Speaker 2: don't do this, we're not going to go to work.
18:22
Speaker 2: We can't go to work tomorrow, like there will be
18:25
Speaker 2: nothing left. So I think that ultimately I'm a big
18:31
Speaker 2: believer that you want to treat the FED the exact
18:33
Speaker 2: same way that you treat any other instrument of power
18:36
Speaker 2: in government, which is, imagine the person that you think
18:40
Speaker 2: least qualified to run it running it and restrict its
18:43
Speaker 2: powers appropriately. And so I don't think we've done a
18:48
Speaker 2: particularly good job of doing that in the last again,
18:52
Speaker 2: kind of forty years or so. It's been a long
18:55
Speaker 2: run to get to this point. And I think unfortunately
18:59
Speaker 2: our sponse when we see, you know, institutions doing something
19:03
Speaker 2: we don't like, rather than saying, oh, like we need
19:05
Speaker 2: to pull back that authority, it's no, we just need
19:08
Speaker 2: to get someone in new who will do it better.
19:10
Speaker 3: And like that reality, most people act the same way
19:12
Speaker 3: with it.
19:13
Speaker 4: That's kind of like what it seems like here is
19:15
Speaker 4: it's like, hey, we don't like the job that Jay
19:17
Speaker 4: Powell is doing, We'll just get someone new, And well,
19:20
Speaker 4: maybe we need to rethink how the whole.
19:21
Speaker 2: Thing is actually being operated instead. Let's take a quick break.
19:26
Speaker 2: When we return, it's Wall Street Watch.
19:39
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Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
19:51
Speaker 1: Street Watch a complete look at what's moving markets so
19:54
Speaker 1: far today right here on the Financial Exchange radio network.
20:00
Speaker 5: The markets are negative territory after President Trump officially selected
20:04
Speaker 5: Kevin worsh as the next chairman of the Federal Reserve.
20:08
Speaker 5: Right now, the Dow is down over four tenths of
20:10
Speaker 5: a percent, or two hundred and eleven points lower. SMB
20:13
Speaker 5: five hundred is off nearly half a percent or thirty
20:16
Speaker 5: two points lower, Nasdaq down by two thirds of a percent,
20:19
Speaker 5: Russell two thousands down over one percent, ten Your Treasure
20:23
Speaker 5: reeled up two basis points at four point two four
20:26
Speaker 5: to seven percent, and Crew to Oil edging higher. Not
20:29
Speaker 5: a lot of movement there, trading its sixty five dollars
20:32
Speaker 5: and fifty four cents a barrel. Apple posted blowout iPhone
20:36
Speaker 5: sales in profit for the fourth quarter with the tech
20:38
Speaker 5: giants saw revenue from iPhones climb twenty three percent compared
20:42
Speaker 5: to the prior year. However, investors are concerned about rising
20:46
Speaker 5: materials costs for Apple, particularly memory in chips due to
20:51
Speaker 5: a I data center demand. Apple shares a down over
20:55
Speaker 5: one percent. Meanwhile, verizonbeat revenue expectations and offered a bullish forecast,
21:00
Speaker 5: saying it expects to add between seven hundred and fifty thousand,
21:03
Speaker 5: one million post paid phone connections this year, verizonstock jumping
21:08
Speaker 5: eight percent higher Elsewhere sand Dis shares rallying thirteen percent
21:12
Speaker 5: after the data storage maker posted quarterly results that beat expectations.
21:17
Speaker 5: Sand Disk also offered a solid guidance that impressed footwear
21:21
Speaker 5: company Deckers Outdoor posted solid quarterly results boosted by Hoka
21:25
Speaker 5: running shoes, sending shares up by fourteen percent. Visa beat
21:30
Speaker 5: earnings expectations driven by strong holidays spending by consumers. However, however,
21:35
Speaker 5: Visa shares down by two percent. In over too Energy,
21:39
Speaker 5: where Chevron posted fourth quarter earnings that beat analysts forecast
21:42
Speaker 5: due to record oil production, that stock up by one percent.
21:46
Speaker 5: On the other hand, ex On Mobile shares are off
21:49
Speaker 5: one percent despite the oil giant beating fourth quarter expectations.
21:54
Speaker 5: I'm Tucker Silva, and that is Wall Street.
21:56
Speaker 3: Watch.
21:57
Speaker 2: A couple other things that I want to discuss, just
22:02
Speaker 2: minor things that as it relates to more logistical items
22:06
Speaker 2: for Worsh's nomination. The first is that in a post
22:14
Speaker 2: was it on Twitter? Where the heck was it? Wherever
22:16
Speaker 2: it was? Hang on? I just want to find it
22:18
Speaker 2: just so that I can quote this accurately here. But
22:22
Speaker 2: in a post somewhere on social media. Senator Tom Tillis
22:26
Speaker 2: has indicated that he will hold up the Worsh nomination
22:31
Speaker 2: at this point until the investigation of the Federal Reserve
22:38
Speaker 2: is walked back by the Justice Department. So here's why
22:43
Speaker 2: this matters. I'll read his It was a post on Twitter.
22:47
Speaker 2: Kevin Warrish is a qualified nominee with a deep understanding
22:50
Speaker 2: of monetary policy. However, the Department of Justice continues to
22:53
Speaker 2: pursue a criminal investigation in a Chairman Jerome power based
22:56
Speaker 2: on committee testimony that no reasonable person could construe is
22:59
Speaker 2: possessing minal intent. Protecting the independence of the Federal Reserve
23:03
Speaker 2: from political interference or legal intimidation is non negotiable. My
23:07
Speaker 2: position is not changed. I will oppose the confirmation of
23:09
Speaker 2: any Federal Reserve nominee, including for the position of Chairman,
23:13
Speaker 2: until the DJ's inquiry into Chairman Palace fully in transport
23:16
Speaker 2: apparently resolved. The reason why this matters is that Tillis
23:20
Speaker 2: is a member of the Senate Banking Committee. Now, if
23:22
Speaker 2: you're not familiar with the Senate Banking Committee, it has
23:24
Speaker 2: twenty four members on it, and right now it's composed
23:27
Speaker 2: of thirteen Republicans and eleven Democrats. In order to get
23:31
Speaker 2: someone to pass out of committee, you need a majority,
23:35
Speaker 2: which means at least thirteen. Otherwise it's a fifty to
23:37
Speaker 2: fifty deadlock and there is no tie breaking vote. You
23:40
Speaker 2: don't get the Vice President coming down to vote in
23:42
Speaker 2: this because it's a committee, not the full Senate. So
23:45
Speaker 2: what it means is that basically, if Tillis and every
23:49
Speaker 2: Democrat were to say no, we are not voting for
23:53
Speaker 2: this person, it's a twelve deadlock and the nominee does
23:57
Speaker 2: not get out of committee to the full Senate for confidence.
24:01
Speaker 2: That's why it matters. Does this actually end up becoming
24:05
Speaker 2: a problem. I have no idea, Like, I don't know
24:09
Speaker 2: where we're going to be three months from now, but
24:12
Speaker 2: this is something that you know, could potentially have an
24:16
Speaker 2: impact on this process, though I don't really know, and
24:19
Speaker 2: I suspect that there is some resolution that is come
24:24
Speaker 2: to before you know, this would become a real issue.
24:28
Speaker 2: So we'll see. The Other thing that I did find interesting,
24:30
Speaker 2: or I guess just kind of comical this week is
24:33
Speaker 2: it was two days ago when President Trump said that
24:35
Speaker 2: he was going to announcing his pick for FED chair
24:37
Speaker 2: next week. And today is not next week. And so again,
24:43
Speaker 2: I think this is interesting just in terms of, like
24:46
Speaker 2: what changed that made the President want to make the
24:50
Speaker 2: nomination this week as opposed to next week. And I
24:53
Speaker 2: don't have any great like theory ask this. I don't
24:57
Speaker 2: have any idea why it will be the case, but
25:01
Speaker 2: I do think that something did, and I'm just trying
25:04
Speaker 2: to make sense of it because, you know, markets have
25:07
Speaker 2: been moving quite a bit, there was a FED meeting
25:09
Speaker 2: this week. You know, there's a lot of stuff that
25:11
Speaker 2: has been going on, a bunch of earnings reports. You know,
25:15
Speaker 2: there's been concern about the dollar and this and that.
25:17
Speaker 2: Like did any of these play into the timing of
25:19
Speaker 2: the decision? That's just something that I think is interesting
25:23
Speaker 2: to think about. I don't really have a firm answer
25:26
Speaker 2: on it, but it was something that caught my attention
25:28
Speaker 2: in terms of, oh, gee, like I wasn't expecting this
25:31
Speaker 2: until next week. Yeah, and here it is today, Like
25:34
Speaker 2: I didn't think we'd be talking about this today.
25:35
Speaker 3: Yeah. It's a fair point.
25:37
Speaker 4: I mean, clearly, it probably takes a bit of the
25:40
Speaker 4: wind out of the sales of what Jay Powell has
25:42
Speaker 4: to say over the course of the next week.
25:44
Speaker 3: But again, if you're doing it next week versus this week. Yeah.
25:47
Speaker 4: J Pewell had the mic and people have been asking
25:49
Speaker 4: him a lot of those questions about what he will
25:51
Speaker 4: do next, So yeah, there might be something to that.
25:54
Speaker 2: Jock Stalk a little bit about Apple earnings from yesterday.
25:59
Speaker 2: The Fruit Company went and posted revenue of eighty five
26:03
Speaker 2: point three billion dollars.
26:05
Speaker 3: Is that good?
26:06
Speaker 2: They're not a fruit company k selling any five point
26:08
Speaker 2: three billion dollars. Eighty five point three billion dollars. That's
26:11
Speaker 2: up twenty three percent from the prior year. So again,
26:16
Speaker 2: like just do the math. There's about ninety days in
26:18
Speaker 2: a quarter. That's almost a billion dollars a day in revenue.
26:23
Speaker 2: Granted it's the holiday season and everyone's buying you know,
26:26
Speaker 2: phones and iPads and this and that.
26:28
Speaker 3: Does that sound like a budget constrained consumer to you?
26:31
Speaker 4: By the way, I know that, No, I know that
26:34
Speaker 4: a lot's been written about how we're going to be,
26:36
Speaker 4: you know, tightening the belt, But boy did we not
26:38
Speaker 4: do so in the fourth quarter of last year with
26:40
Speaker 4: these types of iPhone sales, which is, by the way,
26:43
Speaker 4: the main thing that contributed to this growth.
26:46
Speaker 2: Now, the big thing is that there are going to
26:51
Speaker 2: be higher costs that are coming for Apple. Particularly listen
26:55
Speaker 2: if if if you're not paying attention here, this is
26:59
Speaker 2: something that I think is worth paying attention to. So
27:02
Speaker 2: you know, if you're driving, turn the volume up so
27:04
Speaker 2: you can hear us. Clearly, there's a very good chance
27:07
Speaker 2: that iPhone prices and other computer related pricing is much
27:11
Speaker 2: higher in the next cycle than where we are today,
27:15
Speaker 2: specifically because of what's going on in the memory world,
27:18
Speaker 2: where computer memory often referred to as RAM rapid access memory.
27:22
Speaker 2: There's all kinds of different kinds, but basically the demand
27:27
Speaker 2: for memory to go into AI, GPUs and things like
27:33
Speaker 2: that that are going into data centers is absolutely through
27:37
Speaker 2: the roof.
27:38
Speaker 4: Like for a long time, Apple was, if not the
27:42
Speaker 4: single biggest buyer, really you know, one of these single
27:45
Speaker 4: biggest buyers and one of the only games in town
27:48
Speaker 4: for purchasing this stuff and had a lot of pricing power.
27:52
Speaker 4: Very suddenly they are completing for all this stuff with Microsoft,
27:54
Speaker 4: Facebook and really with an AI and video on eyeing
28:00
Speaker 4: all this stuff up as quickly as possible.
28:03
Speaker 3: And guess what, they also have deep pockets.
28:05
Speaker 2: And so it's just something where there's only a few
28:07
Speaker 2: companies that can make memory and volume. If you know
28:10
Speaker 2: anything about the memory industry, it is it's another place
28:16
Speaker 2: where capital goes to die because you just have these
28:19
Speaker 2: boom bust cycles that are so intense, and this is
28:22
Speaker 2: going to be the most intense. And you listen to
28:25
Speaker 2: interviews from the CEOs of these companies and they're like, listen,
28:29
Speaker 2: we've had to operate a certain way for the last
28:31
Speaker 2: twenty years because if.
28:32
Speaker 3: We don't, we die.
28:34
Speaker 2: And now we've got so much demand out there, but
28:37
Speaker 2: we can't just pivot our whole business that quickly because
28:40
Speaker 2: we know if we do, this won't last forever and
28:43
Speaker 2: we will die as well. And so it's just something
28:47
Speaker 2: where the demand for memory right now is dramatically greater
28:51
Speaker 2: than supply to the point where, like you look at
28:55
Speaker 2: one of the big suppliers of memory, which is Micron Technologies.
28:59
Speaker 2: This is a company where you pull the chart up
29:02
Speaker 2: and just take a look at it. The stock went
29:06
Speaker 2: nowhere for the better part of twenty years and now
29:11
Speaker 2: has gone up in the last let's see, I want
29:16
Speaker 2: to just make sure I get the time period right.
29:18
Speaker 2: In the last six months, the stock is quadrupled. Now
29:24
Speaker 2: that's pretty wild, Okay, since September actually, so the last
29:28
Speaker 2: five months, the stock is quadrupled. And this is because,
29:32
Speaker 2: like they are just able to charge an arm and
29:34
Speaker 2: a leg because they have so much competition, so much
29:37
Speaker 2: demand for what they produce with very little competition. The
29:41
Speaker 2: other companies that are in this where you're talking SAMSUNGSK Highnex,
29:44
Speaker 2: like there's a few of them, but there's a small
29:47
Speaker 2: number of companies that produce this stuff. There's a ton
29:51
Speaker 2: of demand, and so this is what you get is
29:53
Speaker 2: prices going through the roof. Don't be surprised if in
29:56
Speaker 2: order to maintain margins, Apple has to raise iPhone prices
30:00
Speaker 2: a couple hundred bucks next year. And if they don't
30:03
Speaker 2: want to maintain margins, it's absolutely going to eat through.
30:09
Speaker 1: The margins.
30:10
Speaker 2: They have a good story and this just to tell
30:13
Speaker 2: you like where it is right now in terms of
30:15
Speaker 2: how ridiculous the memory pricing is gotten. Y'all know Costco, right,
30:19
Speaker 2: I've heard of them. Yeah, they sell stuff, yes, lots
30:22
Speaker 2: of it.
30:22
Speaker 1: Yeah.
30:24
Speaker 2: One of the stuff that they sell, Okay, glad you
30:28
Speaker 2: picked up on that. One of the stuff they sell
30:30
Speaker 2: is computers, and in computers there's memory. Yes, they have
30:35
Speaker 2: removed all of the memory from their display computers to
30:37
Speaker 2: prevent people from stealing it.
30:41
Speaker 3: Wow.
30:41
Speaker 2: Yeah, that's where we've gotten to is you can't have
30:45
Speaker 2: actual memory in the display computers because people have been
30:48
Speaker 2: stealing it.
30:48
Speaker 1: Out.
30:49
Speaker 2: Let's take a quick break. When we return, we'll talk
30:52
Speaker 2: about some IPO plans after this.
30:54
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31:24
Speaker 3: Chuck, guess what day it is?
31:27
Speaker 2: Friday, January thirtieth, twenty twenty.
31:29
Speaker 4: Six, last weekday of January and therefore the last opportunity
31:34
Speaker 4: we have to talk about the guide from Armstrong Advisory
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Speaker 4: Social Security and medicare. We talked to you about this
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Speaker 4: of January and therefore your last opportunity to.
31:49
Speaker 3: Get your hands on this thing.
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Speaker 4: And I think really the point that I would make
31:55
Speaker 4: about this one is these happen to be some of
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Speaker 4: the most common questions that any financial advisor gets. How
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Speaker 4: do the rules work if I'm in my fifties plus
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32:12
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32:13
Speaker 3: How do I actually do it?
32:14
Speaker 4: Like people always say like, hey, here's the age that
32:17
Speaker 4: you should sign up for social Security, and then it's
32:19
Speaker 4: kind of like, well, how do I sign up for
32:21
Speaker 4: social Security? And this Yeah, it's like it kind of
32:25
Speaker 4: reminds me of the Office episode. You can't just declare bankruptcy.
32:28
Speaker 4: You actually have to go and do something. Yeah, I
32:30
Speaker 4: just claim social Security. I claim social Security. That's not
32:33
Speaker 4: how we w You just write them a letter, right,
32:34
Speaker 4: you know? So this guide goes through it all, all
32:37
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32:42
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32:46
Speaker 4: about it in the context of your greater financial plan.
32:49
Speaker 4: If you would like your free copy of our guide,
32:51
Speaker 4: like I said, last few days of the month, here
32:53
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32:56
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32:59
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33:20
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
33:22
Speaker 1: registered investment advisor. Nothing in the ad or in any
33:25
Speaker 1: Armstrong guide a specific financial, legal or tax advice. Consult
33:28
Speaker 1: your own financial, tax, and estate planning advisors before making
33:31
Speaker 1: any investment decisions. Armstrong may contact you to offer investment
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Speaker 1: advisory services.
33:36
Speaker 2: We've got a few different IPOs that now are being
33:39
Speaker 2: talked about in the AI space for this year Wall
33:42
Speaker 2: Street Journal exclusive saying that OpenAI plans a fourth quarter
33:46
Speaker 2: IPO to try to beat Anthropic to market. You also
33:49
Speaker 2: had reporting from I think it was Reuter's yesterday that
33:53
Speaker 2: SpaceX is reportedly trying to buy Xai en route to
33:58
Speaker 2: trying to IPO itself. And so I gotta be honest.
34:04
Speaker 2: All I can think of is everyone wants to head
34:07
Speaker 2: for the exits. It's just a rush to get there.
34:10
Speaker 2: Giving the scale of this, and it's compounded specifically by
34:15
Speaker 2: this piece here in the Financial Times that I sent
34:19
Speaker 2: to Tucker esterday because I was like, we've got to
34:22
Speaker 2: cover this in a.
34:23
Speaker 4: First sentence, I can relate to Internet companies are in
34:26
Speaker 4: denial about getting fat.
34:27
Speaker 2: Same We've all been there, companies, We've all been there.
34:30
Speaker 2: But here's the thing is that ultimately companies, these companies
34:36
Speaker 2: right now will use Meta as the example, they're going
34:38
Speaker 2: to be spending about one hundred and thirty billion dollars
34:40
Speaker 2: on CAPEX this year. And what you end up with
34:43
Speaker 2: then is that you have depreciation that has to be
34:47
Speaker 2: taken over the useful life of that piece. I'm going
34:51
Speaker 2: to just read a couple things because I think this
34:53
Speaker 2: spells it out more clearly than I would be able
34:55
Speaker 2: to otherwise. And basically, here you go. The depreciation is
34:59
Speaker 2: a non ca cost, the money having already been spent.
35:02
Speaker 2: Any change to useful life assumptions has a big effect
35:04
Speaker 2: on GAPP income. GAAP generally accepted accounting principles, so basically
35:08
Speaker 2: a depreciation comes through to your income. For example, Google
35:12
Speaker 2: owner Alphabet raised earnings guidance in twenty twenty three by
35:15
Speaker 2: three billion by increasing the longevity of data center equipment
35:18
Speaker 2: by a year or two. So you can manipulate your
35:20
Speaker 2: earnings by changing your assumptions there, which is not necessarily wrong.
35:24
Speaker 2: Like I'm not saying there's anything nefarious. It might be, Hey,
35:27
Speaker 2: we figured out a way to make our stuff last longer,
35:29
Speaker 2: and so great, you can do that. The second problem
35:32
Speaker 2: relates to timing the value of a data center under
35:34
Speaker 2: construction is held on a company's balance sheet, but depreciation
35:38
Speaker 2: is only being applied after it becomes operational. Data centers
35:41
Speaker 2: take years to build, so the delay between a capital
35:44
Speaker 2: outlay and net income deduction can be very long. So
35:47
Speaker 2: just because you're building it, it doesn't start depreciating right away.
35:49
Speaker 2: It's only once you start operating it. Also, Kapix adds
35:52
Speaker 2: to a company's book value, showing up immediately in the
35:55
Speaker 2: cash flow statements. Sorry, I know this is accounting on
35:57
Speaker 2: the radio, but it's important here and so doesn't have
36:00
Speaker 2: a parallel increase in depreciation expense on the income statement.
36:04
Speaker 2: Comparing the former with the latter will exaggerate the average
36:06
Speaker 2: asset longevity, and basically what you end up with here
36:10
Speaker 2: is a situation where you're getting to the point now
36:14
Speaker 2: where depreciation as a percentage of revenue for basically the
36:19
Speaker 2: last ten years, was running like five to ten percent
36:21
Speaker 2: for a lot of these companies, it's going to start
36:24
Speaker 2: becoming between twenty and thirty five percent. So a huge
36:29
Speaker 2: chunk of revenue is now going just to depreciation for
36:32
Speaker 2: stuff you've already built. If you don't get a corresponding
36:36
Speaker 2: revenue increase, your earnings go down.
36:39
Speaker 4: I mean, fundamentally, what One of the major things that
36:42
Speaker 4: has made companies like Google, Meta and others so incredibly
36:46
Speaker 4: attractive is that they are able to run these massively
36:49
Speaker 4: profitable businesses because of this exact factor, they haven't needed
36:53
Speaker 4: to spend a ton of money on this type of
36:56
Speaker 4: infrastructure build out. When we talk about capital and intensive businesses,
37:01
Speaker 4: we often criticize them as terrible businesses to run, right,
37:04
Speaker 4: the auto industry, the plane manufacturing business. They are really
37:10
Speaker 4: difficult businesses because they are so mining capital intensive that
37:15
Speaker 4: one misstep leads you to a wrong place, and that
37:17
Speaker 4: has not defined these companies in the past and suddenly
37:21
Speaker 4: is starting to.
37:21
Speaker 2: The other thing is we continue to see more and
37:23
Speaker 2: more new releases that lead me to believe that the
37:26
Speaker 2: actual models that are being run here being commoditized as
37:29
Speaker 2: they become more and more similar. You don't want to
37:34
Speaker 2: be anywhere near a commoditized business, especially a CAPEX intensive one.
37:38
Speaker 2: The place that I think it's becoming interesting to look
37:41
Speaker 2: at is the stuff produced by those models, the different
37:45
Speaker 2: apps and software and stuff that you can produce there,
37:47
Speaker 2: which is probably why software stocks are getting whacked to
37:49
Speaker 2: start the year. You're getting to the point where there's
37:52
Speaker 2: some really interesting stuff going on there. But what if,
37:55
Speaker 2: again we've talked about everyone's being priced in as a winner.
37:58
Speaker 2: What if the model makers are not the winners, but
38:00
Speaker 2: it's the stuff produced by the model that ends up
38:03
Speaker 2: being the winner. Why would you want to own the
38:06
Speaker 2: company that has to produce the model.
38:07
Speaker 3: A lot of layers to this.
38:08
Speaker 2: There's a lot to look at here, and I think
38:11
Speaker 2: at all points to why these companies are trying to IPO. Now,
38:14
Speaker 2: let's take a quick break here. We got our two
38:16
Speaker 2: coming up in a little bit.