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Inflation Stays Hot as AI Pushes Prices Higher · The Financial Exchange Show

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Speaker 2: Good more than happy Thursday. Welcome back to the Financial Exchange.
1:14
Speaker 2: On a very busy Thursday. We've got economic news, we've
1:17
Speaker 2: got earnings, we've got inflation data out, and markets that
1:24
Speaker 2: are doing some confusing things here. Oh and and importantly
1:29
Speaker 2: price hikes announced from Apple. So interesting stuff occurring across
1:33
Speaker 2: the board. But markets, I've got to start here. So
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Speaker 2: last over the course of this week and a little
1:40
Speaker 2: bit into last week, you were seeing pressure on tech
1:43
Speaker 2: shares and video is off several percent. Micron Technology the
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Speaker 2: tenth largest company in the S and P five. It
1:49
Speaker 2: might be ninth now if you include both Googles, But
1:53
Speaker 2: when you take a look at you know where they
1:56
Speaker 2: had gone. Microns shares until today we're down about seven
2:00
Speaker 2: and a half percent. In Video was down about five
2:02
Speaker 2: and a half percent through yesterday, and that was all
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Speaker 2: leading into Micron's earnings last night. And so Micron Technology,
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Speaker 2: I mean, if I want to place them somewhere in
2:14
Speaker 2: the AIS supply chain, I've got to think through where
2:18
Speaker 2: I put them. But they are involved in their memory
2:23
Speaker 2: products go into the semiconductor manufacturing space. They are I
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Speaker 2: guess lower down on the supply chain than in Video
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Speaker 2: would be because in videos, you know, feeding in the
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Speaker 2: the actual technology to go into it. Micron is building
2:36
Speaker 2: some of the stuff that goes into what TSMC manufacturers,
2:40
Speaker 2: so they're pretty far down there in the supply chain
2:43
Speaker 2: on the AI trade and shares have been under pressure
2:48
Speaker 2: as with you know, many other tech shares over the
2:51
Speaker 2: course of the last few days. They then come out
2:54
Speaker 2: with earnings last night. Paul used one word for me
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Speaker 2: to describe Micron's earnings from last night blowout, Okay, blockbuster,
3:02
Speaker 2: any any any B word?
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Speaker 1: What have not.
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Speaker 3: Look at a CNBC and one word are putting is
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Speaker 3: one word?
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Speaker 2: Two words is different? Yeah, they knock the cover off
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Speaker 2: the ball in terms of their earnings. They I mean
3:18
Speaker 2: you want to highlight some of that, Yeah, let's talk
3:20
Speaker 2: about it.
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Speaker 3: And I think it's helpful for listeners out there to
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Speaker 3: get a context. You know, when we say memory chips
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Speaker 3: and there's d RAM and nan, it gets confusing when
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Speaker 3: you're talking about all this semiconductor stuff. So specifically, just
3:31
Speaker 3: think about it this way that whether it's your smartphone
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Speaker 3: or your computer, there are memory capabilities that are used
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Speaker 3: to store information and so d RAM is the short
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Speaker 3: term memory. So what you need to sort of get
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Speaker 3: by on a daily basis when you're using your computer.
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Speaker 3: That is the memory that is short term and that
3:50
Speaker 3: you need that's regularly accessible to get to different files
3:54
Speaker 3: when you're doing your work at your computer during the day.
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Speaker 3: Then there's NAN, which is long term memory storage, which
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Speaker 3: on your computer or your devices you have storage for
4:01
Speaker 3: memory of your videos and your photos and files. And
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Speaker 3: so memory has typically been a boomer bus cycle that
4:09
Speaker 3: is triggered on by just demand for electronic products. For
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Speaker 3: consumer electronics like phones and things like that. That sort
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Speaker 3: of ebbs and flows is whether new iPhones come out
4:18
Speaker 3: or new computers. But the reason why Micron and this
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Speaker 3: sector or the companies in this space have exploded is
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Speaker 3: because now there's another use for these chips, and that's
4:29
Speaker 3: in data centers. And we've talked about the amount of
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Speaker 3: money going into them, it's just been piling in. As
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Speaker 3: a result, the earnings growth that Micron has seen is
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Speaker 3: just truly astounding. Where they came in for this most
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Speaker 3: recent quarter at forty one billion dollars of revenue, that
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Speaker 3: was four times what they did last year. They did
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Speaker 3: nine billion in the same quarter last year, so quadrupling
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Speaker 3: the revenue. Think about any business owner out there, if
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Speaker 3: you quadruple your revenue year over year, that's pretty dang good.
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Speaker 3: And billion is more than they did in their fiscal
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Speaker 3: year twenty twenty five. It just is just tremendous growth
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Speaker 3: that they're seeing here.
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Speaker 2: Now you're paying for it. The stock's up eight hundred
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Speaker 2: and twenty percent over the last twelve months. They are.
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Speaker 3: But here's the crazy thing about them is that they're
5:13
Speaker 3: still only trading at a ten times forward earning multiples.
5:17
Speaker 3: So they're projected to do in fiscal year twenty twenty
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Speaker 3: seven two hundred and thirty six billion dollars of revenue,
5:23
Speaker 3: So the growth is at least projected to continue to
5:27
Speaker 3: go at this break nest pace. It's eerily similar to
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Speaker 3: Nvidia if you look at sort of the hockey shit
5:33
Speaker 3: hockey stick shape growth of revenue that they've seen, where
5:37
Speaker 3: this is a company like Micron that was doing thirty
5:40
Speaker 3: billion in revenue twenty five billion in revenue for a
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Speaker 3: year and now they're reporting a quarter, just one fourth
5:46
Speaker 3: of its year coming in at forty one billion. So
5:49
Speaker 3: it truly has just been Sandys, Micron and others that
5:54
Speaker 3: have really benefited significantly from kind of that shift down
5:57
Speaker 3: the supply chain, like you mentioned, mind.
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Speaker 2: So they're not making finished chips, but they are part
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Speaker 2: of the components that go into all sorts of chips,
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Speaker 2: including the ones made by Nvidia and others. They're signing
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Speaker 2: long term deals to try and lock in these prices
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Speaker 2: right now for years to come. Like good execution. In
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Speaker 2: spite of that, their stock did turn around, right, It
6:18
Speaker 2: was able to turn around this morning. The shares are
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Speaker 2: up about twelve percent for some reason. This morning though
6:24
Speaker 2: in pre market trading, we had the NASDAC up a
6:26
Speaker 2: couple of percent. As I look at it now, NASDAK
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Speaker 2: down one third of a percent. SMP is up now
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Speaker 2: about a third of a percent, Dow is up. But
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Speaker 2: we had this giant piece of the AI trade, a
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Speaker 2: real good indicator of is demand still seeping through the
6:46
Speaker 2: sector all the way down to the smallest manufacturer of components.
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Speaker 2: I don't mean small on a global scale. Micron's huge.
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Speaker 2: They're the tenth largest company in the S and P
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Speaker 2: five hundred, But they, like I said, manufacture components that
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Speaker 2: go into finished semiconductors. And the answer was a resounding yeah,
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Speaker 2: it's still here. The demand still exists, and it was
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Speaker 2: not enough to lift the market at least thus far
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Speaker 2: into trading, which I find fascinating, you know, taking a
7:14
Speaker 2: look around at those big other companies right in Nvidia
7:18
Speaker 2: down two and a half percent today. Let's take a
7:21
Speaker 2: look at Google and other big players here, each were
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Speaker 2: off about a percent of Google down one percent today,
7:29
Speaker 2: Microsoft down two percent today. So I've had a tough
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Speaker 2: time putting my finger precisely on a catalyst that has
7:36
Speaker 2: been sending tech shares lower this week. I don't have
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Speaker 2: a real sense for any one event that was causing concern,
7:44
Speaker 2: but if this was one of them that, hey, for
7:47
Speaker 2: some reason people were expecting disappointing earnings from Micron. We
7:52
Speaker 2: just removed that risk from the markets, and it didn't
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Speaker 2: move them so early trading. We will see what comes here.
7:59
Speaker 2: But I I found it pretty interesting to see the
8:02
Speaker 2: pressure that's been on markets this week. Not that it's
8:04
Speaker 2: been tremendous, but a couple percentage points here and there
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Speaker 2: after a very significant rally, and you just removed one
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Speaker 2: of the potentially concerning items from the risk matrix that's
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Speaker 2: out there, and not quite enough to turn things around.
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Speaker 3: It seems like in what I'm reading here, it kind
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Speaker 3: of dovetails into the story that we're going to cover
8:23
Speaker 3: in regards to Apple as to why there's concern on
8:26
Speaker 3: the major tech sector that therese price increases that Apple
8:30
Speaker 3: has just announced this morning could have an impact to
8:33
Speaker 3: some of these other major tech companies that are big
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Speaker 3: buyers of semiconductors, and so that may be what's driving them.
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Speaker 2: So let's take a quick break, because in addition to
8:41
Speaker 2: all this stuff, in addition to Apple's announcements, we did
8:44
Speaker 2: get readings on inflation for the month of May. I
8:49
Speaker 2: want to cover those because they came in exactly as expected,
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Speaker 2: which is not necessarily good news, but they came in
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Speaker 2: as anticipated. We got this announcement from Apple, and a
8:59
Speaker 2: little bit more on the way of where inflation could
9:02
Speaker 2: be headed. That's next here on the Financial Exchange.
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9:40
Speaker 2: All right, Paul at eight thirty am this morning, we
9:43
Speaker 2: got a release from the Bureau of Economic Analysis. They
9:47
Speaker 2: compute the Fed's preferred measure on inflation, which always comes
9:51
Speaker 2: out a little bit later than the Bureau of Labor
9:54
Speaker 2: Statistics Consumer Price Index, but it's been running hotter than
9:59
Speaker 2: the CPA recently and came in at a multi year
10:03
Speaker 2: high now at four point one percent for the month
10:06
Speaker 2: of April, excuse me, for the month of May. That
10:09
Speaker 2: is the headline number, which does include the increased gas
10:13
Speaker 2: prices and energy prices that we have been seeing. But
10:18
Speaker 2: even when you strip it out, I think the key
10:20
Speaker 2: message that I think the FED successfully delivered at their
10:24
Speaker 2: press conference was that even when you take out the
10:27
Speaker 2: overall conversation on energy prices, food prices here and there,
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Speaker 2: what we're experiencing here is core prices that are still
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Speaker 2: uncomfortably high. And that is the I think the key
10:43
Speaker 2: message here for FED governors and everyone else. Now, to
10:47
Speaker 2: be clear, this was all anticipated, right in terms of
10:51
Speaker 2: where we landed. We came in exactly what was expected,
10:55
Speaker 2: I think, a little bit lower in fact on the
10:57
Speaker 2: month over month inflation numbers, but year over year headline
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Speaker 2: PCE as well as core PCE exactly where was expected
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Speaker 2: for the month of May. I think what we're seeing
11:10
Speaker 2: then in reaction, so one, the odds of a rate
11:13
Speaker 2: hike at the next FED meeting have come down a
11:15
Speaker 2: few percentage points. Bond markets aren't moving terribly as a
11:19
Speaker 2: piece of this. So again, if you're looking for reasons
11:21
Speaker 2: why stocks are being volatile today, I don't think you
11:25
Speaker 2: can point to this price measurement that we got at
11:28
Speaker 2: eight thirty am this morning, so in line with expectations.
11:32
Speaker 2: But the crucial message on the PCE price index is
11:36
Speaker 2: very simply that at three point four percent when you
11:39
Speaker 2: exclude food and energy, which is where we are, that
11:42
Speaker 2: is well above the Fed's target of two percent and
11:45
Speaker 2: is going to take some work to get it down.
11:47
Speaker 3: Yeah, and it's almost a half percent more where we
11:49
Speaker 3: were sitting around this time last year, where that number
11:52
Speaker 3: in July of twenty five was two point nine percent,
11:54
Speaker 3: and it's really been sitting around low threes as of
11:58
Speaker 3: the end of last year, but ticked up pretty significantly
12:02
Speaker 3: over the course of the last few months here.
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Speaker 2: So the expectation, by the way, is to see that
12:06
Speaker 2: core number, the one where you strip out the food
12:07
Speaker 2: and energy costs, which is irrelevant for all of us,
12:10
Speaker 2: since we spend so much of our money on food
12:12
Speaker 2: and energy. But in terms of what the FED actually
12:15
Speaker 2: cares about, they are most experts are targeting a three
12:18
Speaker 2: percent core inflation rate by the end of this year.
12:22
Speaker 2: I think that's plausible, right. I think that is very
12:25
Speaker 2: plausible that we get to that level. We could even
12:28
Speaker 2: get down into that range on a total level, given
12:31
Speaker 2: what we're likely to see with energy prices. But I
12:34
Speaker 2: think there's a lot of risk to the upside, and
12:36
Speaker 2: I think that's part of what's being priced in right
12:38
Speaker 2: now is, Hey, we think that inflation will probably come
12:42
Speaker 2: back down, but there's some serious risk that it might
12:46
Speaker 2: not for a few reasons going on here. So let's
12:49
Speaker 2: talk about one of those small reasons. Because Apple sales
12:52
Speaker 2: are a small component of overall inflation, as big a
12:55
Speaker 2: company they are, but it is a symptom of this
12:59
Speaker 2: over all AI demand economy right now, which is Apple
13:04
Speaker 2: announcing that they'll be raising prices on their Max and
13:06
Speaker 2: iPads by two hundred dollars or more on certain models.
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Speaker 3: Yeah, pretty substantial increases across the board here, Mike, anywhere
13:13
Speaker 3: from like you said, fifteen to twenty percent on Max
13:17
Speaker 3: and fifteen to twenty five percent on iPads. And this
13:20
Speaker 3: is a direct result from what we spoke about earlier
13:24
Speaker 3: in the program. With Micron's earnings. The cost for memory
13:28
Speaker 3: has quadrupled over the course of the last year, and
13:31
Speaker 3: as a result of that, when Apple puts together a
13:35
Speaker 3: device that needs memory to run it, a MacBook Pro
13:38
Speaker 3: or an iPad, the cost inputs have quadrupled, so they've
13:43
Speaker 3: had to increase prices as a result of it. So
13:46
Speaker 3: that is another symptom of all of this AI data
13:50
Speaker 3: center demand having its trickle down impact to the consumer
13:54
Speaker 3: electronic devices that are now being priced higher because of
13:58
Speaker 3: all this other demand that ex this out there on
14:01
Speaker 3: the data center front. And so while you know, iPads
14:05
Speaker 3: and iPhones aren't the end all be all when you're
14:07
Speaker 3: looking at inflationary pressures, it's one of the items in
14:12
Speaker 3: the basket of goods that's under some pressure from a
14:15
Speaker 3: pricing standpoint, in addition to some of the other ones
14:18
Speaker 3: that are you know, adjacent to the energy sector and
14:21
Speaker 3: just other areas of pricing that have seen some sustained
14:25
Speaker 3: pressure over the year.
14:26
Speaker 2: Here, I want iPhone pricing. You know, MacBook and iPad
14:29
Speaker 2: are interesting.
14:30
Speaker 3: But unchanged now, but right coming.
14:32
Speaker 2: But in terms of the upgrade cycle, I actually don't know,
14:35
Speaker 2: but I would imagine that the average iPhone upgrade cycle
14:39
Speaker 2: is around half as long as the like mac or
14:43
Speaker 2: iPad cycle, right like, yeah, I mean, if you're upgrading
14:46
Speaker 2: your phone every two to three years, you think you're
14:49
Speaker 2: lasting with a MacBook or a iPad five to six years.
14:52
Speaker 4: I think longer for a computer, but yeah, yeah, it's
14:55
Speaker 4: definitely longer than an iPhone. I guess like seven to
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Speaker 4: nine years.
14:58
Speaker 2: Yeah, yeah, So I mean that's where the real impact
15:02
Speaker 2: is going to be is Hey, what is the new
15:03
Speaker 2: iPhone pricing when they roll it out. They're still selling
15:06
Speaker 2: the old models that were built on old components, so
15:08
Speaker 2: they can afford to try and hold prices where they
15:11
Speaker 2: are now. But the statements from Apple and just the
15:16
Speaker 2: reality on the ground, there's only one direction that they
15:19
Speaker 2: can really go with that pricing. Their quote here, we
15:23
Speaker 2: have now reached a point where we need to begin
15:25
Speaker 2: raising prices. We have never seen a component price increase
15:29
Speaker 2: this much this quickly. There's no chance that reverses itself
15:33
Speaker 2: by the fall release of their latest iPhone, and so
15:37
Speaker 2: there's only one direction for this stuff.
15:38
Speaker 3: No that's yeah, exactly. That's not how the memory.
15:41
Speaker 2: It's not gasoline prices exactly.
15:44
Speaker 3: Memory inventory. You are very much constrained in terms of
15:47
Speaker 3: how much supply you can create on a year over
15:49
Speaker 3: year basis. It's somewhere between twenty five to thirty percent
15:52
Speaker 3: that you can increase memory capacity. So to your point,
15:55
Speaker 3: this is not like the strait of Hermoves where the
15:57
Speaker 3: shikeuts resolved in a short order. Here this is going
16:00
Speaker 3: to persist on into twenty seven. And as if you
16:04
Speaker 3: listen to micron Ceo, perhaps you know past that. Just
16:07
Speaker 3: quick search here it's yeah, somewhere between two to three
16:10
Speaker 3: years on an iPhone cycle upgrade versus five to seven
16:14
Speaker 3: for those people who are more casual with their iPads,
16:16
Speaker 3: So that jives there.
16:18
Speaker 2: The overarching question to me is not about inflation from
16:22
Speaker 2: the war in Iran. It's not about if we're focused
16:26
Speaker 2: here on the overall narrative about this economy, this market
16:30
Speaker 2: and inflation to the consumer, because inflation to the consumer
16:35
Speaker 2: may not be the all important issue for markets in
16:39
Speaker 2: the short term, but it will absolutely be an all
16:41
Speaker 2: important issue as folks go into the voter box this fall.
16:45
Speaker 2: And you know, the curious question that I can't quite
16:49
Speaker 2: answer yet is how much does this AI boom actually
16:54
Speaker 2: contribute to inflation? Because you know what you can. You
16:57
Speaker 2: can fix oil prices by reopening the straight of horror moves.
17:00
Speaker 2: Food prices are going to remain unpredictable, but nothing that
17:05
Speaker 2: you know, any politician can do is going to inflict
17:08
Speaker 2: that in one direction or another when we take a
17:12
Speaker 2: look at prices overall. You know, we're seeing this from
17:16
Speaker 2: my phone, so yeah, I won't be surprised if over
17:19
Speaker 2: the course of the next few months. Sorry, we haven't
17:21
Speaker 2: seen it from my phones. But other electronics products. You know,
17:24
Speaker 2: I bought a laptop for our house the other day
17:26
Speaker 2: and substantially more expensive than when I was looking at
17:29
Speaker 2: it six months ago. So electronics products, I think, very
17:32
Speaker 2: very obviously are going to go up. Electricity partly because
17:37
Speaker 2: of higher energy costs, but you know, we're up nearly
17:40
Speaker 2: six percent year over year in the most recent month.
17:42
Speaker 2: Is there a path for that to come down? I
17:45
Speaker 2: don't really see it. But you know, with this AI boom,
17:51
Speaker 2: it is not just memory chips and semiconductors that are
17:55
Speaker 2: going to go up in price. It is all sorts
17:58
Speaker 2: of different items throughout the supply chain, and so questions
18:01
Speaker 2: that I have, like, you know, could we see new
18:04
Speaker 2: car prices go up because of the AI demand. There's
18:07
Speaker 2: a lot of semiconductors that go into that. We all
18:09
Speaker 2: remember that from the COVID days of not being able
18:12
Speaker 2: to get our hands on semiconductors. Could you see new
18:15
Speaker 2: car prices go up because all the battery tech and
18:17
Speaker 2: stuff like that is going towards the AI industry instead?
18:20
Speaker 2: What about new home construction? Right, Like, hey, there's only
18:25
Speaker 2: so many skilled laborers out there if they're all building
18:29
Speaker 2: data centers instead of new homes, what does it cost
18:31
Speaker 2: to put a new home, you know, on a plot
18:33
Speaker 2: of land these days? You know, we won't see that
18:37
Speaker 2: show up in inflation right away because that's not how
18:39
Speaker 2: they measure it. They don't really take into account construction
18:42
Speaker 2: costs and inflation. But eventually owner's equivalent rent and you know,
18:46
Speaker 2: maintenance and repair on homes all comes into there. And
18:49
Speaker 2: so that to me is one of the key pieces
18:53
Speaker 2: of all this. The promise of AI has been a
18:55
Speaker 2: giant productivity boom. We've been seeing a bit of a
18:58
Speaker 2: productivity boom and can be disinflationary, but in the short
19:02
Speaker 2: term The only thing that I'm seeing from the AI
19:05
Speaker 2: boom in terms of prices is prices up because we're
19:09
Speaker 2: all now competing for electricity, semiconductors, and electronic components with
19:14
Speaker 2: some of the biggest corporations in the world.
19:17
Speaker 3: Who have a lot of cash.
19:18
Speaker 2: We have a lot of cash and a big willingness
19:21
Speaker 2: to spend it. Right now, we've got to take quick break,
19:24
Speaker 2: but a full market update is coming up next with
19:27
Speaker 2: Wall Street Watch.
19:39
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19:47
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19:55
Speaker 1: driving markets so far today right here on the Financial
19:58
Speaker 1: Exchange Radio Network.
20:00
Speaker 4: They're seeing some volatility out there today, especially in the
20:03
Speaker 4: tech sector, despite blockbuster earnings from Micron Technology. Right now,
20:08
Speaker 4: the Dow is up one and a half percent, or
20:11
Speaker 4: seven hundred and fifty nine points higher, SMP five hundred
20:14
Speaker 4: up about half a percent, Nasdaq down just over a
20:17
Speaker 4: quarter percent, RUSS two thousand is up one a third percent.
20:21
Speaker 4: Ten Your treasureeled down two basis points at four point
20:24
Speaker 4: three seven percent. In oil is up about two thirds
20:28
Speaker 4: of a percent. Rating at seventy dollars a barrel. Micron
20:31
Speaker 4: stock is jumping nine percent after it beat expectations across
20:35
Speaker 4: the board, with the chip maker said revenue quadrupled in
20:38
Speaker 4: the second quarter. Micron also raised its forecast and said
20:41
Speaker 4: it expects the memory chip shortage to extend beyond twenty
20:45
Speaker 4: twenty seven. Meanwhile, Apple this morning announced they raise prices
20:48
Speaker 4: of its Max and iPads by two hundred dollars or
20:52
Speaker 4: more on some models. Apple shares down by five percent elsewhere.
20:56
Speaker 4: In a shake up to Jamie Diamond's succession race, JP
21:00
Speaker 4: morgan Chase promoted two of its top executives, Dave Assuming,
21:03
Speaker 4: Doug Petno and Troy Rollbar into newly created co president Roles.
21:10
Speaker 4: JP Morgan stock is up over two percent. Darted Restaurants
21:15
Speaker 4: posted mixed quarterly results in we guidance, sending shares in
21:18
Speaker 4: the Olive Garden parent company down half a percent, and
21:21
Speaker 4: after its twenty six percent leap yesterday, new Meme stock
21:26
Speaker 4: Wendy's is down by six percent today. I'm Tucker Silva,
21:31
Speaker 4: and that is Wall Street Watch.
21:34
Speaker 2: One other little beneficiary of the AI trade this morning
21:38
Speaker 2: is good old Qualcom, who, in my mind is probably
21:41
Speaker 2: most famous for their you know technology, or in the
21:45
Speaker 2: dot com bubble that sent their stock up some twenty
21:47
Speaker 2: six hundred percent in nineteen ninety nine, and a single
21:51
Speaker 2: calendar year stock was up twenty six hundred percent. That
21:55
Speaker 2: seems familiar to anything that we're going on that we
21:57
Speaker 2: have going on right now. But apparently designing a new
22:00
Speaker 2: CPU for data centers called the Dragonfly C one thousand,
22:05
Speaker 2: saying that Meta would be using them when they start
22:07
Speaker 2: production in twenty twenty eight. I'll be the first to say,
22:11
Speaker 2: like for anyone listening, I have zero expertise in determining
22:15
Speaker 2: whether or not Qualcom is any good whatsoever at designing
22:19
Speaker 2: specific chips for specific things. They, from what I understand,
22:24
Speaker 2: are pretty good at building lower energy intensive semiconductors, which
22:30
Speaker 2: would obviously be important if you are going to continue
22:33
Speaker 2: to build out this data center story. But my continued
22:37
Speaker 2: problem with this entire AI trade is that right now,
22:41
Speaker 2: so far as I can tell, everyone in the AI
22:45
Speaker 2: trade is being treated as a big winner, and quite frankly,
22:49
Speaker 2: they are kind of all big winners right now. If
22:52
Speaker 2: you can make a semiconductor that can be hypothetically produced
22:56
Speaker 2: to power the AI industry today, somebody's going to buy
22:59
Speaker 2: it because there's not enough that anybody else is making.
23:04
Speaker 2: I also fundamentally do not believe that all of these
23:07
Speaker 2: same companies will be the ultimate winners five years from now.
23:12
Speaker 2: And I have no way of differentiating one versus the other.
23:15
Speaker 2: But I have a really tough time believing, pardon me,
23:19
Speaker 2: that every model designer, data center builder, chip manufacturer, chick,
23:26
Speaker 2: chip component piece manufacturer, nuclear power plant producer are all
23:33
Speaker 2: going to permanently benefit from this permit. Yeah, like for
23:37
Speaker 2: the rest of time. And the problem is that the
23:39
Speaker 2: stock market seems to be pricing it that way.
23:42
Speaker 3: No, that is that is probably a manage concerned. There
23:46
Speaker 3: is a shortage of computing right now, well documented, and
23:48
Speaker 3: so as a result of that, you have those who
23:51
Speaker 3: are in demand for computing. A lot of that's from
23:54
Speaker 3: the hyperscalers looking at any source possible to get CPUs, GPUs,
23:59
Speaker 3: any that goes into these data centers, and so as
24:02
Speaker 3: a result, you have this trickle down impact to all
24:05
Speaker 3: of these legacy tech companies that quite quite honestly, in
24:08
Speaker 3: years past, were not very sexy to talk about from
24:11
Speaker 3: an investing perspective, whether it's the intels or the microns
24:15
Speaker 3: or dells.
24:15
Speaker 2: And we need to talk about why. It's because after
24:19
Speaker 2: the dot com boom, the products that they produced became commoditized. Right,
24:24
Speaker 2: anybody could make them because the technology was fairly simple,
24:28
Speaker 2: and so prices got driven down and their stock prices.
24:32
Speaker 2: When you look at such a intensive business model, right,
24:37
Speaker 2: it is not just a snap of your fingers to
24:41
Speaker 2: create a new product. In qualcommer and Video's business model,
24:44
Speaker 2: you have to research and develop, you have to go
24:46
Speaker 2: find a manufacturer. It is very intensive compared to the
24:51
Speaker 2: real beneficiaries of the tech boom for the last decade,
24:54
Speaker 2: which were Facebook and Google, these companies that did not
24:57
Speaker 2: create hardware. They created new, low intensive businesses that ran
25:01
Speaker 2: with like ninety percent profit margins. And so the likes
25:05
Speaker 2: of Qualcomm and Cisco and Oracle and all of these
25:09
Speaker 2: giant beneficiaries of the dot com infrastructures, Yeah, they languished
25:14
Speaker 2: for the last fifteen to twenty years because the stuff
25:18
Speaker 2: that they were making anybody could make and there wasn't
25:21
Speaker 2: enough demand for it. All of a sudden, there's demand again,
25:24
Speaker 2: and the question is just how long will it last?
25:28
Speaker 2: Is it going to play out any differently than the
25:29
Speaker 2: dotcom era.
25:30
Speaker 3: Yeah, how long it lasts, to me is the biggest question.
25:33
Speaker 3: We recognize that Micron will not continue to grow its
25:38
Speaker 3: revenue quadrupling year over year. There's going to be a
25:40
Speaker 3: slowdown at some point in time. From all indications according
25:43
Speaker 3: to the micros On CEO that the demand through twenty
25:46
Speaker 3: twenty seven is still going to persist. I don't mean
25:48
Speaker 3: to focus them and in general, but it seems like
25:51
Speaker 3: generally speaking, this AI trade continues to have momentum projecting
25:54
Speaker 3: at twenty seven. But that is the question is when
25:57
Speaker 3: when is the end point where that demands start to decrease,
26:01
Speaker 3: Whether it's productivity is not coming through enough on the
26:04
Speaker 3: AI end and that allows some of these hyper skills
26:07
Speaker 3: to slow down and zap some of the demand from
26:10
Speaker 3: the market. Who knows what that will be the right
26:12
Speaker 3: behind it.
26:13
Speaker 2: That was also to me why I was so confused
26:14
Speaker 2: about all this focus on Micron's earnings, Like there was
26:18
Speaker 2: only really one way Micron's earnings could have gone, which
26:21
Speaker 2: was blowout blockbuster sales, because we see it from all
26:26
Speaker 2: of the companies that are higher up on the AI
26:29
Speaker 2: demand chain. Right, if you're going to see a slowdown
26:32
Speaker 2: in AI, it's not going to come from the component
26:36
Speaker 2: manufacturer that puts memory into Nvidia chips. It's going to
26:40
Speaker 2: come from the users of the AI tools who say,
26:43
Speaker 2: we're not getting enough out of this for what we're paying,
26:46
Speaker 2: and so we are not renewing our license with Xyzai
26:50
Speaker 2: model company. That will be the start of it. I
26:53
Speaker 2: think it's not going to be in Vidia telling you
26:56
Speaker 2: one day that, hey, we got a bunch of chip
26:59
Speaker 2: order cancelations. That comes last, right, So I mean that's
27:03
Speaker 2: what I'm looking out for, is, hey, are there companies
27:05
Speaker 2: out there like Uber did recently, who said, hey, this
27:09
Speaker 2: is not worth the price we are paying. We have
27:12
Speaker 2: to slow down and be more decisive and more intentional
27:15
Speaker 2: with how we are utilizing AI. I am not seeing
27:18
Speaker 2: that across the board right now, and so I don't
27:20
Speaker 2: think we're even at the start of that. But that,
27:22
Speaker 2: to me is the signal that you keep an eye
27:24
Speaker 2: out for. It's not what Micron's telling you about their earnings.
27:27
Speaker 2: It's not what some uh, what are other components that
27:30
Speaker 2: go into this. It's not some copper manufacturer or Toto
27:33
Speaker 2: toilets who puts together porcelain for the semiconductor manufacturing space.
27:37
Speaker 2: It is the end users of these tools who are
27:41
Speaker 2: paying gargantuan amounts of money for tokens, If they start saying, hey,
27:45
Speaker 2: they ain't that useful, then watch out. Then you know,
27:49
Speaker 2: it starts flowing down to the other providers. But by
27:53
Speaker 2: most analysis that I'm seeing, I don't think we're terribly
27:56
Speaker 2: close to that point in time.
27:57
Speaker 3: No, But it is a good point to bring up
27:59
Speaker 3: that if there is so many inflationary impacts on the
28:03
Speaker 3: cost of a token from all of these underlying supplying components,
28:08
Speaker 3: does it get to a point where these businesses scrutinize
28:11
Speaker 3: their spend. If it continues to be very costly to
28:14
Speaker 3: run different tokens over the next six to twelve months
28:18
Speaker 3: because of these memory shortages and other things, does that
28:20
Speaker 3: cause that demand?
28:21
Speaker 2: I'm not saying we're seeing no signs of that, right
28:24
Speaker 2: Like open Ai has hinted that they were going to
28:26
Speaker 2: cut prices for some of their latest models, and others
28:29
Speaker 2: have talked a little bit about it. But I'm not
28:32
Speaker 2: seeing any expense discipline on behalf of corporation saying no,
28:36
Speaker 2: let's look at how we're using AI.
28:38
Speaker 3: Yeah, because you run the risk of the concern now
28:41
Speaker 3: that they have is fomo basically this concept that they're
28:44
Speaker 3: going to miss out, so they need to invest and
28:46
Speaker 3: spend the money to learn and understand what the technology
28:50
Speaker 3: can do. So you're willing to throw that caution to
28:52
Speaker 3: the wind. The further you get along down that road
28:55
Speaker 3: and you start to question how valuable the technology is,
28:57
Speaker 3: that's when you start to scrutinize the expense. But right
29:00
Speaker 3: now it's an existential threat for a lot of them,
29:03
Speaker 3: So you need to be up on the technology and
29:05
Speaker 3: spend to research it.
29:07
Speaker 2: Or I'm wrong. Yeah, or I'm wrong, and the cost
29:13
Speaker 2: genuinely is so profitable that you start laying off employees
29:17
Speaker 2: and you just consume more and more AI. That's the
29:21
Speaker 2: way that i'm.
29:21
Speaker 3: That's the way bulls would argue against you.
29:24
Speaker 2: Yeah, yeah, that's the way that I'm wrong. If I'm
29:26
Speaker 2: wrong in some meaningful way on this, That's how I'm
29:28
Speaker 2: wrong is that I am underappreciating just how impactful this
29:32
Speaker 2: new technology will be and it will lead to mass
29:35
Speaker 2: layoffs and higher unemployment for a period of time and
29:38
Speaker 2: truly revolutionary new profits for companies. But if that does happen,
29:43
Speaker 2: it'll be the first technology we've seen in history that does.
29:47
Speaker 3: It like that to do that quickly.
29:48
Speaker 2: Yeah, let's take a quick break when we come back.
29:51
Speaker 2: A bit of an update on oil prices, gasoline prices
29:54
Speaker 2: and frustration mounting from the Trump administration on the pace
29:58
Speaker 2: of movement on gas prices. It's next year on the
30:00
Speaker 2: Financial Exchange.
30:02
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30:16
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30:25
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30:42
Speaker 2: We have seen oil prices now tick down to prices
30:47
Speaker 2: that we haven't seen since the beginning of our pre
30:51
Speaker 2: wartime for the war in Iran, and nonetheless cord to
30:55
Speaker 2: triple A. The average cost for a gallon of gasoline
30:58
Speaker 2: is sitting at three dollars and ninety two cents. That
31:03
Speaker 2: is still above where we were prior to the outbreak
31:06
Speaker 2: of tensions in Iran, and it seems to be easy
31:11
Speaker 2: targets whether you're the Biden administration or the Trump administration.
31:14
Speaker 2: You like to call out oil companies for price gouging,
31:16
Speaker 2: and I feel like between them and institutional buyers of
31:20
Speaker 2: single family homes, everyone can agree that they just dislike
31:23
Speaker 2: these two groups of people. But the Trump administration pretty
31:26
Speaker 2: much using the exact same language that the Biden administration
31:29
Speaker 2: did calling out oil executives for not bringing down gas
31:32
Speaker 2: prices faster and plainly that's just not how it works.
31:36
Speaker 3: Yeah, let's get into that of just how the system works.
31:40
Speaker 3: I misquoted this phrase earlier on a call into New
31:44
Speaker 3: Hampshire radio station of what happens with oil prices. I
31:47
Speaker 3: used the expression clearly had had my coffee up like
31:50
Speaker 3: an elevator, down like a feather. The expression is up
31:53
Speaker 3: like a rocket, down like a feather. Yeah, that is
31:55
Speaker 3: what's happened with oil prices. And the reason why you
31:58
Speaker 3: see it sort of be this feather phase that we
32:01
Speaker 3: sit in right now where you're not seeing gas prices
32:04
Speaker 3: to reflect what's going on with West Texas in your
32:06
Speaker 3: media is because think about it, if you're the retailer
32:09
Speaker 3: selling the gasoline, the gasoline that you're selling that you
32:12
Speaker 3: and I are buying today, if I hit the road,
32:15
Speaker 3: Mike is not gas that just got there today. It's
32:19
Speaker 3: been sitting there for weeks in their inventory, or they
32:22
Speaker 3: ordered at wholesale four six weeks ago. I don't know
32:25
Speaker 3: the exact timeframe on it. I'm not an expert on
32:28
Speaker 3: that part of it, but they paid higher prices for
32:30
Speaker 3: the wholesale fuel that you and I are pumping into
32:33
Speaker 3: our cars today. So as a result of that, they
32:36
Speaker 3: cannot just take down their prices immediately because then they
32:39
Speaker 3: would take a loss on that inventory that they're trying
32:41
Speaker 3: to clear through. That's why it takes time for you
32:44
Speaker 3: and I to see the decrease at the pump, because
32:47
Speaker 3: they have to clear through that inventory that they once
32:49
Speaker 3: bought at higher prices. Now the next cycle when they're
32:51
Speaker 3: buying wholesale again this time around for the next you know,
32:56
Speaker 3: pumping of fuel. You know, however, long three, four, five,
32:59
Speaker 3: six weeks from that's when you'll see the impact from.
33:01
Speaker 2: Yeah. To be clear here, you hit peak oil prices
33:04
Speaker 2: during this conflict on April eighth, April sixth. You did
33:10
Speaker 2: not see peak gasoline prices until May eleventh, So it
33:15
Speaker 2: just plainly takes a while for it to come back
33:18
Speaker 2: down and go all the way up. It is not,
33:21
Speaker 2: so far as I can tell, price gouging by any
33:24
Speaker 2: stretch of the imagination. In these companies that do operate
33:27
Speaker 2: in the oil industry are not exactly all raking in
33:33
Speaker 2: capital at all points in time. It is not.
33:35
Speaker 3: It's a commodity and there's one on every corner. Like you,
33:38
Speaker 3: you really don't. These retailers don't just sit around to
33:42
Speaker 3: gouge people.
33:43
Speaker 2: That is the more important piece too, Like does anyone
33:46
Speaker 2: feel like driving through you know, United States that there
33:50
Speaker 2: is a lack of competition at gas stations, right, That's
33:55
Speaker 2: who sets the prices for these things. And I think
33:57
Speaker 2: that if they thought they could pick up a whole
34:00
Speaker 2: bunch of volume by lowering prices against their competitors, they
34:03
Speaker 2: would certainly do so.
34:05
Speaker 3: Such a low margin business in the first place.
34:07
Speaker 2: Yeah it is. Yeah, it wasn't price gouging under Biden.
34:09
Speaker 2: It's not price gouging under Trump either. They're not all
34:13
Speaker 2: getting together and saying, hey, we really like dislike this
34:15
Speaker 2: Trump guy. We need to we need to make sure
34:18
Speaker 2: we keep gas prices higher. So that's that's the state
34:21
Speaker 2: of gasoline. It'll come down. It just takes a little while.
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35:31
Speaker 2: Well, they haven't moved much, but auto loan rates apparently
35:35
Speaker 2: have moved down enough to incentivize a whole bunch of
35:39
Speaker 2: people to go and refinance their auto loans, which is
35:42
Speaker 2: probably a good idea, but a bad sign of things.
35:47
Speaker 2: We have terrible personal finance habits when it comes to
35:51
Speaker 2: auto purchases, and I'm not shocked that people that are
35:55
Speaker 2: sitting in seven and eight year auto loans are finding
35:59
Speaker 2: that they can save some money by refinancing those auto loans.
36:03
Speaker 2: But some one hundred eleven thousand people in the first
36:06
Speaker 2: quarter of the year ended up refinancing, which does make sense.
36:10
Speaker 2: That was prior to interest rates shooting up as a
36:12
Speaker 2: result of the war in Iran, so you probably could
36:14
Speaker 2: get a better rate at that point in time. That
36:17
Speaker 2: was when we saw mortgage rates dipping below six percent briefly.
36:21
Speaker 2: But yeah, not exactly a real strong indication of the
36:25
Speaker 2: state of the American consumer if they're needing to go
36:28
Speaker 2: and do this.
36:28
Speaker 3: Yeah, And I feel like these are probably most occurring
36:31
Speaker 3: with people who were in probably a lower credit score bucket,
36:34
Speaker 3: just given what the initial rates look like when they
36:37
Speaker 3: initially bought these vehicles that were sitting at an average
36:40
Speaker 3: of about ten and a half percent back in twenty
36:42
Speaker 3: twenty four, and now the refinancing rate that they're seeing
36:45
Speaker 3: for those is two hundred quarter percent lower. But I
36:48
Speaker 3: just feel like I don't recall that on the auto
36:51
Speaker 3: loan side of things in twenty four that for just
36:55
Speaker 3: you know, a high credit quality bar or that it
36:57
Speaker 3: was anywhere near that level of ten and a half
36:59
Speaker 3: maybe d eights or nines is kind of what I
37:02
Speaker 3: recall just off hand.
37:05
Speaker 2: This is another terrible idea, But can you do a
37:08
Speaker 2: cash out REFI on a car? Probably right I'm sure
37:12
Speaker 2: there's a lender somewhere that'll say, yeah, I'll give you
37:14
Speaker 2: one hundred percent of the Kelly Blue Book value of
37:17
Speaker 2: this car right now that you paid down of the
37:18
Speaker 2: course the last few years.
37:21
Speaker 3: Yeah, I'm sure you could, Sure you could, Sure you could.
37:24
Speaker 3: Finance wouldn't be great on it, but.
37:26
Speaker 2: Yeah, I mean, if you can roll your debt into
37:28
Speaker 2: a car and immediately be underwater when you drive off
37:30
Speaker 2: the lot, there's gotta be some garbage lender out there
37:33
Speaker 2: that'll say, yeah, you're fifteen thousand dollars Corolla with only
37:36
Speaker 2: ten thousand dollars a debt. I will refinance that loan,
37:39
Speaker 2: give you five thousand dollars and send you on your
37:41
Speaker 2: merry away.
37:42
Speaker 3: Definitely.
37:42
Speaker 2: Yeah, yeah, so that probably is part of this whole
37:46
Speaker 2: narrative as well. And yeah, my sense would be that
37:50
Speaker 2: there's gonna be some used cars going on sale over
37:53
Speaker 2: the next few years as they get repossessed. But we
37:55
Speaker 2: will see. We've got to take a quick break. Markets
37:58
Speaker 2: remain in mixed territory, but a big recovery here from
38:01
Speaker 2: the Nasdaq, which was at one point earlier down about
38:04
Speaker 2: half a percent. We'll be right back with a full
38:06
Speaker 2: market recap and more. Stay tuned, folks,