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Stocks Are Ignoring the Oil Problem · The Financial Exchange Show

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1:03
Speaker 1: This is the Financial Exchange with Chuck Zada and Mike Armstrong.
1:10
Speaker 2: Honeyho, it's Chuck, Mike and Tucker with you here, and
1:16
Speaker 2: Happy May first to everyone, the last day of the week,
1:20
Speaker 2: the first day of the month, full moon. A lot
1:24
Speaker 2: happening in terms of the calendar and space right now.
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Speaker 3: Yeah, I really hadn't added the full moon to the list,
1:31
Speaker 3: but it's a Friday.
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Speaker 4: Why not.
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Speaker 2: Do you know that this is actually going to be
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Speaker 2: a blue moon month? Oh yeah, two full moons in
1:37
Speaker 2: the month of May. So Happy May to everyone, and
1:42
Speaker 2: we're gonna kick things off talking about this piece from
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Speaker 2: the New York Times. Stocks in April on a high
1:47
Speaker 2: even as oil prices touch new peak. And here's the
1:50
Speaker 2: deal is, for the month of March, stocks and oil
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Speaker 2: were negatively correlated, meaning that as oil went up, stocks
1:58
Speaker 2: went down. For the month of April, stocks and oil
2:04
Speaker 2: are positively correlated. Specifically for the last two and a
2:08
Speaker 2: half weeks now. Oil has gone on West Texas Intermediate
2:11
Speaker 2: from eighty dollars a barrel up to a touch one
2:14
Speaker 2: ten briefly and a couple days ago, but you know
2:17
Speaker 2: since has since reversed a little bit. We'll talk about
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Speaker 2: some of the mechanics on that. If we want to
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Speaker 2: I don't know if we want to, but it's oil's
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Speaker 2: gone up twenty five percent in the last couple weeks,
2:28
Speaker 2: and stocks have shrugged it off, and the S and
2:31
Speaker 2: P five hundred during that same time has gone from
2:36
Speaker 2: let's see about yeah, sixty nine hundred up to seventy
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Speaker 2: two sixty, so three four percent on the smp SO.
2:43
Speaker 2: Stocks up, Oil up is what we are seeing right now,
2:47
Speaker 2: and I don't think it's entirely irrational if you're just
2:50
Speaker 2: looking at the economic data that we've been getting. The
2:55
Speaker 2: labor market seems to be firming up a little bit.
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Speaker 2: We continue to see very low initial unemployment claims and
3:03
Speaker 2: continuing claims are declining. Actually, we are seeing signs that
3:09
Speaker 2: job openings are starting to come online again, and you've
3:13
Speaker 2: got all kinds of activity and freight markets. You talk
3:16
Speaker 2: to anyone in the trucking or railroad industry and they're like,
3:18
Speaker 2: it's absolutely nuts right now. Manufacturing is cooking in Q one.
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Speaker 2: It may be a restocking cycle, it may not be,
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Speaker 2: but you can't deny what's happening. Like things look good
3:29
Speaker 2: there and so couple that with you know, good earning
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Speaker 2: so far through the quarter, and ultimately the picture that
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Speaker 2: you get is one where Yeah, to this point, energy
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Speaker 2: prices have gone up a lot. We don't really like it,
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Speaker 2: but you'd be hard pressed to be like, hey, this
3:45
Speaker 2: is dramatically altered the trajectory of the US economy and
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Speaker 2: the data to what we've seen to this point.
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Speaker 4: I think that's fair. That's the read. So where do
3:54
Speaker 4: we end April?
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Speaker 3: Get up nine percent plus on the s and P
3:57
Speaker 3: five hundred after obviously dropping for the month of March.
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Speaker 3: I think you're to date we're up around five on
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Speaker 3: the SMP and it's been a yeah. Again, it's been
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Speaker 3: two different markets, right, a energy market that's still SMBO
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Speaker 3: up ten point four for then the.
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Speaker 2: Month of April, Yeah, opened at sixty five fifty six,
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Speaker 2: closed at seventy two oh nine. And so ultimately, like
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Speaker 2: where where we sit right now is that the market
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Speaker 2: is pricing in that what we have seen from the
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Speaker 2: economic data is going to continue, and and quite honestly,
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Speaker 2: if it does, the market's pricing and the right thing.
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Speaker 2: The question is going to be is that what we
4:40
Speaker 2: actually get?
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Speaker 4: And I think it is.
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Speaker 2: A very very real question. Because we went through the
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Speaker 2: math on yesterday's show. We went through a little bit
4:49
Speaker 2: of it on Wednesdays. I'm not going to do it
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Speaker 2: every day for the entire summer because that would be
4:54
Speaker 2: kind of a horrible show. Nothing likes some good radio math.
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Speaker 2: But the math works out this way. If nothing else
5:01
Speaker 2: changes in the strait of horror moves, the US oil
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Speaker 2: system reaches minimum operational capacity sometime between early July and
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Speaker 2: late September, most likely in the middle of that, and
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Speaker 2: at that point prices need to rise further, and leading
5:17
Speaker 2: up to that point, prices need to rise further in
5:19
Speaker 2: order to destroy demand. And so this is what we
5:23
Speaker 2: are going to be reckoning with as we head into
5:27
Speaker 2: the summer, is how long does that potentially last?
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Speaker 3: Well, then that's just a lovely transition to talk about
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Speaker 3: Exonmobile and Chevron and there executives' views on this oil
5:36
Speaker 3: price shock and how they are responding to it. And
5:40
Speaker 3: if there is one theme right now that you are
5:43
Speaker 3: hearing from oil executives, it is we don't think this
5:47
Speaker 3: is going to prolong. We are not expanding capacity because
5:51
Speaker 3: six months from now we think that oil prices will
5:53
Speaker 3: be lower than where.
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Speaker 2: They are right now, and even beyond that, not even
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Speaker 2: the six months. Remember that when you talk about and oil, Well,
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Speaker 2: you're talking about, Hey, is this going to be profitable
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Speaker 2: over a ten to fifteen year period. That's that's ultimately
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Speaker 2: what the math is. And Mike, I have a question
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Speaker 2: for you on the back end of this crisis, what
6:18
Speaker 2: is the what do you think countries that can't produce
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Speaker 2: very much oil are going to be doing in order
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Speaker 2: to make sure they don't end up back here again.
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Speaker 4: Buying a bunch of oil and storing it in giant bins.
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Speaker 4: They're going to be doing that.
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Speaker 2: They are also going to be saying, hey, how can
6:36
Speaker 2: we diversify our needs away from hydrocarbons that we can't
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Speaker 2: produce ourselves. So nukes if we can build them, nuclear
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Speaker 2: everything like all this stuff where it's like, hey, we
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Speaker 2: don't have to have things shipped through the straight of
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Speaker 2: hooem moves great, let's figure out how.
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Speaker 4: To build that.
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Speaker 2: So I think that part of this is also energy
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Speaker 2: executives looking at the longer term picture in saying yes,
7:02
Speaker 2: in the short term next one to three years, there
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Speaker 2: is absolutely going to be massive demand for our product.
7:12
Speaker 2: On the back end of that, it's a little more
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Speaker 2: uncertain because countries that can't produce their own oil because
7:18
Speaker 2: they don't like it just doesn't exist there in the ground.
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Speaker 2: They're gonna say, okay, no, this is not for us.
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Speaker 2: And the other thing, the ones that do have those
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Speaker 2: resources that need to fill that extra demand in the
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Speaker 2: short term, they're probably gonna spool up some other production
7:35
Speaker 2: as well. On the margin. You already see this in
7:37
Speaker 2: terms of how Mexico's talking about oil, Brazil is talking
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Speaker 2: about it like you see this in these areas, And
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Speaker 2: so you get to a place where, yes, oil prices
7:48
Speaker 2: and again, who knows exactly how long this particular situation
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Speaker 2: in hormones takes to resolve, but either way, oil prices
7:56
Speaker 2: are going to remain elevated above pre war levels for
7:59
Speaker 2: probably two to three years absent a recession.
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Speaker 3: So getting to specifics here, Exon Mobile mentioned that about
8:06
Speaker 3: fifteen percent of their worldwide output remains offline right now
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Speaker 3: due to war related production outages that cost them some
8:13
Speaker 3: four hundred million dollars. Fortunately, though, the excess price that
8:18
Speaker 3: they're getting for selling their oil resulted in a gain
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Speaker 3: of about one point seven billion dollars, so the four
8:23
Speaker 3: hundred million dollar loss was more than offset by the
8:25
Speaker 3: higher prices they're selling their product. At You have to
8:29
Speaker 3: remember companies like Exon Mobile are so heavily integrated that
8:33
Speaker 3: they have constant levers to make money and lose money
8:36
Speaker 3: in just about any scenario. They refine product, they sell
8:38
Speaker 3: it at gas stations, they pump it out of the ground,
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Speaker 3: they transport it across the globe, and so depending on
8:45
Speaker 3: the environment, they make and lose money. But yes, any
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Speaker 3: company like Exon, like Chevron VP are going to benefit
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Speaker 3: from much higher oil prices, regardless of how much production
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Speaker 3: generally speaking, will go offline during that period of time.
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Speaker 3: But yeah, the key message that I think is being
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Speaker 3: delivered from companies in the US, both big and small,
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Speaker 3: in the oil production space are we just aren't. Our
9:10
Speaker 3: investors are not going to give us the room to
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Speaker 3: go expand production.
9:15
Speaker 2: And if you want the reason why, the answer can
9:19
Speaker 2: be found in the twenty tens if you take a
9:22
Speaker 2: look back throughout that period. And I'm pulling it up
9:25
Speaker 2: right now just so that I can speak authoritatively on
9:29
Speaker 2: the topic. Ah, Yes, it's the summer of twenty fourteen.
9:35
Speaker 4: The World Cup is in Brazil, I believe. I think
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Speaker 4: it was that one.
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Speaker 2: The World Cup was somewhere and people were playing soccer
9:45
Speaker 2: and they were happy to be playing soccer because the
9:48
Speaker 2: price of oil had been bludging down from one hundred
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Speaker 2: dollars a barrel down to by the end of twenty fifteen,
9:54
Speaker 2: twenty six dollars a barrel got that low. Yes, Michael,
9:58
Speaker 2: allow me to introduce you to West Texas Intermediate. It
10:02
Speaker 2: is the US crewed benchmark. And at let's see, in
10:06
Speaker 2: September of twenty fourteen, it opened the month at ninety
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Speaker 2: five eighty one a barrel by February first, by February
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Speaker 2: of twenty sixteen, it hit a low of twenty six.
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Speaker 4: Oh five a barrel.
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Speaker 3: Remember the days then you could move out there in
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Speaker 3: your RV and make like one hundred thousand dollars in
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Speaker 3: North Dakota cooking for oil workers.
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Speaker 2: Yeah, that was back in like the early twenty tens.
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Speaker 2: It was one of the few good jobs that you
10:29
Speaker 2: could find then because the rest of the economy kind
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Speaker 2: of sucked. So the reason that I point out this
10:36
Speaker 2: year is because what happened then is the US was
10:39
Speaker 2: going through this shale boom back in the early twenty tens,
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Speaker 2: and Russia and Opek got kind of upset that the
10:46
Speaker 2: US was able to make so much money basically and said, hey,
10:51
Speaker 2: screw you, guys, We're just going to turn on the taps.
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Speaker 2: And so what you ended up with was just this
10:56
Speaker 2: flood of oil coming onto the market that literally cut
10:59
Speaker 2: the price by three quarters. And talk to anyone that
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Speaker 2: worked in the energy industry then and they will tell
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Speaker 2: you it absolutely shredded companies. The amount of money that
11:08
Speaker 2: was lost, not just then but in the five years
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Speaker 2: after with companies just trying to dig out from this
11:14
Speaker 2: was just ridiculous. So energy companies in their boards basically
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Speaker 2: at this point are like, no, we're not going to
11:20
Speaker 2: be doing that again, because they went willy nilly back
11:24
Speaker 2: in the twenty tens and it burned them. And so
11:27
Speaker 2: capital discipline is the name of the game for those
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Speaker 2: guys now, and they don't want to go through that
11:32
Speaker 2: because quite honestly, a lot of the people working at
11:34
Speaker 2: these energy companies now worked at once in the twenty
11:37
Speaker 2: tens that went bankrupt because of overproduction.
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Speaker 4: Yep.
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Speaker 3: So the lesson they've learned is take the higher prices,
11:43
Speaker 3: but don't overproduce.
11:44
Speaker 2: Quick break here, We've got Apple earnings next.
11:48
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Speaker 2: The voicemails are fun because normally you guys have to
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Speaker 2: listen to us for a couple hours a day, and
12:53
Speaker 2: instead you can force us to listen to you.
12:56
Speaker 4: Spice it up, you know.
12:58
Speaker 2: It's uh, it's payback, it's you could say all the
13:01
Speaker 2: things you've always wanted to say.
13:03
Speaker 1: Tuk.
13:03
Speaker 2: I might have to bleep a few of them out
13:05
Speaker 2: if you know, you really say what you think about us,
13:07
Speaker 2: But hey, it's you know.
13:09
Speaker 4: Sit in the chair.
13:10
Speaker 2: You gotta deal with that.
13:11
Speaker 4: No different than going home at night.
13:13
Speaker 2: No, it's all good what happens at your house. Let's
13:18
Speaker 2: talk about this piece from Bloomberg. Apple forecast tops estimates
13:22
Speaker 2: even as max shortage's linger. So we got a couple
13:26
Speaker 2: interesting things here. The first is that Apple is their guidance,
13:32
Speaker 2: as they said, is insane for the upcoming quarter. They
13:36
Speaker 2: guided to fourteen to seventeen percent year over year growth
13:38
Speaker 2: for Q two. Their expectations from analysts was nine point
13:43
Speaker 2: one percent, So Apple's saying yes, like sales are going
13:47
Speaker 2: to go way up. The interesting piece, though, and what
13:51
Speaker 2: I'm wondering about this is Tim Cook again, like Tim
13:55
Speaker 2: Cook's on his way out. Sure he still ended up
13:58
Speaker 2: answering some question in this call that John turnas. I
14:02
Speaker 2: don't know if he didn't want to or how they
14:04
Speaker 2: divided this up, but I found the ones interesting that
14:06
Speaker 2: he talked about specifically because he talked about the memory
14:09
Speaker 2: shortage and said, guys, like, this memory chip problem is
14:14
Speaker 2: not going away anytime soon. He's like, this isn't gonna
14:16
Speaker 2: be like a couple quarters. This is a problem for
14:18
Speaker 2: the foreseeable future. And what I got to tell you,
14:22
Speaker 2: that's sorry, we gotta be clear.
14:23
Speaker 3: I know I've talked about this, but ye, why there's
14:25
Speaker 3: a memory shortage is because of the AI demand.
14:28
Speaker 2: Yes, the artificial intelligence chips that power these data centers
14:32
Speaker 2: use enormous quantities of memory, and because of all the
14:37
Speaker 2: money flowing in there, the AI data centers are willing
14:39
Speaker 2: to pay ridiculous prices like four times as much as
14:43
Speaker 2: a few months ago for these chips. It's gotten to
14:46
Speaker 2: the point where Costco has taken memory chips out of
14:51
Speaker 2: their display computers because they don't want people coming into
14:54
Speaker 2: the store and stealing them. Like that's how crazy it
14:56
Speaker 2: is right now. And Tim Cook said, look, this is
14:59
Speaker 2: gonna be a problem for a wh while. I'm really
15:01
Speaker 2: wondering what happens on Apple's pricing for upcoming products, because again,
15:07
Speaker 2: their margins are still really good right now. But this
15:11
Speaker 2: is eventually going to become problematic if if it stays
15:15
Speaker 2: in this way, because remember when Apple goes and negotiates,
15:20
Speaker 2: they are the out eight hundred pound gorilla in the room.
15:23
Speaker 2: They come in and they say, okay for iPhone, what's
15:26
Speaker 2: the current one that says it's seventeen or twenty six,
15:28
Speaker 2: seventeen iPhone seventeen. Hey, here is the quantities that we
15:33
Speaker 2: need in the pricing and here's the contract. If you
15:35
Speaker 2: want to deal with us, these are the terms, and
15:37
Speaker 2: that's just what they get. That contract was signed before
15:40
Speaker 2: this memory thing became a problem.
15:42
Speaker 3: Right, so that profit margins are reflecting prices that they
15:44
Speaker 3: paid for memory.
15:46
Speaker 5: Right.
15:46
Speaker 2: The iPhone contract, the iPhones that you have right now
15:49
Speaker 2: in your hands, Like if you're going to the Apple
15:51
Speaker 2: store and buying one today, it was made like in
15:54
Speaker 2: Q four of last year and finally got shipped over
15:57
Speaker 2: and then you know, so on and so forth. The
15:59
Speaker 2: question is going to be what happens to pricing as
16:02
Speaker 2: you get into the next generation this fall, And I
16:05
Speaker 2: think that's interesting. But yeah, Apple with again a nice
16:11
Speaker 2: big quarter. You can't call it a nice little quarter.
16:13
Speaker 2: When you did one hundred and eleven billion dollars in sales.
16:16
Speaker 2: That's more than a billion dollars a day of apple
16:19
Speaker 2: stuff that's being sold. It's a whole lot of fruit.
16:21
Speaker 2: And so I mean to be a company doing four
16:25
Speaker 2: hundred plus billion dollars in revenue and you're still growing
16:29
Speaker 2: your revenue with double digits, pretty.
16:31
Speaker 3: Wild, Yeah, it is. That's insane notable. You know, Tim Cook,
16:36
Speaker 3: this was previously known, but September of this year he's
16:39
Speaker 3: he's out.
16:40
Speaker 4: How long has Tim Cooke been seen?
16:42
Speaker 3: I mean fifteen, fifteen years and years? Yeah, that's Tim
16:46
Speaker 3: cooked quite some time. The other piece, the services revenue
16:51
Speaker 3: portion of this.
16:52
Speaker 4: I know they're not realizing a ton right now, but.
16:56
Speaker 3: A lot of I'm trying to think of where Apple's
16:59
Speaker 3: playing in the AI space, because largely they're not right now.
17:02
Speaker 3: They're licensing some technology from Google in order to make
17:06
Speaker 3: their assistant a little bit smarter.
17:08
Speaker 4: But if we see it show up somewhere in the
17:10
Speaker 4: short time, you might.
17:11
Speaker 3: See services revenue boost with you know, people subscribing to
17:15
Speaker 3: these AI models on their mobile devices. I don't think
17:19
Speaker 3: that's gonna be a huge boost, but I continue to
17:21
Speaker 3: wonder how long Apple waits before diving in more to AI.
17:28
Speaker 2: I don't think they're going to just at all. No,
17:33
Speaker 2: I guess here's you know, we always say that Apple
17:38
Speaker 2: tends to wait like Apple's never the first mover.
17:40
Speaker 4: No, they're not.
17:41
Speaker 2: They like to go into markets that other people have
17:43
Speaker 2: already explored, and then they say, okay, this is for us.
17:47
Speaker 2: I don't know that artificial intelligence.
17:49
Speaker 4: Is one where you can really do that.
17:52
Speaker 2: You know, it's kind of like there's a reason why
17:54
Speaker 2: Apple didn't get into search just as an example. Yeah,
17:57
Speaker 2: part of it is they didn't need to because they
17:59
Speaker 2: already had all the data that they need there. I think,
18:02
Speaker 2: quite honestly, they're looking at They're like, you guys can
18:04
Speaker 2: spend all of the money on this if you want,
18:06
Speaker 2: and if we want something, we can license it from you.
18:09
Speaker 2: If you want to be the exclusive provider of AI
18:12
Speaker 2: on Apple, great, you can pay us to do so,
18:14
Speaker 2: just like Google pays us to be the you know,
18:16
Speaker 2: default search engine, and they're happy to take you know,
18:20
Speaker 2: whatever side they want there. Because I don't think you
18:23
Speaker 2: can catch up, quite honestly, if you really believe that
18:25
Speaker 2: the AI the AI race is being run in terms of, hey,
18:30
Speaker 2: you got to build these data centers and models to
18:32
Speaker 2: then you know, have the inference capacity and this, I
18:35
Speaker 2: quite honestly think that if you're trying to start that now,
18:40
Speaker 2: I think there's just too far to go to catch up.
18:43
Speaker 3: It's just amazing to me to see a major tech
18:46
Speaker 3: company avoiding AI and being a beneficiary in the style
18:52
Speaker 3: and receiving benefits in the stock market today.
18:54
Speaker 4: Right AI has been sucking.
18:56
Speaker 3: Up every molecule of oxygen in the room for the
19:00
Speaker 3: last three years, and yet Apple still manages to surprise
19:04
Speaker 3: to the upside while you know, zagging when everybody else
19:07
Speaker 3: is digging.
19:08
Speaker 2: They're the Toyota of techy again. Five years ago, everyone
19:13
Speaker 2: in their grandmother was like, hey, we got to build
19:16
Speaker 2: the electric vehicles. Everyone's gonna want the evs, and Toyo
19:20
Speaker 2: was like that pass and it turned out to be right.
19:26
Speaker 2: Even though the new Highlander is going to be electric
19:28
Speaker 2: only who dow quick break when we come back, We've
19:31
Speaker 2: got Wall Street Watch.
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Speaker 5: The traders are turning the calendar to May, with markets
20:04
Speaker 5: adding to their rally in April, and both the SMP
20:07
Speaker 5: five hundred and NASDAK notched their largest month of gain
20:10
Speaker 5: since twenty twenty, driven by strong earnings and optimism around tech.
20:15
Speaker 5: Right now, the Dow is up by half a percent,
20:18
Speaker 5: SMP five hundred up seven tenths of a percent, NASDAK
20:22
Speaker 5: up nine tenths of one percent, or two hundred and
20:24
Speaker 5: seventeen points. RUSS two thousand is up about a quarter
20:27
Speaker 5: percent ten year, Treasure reeled down three business points at
20:31
Speaker 5: four point three five eight percent, in Oil retreating four
20:35
Speaker 5: percent today trading at one hundred dollars a barrel. Apple
20:39
Speaker 5: gaining five percent after the tech giant reported its iPhone
20:42
Speaker 5: revenue climbed twenty one point seven percent to nearly fifty
20:46
Speaker 5: seven billion dollars in the previous quarter. Meanwhile, Sandis shares
20:51
Speaker 5: are up two percent after the data storage company be
20:53
Speaker 5: earnings expectations and offered stronger than expected guidance. Western Digital
20:58
Speaker 5: also impressed with its quarterly profit fits, yet the stock
21:00
Speaker 5: is down over one percent. Elsewhere, Alassian stock is rallying
21:05
Speaker 5: twenty one percent after the software company reported strong cloud
21:08
Speaker 5: growth and data center revenue. Video game company Roadblocks cut
21:13
Speaker 5: its full year guidance has efforts to boost its safety
21:16
Speaker 5: features weight on its latest results, that stock tanking fifteen percent.
21:21
Speaker 5: Reddit reported double digit sales growth in AD revenue and
21:24
Speaker 5: boosted sales and profit sending shares up by eleven percent,
21:28
Speaker 5: and Chlorox down by nine percent after the consumer products
21:33
Speaker 5: company cut its full year earnings guidance reflecting increased costs
21:37
Speaker 5: from the acquisition of per Purel maker Gojo. I'm Tucker Silva,
21:43
Speaker 5: and that is Wall Street Watch.
21:46
Speaker 2: Let's see, we want to talk some AI stuff for
21:50
Speaker 2: a little bit. Not a day goes by that we
21:52
Speaker 2: don't talk about it.
21:53
Speaker 3: Yeah, this was easily the biggest week we'll get this
21:56
Speaker 3: quarter for earnings from those companies that are driving the spending.
22:00
Speaker 3: So I think it deserves a wee bit more attention,
22:03
Speaker 3: don't you, Chuck, Yes, I do so. Amazon, Microsoft, Meta,
22:08
Speaker 3: and Alphabet all reported earnings two days ago, yes, Wednesday
22:14
Speaker 3: of this week. That market capitalization combined I believe exceeds
22:19
Speaker 3: eleven trillion dollars, and now they're spending on CAPEX four
22:24
Speaker 3: calendar year twenty twenty six now exceeds seven hundred billion dollars.
22:27
Speaker 3: I think it's closing in on seeven to ten okay
22:30
Speaker 3: seven ten. For the year started this year at six
22:32
Speaker 3: hundred billion.
22:33
Speaker 2: The projections next year like eight hundred and thirty in
22:36
Speaker 2: the year after like one d one point one trillion,
22:39
Speaker 2: So it's again we're realistically talking pretty close to three
22:42
Speaker 2: trillion in CAPEX twenty six through twenty eight.
22:45
Speaker 3: So good news and bad news. Good news is we're
22:49
Speaker 3: very clearly feeling it when it comes to things like
22:51
Speaker 3: measurements of GDP. Without this spending, the economy, you know, granted,
22:56
Speaker 3: it's impossible to pull that spending out and guess what
22:58
Speaker 3: the economy would be doing. So it is a major
23:00
Speaker 3: contributor to GDP growth in the first quarter, and I
23:03
Speaker 3: expect that it will remain so for the next several
23:07
Speaker 3: Other good news that I take not every company is
23:08
Speaker 3: being treated equally, right. It's not just hey, because you're
23:11
Speaker 3: spending the money, we are going to reward your shares
23:14
Speaker 3: Alphabet Amazon generally speaking rewarded this year, sorry this quarter,
23:20
Speaker 3: Microsoft's Meta not so much. And so I do like
23:25
Speaker 3: to see that investors are at least differentiating between good
23:32
Speaker 3: plans and uncertain plans when it comes to this AI spend.
23:38
Speaker 3: But I'll tell you, and I know you voiced this
23:41
Speaker 3: early this week, Chuck, is the questions of a year
23:45
Speaker 3: ago about how this is going to be monetized over
23:49
Speaker 3: what time period, and whether or not these companies can
23:53
Speaker 3: actually make a profit on it the way they were
23:56
Speaker 3: on search and advertising and the other businesses that they
23:59
Speaker 3: have remains a very open question and very difficult to
24:03
Speaker 3: make the math work.
24:05
Speaker 2: Yeah, it's one where the only way that I can
24:09
Speaker 2: figure it out is the cost for using AI has
24:15
Speaker 2: to go up quite a bit, which in turn might
24:18
Speaker 2: reduce the demand for AI, which means the cost has
24:20
Speaker 2: to go up more than in order to cover this.
24:22
Speaker 2: And so I think where I land on this is
24:26
Speaker 2: it might be that until you see big improvements in
24:28
Speaker 2: the efficiency of AI, where it may end up being
24:33
Speaker 2: like three or four years from now, is yes, it
24:35
Speaker 2: can do amazing things, but it's not really huge cost
24:38
Speaker 2: savings over employees.
24:40
Speaker 4: Necessarily the humans are cheaper than the robots.
24:43
Speaker 2: It might be that we are until the AI figures
24:45
Speaker 2: out a way to cheapen itself, which I'm sure it's
24:48
Speaker 2: working on as it tries to eliminate us from you know,
24:54
Speaker 2: running the place.
24:56
Speaker 3: The question for the industry as a whole is which
25:00
Speaker 3: company is going to be the first one to.
25:03
Speaker 4: Blink under financial pressure?
25:06
Speaker 3: I think, right, if we're looking for a potential turn
25:09
Speaker 3: in this story, which may not come, but you know
25:12
Speaker 3: already investors are questioning Metow a little bit to say,
25:14
Speaker 3: you know, how exactly are you going to be making
25:16
Speaker 3: money on one hundred and eighty billion dollars of capital expenditure,
25:20
Speaker 3: and does that pressure mount to the point where one
25:24
Speaker 3: of these companies needs to pivot away and say, yeah,
25:27
Speaker 3: you know what, we sank this money. We were planning
25:28
Speaker 3: on spending quite a bit next year. But like we've
25:31
Speaker 3: done with the metaverse or other types of projects that
25:33
Speaker 3: just didn't work out the way we planned, we're going
25:36
Speaker 3: to reshuffle the deck, go back to the drawing board,
25:39
Speaker 3: and go back to what has made us this company
25:41
Speaker 3: in the first place, which is delivering products to your home,
25:45
Speaker 3: or selling cloud capacity, or delivering advertisements to a whole
25:49
Speaker 3: bunch of people at seventy percent profit margins.
25:52
Speaker 4: The question that's.
25:53
Speaker 2: Going to matter for the broader economy then is well,
25:58
Speaker 2: that's fine, but tell me about the debt, because it's
26:03
Speaker 2: one thing to say, okay, like we're gonna pivot away
26:05
Speaker 2: if you're meta in the metaverse. Just as an example,
26:08
Speaker 2: Meta didn't take out any debt to get all metaversical
26:11
Speaker 2: on us. Mark was just like, hey, I want to
26:15
Speaker 2: wear headsets. I think they make me look good. Let's
26:17
Speaker 2: spend forty billion dollars in order to make me look
26:20
Speaker 2: good in a headset with no legs. Thank you, Yes,
26:24
Speaker 2: and that was fine, Like investors eventually tolerated it because
26:27
Speaker 2: the company was making money and it wasn't affecting the
26:29
Speaker 2: bottom line, and that's that's all well and good. But
26:32
Speaker 2: now you've got dudes like Oracle coming in being like, hey,
26:38
Speaker 2: what do you mean cash flow? What does that mean exactly?
26:42
Speaker 2: Because yes, they have to raise a ton of debt
26:45
Speaker 2: in order to cover these costs. And the problem is
26:49
Speaker 2: if that debt gets to a certain size and they
26:53
Speaker 2: just abandon this, the math doesn't really math for some
26:57
Speaker 2: of these companies, Like it becomes proba just in terms
27:00
Speaker 2: of servicing the debt if you go out a few
27:02
Speaker 2: years at these these build rates. And the other piece
27:06
Speaker 2: then is okay, if some of these companies can't service
27:09
Speaker 2: the debt, then how much of it is out there?
27:12
Speaker 2: And what are the broader impacts if some of these
27:15
Speaker 2: companies have to default on it to the US economy.
27:18
Speaker 3: I know that the scale of this spend at this
27:21
Speaker 3: point fores surpasses the spend on things like the Internet
27:25
Speaker 3: build out or railroads or radio dollar wise, not GDP wise.
27:32
Speaker 3: But let's talk about the historical context. And I recognize
27:35
Speaker 3: many many people are going to tell me that AI
27:38
Speaker 3: is different than railroads or different than the internet.
27:41
Speaker 4: So it's not.
27:41
Speaker 3: But well, many people are going to tell me that though,
27:44
Speaker 3: no they're wrong. But can we talk about the historical
27:48
Speaker 3: context of I mean, we still have railroads today. Yes,
27:50
Speaker 3: I don't think we can look at that as a failure.
27:52
Speaker 3: We still have the internet. That's how our show is
27:55
Speaker 3: on radio.
27:55
Speaker 2: If you haven't paid attention to like not paid attention,
27:58
Speaker 2: if you've never read about the bubble that happened in
28:00
Speaker 2: radio in the early twentieth century.
28:02
Speaker 3: Well I'm sure that plenty people haven't. So let's explain
28:04
Speaker 3: how that went, because it's not completely different than what
28:08
Speaker 3: we are experiencing right now.
28:09
Speaker 1: No.
28:09
Speaker 2: What happens is there's an exciting new technology that everyone
28:12
Speaker 2: sees the potential in, and so a ton of capital
28:15
Speaker 2: rushes in. Some of it gets deployed correctly, a lot
28:18
Speaker 2: of it gets deployed incorrectly and can't be profitable because
28:21
Speaker 2: there's just too much money chasing too few returns. What
28:24
Speaker 2: ends up happening in every one of these major cases
28:28
Speaker 2: is you have a technology that does end up transforming
28:32
Speaker 2: the world for decades or centuries afterwards, but a ton
28:37
Speaker 2: of money ends up being lost in the process because
28:40
Speaker 2: there's this rush to invest when in the short term
28:43
Speaker 2: for actually being able to fill the demand, it's just
28:48
Speaker 2: not there. There's just not enough demand to meet the supply,
28:51
Speaker 2: and so you end up with this malinvestment bubble that
28:54
Speaker 2: eventually pops. And so the two things that I think
28:57
Speaker 2: are going to remain true in my opinion. Look, at
29:01
Speaker 2: some point in the future, they're going to be an
29:04
Speaker 2: awful lot of people hurt by the AI bubble. It
29:07
Speaker 2: might still have like years to run, it might have
29:10
Speaker 2: a decade to run. Like I'm not saying this is tomorrow,
29:13
Speaker 2: but ultimately we're going to be using a lot more
29:16
Speaker 2: AI at the end of said bubble than we were
29:20
Speaker 2: at the beginning or even right now. So those two
29:23
Speaker 2: things are true, I think, and they can be.
29:26
Speaker 4: And there will be winners. There'll be a lot of
29:28
Speaker 4: wood losers too. Losers. Let's take a quick break.
29:32
Speaker 2: When we come back, let's talk a little bit about
29:35
Speaker 2: the national debt crossing an important milestone.
29:40
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30:00
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30:50
Speaker 2: So we crossed a milestone on March thirty first, where
30:58
Speaker 2: the publicly held death of the United States of America
31:02
Speaker 2: crossed one hundred percent of GDP. Now, the total debt
31:05
Speaker 2: outstanding UH is higher than that, but a bunch of
31:09
Speaker 2: it's held by the FED and other central banks and
31:11
Speaker 2: things like that, which means it's not publicly held because
31:14
Speaker 2: the central the Fed is fundamentally a different buyer of
31:18
Speaker 2: debt than you or I.
31:21
Speaker 3: Uh.
31:21
Speaker 2: But basically what we have here is we are continuing
31:25
Speaker 2: to run up that debt to GDP ratio because we're
31:28
Speaker 2: running six to seven percent deficits right now with about
31:31
Speaker 2: five percent nominal growth, which means this is going up
31:33
Speaker 2: about one to two percent a year. And so that's
31:37
Speaker 2: kind of where we are.
31:41
Speaker 3: Yeah, it's okay because I see a lot of fundamental
31:44
Speaker 3: seriousness in Washington about dealing with our nation's debt issues.
31:48
Speaker 2: You remember Doze last year.
31:51
Speaker 4: We haven't talked about that in a while, like a
31:53
Speaker 4: week and a half.
31:53
Speaker 2: Yeah, it's uh again, it just was something that fundamentally
31:58
Speaker 2: didn't do anything anything is it relates to dealing with
32:01
Speaker 2: the deficit.
32:02
Speaker 4: It did?
32:03
Speaker 2: You know, a bunch of people left like the federal government.
32:05
Speaker 2: But as we outlined, employment is not the main expense
32:08
Speaker 2: of the federal government, and so if you're not willing
32:11
Speaker 2: to deal with the actual stuff that is, or raise revenue,
32:16
Speaker 2: you're not gonna get to a point where you're actually
32:18
Speaker 2: dealing with the deficit. So that's kind of where we are.
32:22
Speaker 3: Yeah, and you know, again we talked about the deficit,
32:26
Speaker 3: and this isn't directly tied. But obviously we have Social
32:28
Speaker 3: Security and Medicare programs that the debt to GDP. Right,
32:32
Speaker 3: there's no magic number here where this becomes an explosion.
32:35
Speaker 3: Japan's like, yeah, so there is no magic number, but
32:40
Speaker 3: when it comes to Social Security and Medicare there is.
32:43
Speaker 3: In fact, there is a magic date at which we
32:47
Speaker 3: estimate the trust fund will be empty and beneficiaries will
32:50
Speaker 3: receive a twenty some odd percent cut to benefits on
32:53
Speaker 3: Social Security or Medicare. I don't think anybody really has
32:55
Speaker 3: an answer as to what happens in that case. I
32:58
Speaker 3: guess programs get cut and benefits get cut substantially. So
33:02
Speaker 3: you're too fundamentally different issues. And yet, even with those
33:05
Speaker 3: ones where there is a deadline coming, the only Social
33:08
Speaker 3: Security proposals that have gone anywhere over the last few
33:12
Speaker 3: years to raise benefits, which are raise benefits for recipients.
33:16
Speaker 3: There's another one floating around there right now to add
33:18
Speaker 3: an additional benefit for caretakers caregivers. Rather so, anybody that
33:23
Speaker 3: you know, for instance, cares for a child or an
33:26
Speaker 3: adult would get credit years for doing so on Social Security.
33:31
Speaker 3: And therefore wait, hold on, hold on, hold on, yeah, yeah, holding.
33:36
Speaker 2: I want to make sure I'm understanding this. Yeah, and
33:39
Speaker 2: this is not to disparage anyone that is raising children.
33:43
Speaker 4: In place of.
33:46
Speaker 2: Like working a job outside the house. But you're telling
33:49
Speaker 2: me there's a proposal in place that will give people
33:53
Speaker 2: credit for Social Security for doing that despite not paying
33:58
Speaker 2: into the Social Security taxes.
34:00
Speaker 3: The Social Security Caregiver Credit Act of twenty twenty three
34:03
Speaker 3: proposes giving providing up to five years of Social Security
34:06
Speaker 3: earnings credits to unpaid caregivers, protecting their retirement benefits. It
34:10
Speaker 3: covers those caring for dependents under twelve or with chronic
34:13
Speaker 3: illnesses for at least eighty hours a month, aimed at
34:17
Speaker 3: offsetting gaps in employment.
34:21
Speaker 2: Okay, I'd say this in the nicest way possible, but
34:24
Speaker 2: that's completely insane. It's not that that isn't work. That's
34:29
Speaker 2: not what I'm saying. Sure, what I'm saying is that
34:32
Speaker 2: it is fiscally insane because you are creating more liabilities
34:37
Speaker 2: without the like matching asset.
34:39
Speaker 3: Chuck, I mean, you could say the exact same thing
34:41
Speaker 3: about the GPO, and I know.
34:43
Speaker 2: But here's the thing, Like, I'm starting to get a
34:45
Speaker 2: little bit upset about this, Okay, Cuz again, my favorite
34:51
Speaker 2: scene in one of my favorite show's succession is where
34:55
Speaker 2: the dad's talking to all of his kids and he
34:57
Speaker 2: just goes, you are not serious people, becau, They're just
35:00
Speaker 2: they're putting out just like crap. And where we are
35:02
Speaker 2: right now when it comes to any of this is
35:05
Speaker 2: there is no one who is a serious person about
35:08
Speaker 2: the deficit who's actually in a position to do.
35:11
Speaker 1: Anything about it.
35:12
Speaker 2: Yeah, we've all Does anyone listening know that? Again, like,
35:19
Speaker 2: there are two different ways that you can deal with this.
35:22
Speaker 2: You can balance this one of two ways. You can
35:26
Speaker 2: cut entitlements or you can raise taxes.
35:29
Speaker 4: That's it.
35:31
Speaker 2: Do you know what the only things are that we
35:32
Speaker 2: do right now? We raise entitlements and cut taxes. It's
35:36
Speaker 2: the exact opposite. It's the exact opposite. Yes, I'm just
35:43
Speaker 2: we are fundamentally unseerious people because we want all of
35:47
Speaker 2: the ponies and unicorns and we don't want any of
35:51
Speaker 2: the poop from them. We want poopless unicorns, and you
35:56
Speaker 2: can't have a unicorn that doesn't poop.
36:01
Speaker 4: It's just this is ridiculous at this point, it is
36:04
Speaker 4: rather silly.
36:05
Speaker 2: So I don't know what I'm gonna do. Like again,
36:07
Speaker 2: there's nothing you can do as like a private citizen,
36:10
Speaker 2: Yes there is, what what what can I do?
36:12
Speaker 4: What? What what can I do?
36:13
Speaker 3: Michael tell me again, vote people out of office. That
36:20
Speaker 3: pretty much everybody and the thing I recognize. But like Mike,
36:26
Speaker 3: here's the problem. Every single person that runs for office
36:29
Speaker 3: now runs on being an outsider because we don't like
36:32
Speaker 3: the insiders. And then they get there, they get there
36:35
Speaker 3: and they don't do anything. They just become the insiders.
36:37
Speaker 3: And so it's like, maybe I want someone who runs
36:41
Speaker 3: on being an insider. Actually, like I I'm just I'm
36:44
Speaker 3: out of options at this point. I don't know what
36:46
Speaker 3: to do because no one wants to deal with this
36:49
Speaker 3: because we just want all the fun and none of
36:52
Speaker 3: the pain. And eventually the pain is gonna come from
36:55
Speaker 3: an involuntary choice that like we're forced into but like
37:01
Speaker 3: we were just not serious people. And the wild thing
37:05
Speaker 3: is you could point to a time you go back
37:08
Speaker 3: to the eighties and nineties, Reagan raise taxes as a republican,
37:13
Speaker 3: cutting in the nineties, cut entitlement programs as a democrat. Yeah,
37:18
Speaker 3: Bush raise taxes as a republican, Like you can go
37:22
Speaker 3: back in time to the eighties and nineties and be like, oh,
37:25
Speaker 3: these are people that had to buck their party's orthodoxy
37:28
Speaker 3: because it was like the right thing to do for
37:30
Speaker 3: the country. And then you get to like two thousand, everyone's.
37:33
Speaker 2: Like new millennium, new math, man, Like, what are we
37:38
Speaker 2: doing here? Yeah, one plus one equals five. I'm sorry, man, Like,
37:47
Speaker 2: it's just we're not serious people, and until we want
37:52
Speaker 2: to actually do something about.
37:54
Speaker 3: It, this is a non part isn't issue, folks, No,
37:58
Speaker 3: it consistently go look at go look at debt increases
38:02
Speaker 3: over Republicans Democrats. For the last twenty six years, it
38:06
Speaker 3: has been just poppycock.
38:09
Speaker 2: Let's take a quick break, and when we come back
38:12
Speaker 2: hour two, I'm gonna try to cool off a little
38:15
Speaker 2: bit in the interim