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Are financial conditions actually too tight right now? · The Financial Exchange Show

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Speaker 1: a donation today. This is the Financial Exchange with Chuck
1:05
Speaker 1: Zada and Mike Armstrong.
1:10
Speaker 2: Chuck, Mike and Tucker with you, and we are broadcasting
1:13
Speaker 2: live from the Margaritaville Resort on Cape Cod And we
1:18
Speaker 2: got a fantastic crowd here today hanging out with us.
1:22
Speaker 2: We are excited to see everyone. It's nice and we
1:26
Speaker 2: got a really good show today. Even though the federal
1:29
Speaker 2: government remains shut down into its ninth day, the Financial
1:32
Speaker 2: Exchange continues to not shut down into its ninth day,
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Speaker 2: and so we're gonna be talking about some earnings. We
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Speaker 2: got Delta who reported earnings. Pepsi reported earnings this morning.
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Speaker 2: We unfortunately do not have weekly jobless claims, but Mike
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Speaker 2: and I still have jobs as of this very minute,
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Speaker 2: and so no claims on our side at the moment.
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Speaker 2: But I think the big thing that I want to
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Speaker 2: kind of kick things off with is looking at this
1:58
Speaker 2: Q three earning season as we get into it again.
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Speaker 2: Delta and Pepsi both reporting this morning. We take a
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Speaker 2: look at Delta. They had a very nice quarter in
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Speaker 2: a good guide, which is why the stock's up six percent.
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Speaker 2: They basically reaffirmed towards the top end of their full
2:15
Speaker 2: fiscal year guidance, and so that's always good to see.
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Speaker 3: Pepsi had almost nothing interesting to say in which is
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Speaker 3: kind of what find so right it exists. Next, you're
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Speaker 3: at the point right now where if you look at
2:28
Speaker 3: the world as a whole, the eight billion people out
2:31
Speaker 3: there all kind of have their opinion on soda and
2:34
Speaker 3: they're not really changing much. You know, you're either drinking
2:37
Speaker 3: X amount of day or you're not. It's there's there's
2:40
Speaker 3: just not that much room for movement there, which is
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Speaker 3: why Pepsi stock is up point three percent today. Let's
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Speaker 3: start talking about Delta then, because I think that they
2:49
Speaker 3: did have some interesting things to say, both about the
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Speaker 3: government shutdown and the state of consumers in this country
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Speaker 3: right now. I guess global consumers, but you know, a
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Speaker 3: little bit more of a focus here in the United States.
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Speaker 3: So guiding their earnings for the next quarter, they came
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Speaker 3: in at anywhere between a bucks sixty and a buck
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Speaker 3: ninety is what they're estimating for the upcoming quarter. Analysts
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Speaker 3: that have been pulled we're planning on a bucks sixty
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Speaker 3: five per share in earnings, so you know, the very
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Speaker 3: lower end of the expectations there would beat most analysts expectations.
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Speaker 3: I guess the two pieces that I found interesting. One
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Speaker 3: was that, coinciding with a lot of the data, we
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Speaker 3: already have their luxury, high spending consumer in their first
3:33
Speaker 3: class cabins doesn't seem to be slowing down.
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Speaker 2: No, here's what you saw from them. Revenue from that
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Speaker 2: high end segment, first class, you know, the premium economy,
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Speaker 2: anything that's in that category. That revenue up nine percent
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Speaker 2: in Q three. Main cabin revenue down four percent over
3:52
Speaker 2: the same time period. This basically exactly matches. Remember, Marriott
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Speaker 2: reported their second quarter earnings a couple months ago, and
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Speaker 2: it showed almost an identical pattern. The high end brands
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Speaker 2: that they have, whether you're talking about you know, Ritz, Carlton,
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Speaker 2: Saint Regis, all that stuff crankin the Marriott courtyard and
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Speaker 2: stuff like that slowing down. And so it's very clear.
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Speaker 2: We talked about this a lot, this idea of this
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Speaker 2: K shaped recovery, where the high end consumer, if you
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Speaker 2: are in the top twenty percent as far as either
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Speaker 2: income or net worth, you're spending like it's going out
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Speaker 2: of style. If you are in the bottom fifty to
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Speaker 2: sixty percent as far as income or net worth, you
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Speaker 2: don't have the money to spend like it's going out
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Speaker 2: of style. It's not available to you right now. And
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Speaker 2: so I think that ultimately Delta giving us further confirmation
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Speaker 2: on that front. And it also gets back to this
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Speaker 2: question that I think that you know, we've talked about
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Speaker 2: over the last month or two now, which is, hey,
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Speaker 2: we've seen it continued weakening in the labor market, but overall,
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Speaker 2: consumer spending trends remain remarkably consistent. Four to six percent
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Speaker 2: year over year growth in consumer spending. You figure inflations
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Speaker 2: running about three percent, so net net, yeah, you got
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Speaker 2: consumer spending rising somewhere like one to three percent on
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Speaker 2: a real basis, and we we kind of look at
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Speaker 2: it and we say, well, look, payrolls aren't growing that
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Speaker 2: quickly anymore. What gives Hey, You've got a bunch of
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Speaker 2: baby boomers that are retired and living off of portfolios
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Speaker 2: and social Security right now, which is going up, which
5:33
Speaker 2: you know could continue to move up. You've got a
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Speaker 2: situation where high income earners are generally not the ones
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Speaker 2: that are seeing the more sluggish job market right now.
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Speaker 2: And so ultimately, I think we are in a position,
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Speaker 2: until proven otherwise, where you can still have that consumer
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Speaker 2: ending engine. Consumer spending engine just chugging right along until
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Speaker 2: you know, you see those high end segments impacted, which
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Speaker 2: they have not been.
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Speaker 3: To this point. I think the baby boomer piece of
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Speaker 3: it is especially relevant, Chuck, because remember too that when
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Speaker 3: that segment goes and files their taxes next spring, most
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Speaker 3: of the we're gonna be gett an extra twelve grand
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Speaker 3: deduction on top of everything that they previously had. It
6:18
Speaker 3: sounds fun making. Just imagine for a minute that you had,
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Speaker 3: between your IRA withdrawals and your source security and everything else,
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Speaker 3: you had gross income of one hundred and twenty thousand
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Speaker 3: dollars back in twenty twenty four. If you do that
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Speaker 3: same thing in twenty twenty five, you're probably gonna save
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Speaker 3: something like fifteen hundred bucks in taxes. Mean, you're getting
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Speaker 3: a bigger refunder than you did the previous year. And
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Speaker 3: so it it all comes back to one, you know,
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Speaker 3: really important question, which is our financial conditions actually too
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Speaker 3: tight right now? But that's that's a question for the
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Speaker 3: FED to try and answer. I don't want to answer
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Speaker 3: it quite yet. That's fine, We've got that coming up.
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Speaker 3: We'll talk about that in a little bit. Letch on
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Speaker 3: one more thing on Delta before we move on from that.
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Speaker 2: Sure.
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Speaker 3: The CEO ed Bashom was specifically asked about the government shutdown,
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Speaker 3: and according to him quote it had not had a
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Speaker 3: significant impact on the airline's operations. He did warn that
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Speaker 3: should it continue for another week to ten days, he
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Speaker 3: would very much expect a significant operational difficulty for their airline.
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Speaker 3: Every airline is a little bit different here, they have
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Speaker 3: all different exposures. Obviously, Delta does not fly into your
7:24
Speaker 3: smaller airlines where some small staffing issue can really throw
7:27
Speaker 3: things off. So I would imagine that your smaller regional
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Speaker 3: folks might already be experiencing some problems, but for Delta themselves,
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Speaker 3: no impact yet from this government shutdown, and I think
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Speaker 3: continued shutdown or at least a lack of pressure for
7:40
Speaker 3: an end to that shutdown coming from the airline industry
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Speaker 3: thus far.
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Speaker 2: Yeah, the betting markets now have the government shutdown lasting
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Speaker 2: twenty seven days. That's where prediction markets are up to.
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Speaker 2: We're currently at nine, so that would be eighteen days
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Speaker 2: beyond where we are today. Twenty nineteen was thirty four
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Speaker 2: thirty four, so we'll see again. It's you know, we're
8:05
Speaker 2: not really getting anywhere at the moment. If we have
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Speaker 2: a resolution in the next week or so, it's unlikely
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Speaker 2: that you'd have any kind of meaningful broad economic impact,
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Speaker 2: even though again, if you talk to anyone who's you know,
8:17
Speaker 2: a government contractor or adjacent to those businesses, they'll tell
8:21
Speaker 2: you that, yeah, like things are a little bit dodgy
8:23
Speaker 2: right now. But broadly speaking, the shutdown is not having
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Speaker 2: any major impact on the US economy at this point,
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Speaker 2: even though obviously it can be uncomfortable for some of
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Speaker 2: those who may be directly impacted by it right now.
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Speaker 2: At least, so when we get back to looking at
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Speaker 2: Q three earnings right now, in the aggregate fact set,
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Speaker 2: which is just kind of a big aggregator platform, they
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Speaker 2: anticipate that year over your earnings growth is going to
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Speaker 2: be eight percent for Q three, which is actually an
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Speaker 2: upward revision from where they thought it would be on
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Speaker 2: June thirtieth. So what I will say this is one
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Speaker 2: of the more positive things that you can see in
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Speaker 2: markets when earnings revisions are moving upward into the quarter
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Speaker 2: of reporting, that's kind of unexpected. Normally the game that
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Speaker 2: you see played is, well, two months ago, we thought
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Speaker 2: earnings growth was going to be seven point three percent.
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Speaker 2: Now we think it's going to be six and hey,
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Speaker 2: all these companies beat and Earning's growth came in at
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Speaker 2: seven point five percent. Well, yeah, that's because you guys
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Speaker 2: all lowered your expectations heading into it. When you have
9:31
Speaker 2: an upwardly revised set of earnings going into it, it's
9:35
Speaker 2: typically a pretty optimistic sign. And you can say that
9:38
Speaker 2: that's one of the reasons why markets might have continued
9:41
Speaker 2: to move up over the last quarter is that earnings
9:44
Speaker 2: estimates have been improving as some of the uncertainty regarding
9:48
Speaker 2: tariff impact and things like that has been pushed out
9:52
Speaker 2: of the overall system.
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Speaker 3: Now I'm doing a bit of apples to oranges comparisons
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Speaker 3: here in terms of timeline, Chuck. But if Earning's growth
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Speaker 3: comes in it eight percent year every year, and the
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Speaker 3: stock market of the last twelve months is up, let's
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Speaker 3: call it sixteen more with dividends. What that means is
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Speaker 3: we've all become willing to pay a fair bit more
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Speaker 3: for the stocks that we all own.
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Speaker 2: Yes, So here's the thing. Stocks aren't cheap right now.
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Speaker 2: The forward twelve month peve ratio for the S and
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Speaker 2: P five hundred, it's twenty two point eight x the
10:26
Speaker 2: five year average is nineteen point nine, the ten year
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Speaker 2: average is eighteen point six. The long term average is
10:31
Speaker 2: down even further than that. You can make a case
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Speaker 2: that there are structural changes that mean that you're not
10:37
Speaker 2: going to get back to a time where stocks should
10:39
Speaker 2: be valued like twelve thirteen times earnings.
10:41
Speaker 3: That's fine.
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Speaker 2: I think we can accept that they're still expensive even
10:45
Speaker 2: relative to the last five years, which include one of
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Speaker 2: the bubbliest periods that we've seen. I mean, we were
10:52
Speaker 2: talking spack mania back in twenty twenty one. We had
10:55
Speaker 2: Trevor Milton pushing trucks down hills in order to get
10:59
Speaker 2: them moving. You know, we had Shamath was coming out
11:03
Speaker 2: with U Spack every week in order to do something.
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Speaker 2: This is. You know, we're at some pretty high valuations,
11:12
Speaker 2: but market's been pretty highly valued all year. Valuation isn't
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Speaker 2: what causes problems. No, it's when something pops that the
11:21
Speaker 2: valuation means that you might have further to fall. But
11:24
Speaker 2: just because something's valued highly doesn't mean that it's going
11:28
Speaker 2: to at any point in the near future. Just take
11:30
Speaker 2: a quick break. When we return, let's talk a little
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Speaker 2: bit about the FED. We got FED meeting minutes, which
11:37
Speaker 2: in a time when there's nothing coming out from the
11:40
Speaker 2: federal government as far as economic data, gosh, FED meeting
11:44
Speaker 2: minutes something to look forward to. We're going to talk
11:46
Speaker 2: about that next.
11:49
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12:20
Speaker 3: All right.
12:20
Speaker 2: We got a Wall Street Journal piece here. It's titled
12:25
Speaker 2: five Minutes Revealed, Divide over outlook for interest rate cuts?
12:31
Speaker 2: What is happening on the most dramatic season of the
12:34
Speaker 2: Federal Reserve.
12:35
Speaker 3: Yeah, not as nearly as dramatic as as even the
12:38
Speaker 3: Wall Street Journal wants to make it. But you did
12:42
Speaker 3: have the meeting minutes come out. These are somewhat informative
12:46
Speaker 3: to give you the behind the scenes view because you
12:48
Speaker 3: don't get that immediately, and quite frankly, in the absence
12:51
Speaker 3: of any data on joblessness, inflation, etc. People are gonna be,
12:56
Speaker 3: you know, pondering over this and looking through it. I
12:59
Speaker 3: think what you still have excuse me, what you still
13:03
Speaker 3: have after digesting the meeting minutes, at least in my view,
13:06
Speaker 3: would be a small majority of folks believing that they
13:10
Speaker 3: need to continue with the most recent rate cuts and
13:13
Speaker 3: do that at least two more times to the end
13:15
Speaker 3: of this year. And so I suspect that that's what
13:18
Speaker 3: is going to happen. But it is not as much
13:22
Speaker 3: as a There's not as much cohesion there around the
13:27
Speaker 3: subject on lower interest rates as you might expect given
13:30
Speaker 3: where the votes came like very obviously everybody wanted to
13:33
Speaker 3: cut rates at the most recent meeting. There's not a
13:36
Speaker 3: clear outlook for that. Definitely needing another two rate cuts
13:40
Speaker 3: through year end. When you take a look at these minutes, though.
13:44
Speaker 2: Say that one more time so I can make sure
13:46
Speaker 2: I understand what you just said.
13:47
Speaker 3: I think that the surprise could be towards the fewer
13:51
Speaker 3: rate cuts side rather than the more.
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Speaker 2: I don't think it will be in the next two months,
13:56
Speaker 2: because really we're talking about a meeting in three weeks
14:00
Speaker 2: and a meeting in nine weeks.
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Speaker 3: Yep.
14:03
Speaker 2: So here's where I land.
14:04
Speaker 3: Pretty much locked into two cuts? Is your outlook the
14:08
Speaker 3: October meeting, there's a pretty good chance you don't have
14:12
Speaker 3: any more economic data by then. Yep yees, who changes
14:17
Speaker 3: their mind from the September meeting? No one voting?
14:20
Speaker 2: Probably right, Like what changes your mind the December one?
14:25
Speaker 2: Will see what data we have that comes in at
14:28
Speaker 2: that point. But I think there are two different cases
14:30
Speaker 2: to be made. The first is, look, you might only
14:33
Speaker 2: have one job support if this shutdown goes into early November.
14:37
Speaker 2: You might only have a jobs report that comes out
14:40
Speaker 2: in early December, and you might have one CPI reading
14:43
Speaker 2: as well. There's not much to work from there. The
14:48
Speaker 2: other piece is when we talk about policy errors. I
14:51
Speaker 2: love how everyone likes to get all hopped up about well,
14:54
Speaker 2: are they gonna cut a quarter percent or a half Guys,
14:59
Speaker 2: the difference between in a quarter percent cut in a
15:02
Speaker 2: half percent cut has no impact on the economy. When
15:07
Speaker 2: we talk about policy errors, were like, hey, we were
15:10
Speaker 2: cutting and got interest rates down to three percent when
15:13
Speaker 2: they should have been up at five. That's a policy error.
15:16
Speaker 2: Not well, we cut a quarter percent when we should
15:19
Speaker 2: have cut a half. No, like that's that that that's
15:22
Speaker 2: not going to cause problems because a quarter percent shift
15:25
Speaker 2: in either direction, it's just not fundamentally big enough to
15:31
Speaker 2: cause either a problem or be a huge benefit. So
15:35
Speaker 2: I think if you're in the camp that I'm in,
15:37
Speaker 2: which is they cut in September because they saw problems
15:40
Speaker 2: with the labor market. To this point, all of the
15:43
Speaker 2: supplemental data that's out there you'll get indeed, ADP paychecks,
15:47
Speaker 2: all the private sector data that we get, is any
15:50
Speaker 2: of it showing improvement in the labor market.
15:53
Speaker 3: No, there's no improvement, but there's still no firings.
15:56
Speaker 2: True.
15:57
Speaker 3: But if you were comfortable cutting in septem yeah, you
16:00
Speaker 3: shouldn't it.
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Speaker 2: And there's been no change in trajectory of the other
16:04
Speaker 2: data that you get.
16:05
Speaker 3: Yep.
16:06
Speaker 2: Then you say yes, I'm good to cut in October.
16:08
Speaker 2: And if you say yes, I'm good to cut in October, well,
16:11
Speaker 2: what's the worst that happens if we cut an extra
16:12
Speaker 2: quarter percent in December?
16:15
Speaker 3: Fair?
16:15
Speaker 2: So that that's kind of where I get to in
16:17
Speaker 2: terms of I know everyone wants to make this all dramatic,
16:21
Speaker 2: because look, I get it. You want people to pay
16:25
Speaker 2: attention to you and read your stuff. This is another
16:28
Speaker 2: one of those points where I kind of say, it
16:31
Speaker 2: doesn't really matter if there's an extra quarter percent cut
16:34
Speaker 2: or not. What matters is the broader direction of travel.
16:39
Speaker 2: And if the Fed's wrong, it's not gonna be because
16:41
Speaker 2: they cut by an extra quarter percent. It's gonna be
16:45
Speaker 2: because they cut it all when they should have been hiking.
16:49
Speaker 3: Yeah, and that seems like an unlikely outcome base what
16:51
Speaker 3: we're seeing right now, but I do hear you. One
16:54
Speaker 3: interesting trend we've been following to the last FED meeting
16:58
Speaker 3: September seventeenth, correct, that was the date of the actual announcement.
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Speaker 2: Sure, I believe you, uh ye.
17:04
Speaker 3: Mortgage rates on that day thirty year fixed, according to
17:06
Speaker 3: Mortgage News Daily sitting at six two two. We are
17:09
Speaker 3: now sitting at six three six. We have continued to
17:12
Speaker 3: see a rise in mortgage rates in spite of the
17:15
Speaker 3: FED cutting at the most recent meeting and signaling that
17:17
Speaker 3: they are going to continue to cut. We saw this
17:19
Speaker 3: last fall, Yeah, last fall as well, just fall end
17:23
Speaker 3: of the year, where the FED started cutting rates, mortgage
17:25
Speaker 3: rates went in the exact opposite direction. And when you
17:28
Speaker 3: are cutting interest rates in an environment that is not recessionary,
17:32
Speaker 3: which you never know if you're in recession until years out,
17:35
Speaker 3: but hypothetically we might be there again, it is a
17:37
Speaker 3: coin flip, as to whether or not mortgage rates follow
17:40
Speaker 3: the Fed's decision. So we are right now seeing mortgage
17:43
Speaker 3: rates move back up. It speaks to, you know, general
17:47
Speaker 3: financial conditions, and I think the main argument you can
17:50
Speaker 3: make for why rates might need to stay where they
17:54
Speaker 3: are would be, yeah, we're seeing some weakness in the
17:57
Speaker 3: labor market, but we're not on the spending side. The
18:00
Speaker 3: stock market continues to hit new all time highs almost
18:03
Speaker 3: every day, and also the housing market, while showing weakness,
18:06
Speaker 3: is not in free fall either. Let's be honest.
18:10
Speaker 2: The case to be made for the FED not cutting
18:13
Speaker 2: rates right now is that Round Hill Investments just brought
18:17
Speaker 2: back their meme stock ETF No Boy, which the last
18:21
Speaker 2: time that they had it out there was basically the
18:24
Speaker 2: top of the meme market. They got rid of it
18:27
Speaker 2: at the bottom, and now it's back baby.
18:30
Speaker 3: They brought it back. Huh.
18:31
Speaker 2: Fed's got a hike.
18:35
Speaker 3: So that it actually went defunct and then they just
18:37
Speaker 3: brought it back up.
18:38
Speaker 2: Yes, I saw the chart of it earlier today. Let
18:41
Speaker 2: me see if I can find it.
18:42
Speaker 3: If we're speaking Greek ta if you remember meme stocks
18:46
Speaker 3: back in twenty twenty one, was basically anybody that posted
18:49
Speaker 3: something on Reddit or started some infatuation with any company
18:53
Speaker 3: they wanted, just blew up to the upside, put a
18:56
Speaker 3: bunch of hedge funds nearly or entirely out of business,
18:59
Speaker 3: and there were no real fundamentals on the trading strategy
19:03
Speaker 3: other than follow me because I'm gonna blow up some
19:06
Speaker 3: hedge funds. And if that's coming back, then that leads
19:10
Speaker 3: to some interesting questions about where this market could drive
19:14
Speaker 3: to next.
19:15
Speaker 2: Yeah, so I'll pull the exact dates during the break.
19:20
Speaker 2: But needless to say, this was okay, no, here we go,
19:24
Speaker 2: so oh no, we got to go to break?
19:26
Speaker 3: We do? Okay, Well, we're sorry.
19:29
Speaker 2: Watch Wall Street watch and then the meme stock ETF
19:32
Speaker 2: when we return.
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19:56
Speaker 1: far today right here on the Financial Exchange Radio.
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Speaker 4: This day nine of the government shut down, and markets
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Speaker 4: are pulling back in negative territory as investors sift through
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Speaker 4: FED meeting minutes. And also we act to third quarter
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Speaker 4: earnings from PEPSI and Delta unveiled earlier this morning. Right now,
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Speaker 4: the Dow is down by four tenths of one percenter
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Speaker 4: one hundred and ninety four points. SMB five hundred is
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Speaker 4: down about a third of a percent or twenty one points.
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Speaker 4: NASDAC also down by about a third of a percent
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Speaker 4: or seventy nine points. Russell two thousand is off by
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Speaker 4: you guessed it a third of a percent. Tenure Treasreel
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Speaker 4: is flat at four point one four percent. In crude
20:36
Speaker 4: oil is down about four tenths of one percent, trading
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Speaker 4: at sixty two dollars and thirty cents a barrel. Delta
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Speaker 4: reported stronger than expected third quarter results, where the airline
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Speaker 4: issued strong guidance, saying it expects a resurgence in travel
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Speaker 4: demand to continue in the holiday season. Delta stock is
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Speaker 4: climbing nearly four percent higher. Meanwhile, Pepsi up over one
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Speaker 4: percent after the snacks in average Giant also impress for
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Speaker 4: its third quarter beating on earnings in revenue. Pepsi also
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Speaker 4: named a new CFO from Walmart's US unit. Elsewhere shares
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Speaker 4: in luxury car maker Ferrari skidding twelve percent after the
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Speaker 4: company trimmed its electrification targets. Ferrari said it expects its
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Speaker 4: twenty thirty sports car model lineup to be made up
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Speaker 4: of only twenty percent fully electric vehicles, down from its
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Speaker 4: prior target of forty percent EV sales by the end
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Speaker 4: of the decade. Mp Material stock rising over six percent
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Speaker 4: after BMO Capital Markets reinstated coverage at a market perform rating,
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Speaker 4: calling the rare earth metals producer a rare earth champion
21:43
Speaker 4: following its partnership with the Department of Defense. Separately, China
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Speaker 4: said it tightened rare earth export controls ahead of a
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Speaker 4: potential meeting between President Trump and Chinese President Jijingpeng, and
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Speaker 4: Costco saw its sales climb eight percent on the year,
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Speaker 4: sending that stock up almost three percent. I'm Tucker Silva,
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Speaker 4: and that is Wall Street Watch, Mike.
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Speaker 2: We're continuing to get more information surrounding the First Brands bankruptcy.
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Speaker 3: Should we do a little bit of background on that
22:15
Speaker 3: first brand? Again, nobody really knew who this company was,
22:19
Speaker 3: right they might be second brands until what this time
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Speaker 3: last week, last Monday.
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Speaker 2: Yes, like, in full disclosure, I didn't have any idea
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Speaker 2: that this company existed before last week. It's not like
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Speaker 2: this is something that we paid any attention to because
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Speaker 2: you and I do not scrutinize auto part manufacturers balance
22:42
Speaker 2: sheets that are not publicly traded, like this is just
22:45
Speaker 2: not something that you would do. So First brands that
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Speaker 2: the big thing for them. They are a or They
22:52
Speaker 2: were a company that operated a lot of you know,
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Speaker 2: big auto parts. Think about you know, fram oil filters,
23:02
Speaker 2: they made windshield wipe, but like all kinds of different
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Speaker 2: stuff all across the board. And last week they declared bankruptcy.
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Speaker 2: And most of their creditors were expecting them to declare
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Speaker 2: somewhere in the ballpark of around like five to seven
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Speaker 2: billion dollars in debt. It now appears that they have
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Speaker 2: somewhere between twelve and fifteen billion dollars in debts that
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Speaker 2: come and most of it held you know, off balance sheet,
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Speaker 2: and some of their lenders are saying that there might
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Speaker 2: be as much as two point three billion dollars in
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Speaker 2: assets that are unaccounted for. This from a technology group
23:42
Speaker 2: called Raystone, who helped arrange a lot of this financing.
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Speaker 2: They're basically saying, hey, we arranged this with the idea
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Speaker 2: that you had you know, assets of X, Y and
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Speaker 2: Z to lend against, and now you're telling us this
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Speaker 2: two point three billion is missing, So is it actually
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Speaker 2: I don't know, but First Brands is pretty much already
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Speaker 2: admitted Yeah, there's some accounting stuff that we can't reconcile.
24:05
Speaker 2: And so it does appear that you do need an
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Speaker 2: independent third party auditor to come in and at the
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Speaker 2: very least say hey, show us what's going on here.
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Speaker 3: So the interesting part of this story to me at least,
24:19
Speaker 3: has been about the debt from the very beginning and
24:23
Speaker 3: how much did the lenders know about the business, how
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Speaker 3: much did they know about the other debt being issued
24:29
Speaker 3: against the business, and is it indicative of the overall
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Speaker 3: private credit space? And I suppose if you want to
24:36
Speaker 3: look at the optimistic side of this and say, no,
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Speaker 3: it's not a problem with private credit and there's two
24:42
Speaker 3: point three billion dollars worth of accounting fraud potentially in there,
24:46
Speaker 3: you might be able to take that as a positive
24:48
Speaker 3: news story here that oh no, it was not a
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Speaker 3: blow up in the private credit industry. It was one
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Speaker 3: company ripping off their customers, or not ripping off their customers,
24:56
Speaker 3: ripping off their lenders by miscalculating things and high things
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Speaker 3: from them. That would be the most optimistic viewpoints you
25:03
Speaker 3: could take. The pessimistic viewpoint would be this type of
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Speaker 3: lending is insidious in the overall industry. And while it
25:12
Speaker 3: might not be occurring at the Walmarts of the world
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Speaker 3: because they don't need to go to KKR or UBS's
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Speaker 3: O'Connor fund to find debt to finance their businesses, this
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Speaker 3: could be insidious of much smaller companies across the country
25:26
Speaker 3: where we have seen this type of debt issuance really
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Speaker 3: blow up over the course of the last fifteen years
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Speaker 3: and especially over the last five to ten.
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Speaker 2: The third possibility, and the one that I am increasingly thinking,
25:39
Speaker 2: is that there is a problem in the auto sector
25:43
Speaker 2: that is much larger than anyone wants to admit. And
25:47
Speaker 2: that's because look, in the last month now, we've had
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Speaker 2: three different signals there. We've got this first Brands bankruptcy
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Speaker 2: that blew up. We have this Tricolor bankruptcy, Tricolor a
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Speaker 2: dealer and lender for subprime borrowers. And we've got CarMax
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Speaker 2: that reported earnings that were horrific to quite horrific, and
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Speaker 2: the stockfeld, you know, twenty percent upon the release of
26:18
Speaker 2: those earnings. The other thing that we're now seeing and
26:22
Speaker 2: this is if you look at some of the I
26:28
Speaker 2: do love that we're like, we're basically doing the auto
26:30
Speaker 2: version of two thousand and seven is kind of where
26:33
Speaker 2: we are right now.
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Speaker 3: I was talking at Vini Penn this morning. If you're
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Speaker 3: not familiar. Vinie Penn is a radio show host down
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Speaker 3: in Connecticut on one of the stations that we broadcast to,
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Speaker 3: and he made that exact point. He's like, this, what
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Speaker 3: you're describing with this auto sector and what's happening with
26:48
Speaker 3: these loans sounds a lot like two thousand and seven.
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Speaker 2: And it does. Yeah, frankly, it just does. So where
26:56
Speaker 2: we're at right now. Carvana, who is a publicly traded company.
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Speaker 2: One of the main things that they do is they
27:03
Speaker 2: underwrite loans for their vehicles and then remind me, if
27:06
Speaker 2: this sounds familiar, they package those loans up into different
27:10
Speaker 2: tranches based on how likely they are to be repaid,
27:13
Speaker 2: and they sell them off to people who want to
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Speaker 2: buy those loans. And basically what you're seeing now is
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Speaker 2: the tranches that have been issued since twenty twenty one
27:23
Speaker 2: are seeing significantly higher losses than the prior vintages. So
27:30
Speaker 2: as an example, if you look at they have different
27:34
Speaker 2: vintages per year, so they have one that's categorized as
27:37
Speaker 2: twenty twenty and one. It's just like the number. And
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Speaker 2: if you look at basically where that was at the time,
27:45
Speaker 2: that about fifty percent of the loan was paid off
27:49
Speaker 2: on average, you ended up in a situation where the
27:52
Speaker 2: cumulative losses were about four percent on those loans. Now,
27:55
Speaker 2: remember in twenty twenty one, there was still free money
27:59
Speaker 2: slashing around. We had a last round of stremulous checks.
28:02
Speaker 2: You had mortgage for barons that was in place for
28:05
Speaker 2: an awful long time. You had student loan payments that
28:08
Speaker 2: were stopped. Like twenty twenty one was as good of
28:11
Speaker 2: a credit situation as you could find. By which you
28:14
Speaker 2: mean you could borrow money with no repercussions, is that well,
28:18
Speaker 2: no one was defaulting, You could lend money with no repercussions,
28:21
Speaker 2: Like nothing went wrong if you went money in early
28:24
Speaker 2: twenty twenty one, like everyone paid it back because it
28:26
Speaker 2: was just sloshy slashy.
28:28
Speaker 3: Just clarifying that it wasn't necessarily a good idea, just
28:31
Speaker 3: good if you were either lending borrowing the money.
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Speaker 2: It was a good idea. This is what I'm saying.
28:36
Speaker 2: Like the loans that were made in twenty twenty. Only
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Speaker 2: by the time half those auto loans were paid off,
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Speaker 2: only four percent was was realized as a loss like
28:45
Speaker 2: it was it was great, Like it was a.
28:47
Speaker 3: Good decision to problem the money and to borrow the
28:50
Speaker 3: money was a good decision in twenty Making the conditions
28:53
Speaker 3: to allow that type of borrowing and lending, I don't
28:56
Speaker 3: think was a good idea.
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Speaker 2: Yes, totally. And here's the other problem is that lenders,
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Speaker 2: like the end buyers of these loans, looked at that
29:06
Speaker 2: vintage and said, great, this is what we can expect
29:09
Speaker 2: going forward. And now what we have is when we
29:13
Speaker 2: look at the twenty twenty four vintage that's in the
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Speaker 2: same boat, the cumulative losses on that vintage are around
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Speaker 2: seventeen percent as opposed to four percent, four and a
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Speaker 2: quarter times as high. And so I am increasingly convinced
29:32
Speaker 2: that there is something very ugly happening in the auto
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Speaker 2: lending area, and it's going to cause some problems, not
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Speaker 2: to the scale of what we saw in the financial crisis,
29:43
Speaker 2: because the auto sector is a tenth of the size
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Speaker 2: of the housing sector.
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Speaker 3: So that's the important clarification here is according to the
29:54
Speaker 3: most recent numbers from the Federal Reserve back in New
29:56
Speaker 3: York second quarter twenty twenty five, total mortgage dead outstanding
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Speaker 3: about thirteen trillion dollars, Auto loan debt one point sixty six,
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Speaker 3: So not big enough to sink big major banks, but
30:09
Speaker 3: pretty messy.
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Speaker 2: Pretty messy, and enough also to have when you look
30:13
Speaker 2: at like the underwriting standards for auto loans, they're gonna
30:17
Speaker 2: have to change dramatically over the next couple of years,
30:20
Speaker 2: which means the auto sector is likely entering into a
30:23
Speaker 2: period where they're not gonna be able.
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Speaker 3: To sell as many vehicles. By the way, pretty wild debt.
30:27
Speaker 3: Student loan debt is at about the same level of
30:29
Speaker 3: auto loan debt. If if you just think about like
30:32
Speaker 3: the portion of Americans that have an auto loan versus
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Speaker 3: the portion of Americans that have a student loan, for
30:39
Speaker 3: that to be the total student loan debt one point
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Speaker 3: six four trillion dollars in credit card debt at one
30:44
Speaker 3: point two trillion, it's just wild to be that dispersion
30:48
Speaker 3: given how narrow a student loan is.
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Speaker 2: Yeah, because student loans, I think there's somewhere between like
30:53
Speaker 2: forty and sixty million people that have outstanding borrowings auto loans.
30:57
Speaker 2: I think it's double or triple that. Yeah, I think
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Speaker 2: it's like somewhere around one hundred to one hundred and
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Speaker 2: twenty million.
31:02
Speaker 3: Because does anyone.
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Speaker 2: Pay cash for a car in this in straine environment
31:07
Speaker 2: and this you would you would like to, but I
31:09
Speaker 2: think most people don't, like they're not cheap. So I
31:13
Speaker 2: think there's something in the auto sector that that stinks.
31:16
Speaker 2: Other things just that I think are like kind of
31:21
Speaker 2: the the black comedy of this whole thing is okay, so.
31:27
Speaker 3: Excuse me.
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Speaker 2: Jeffrey's Financial yesterday said that they had a fund that
31:33
Speaker 2: was impacted potentially up to seven hundred and fifteen million dollars.
31:37
Speaker 2: The name of the asset manager that they have is
31:40
Speaker 2: called Point Benita Capital, which feels like it's right out
31:43
Speaker 2: of like Glengarry glen Ross. It's like Alec Baldwin trying
31:46
Speaker 2: to sell like bad real estate. To me, yeah, I
31:48
Speaker 2: work for Point Benita Capital. I got auto loans like it,
31:52
Speaker 2: just it feels just too on brand. There. The other thing, ubs.
31:58
Speaker 3: Of course, you'd bs who bought.
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Speaker 2: Credit Sweee a couple of years ago, and Credit Sweez
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Speaker 2: historically has been like they've been the company that always
32:07
Speaker 2: is on the front edge, the leading edge of well
32:12
Speaker 2: this is kind of questionable, but will make the loan
32:14
Speaker 2: and see how it goes. Like that's what credit Sweese does.
32:16
Speaker 2: They make the loan that no one else will did
32:19
Speaker 2: they did?
32:20
Speaker 3: Yeah?
32:20
Speaker 2: Yeah, and then they had to get bought by UBS
32:22
Speaker 2: because they basically like did too much of that. Yeah,
32:25
Speaker 2: they did too much. UBS said that they have around
32:30
Speaker 2: five hundred million dollars in exposure as well, because of
32:33
Speaker 2: course UBS they have.
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Speaker 3: One fund where thirty percent of it approximately with loans
32:38
Speaker 3: to this first.
32:38
Speaker 2: Preak, which seems totally reasonable from a risk management perspective. Yeah,
32:42
Speaker 2: I just put thirty percent of it in this like
32:44
Speaker 2: subprime auto parts loans loan.
32:46
Speaker 3: So counterpoint to this just being relegated to the auto
32:50
Speaker 3: industry would be that some of the major private credit
32:53
Speaker 3: lenders there out there are getting hammered this year. Apollo
32:56
Speaker 3: Global Management down twenty five percent, KKR down seventeen percent
33:00
Speaker 3: this year.
33:02
Speaker 2: I'd like to introduce you to Blue Owl Capital, who really,
33:05
Speaker 2: like it is, is specifically focused in this area, down
33:08
Speaker 2: twenty seven percent and down ten percent in the last
33:12
Speaker 2: couple of weeks. And the problem that you have now
33:15
Speaker 2: is you get a couple of these popping up in
33:17
Speaker 2: every lender out there is kind of looking at it going,
33:21
Speaker 2: I don't know what my loans are worth right now,
33:23
Speaker 2: I don't know what we're going to do. Let's take
33:26
Speaker 2: a quick break and when we come back, Uh, let's
33:29
Speaker 2: do a little bit of tariff talk.
33:31
Speaker 1: When we return, the latest news on inflation, the Fed,
33:35
Speaker 1: the economy, and how the markets are reacting. Every morning
33:38
Speaker 1: right here on the Financial Exchange Radio Network. Thanks to
33:43
Speaker 1: us six one seven, three six two thirteen eighty five
33:46
Speaker 1: with your comments and questions about today's show, and let
33:49
Speaker 1: us know what you think about the stories we are covering.
33:52
Speaker 1: This is the Financial Exchange Radio.
33:54
Speaker 5: Network piece from the Blue Meeberg Who's gonna eat the tariffs,
34:04
Speaker 5: not US shoppers?
34:05
Speaker 2: That is the piece that is here talking about, Hey,
34:09
Speaker 2: you're starting to see signs of more tariff price related
34:12
Speaker 2: increases coming into stores over the last few months. To
34:18
Speaker 2: this point, you haven't seen any impact though in overall
34:21
Speaker 2: retail sales.
34:22
Speaker 3: Retail sales up three and a half percent.
34:24
Speaker 2: Now in real terms they're up half a percent.
34:26
Speaker 3: Sure, okay, but that means that the people are still
34:28
Speaker 3: buying more stuff. It's divided higher prices.
34:30
Speaker 2: They are, So I think the big thing that I
34:33
Speaker 2: look at is the question that we've been asking for
34:36
Speaker 2: a while, which is, Okay, you've got weakening jobs data,
34:40
Speaker 2: you still have strong consumer spending. Typically, consumer spending does
34:44
Speaker 2: not break in advance of a recession. It's usually when
34:46
Speaker 2: people start getting laid off. That's when the spending issue happens.
34:51
Speaker 2: And I think, honestly, I'm kind of getting to the
34:54
Speaker 2: point where, unless the stock market cracks or high income
34:58
Speaker 2: earners start getting laid off in larger numbers, I don't
35:02
Speaker 2: know that you're going to see an impact on the
35:04
Speaker 2: retail side of things like that. This piece tries to
35:07
Speaker 2: make the case that US shoppers won't pay price increases.
35:10
Speaker 3: I think they will.
35:11
Speaker 2: I don't know that some of them might not because
35:14
Speaker 2: they might not be able to. But those aren't the
35:16
Speaker 2: spenders that are driving the US economy right now from
35:20
Speaker 2: the data that we see.
35:21
Speaker 3: Yeah, I mean tough position to be in if you're
35:24
Speaker 3: a retailer, because you have no idea what to do
35:25
Speaker 3: with pricing. Also, you're pretty concerned about driving those higher
35:29
Speaker 3: price increases in the face of all this, all these
35:33
Speaker 3: news stories about to the weaker kids.
35:35
Speaker 2: Did you also know that as of last year, even
35:36
Speaker 2: before this year, the terrify on imported leather gloves averaged
35:41
Speaker 2: nineteen and a half percent. You weren't to wear that, chuck,
35:44
Speaker 2: I wasn't buying leather gloves. Apparently not, I guess not.
35:46
Speaker 1: So.
35:47
Speaker 2: Ultimately, the question is going to be are consumer's going
35:50
Speaker 2: to go and keep buying this stuff or do they
35:52
Speaker 2: just take a look at the window and say not
35:54
Speaker 2: for me.
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37:01
Speaker 2: And Financial Times why car makers are falling back.
37:04
Speaker 3: In love with petrol because they pushed too much into
37:08
Speaker 3: electric vehicles and nobody wants to.
37:10
Speaker 2: It's because they're actually profitable. That's why they're falling in
37:12
Speaker 2: love with petrol. The reason that they fell in love
37:15
Speaker 2: with EV's they saw what was going on with Tesla's
37:17
Speaker 2: stock price and said, oh, we can be that, and
37:19
Speaker 2: then it turned out, no, you can't be that. It's
37:21
Speaker 2: it's actually really hard to be that. If you don't
37:23
Speaker 2: have someone named Elon Musk running an EV company.
37:25
Speaker 3: They might have also fallen in love with some really
37:27
Speaker 3: nice subsidies on electric vehicles.
37:30
Speaker 2: Possible. Yeah, but I think that when you look at this,
37:32
Speaker 2: ultimately internal combustion engine vehicles are profitable. The evs generally
37:38
Speaker 2: are not for most automakers right now. And so you've
37:41
Speaker 2: got projections out now, this from alex Partners, that US
37:45
Speaker 2: EV sales are going to be around seven percent of
37:47
Speaker 2: all car sales this year and maybe only as little
37:49
Speaker 2: as eighteen percent in twenty thirty, compared to previous estimates
37:53
Speaker 2: of like thirty to fifty percent at that time.
37:55
Speaker 3: Not just the US phenomenon either, you're seeing the same
37:57
Speaker 3: thing upon among European makers who sure partly are seeing
38:01
Speaker 3: the pushback on demand and then partly are trying to
38:04
Speaker 3: compete with Chinese made evs. And good luck.
38:07
Speaker 2: Let's take a quick break when we return. We got
38:11
Speaker 2: a whole nother hour coming up to make sure you
38:13
Speaker 2: stick around on the Financial Exchange