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What lies behind the dramatic shift in markets? · The Financial Exchange Show

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Speaker 2: Good morning, Welcome back to the Financial Exchange. I know
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Speaker 2: a lot of folks probably tuning in after yesterday's big
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Speaker 2: market selloff, and we're going to start the show right
1:24
Speaker 2: there in early trading. So far, you've got equity selling
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Speaker 2: off again today, but not nearly as substantially as yesterday.
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Speaker 2: So I think we should start with a brief market
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Speaker 2: recap of just what was said over the weekend, how
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Speaker 2: markets reacted, and then go from there as markets get
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Speaker 2: a volatile start to the trading day today. But yesterday,
1:43
Speaker 2: NASDAK had its worst day in three years, going back
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Speaker 2: to twenty twenty two, last time that the Nasdaq fell
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Speaker 2: by as much as it did, a total four percent
1:52
Speaker 2: drop on the Nasdaq. SMP and Dow both off more
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Speaker 2: than two percent as well, marking the worst day of
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Speaker 2: twenty twenty five. All of this falling following commentary from
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Speaker 2: the President on Sunday on a what was the name
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Speaker 2: of the show? I know it was a Fox Morning show,
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Speaker 2: I just don't remember the name of it. Nonetheless, he
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Speaker 2: was asked about the possibility of recession in twenty twenty five, and.
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Speaker 3: I will credit him with this.
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Speaker 2: He gave the most transparent and honest answer that I've
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Speaker 2: ever seen a sitting president give when it comes to
2:21
Speaker 2: their expectations about the possibility of an economic downturn where
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Speaker 2: people lose a bunch of jobs.
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Speaker 4: It was refreshingly honest, honestly, and you know what that is.
2:31
Speaker 2: In no small part I think why people follow him
2:35
Speaker 2: like him, voted for him, is a refreshingly honest assessment
2:39
Speaker 2: of everything in American society. The downside to that is
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Speaker 2: when you have a lot of direct control over the
2:47
Speaker 2: economy and you say that, look, I'm just unwilling to
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Speaker 2: rule out the possibility of recession. Which is a summary
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Speaker 2: of what he said, not the exact quote. Markets reacted,
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Speaker 2: and I think he saw that up upfront and close
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Speaker 2: here yesterday.
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Speaker 4: My theory, though, if I may share it, is he
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Speaker 4: thinks someone's telling him that if you get a recession
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Speaker 4: out of the way now, the rest of your term
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Speaker 4: will be It's the only rational explanation I could come
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Speaker 4: up with. Maybe you have your own theories, would love
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Speaker 4: to hear them. The only rational explanation I could come
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Speaker 4: up with for somebody appearing to push an already wobbly economy,
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Speaker 4: or in terms of sentiment anyway, possibly over the edges.
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Speaker 4: He thinks, if he can get out of the way now,
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Speaker 4: the next three the remaining three years of his term
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Speaker 4: will be relatively smooth sailing. That's an erroneous though belief.
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Speaker 4: Recessions can happen back to back. It just haven't happened
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Speaker 4: for it hasn't happened for a while, and they can't
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Speaker 4: spiral out of control.
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Speaker 2: So in any case, that commentary, combined with the tariff
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Speaker 2: uncertainty we've seen over the last few weeks, has contributed
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Speaker 2: to a pretty substantial sell off of equities. Today, we've
3:52
Speaker 2: got a mixed market, but overall you've got the S
3:55
Speaker 2: and P five hundred, which we use as probably the
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Speaker 2: best gauge of the overall large size company US stocks
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Speaker 2: down eight or nine percent off of the all time
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Speaker 2: highs that were reached back in mid February of this year.
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Speaker 2: You've now raised about six months of gains in the
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Speaker 2: stock market, where back to levels not seen since approximately
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Speaker 2: September of last year, and a fair bit of investor
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Speaker 2: jitters about what comes next. And so you raised a
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Speaker 2: theory here that hey, maybe I can get a recession
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Speaker 2: out of the way early.
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Speaker 4: Well, God, you want to provoke. He seems to be
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Speaker 4: provoking one. He seems to be trying to induce a
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Speaker 4: recession early. Perhaps there's ever a timing high time requirement.
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Speaker 3: Yeah, look, perhaps that is the case.
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Speaker 2: Perhaps there there is really a longer term vision of
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Speaker 2: how tariffs can benefit you know, certain Americans over the
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Speaker 2: long term and restructure the format of the American economy.
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Speaker 2: I also just wonder, all right, so we talk a
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Speaker 2: lot about Wall Street, and we talk a lot about
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Speaker 2: markets and how that's important to a lot of consumer spending.
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Speaker 2: You know, we've talked about how the top ten percent
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Speaker 2: of income earners are driving half of total consumer spending
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Speaker 2: as of most recently, which has been a growing share
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Speaker 2: of that total consumer spending. Pie how, in our opinion,
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Speaker 2: a lot of it is probably motivated by the value
5:13
Speaker 2: of someone's four oh one case statement that they get
5:15
Speaker 2: in the mail and how high that's gotten the value
5:18
Speaker 2: of their home price. I guess my point would be,
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Speaker 2: I'm not sure that Donald Trump does or should care
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Speaker 2: so much about that constituent's opinion. He didn't win that
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Speaker 2: vote in the most recent election, you know, his constituency.
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Speaker 2: If you take a look at you know where the
5:37
Speaker 2: two people running for president really did well like Kamala
5:41
Speaker 2: Harris did quite well, especially for a Democrat on households
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Speaker 2: earning over one hundred thousand dollars. The problem for her
5:48
Speaker 2: was that that makes up like a third of the
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Speaker 2: total voter base. Donald Trump gained among you know, any
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Speaker 2: of those earning between fifteen one hundred thousand dollars a
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Speaker 2: year that voter consider moved about twenty points towards Donald
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Speaker 2: Trump in the most recent election. And again, just calling
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Speaker 2: a spade a spade, if you're making between fifteen one
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Speaker 2: hundred thousand dollars, it's unlikely that you own a home
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Speaker 2: in a large portion of the country. It's unlikely that
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Speaker 2: you have a substantial four oh one k or frankly
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Speaker 2: that you care about what the stock market is doing
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Speaker 2: on a day to day basis.
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Speaker 3: And so, you know, we read a lot into this.
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Speaker 2: I get asked the question a lot, like, you know,
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Speaker 2: he's the pro business guy, he's cozy up with the
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Speaker 2: bank's CEOs and executives.
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Speaker 3: And I would counter that narrative a little bit.
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Speaker 2: He has not been terribly cozy to CEOs, and I
6:35
Speaker 2: don't see many you know, big Wall Street types in
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Speaker 2: his cabinet at this point in time.
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Speaker 4: He cares about economic growth and we all should. And
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Speaker 4: ultimately that's driven by the people that spend and invest
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Speaker 4: the most. YEP, those people overwhelmingly reside in in blue
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Speaker 4: states and voted blue. So you don't want to alienate them.
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Speaker 4: You want to keep the blue states and the blue
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Speaker 4: voters spending. That's one point that I'd make. And the
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Speaker 4: related point is that, and it follows directly from this
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Speaker 4: first point. Lower income voters should care what the stock
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Speaker 4: market is doing, whether or not they think they have
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Speaker 4: a direct interest in it. Sure, farmers during the Great
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Speaker 4: Depression had no direct it. They first poop pooed it.
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Speaker 4: I don't care what's going on on Wall Street. I'm
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Speaker 4: self sufficient. I sell into local markets. They very quickly
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Speaker 4: realized the errant nature of that thinking. So I may
7:22
Speaker 4: not have as big a stake as a very wealthy
7:24
Speaker 4: person living in one of the suburbs that our office
7:27
Speaker 4: is near here and Needham sure may not have as
7:31
Speaker 4: big The wealth effect may not be as pronounced for
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Speaker 4: somebody like me, But I care because I work for
7:37
Speaker 4: a business. I provide services to people with money. The
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Speaker 4: economy just doesn't go very far without the most talented
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Speaker 4: and therefore arguably the wealthiest. Feeling good about it.
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Speaker 2: Mike, Yeah, you know, Look, I don't think there's anyone explanation,
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Speaker 2: but you know, very clearly, the commentary from Sunday morning
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Speaker 2: was incredibly transparent, incredibly straightforward about the sitting president's views
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Speaker 2: on the economy right now, and I'll say, pretty unprecedented.
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Speaker 2: I mean, you probably have more of a historical look
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Speaker 2: at this than I do, but I don't remember any
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Speaker 2: sitting president saying, at least not trying.
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Speaker 4: To get out of that question, like you're not supposed
8:15
Speaker 4: to answer right a Treasury secret the rule, the golden
8:19
Speaker 4: rule for Treasury secretary's responses to the media is strong
8:22
Speaker 4: dollar is in the United States interest. Similarly, the rule
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Speaker 4: for presidents and other politicians at the executive who are
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Speaker 4: part of the executive branch should be something like, we
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Speaker 4: view the economy as fundamentally strong, and our policies will
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Speaker 4: make it stronger, full stop. I don't know what he's
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Speaker 4: playing at here. I suspect there's something motivating him again,
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Speaker 4: maybe the desire to get a recession out of the way,
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Speaker 4: thinking that if we take our medicine now, he won't
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Speaker 4: get blamed for it. Reagan had a very deep recession
8:51
Speaker 4: early in his term. They lost a lot of seats
8:53
Speaker 4: in eighty two, the GOP did, but he and the
8:56
Speaker 4: GOP came back fairly strongly in eighty four. As we
8:59
Speaker 4: all know. One example. There are others. Clinton didn't start
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Speaker 4: off great. He's a very shaky start yep, but had
9:05
Speaker 4: a great first term finish, went on to beat all easily,
9:08
Speaker 4: et cetera. So I think, Mike, that's probably what he's thinking.
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Speaker 4: Let's get a recession out of the way, purge all
9:14
Speaker 4: the bad stuff what your recession tends to do, and
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Speaker 4: the economy will bounce back again. That's really risky.
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Speaker 2: The other, you know, big piece of this, and you know,
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Speaker 2: I'm trying to bring this back to what this might
9:26
Speaker 2: mean for the average person that's listening right now, who's
9:28
Speaker 2: seeing their four oh one K balance drop precipitously over
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Speaker 2: the course of the last few weeks. Is a lot
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Speaker 2: of this is being driven by policy uncertainty right now. Yes,
9:38
Speaker 2: there's some core fundamentals working against the market right now.
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Speaker 2: It's been an incredibly pricey market for the last few years.
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Speaker 2: You're going into twenty twenty five with some possibility of
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Speaker 2: economic slow down. But a lot of what we have
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Speaker 2: seen so far in terms of both economic CEO and
9:54
Speaker 2: market reaction has been policy uncertainty driven. I would describe
9:59
Speaker 2: it as and so so that's the tough part about
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Speaker 2: navigating one of these markets is let me just ask
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Speaker 2: you a question. Would anything shock you Mark if sometime
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Speaker 2: over the next three months you saw saw the President
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Speaker 2: post something on true social about the finalization of tax
10:15
Speaker 2: cuts and another waiver of teriffs for a number of
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Speaker 2: countries across the globe. No, and what it surprised you
10:21
Speaker 2: to see markets dramatically turn on that type of news.
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Speaker 4: They should, assuming it's news.
10:27
Speaker 2: So that's the difficulty with this type of market to navigate,
10:30
Speaker 2: and I think probably where a lot of investors are
10:33
Speaker 2: trying to figure out where and how to hang on
10:36
Speaker 2: here given that, like I just said, you know, you
10:39
Speaker 2: could see this thing turn on a dime depending on
10:43
Speaker 2: what the President's true objectives are and just how much
10:46
Speaker 2: of that how have they described it? You know, discomfort
10:50
Speaker 2: the average American ends up dealing with as a result
10:53
Speaker 2: of some of these policies.
10:54
Speaker 4: Forecasting is always hard because relationships aren't stable. Sure, Forecasting
10:58
Speaker 4: inflation is hard because sometimes unemployment explains it, sometimes it doesn't.
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Speaker 4: In the present situation, forecasting is exceptionally hard because the rules,
11:08
Speaker 4: the fundamental rules of the game are changing and they
11:12
Speaker 4: might be fluid for a few years.
11:13
Speaker 2: And that is the objective of the administration. Let's make
11:17
Speaker 2: you know, Let's make that very clear. They are trying
11:20
Speaker 2: to change the rules of the game and think that
11:23
Speaker 2: there could be big benefits for Americans if they're successful
11:25
Speaker 2: in doing something big.
11:26
Speaker 4: Big regime change is very risky. It often leads to
11:31
Speaker 4: unintended even bigger changes in regime. All the big revolutions
11:35
Speaker 4: in history were preceded by what I'm saying here is
11:37
Speaker 4: and I'm not making a prediction. I'm just saying all
11:39
Speaker 4: the big revolutions that we associate, whether it's the French Revolution,
11:43
Speaker 4: the Communist Revolution, and those are really the only too
11:47
Speaker 4: of the American Revolution for that matter, all preceded by
11:50
Speaker 4: smaller societal changes that someone thought they could control. They
11:54
Speaker 4: very quickly spiral out of control. We've got a good
11:57
Speaker 4: thing going here, Mike. I think in the United States
11:59
Speaker 4: we've got to be very very careful what we wish for.
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Speaker 2: Let's take a quick break at two relatively breaking stories. One,
12:05
Speaker 2: we did receive another jobs report this morning about seventeen
12:08
Speaker 2: minutes ago. I want to cover second new announcements on
12:11
Speaker 2: tariffs coming out just this morning as well.
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Speaker 3: We'll cover both next here on the Financial Exchange.
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13:18
Speaker 2: Just minutes ago President Trump announced that he is increasing
13:22
Speaker 2: tariffs on Canadian steel as well as aluminum to fifty
13:26
Speaker 2: percent five zero percent from the current twenty five is
13:30
Speaker 2: where we were previously. I need to double check out,
13:33
Speaker 2: but I believe we were at twenty five before. So
13:35
Speaker 2: at doubling of tariff rates on Canadian steel as well
13:39
Speaker 2: as aluminum, potentially in response to the Ontario Is he
13:44
Speaker 2: a governor premier? I don't know, but he imposed tariffs
13:48
Speaker 2: on electricity going to the United States, so I guess
13:53
Speaker 2: that's not a tariff, but tax surcharge specifically for electricity
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Speaker 2: generation go from Ontario going to the states of New York,
14:01
Speaker 2: Michigan and Minnesota. Did not specifically mention that in regard
14:05
Speaker 2: to his announcement on tariffs, but nonetheless appears to be
14:08
Speaker 2: going into a place. Like he said at midnight to
14:11
Speaker 2: night those edition, she.
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Speaker 4: Looks like a guy who just want to fight it out.
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Speaker 3: Is it bored?
14:16
Speaker 4: Is that the person?
14:17
Speaker 3: Yes, yes, it is.
14:17
Speaker 4: He looks like he means business.
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Speaker 2: Yeah, So that is the newest announcement on tariffs. Obviously
14:22
Speaker 2: a lot more to come with the delayed terraffs due
14:25
Speaker 2: to go into place on April second, So we shall
14:28
Speaker 2: see my birthday, by the way, so that's not gonna
14:30
Speaker 2: be the greatest birthday gift.
14:32
Speaker 3: At the same time, this wens Mike.
14:34
Speaker 4: That is the biggest downside of the tariffinality.
14:38
Speaker 3: Yeah, we' ruining your birth.
14:39
Speaker 2: He didn't call me at all to consult with me
14:42
Speaker 2: on the timing of all this, which would have been nice,
14:44
Speaker 2: you know, But I guess you can't do it on
14:45
Speaker 2: April Fool's Day either, my mother's birthday.
14:47
Speaker 3: That would be difficult too.
14:50
Speaker 2: This morning, at ten am, we received a labor market
14:53
Speaker 2: report from the Bureau Labor Statistics. Friday of last week,
14:57
Speaker 2: we got the jobs report that one indicated another consistent
15:01
Speaker 2: creation month, four jobs. I think expectations were about twenty
15:05
Speaker 2: thousand higher than the total jobs created, but that's well
15:07
Speaker 2: within the margin of error. Unemployment rates stayed in the
15:10
Speaker 2: low fours, ticked up slightly to four point one percent.
15:14
Speaker 2: And as we've talked about, these reports are backward.
15:17
Speaker 3: Looking by their very nature.
15:19
Speaker 2: You know, they look at data collected in the previous month.
15:22
Speaker 2: Depends on you know, whitch report in terms of when
15:25
Speaker 2: the collection of data occurred. But this Jolt report occurred
15:29
Speaker 2: on the last business day of February and found that
15:32
Speaker 2: the total number of jobs that were sitting open. Sorry
15:35
Speaker 2: this is actually back to January, so this is fairly
15:39
Speaker 2: out data data when it comes out, but total jobs
15:42
Speaker 2: open little change, sitting at seven point seven million jobs open.
15:47
Speaker 2: They also reported that hires held steady at five point
15:50
Speaker 2: four million, discharges little change.
15:53
Speaker 3: So you know, sometimes you take a look at this report.
15:55
Speaker 2: This is where we gather the information on how many
15:58
Speaker 2: people are looking for work compared to how many jobs
16:00
Speaker 2: open there are. But for a number of reasons, I
16:03
Speaker 2: haven't found this to be a particularly useful report over
16:07
Speaker 2: the last few years in Part two because of how
16:10
Speaker 2: easy it is to advertise a job today compared to
16:12
Speaker 2: thirty years ago. That I'm just not sure we're going
16:15
Speaker 2: to learn a ton about this. I certainly wouldn't expect
16:18
Speaker 2: to learn anything about this economy on a forward looking
16:21
Speaker 2: basis from this report.
16:23
Speaker 4: It did a good job explaining inflation when unemployment and
16:28
Speaker 4: other traditional measures of slack in the economy didn't, so
16:31
Speaker 4: some researchers gravitated to jolts. It helped your models fit,
16:35
Speaker 4: so to speak, the data better.
16:37
Speaker 3: But as you.
16:40
Speaker 4: Say, many of these jobs aren't real. It's just too
16:43
Speaker 4: darn easy to post, so that calls into question, Well,
16:47
Speaker 4: we'll need more time with this series. The series itself
16:51
Speaker 4: has only been produced for about twenty years. There are
16:53
Speaker 4: some researchers who spliced a longer series together also did
16:57
Speaker 4: a decent job explaining inflation relative to at the unemployment
17:00
Speaker 4: rate and other measures of slack and the labor market
17:03
Speaker 4: can do. I think it's just fair to say the
17:05
Speaker 4: jury is still out. Should we care about jolts. We
17:08
Speaker 4: report on it because it's a release and that's our job,
17:12
Speaker 4: but I wouldn't get to work if.
17:13
Speaker 2: We're looking to confirm a bunch of layoffs that occurred
17:15
Speaker 2: in the past. I think it'll be a great tool
17:17
Speaker 2: a doing.
17:17
Speaker 4: It you line up, it should be consistent with other measures.
17:20
Speaker 2: Yes, I have a question for you, just regional speaking,
17:24
Speaker 2: because you know, we saw Harvard, for instance, went on
17:27
Speaker 2: a hiring freeze. I think MGH recently did the same.
17:30
Speaker 2: So some you know, big local employers going on hiring freezes.
17:35
Speaker 2: And I'm kind of openly wondering because those types of employers,
17:39
Speaker 2: to me, were one of the main reasons that the
17:43
Speaker 2: Greater Boston area certainly did not escape the two thousand
17:47
Speaker 2: and eight recession, but I would say was more insulated
17:50
Speaker 2: from that recession compared to places like Florida and frankly
17:53
Speaker 2: the rest of the country. Real estate values didn't fall
17:56
Speaker 2: quite as far, not as many homes in foreclosure.
17:59
Speaker 3: All sorts of tag.
18:00
Speaker 2: Along stories here that had to do with the insulation
18:03
Speaker 2: that New England has. If we are seeing again a
18:08
Speaker 2: different type of situation here where government funding for research
18:12
Speaker 2: is drying up or at least being questioned more thoroughly,
18:15
Speaker 2: universities are seeing their grants dry up in a different
18:18
Speaker 2: way that didn't happen during the last recession. I just
18:21
Speaker 2: openly wonder if maybe you have kind of a reversal
18:25
Speaker 2: of what you saw during previous downturs when it comes
18:27
Speaker 2: to this specific area. I think the jury's very much
18:30
Speaker 2: still out on that, but I just found it really
18:33
Speaker 2: an interesting question that was raised to me the other
18:35
Speaker 2: day of Hey, the same things that kind of protected
18:37
Speaker 2: the New England economy last time around, maybe the very
18:40
Speaker 2: ones that actually cause a local recession this time around.
18:43
Speaker 4: Sure, yeah, yeah, I think you're spine on.
18:46
Speaker 2: I think it's it's very difficult to know this sort
18:48
Speaker 2: of thing, and look, you could have funding very much
18:51
Speaker 2: continue for the likes of MIT and Harvard in ways
18:53
Speaker 2: that we're not expecting, but those were those were areas
18:57
Speaker 2: that just look, you know, typically hiring of doctors and
19:00
Speaker 2: researchers and nurses because government spending is usually pretty darn consistent,
19:05
Speaker 2: just you know, continued in terms of paying an income
19:08
Speaker 2: during the last recession.
19:08
Speaker 4: Mike, It's a good example of how all bets are
19:11
Speaker 4: off if your research, you're doing forecasts, because relationships that
19:15
Speaker 4: held up in the past, our services economy are info,
19:19
Speaker 4: tech and biotech tilted economy here in the northeast Massachusetts,
19:25
Speaker 4: I guess specifically.
19:27
Speaker 2: Quick break, we've got Wall Street Watch coming up next.
19:41
Speaker 1: Like us on Facebook and follow us on Twitter at
19:43
Speaker 1: TFE show. Breaking business news is always first right here
19:48
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
19:53
Speaker 1: Street Watch. A complete look at what's moving markets so
19:56
Speaker 1: far today right here on the Financial Exchange Radio netw work.
20:01
Speaker 5: Following yesterday steep selloff driven by fears of an economic
20:05
Speaker 5: slowdown and impossible recession, markets today are extending their losses.
20:11
Speaker 5: Breaking news this hour after President Donald Trump said he
20:14
Speaker 5: has ordered his administration to raise tariffs on Canadian steel
20:18
Speaker 5: and aluminum imports by an additional twenty five percent, bringing
20:23
Speaker 5: the total duties to fifty percent, so the new policy
20:27
Speaker 5: will go into effect tomorrow morning. At the moment, the
20:31
Speaker 5: Dow is down over one percent, are four hundred and
20:34
Speaker 5: fifty eight points, SMP five hundred down by eight tenths
20:37
Speaker 5: of a percent or forty five points, and the Nasdaq
20:40
Speaker 5: down by over half a percent or one hundred and
20:44
Speaker 5: two points of Russell two thousand is edging slightly higher
20:48
Speaker 5: so far today, ten year treasurey yield is down by
20:51
Speaker 5: one basis point a four point two zero percent, and
20:54
Speaker 5: crude oil up just over one percent higher. Training in
20:58
Speaker 5: sixty six dollars and seventy four cents a barrel Oracle
21:02
Speaker 5: down by over six percent after the cloud Services company
21:06
Speaker 5: issued an optimistic sales outlook. However, it missed quarterly earnings
21:11
Speaker 5: and revenue expectations. Meanwhile, Delta Airlines cut its outlook, citing
21:16
Speaker 5: reduced consumer and corporate confidence and economic uncertainty. American Airlines
21:21
Speaker 5: also roughly doubled its profit guidance in half, Delta down
21:26
Speaker 5: by six percent, while American Airlines stock down by four percent.
21:30
Speaker 5: One other item from the airline sector, with Southwest Airlines
21:34
Speaker 5: announced that it will start charging passengers to check bags
21:37
Speaker 5: and we'll begin offering a basic economy fair Following pressure
21:41
Speaker 5: from activist investor Elliott Investment Management, Southwest shares are actually
21:45
Speaker 5: up by eight percent. Over to the retail sector, where
21:49
Speaker 5: shares and Coals down by nineteen percent after the struggling
21:53
Speaker 5: retailer posted a decline of nine point four percent in
21:57
Speaker 5: net sales during the fourth quarter. Coals Full Your guidance
22:00
Speaker 5: also missed expectations. Dick Sporting Goods is also taking a
22:04
Speaker 5: hit of three percent after the retailer offered earnings guidance
22:08
Speaker 5: that came in lower than expected, and Redfin stock down
22:12
Speaker 5: by four percent after it's sharp gain more than sixty
22:15
Speaker 5: percent yesterday after the company announced a deal to be
22:18
Speaker 5: acquired by Rocket Companies. I'm Tucker, Silva and Mass Wallstreet.
22:23
Speaker 2: Watch peace out from the Financial Times today? What lies
22:26
Speaker 2: behind their dramatic shift in markets? And I want to
22:29
Speaker 2: actually kind of take a look at global markets right now,
22:31
Speaker 2: just to set a benchmark.
22:33
Speaker 3: This is all data from.
22:34
Speaker 2: SMP Global, who runs funds, indices, all sorts of you know,
22:38
Speaker 2: interesting market data and research. According to SMP Global, the
22:42
Speaker 2: SMP five hundred index, you're to date as of the
22:45
Speaker 2: close yesterday, down about four and a half percent. When
22:48
Speaker 2: we take a look outside the United States, though, the
22:50
Speaker 2: SMP Euro Index up nearly ten percent nine point nine
22:54
Speaker 2: to four percent as of yesterday's close, and the SMP
22:57
Speaker 2: Emerging Markets into cy up about one point four percent
23:01
Speaker 2: so far this year. In trading, again, there are you know,
23:05
Speaker 2: funds that track all this stuff, but just giving you
23:07
Speaker 2: a sense for where stocks are going in different geographic areas,
23:11
Speaker 2: and I think that might surprise people, like, hey, we're
23:12
Speaker 2: talking about tariffs on some of these countries, and nonetheless
23:15
Speaker 2: their markets are moving up. And I just I think
23:18
Speaker 2: this is an interesting shift away from markets for a
23:21
Speaker 2: moment for us to talk about bigger picture stories about
23:24
Speaker 2: you know, what's dominated global economies over the last few decades,
23:27
Speaker 2: because it's fairly easy to say that US and Chinese
23:32
Speaker 2: growth have been kind of the main story that drove
23:37
Speaker 2: geopolitical and economic power over the course of the last
23:41
Speaker 2: two decades. Chinese growth, especially coming out of the Great Recession,
23:44
Speaker 2: a big piece that lifted things.
23:46
Speaker 3: Out of there.
23:47
Speaker 2: And we're talking about a somewhat significant potential reordering of things.
23:51
Speaker 3: Right.
23:51
Speaker 2: On one hand, you have an administration that at least on
23:55
Speaker 2: the surface, is talking seriously about you know, global or
23:59
Speaker 2: US deficits, you know, calling out that, hey, the pace
24:02
Speaker 2: at which the Biden administration was spending compared to tax
24:05
Speaker 2: revenue being brought in, you know, six seven percent deficits
24:09
Speaker 2: is not something we should aspire to and you know,
24:13
Speaker 2: needs to be looked at critically and wants to bring
24:17
Speaker 2: those down to a more reasonable three percent growth rate. Still,
24:20
Speaker 2: you know, talking about deficits, but a much more sustainable
24:24
Speaker 2: path on them. At the same time that's occurring, you
24:27
Speaker 2: have a US largely saying that, hey, Europe, we want
24:30
Speaker 2: you to, you know, largely stand on your own when
24:33
Speaker 2: it comes to national defense and things along those lines.
24:35
Speaker 2: And a bit of a shift there in terms of
24:37
Speaker 2: what they are willing to do in terms of debt
24:39
Speaker 2: issuance and spending. And I think it's an interesting time
24:44
Speaker 2: to talk about all this. So let's start with US
24:46
Speaker 2: deficits and just mechanically.
24:49
Speaker 3: Why they Why we worry about them?
24:52
Speaker 1: Right?
24:52
Speaker 2: I think when you tell someone like, oh, when someone
24:54
Speaker 2: tells you I'm worried about deficits, I always like to
24:57
Speaker 2: dig in, like why, and their answer is usually well, well,
25:00
Speaker 2: you know it seems unsustainable, it's going to cause inflation
25:03
Speaker 2: at some point, or just the collapse of society.
25:05
Speaker 3: I don't think they're necessarily wrong, but I.
25:07
Speaker 2: Want to get into the mechanics of why deficits are
25:10
Speaker 2: actually important when we talk about at the pace at
25:13
Speaker 2: which they've been growing. So like, let's walk it through here.
25:16
Speaker 2: Like when you have a deficit, the government actually issues
25:19
Speaker 2: bonds to fund that difference in what the government is
25:22
Speaker 2: spending versus what they are taking in.
25:24
Speaker 4: And when it issues those bonds, it issues them to
25:26
Speaker 4: banks and indirectly or directly individuals. Those institutions and individuals
25:31
Speaker 4: need to be induced to hold them if there are
25:33
Speaker 4: more of them out there. That increases, albeit very slightly
25:37
Speaker 4: default in the form of inflating the debt away. We
25:40
Speaker 4: could talk about that a slightly separate point, but increases
25:43
Speaker 4: the risk more generally of holding them.
25:46
Speaker 2: And it'll so we can generally state that, you know,
25:49
Speaker 2: in the entire world, there's a global set of buyers
25:53
Speaker 2: of mixed a given high grade and government debt.
25:58
Speaker 4: They're people who want government debt for various reasons. These
26:00
Speaker 4: companies want to hold it for different reasons capital requirements,
26:02
Speaker 4: for example, than you and I do, and then institutions do.
26:05
Speaker 4: But the point is it's a fixed demand pool. If
26:08
Speaker 4: you dump more supply into that fixed demand pool, those demanders,
26:12
Speaker 4: the buyers, you and me and other institutions are going
26:15
Speaker 4: to demand a higher rate of interest to hold that
26:18
Speaker 4: government debt. All else equals.
26:20
Speaker 2: So let's stick China out of the equation right now,
26:21
Speaker 2: because who knows, but Europe seems very much on a
26:23
Speaker 2: path of raising deficits in order to afford defense spending.
26:27
Speaker 3: That seems like a very probable outcome there.
26:30
Speaker 4: Force their hand.
26:31
Speaker 2: And if you are an insurance company, a global insurance
26:34
Speaker 2: company who you know, in a lot of cases buy
26:36
Speaker 2: mandate needs to buy high grade credit quality government debt
26:41
Speaker 2: as a big part of your portfolio, you could seemingly
26:44
Speaker 2: go to Germany, France, the United States and kind of
26:48
Speaker 2: look at all of those equally. But you probably aren't
26:51
Speaker 2: dramatically increasing your demand for over all that debt, but
26:55
Speaker 2: you could be increasing the supply of the issuance over
26:58
Speaker 2: the course of the next few years. So demand, let's
27:02
Speaker 2: assume remains relatively fixed, supply goes up. Yeah, econ one
27:08
Speaker 2: on one, what happens to price price of bonds hypothetically
27:11
Speaker 2: goes down because the demand is not enough to supply. Now,
27:19
Speaker 2: this could very well be overstated because we've seen that. Look,
27:24
Speaker 2: the United States has been able to issue more and
27:25
Speaker 2: more debt over the course of the last several decades,
27:28
Speaker 2: and our society hasn't collopsed. We haven't been hit with hyperinflation,
27:32
Speaker 2: we haven't seen long term rates go to completely unsustainable levels.
27:38
Speaker 3: Go ahead, you're gonna.
27:39
Speaker 4: Say, A big part of that is the trading regime
27:43
Speaker 4: and the defense umbrella that we created. The post World
27:45
Speaker 4: War two order forced other developed countries to hold our
27:49
Speaker 4: debt because the dollar is the global currency, and you
27:52
Speaker 4: don't hold dollars necessarily, you hold US assets, and the
27:55
Speaker 4: risk the least risky US asset hold is treasury. So
27:58
Speaker 4: the things we are doing today, this is a point, Mike,
28:01
Speaker 4: that we cannot emphasize enough, and we'll probably be talking
28:03
Speaker 4: about a lot over the next four years. All those
28:06
Speaker 4: old trend lines growth and stock market appreciation and you
28:10
Speaker 4: name it that we like to as researchers extrapolate from
28:14
Speaker 4: may break under a new regime. So I don't know
28:17
Speaker 4: what interest rates are gonna do if Europe has to
28:19
Speaker 4: match our defense budget and indeed we have to increase
28:22
Speaker 4: at the same time our defense budget because we no
28:24
Speaker 4: longer have a reliable ally in Western Europe and have
28:27
Speaker 4: to beef up to potentially fight a war I don't
28:29
Speaker 4: know for Greenland and at the same time a Greenland,
28:32
Speaker 4: however it's pronounced, and at the same time for China.
28:34
Speaker 4: I'm being a little silly, but you know what I mean.
28:35
Speaker 4: You may not have our back in the in the
28:37
Speaker 4: future and vice versa, so we all have to spend more.
28:40
Speaker 4: This soaks up the global supply of savings.
28:43
Speaker 2: It's just an interesting thought process that I had. Because
28:46
Speaker 2: we talk all you say so yourself, we talk about.
28:50
Speaker 3: Kind of fascinating market. I'm gonna try to explain to you.
28:53
Speaker 2: The story that we hear over and over again is Look,
28:57
Speaker 2: it's hard to say when deficits will become a problem,
28:59
Speaker 2: but certainly at some point they become unsustainable and things
29:03
Speaker 2: start to change, And it would just be fascinating to
29:06
Speaker 2: me if what started to change it was something that
29:08
Speaker 2: I think most would consider probably positive, which is, you know,
29:13
Speaker 2: Europeans covering their share of defense spending when it comes
29:17
Speaker 2: to NATO commitments.
29:18
Speaker 4: This is why you have to think things through beyond
29:20
Speaker 4: a late night drinking session.
29:22
Speaker 3: What is that.
29:22
Speaker 4: I'm not saying that's how policy is being made right now,
29:25
Speaker 4: but I have unreliable sources that it could be. Sorry, Look,
29:30
Speaker 4: you got to think these things through, guys. If you
29:32
Speaker 4: want Europe to spend more on defense, that means they
29:33
Speaker 4: need to borrow more. If they need to borrow more,
29:35
Speaker 4: we're competing now for global savings. That pushes up interest
29:38
Speaker 4: rates and makes everything harder. If you want high tariffs,
29:41
Speaker 4: that means we and others have to become more self sufficient.
29:44
Speaker 4: That also requires capital. This can all be done. It
29:47
Speaker 4: just means less capital for the stuff that we all
29:50
Speaker 4: take for granted. Now said differently, lower growth per capital,
29:55
Speaker 4: lower living standards over time. You may say that's worth it.
29:58
Speaker 4: I want to be autarkic, as the Soviets used to say.
30:01
Speaker 4: I want to be able to produce everything here. I
30:03
Speaker 4: don't want to rely on anybody, no alliances, no nothing.
30:06
Speaker 4: That's fine. You'll just have much slower growth. We won't
30:09
Speaker 4: know the difference because we don't know what the future
30:10
Speaker 4: would have looked like had we taken a different path,
30:13
Speaker 4: but it will mean slower growth presumably than otherwise.
30:16
Speaker 2: Mike let's take a quick break. When we come back.
30:18
Speaker 2: FED meeting upcoming in eight days. Here cover that next
30:22
Speaker 2: here on the Financial Exchange.
30:23
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30:44
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30:54
Speaker 2: So why doesn't the Federal Reserve care about food prices?
31:03
Speaker 2: And what am I talking about? What am I talking about?
31:06
Speaker 2: When I said the Federal Reserve doesn't care about food?
31:07
Speaker 1: Yeah?
31:08
Speaker 4: Sure? So the Fed's job. The FED controls the supply
31:10
Speaker 4: of money. It does. It can either look at the
31:13
Speaker 4: supply of money directly or indirectly by targeting interest rates.
31:16
Speaker 4: The latter's been the predominant policy over the past thirty years.
31:18
Speaker 4: Let's just just just to get that out there, so
31:20
Speaker 4: that the FED is responsible for long term inflation. Short
31:23
Speaker 4: term inflation jumps around. Some prices adjust more quickly than others.
31:27
Speaker 4: Food and energy adjust quickly, and they're jumpy. The FED
31:30
Speaker 4: tends to because they can't control those elements of overall
31:35
Speaker 4: inflation directly, they tend to look past them, but not entirely,
31:38
Speaker 4: because food and energy inflation make their way into other
31:41
Speaker 4: prices and into expectations.
31:43
Speaker 2: Mike, that was gonna be my point is I don't
31:45
Speaker 2: think that the Federal Reserve. I think the Federal Reserve
31:48
Speaker 2: does care about food.
31:49
Speaker 3: They do.
31:50
Speaker 2: I don't want the Federal Reserve to react to the
31:53
Speaker 2: current egg price spike that we are seeing right now
31:56
Speaker 2: with the the results of high, you know, higher interest rates,
31:59
Speaker 2: because guess what, I don't think that higher interest rates
32:02
Speaker 2: are going to bring down egg prices.
32:04
Speaker 4: It's not likely they'll react with higher It's likely they'll
32:06
Speaker 4: react with more accommodative policy. Because if you don't, then
32:09
Speaker 4: the money people spend on eggs they can't spend on
32:14
Speaker 4: something else, and that could force a recession. The FED
32:16
Speaker 4: is really in a pickle. No food pun intended that
32:20
Speaker 4: I really wasn't intended. I just couldn't think of a
32:22
Speaker 4: better expression, Mike. When the price of oil or food
32:25
Speaker 4: or something goes up, the FED is immediately faced with
32:28
Speaker 4: a dilemma. Do we accommodate the shock to prevent recession?
32:32
Speaker 4: If we do, the price level will go up a
32:34
Speaker 4: little jump in inflation or maybe a persistent jump depending
32:37
Speaker 4: on expectations and the inertia in the inflation process. If
32:41
Speaker 4: you think about all the intermediate prices that go into
32:44
Speaker 4: the final price of anything that you have, that's.
32:46
Speaker 2: The different piece here, right When we think about food
32:50
Speaker 2: prices in states, like when I go to the grocery
32:53
Speaker 2: store and I buy a dozen eggs, I'm not primarily
32:57
Speaker 2: paying for the farmer's cost of raising that chicken than
33:00
Speaker 2: that egg, you know, being actually born, what I am
33:04
Speaker 2: born laid there we go.
33:06
Speaker 3: What I'm paying for is the cost of the.
33:08
Speaker 2: Worker in the grocery store, the rent that they pay
33:11
Speaker 2: for that giant building there, the transportation cost of moving
33:14
Speaker 2: that egg from where do we say the biggest egg
33:17
Speaker 2: growing was Iowa, Iowa, Nebraska, something like that. So here
33:22
Speaker 2: in the United States, the food prices that we actually
33:23
Speaker 2: face generally don't have a ton to do with the
33:26
Speaker 2: raw commodity. They have to do with all of the
33:29
Speaker 2: costs associated with delivering that food product to us in
33:33
Speaker 2: the grocery store on the pretty shelf. And those are
33:36
Speaker 2: items that the fed more directly controls than the commodity
33:39
Speaker 2: price itself.
33:39
Speaker 4: The FED does, as you point out, does pay attention
33:44
Speaker 4: to food, energy, and other seemingly transitory increases or decreases
33:49
Speaker 4: in prices because it has to decide do we want
33:52
Speaker 4: to accommodate push back against a price shock, or just
33:56
Speaker 4: let it work its way through the economy. The latter
33:58
Speaker 4: strategy is risky. As we saw in twenty twenty twenty
34:01
Speaker 4: twenty twenty one, the FED let inflation run up in
34:04
Speaker 4: response to what may have been people argue about this
34:06
Speaker 4: what may have been largely a COVID shutdown related supply shock.
34:10
Speaker 4: All around the world, inflation became embedded for a few years.
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35:31
Speaker 2: So Mark I mentioned FED meeting coming up in eight
35:33
Speaker 2: days on March nineteenth. According to the Chicago Mercantile Exchange,
35:37
Speaker 2: there's currently a ninety seven percent chance that they do
35:40
Speaker 2: nothing in terms of rate moves at this next meeting.
35:42
Speaker 2: We sometimes talk about the FED in terms of the
35:44
Speaker 2: difficulty of their job and facing a you know, critical
35:48
Speaker 2: decision that they have to make, and messaging needs to
35:50
Speaker 2: be good. This is a pretty easy meeting, as far
35:52
Speaker 2: as I can tell. You're not facing immense pressure from
35:55
Speaker 2: the White House to do something. You can very easily
35:58
Speaker 2: go out there and just tell the public. Look, nobody
35:59
Speaker 2: knows anything, and we can't possibly move in reaction to
36:03
Speaker 2: potential tariff announcements. It actually seems like a really easy
36:07
Speaker 2: message to deliver forge your own pale at this next meeting.
36:10
Speaker 2: Not that it's a robust economy that he knows exactly
36:13
Speaker 2: what to do with, but simply that there is so
36:15
Speaker 2: much uncertainty out there that their job should be very clear.
36:20
Speaker 2: We're going to stay exactly where we are right now,
36:22
Speaker 2: and we'll react if we know something in the future.
36:25
Speaker 4: In the long run, the FED controls inflation. In the
36:27
Speaker 4: short run, other forces act to move inflation up or down,
36:30
Speaker 4: and in the short run there's a trade off between
36:32
Speaker 4: unemployment and inflation. That's why the FED so called dual
36:34
Speaker 4: mandate is to achieve the highest possible level of employment
36:38
Speaker 4: with stable Why are you smirking.
36:39
Speaker 3: Am I? The next story is what I'm smirking about.
36:41
Speaker 4: Okay, I thought I maybe had Sorry, I don't know,
36:43
Speaker 4: my fly was down there or something. They probably wouldn't
36:45
Speaker 4: have been a smirk though, So Mike, the FED is
36:47
Speaker 4: always trying to balance forces of too much demand and
36:52
Speaker 4: the resulting force of inflation, and right now those appear
36:58
Speaker 4: to be in balance. Inflation stable but a little bit elevated,
37:02
Speaker 4: unemployment bouncing around. As you said in the first segment
37:05
Speaker 4: in the low fours, those forces appear to be in balance.
37:08
Speaker 4: So not doing anything keeping the rate near what might
37:12
Speaker 4: be neutral probably makes sense.
37:16
Speaker 2: Wall Street Journal says consumers keep bailing out the economy.
37:19
Speaker 2: Now they might be maxed out, Tucker, Mark, I would
37:22
Speaker 2: challenge you to find a single year where the Wall
37:26
Speaker 2: Street Journal did not write an article with the exact
37:29
Speaker 2: same message anytime over the course of the last ten years.
37:33
Speaker 2: How much time do we have to it like this
37:36
Speaker 2: exact story gets written every single year. They may be right,
37:40
Speaker 2: you know, if you say something over and over again,
37:43
Speaker 2: you will eventually be correct about it is kind of
37:45
Speaker 2: how the economy works. But I don't really think you
37:50
Speaker 2: can take this one seriously, because I promise you this
37:52
Speaker 2: exact story has betten written every single year for at
37:55
Speaker 2: least the last decade. What makes it different this time is, yeah,
37:58
Speaker 2: those those high income murders are predominantly the ones feeling
38:03
Speaker 2: this most recent market downturn, and they contribute a lot
38:05
Speaker 2: to consumer spending. Will that reverse, will it truly result
38:09
Speaker 2: in recession? Anyone's guess is a fair game. At this point,
38:12
Speaker 2: We'll be right back here on the financial exchange markets
38:15
Speaker 2: remain in pretty strongly negative territory. We'll cover that in
38:18
Speaker 2: a whole lot more next