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Why a MidWest auto parts maker going bankrupt has massive ramifications · The Financial Exchange Show

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Speaker 2: Good morning, Happy Monday, Welcome back to the Financial Exchange.
1:16
Speaker 2: It's Mike, Paul and Tucker with you on a busy
1:20
Speaker 2: start to a week. Paul, We've got a lot of
1:22
Speaker 2: data that is due to come out. We've got a
1:23
Speaker 2: looming government shut down that we will be covering. Nobody
1:28
Speaker 2: seems terribly concerned about that one, quite honestly. We have
1:32
Speaker 2: a bunch of data about jobs coming out this week.
1:35
Speaker 2: Tomorrow Willie will have a job openings survey. On Friday,
1:39
Speaker 2: we get the monthly jobs report. On Thursday, we get
1:41
Speaker 2: the weekly jobless claims, a little bit of home sales
1:44
Speaker 2: data as well, and then finally we will also have
1:49
Speaker 2: a few earnings coming out. At eleven AM today, we're
1:52
Speaker 2: going to be discussing another story in quite honestly, it's
1:57
Speaker 2: a story that's getting overlooked by most major news public
2:00
Speaker 2: that I think could end up being one of the
2:01
Speaker 2: biggest stories of the year when it comes to debt
2:04
Speaker 2: markets and another blow up in the auto industry. But
2:07
Speaker 2: we'll be covering that at eleven But I want to
2:09
Speaker 2: start off with the week ahead and just kind of
2:13
Speaker 2: where to focus because there is a lot coming out
2:15
Speaker 2: this week. Just cover that schedule again. Pending home sales
2:19
Speaker 2: just came out seven minutes ago, we'll cover that. Another
2:23
Speaker 2: home data point tomorrow at nine am is the SMP
2:26
Speaker 2: Case show Er Home Price Index. We have not seen
2:30
Speaker 2: a dramatic drop in home prices nationally, but market by
2:34
Speaker 2: market it's been a little bit interesting. At ten am
2:36
Speaker 2: tomorrow the Job Openings Report. We do expect to see that.
2:39
Speaker 2: One Consumer Confidence is also out at ten am, and
2:42
Speaker 2: then at midnight tomorrow is when the government shutdown could
2:46
Speaker 2: go into place here, So anything beyond that a little
2:49
Speaker 2: bit of a question mark in terms of whether we
2:51
Speaker 2: will get at ADP employment that's done by a private
2:53
Speaker 2: payroll provider will get that data. Ism manufacturing same story
2:58
Speaker 2: by a private organization, but other pieces around you know,
3:03
Speaker 2: the jobless claims out on Thursday as well as I
3:07
Speaker 2: don't know a factory who puts together the factory orders.
3:09
Speaker 2: I'm guessing that's private industry as well. And then the
3:11
Speaker 2: Friday Jobs report is done by the Bureau of Labor Statistics,
3:14
Speaker 2: which will almost certainly be shut down the event of
3:18
Speaker 2: a government shutdown, so I wouldn't expect to get that
3:20
Speaker 2: if we do have this shutdown. But what are you
3:23
Speaker 2: looking at, Paul that you know could move the narrative
3:26
Speaker 2: here for the state of the economy, assuming we get
3:28
Speaker 2: all these releases.
3:29
Speaker 3: To me, you'd be the jobs report.
3:31
Speaker 4: Obviously, the Federal Reserve has indicated that the labor market
3:34
Speaker 4: is their biggest concern at the moment. That's why we
3:37
Speaker 4: saw the most recent rate cut, and there could perhaps
3:39
Speaker 4: be two more over the course of the end of
3:42
Speaker 4: the year. So whatever data that we can gather from
3:45
Speaker 4: Thursday and Friday's reports is really what is going to
3:48
Speaker 4: be most significant. We had the initial jobless games for
3:53
Speaker 4: last week come in lower than anticipated, so that was
3:56
Speaker 4: lower meaning better better than anticipated, So that was certainly
4:00
Speaker 4: a positive note. Yeah, exactly birdying there. But the week
4:05
Speaker 4: prior to that, earlier in the month was rather abysmal.
4:09
Speaker 4: But week to week these numbers can get kind of
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Speaker 4: noisy on that front. Of course, Friday's report is probably
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Speaker 4: the most significant of all this week, where we're anticipating
4:16
Speaker 4: that we would see a fifty thousand increase to non
4:21
Speaker 4: farm payrolls after a twenty two thousand gain in August.
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Speaker 4: For the last four months, we're averaging about twenty six
4:27
Speaker 4: thousand jobs added.
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Speaker 3: This is much less than.
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Speaker 4: Where we were over the course of the last several years,
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Speaker 4: where one hundred and fifty thousand was kind of more
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Speaker 4: the number. So really that is the biggest focus for
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Speaker 4: me this week. Some of this other stuff is noise
4:41
Speaker 4: that will definitely fall and keep an eye on, But
4:43
Speaker 4: the labor market is really of utmost importance and any
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Speaker 4: data point that could perhaps push it one way or another
4:51
Speaker 4: is what markets will be most focused on.
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Speaker 2: Yeah, I think there's the other piece to the unemployment
4:57
Speaker 2: rate that comes out on Friday is of key focus,
4:59
Speaker 2: and you know that's all included in the same report,
5:02
Speaker 2: But that unemployment rate is the one that the FED
5:05
Speaker 2: has pointed at over and over to say, this is
5:07
Speaker 2: more what we care about when we're trying to measure
5:09
Speaker 2: the tightness or slack in the labor market. It has
5:12
Speaker 2: slowly crept up from about four to one to four
5:14
Speaker 2: to three over the last twelve months, but honestly, that's
5:16
Speaker 2: not a big move and is I think the I
5:20
Speaker 2: think that's the main item that's kind of holding more
5:22
Speaker 2: FED governors back from buying into a full end and
5:27
Speaker 2: full throatd support of more rate cuts down the road.
5:30
Speaker 2: And so should you see that unemployment rate go down, which, again,
5:34
Speaker 2: how could that happen when we're seeing such weak job
5:36
Speaker 2: hiring numbers. Deportations and retirees a right, like, those are
5:40
Speaker 2: the two main factors that I'm looking at that could
5:42
Speaker 2: lower the unemployment rate. Would be more people leaving the
5:45
Speaker 2: workforce because of deportations, more people retiring because baby boomers
5:50
Speaker 2: are getting older. Now weigh that against a very weak
5:54
Speaker 2: hiring market right now, employers that are just not pulling
5:58
Speaker 2: the trigger on the new rules, whether because of AI,
6:01
Speaker 2: uncertainty about tariffs or some other factor, they are just
6:06
Speaker 2: not hiring at the pace that they were for the
6:07
Speaker 2: last several years. And there you land the Fed in a,
6:12
Speaker 2: you know, particularly difficult conundrum right now. We think we're
6:15
Speaker 2: a little bit too aggressive in terms of our rates
6:17
Speaker 2: right now. We don't know how much lower they need
6:20
Speaker 2: to go. And that Job's report, I think is going
6:22
Speaker 2: to be key to determining which direction that goes in.
6:25
Speaker 4: Yeah, I think it segues us into kind of that
6:27
Speaker 4: discussion that the rate cuts perhaps they're not enough to
6:31
Speaker 4: cure the job market. I mean, we have to see
6:33
Speaker 4: what the job market looks like. As you were just
6:35
Speaker 4: mentioning there and we were talking about what we'll see
6:37
Speaker 4: from Friday's report, but what we've seen is, like I mentioned,
6:40
Speaker 4: a quarter of a percent cut that occurred earlier this month,
6:44
Speaker 4: and perhaps two more. But typically when you're lowering interest rates,
6:49
Speaker 4: what that provides to the economy is a boost to
6:51
Speaker 4: asset prices. So all of a sudden, you know, barring
6:54
Speaker 4: costs are less or potentially risk free rates of return
6:57
Speaker 4: are less than they once were, so that would boost
7:00
Speaker 4: asset prices. But at the same point in time, it
7:04
Speaker 4: doesn't necessarily trigger an expansion of hiring or anything of
7:09
Speaker 4: that nature. It's good for people looking to buy house.
7:11
Speaker 4: Potentially there's some trickle down effect on the interest rate
7:14
Speaker 4: side of things and for borrowings, but not necessarily an
7:17
Speaker 4: immediate impact to hiring.
7:19
Speaker 2: To be clear, if the labor market needs rescuing, needs saving,
7:24
Speaker 2: the FED lowering rates has no ability to do that,
7:26
Speaker 2: rights right, Like, the reason they're cutting rates is not
7:29
Speaker 2: because they think the labor market needs rescuing. They're doing
7:32
Speaker 2: it because they think they're maybe getting in the way
7:34
Speaker 2: a little bit. They think that their policy is a
7:37
Speaker 2: little bit restrictive for businesses, and so they're saying, hey,
7:40
Speaker 2: we just need to normalize things so that we stay
7:42
Speaker 2: out of the way of the economy and of businesses
7:47
Speaker 2: trying to move forward with their plans. That is the
7:49
Speaker 2: only thing that the FED is acknowledging here. But yeah,
7:50
Speaker 2: I mean to your point. If the labor market ends
7:53
Speaker 2: up in a free fall where unemployment is rising and
7:55
Speaker 2: rising quickly, the FED really has no real ability to
7:59
Speaker 2: rescue that on their own. They rely on Congress to
8:01
Speaker 2: come up with different things, or they just allow for
8:03
Speaker 2: the business cycle to go through what it needs to
8:05
Speaker 2: go through, and the best they can do is get
8:07
Speaker 2: out of the way.
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Speaker 3: Right They only have so many tools at their disposal.
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Speaker 4: This is one of them to try and stir up
8:13
Speaker 4: more economic activity or like you said, maybe get out
8:16
Speaker 4: of the way. But it's not a cure all necessarily.
8:18
Speaker 4: And that's why we want to focus on the jobs
8:21
Speaker 4: report in the labor market because it is it's significant
8:25
Speaker 4: to the overall well being of the economy, and that's
8:27
Speaker 4: what the FED focuses on too, and tries to do
8:29
Speaker 4: its best to keep it afloat. But you know, it
8:32
Speaker 4: doesn't have every tool it's disposal to cure all the ills.
8:36
Speaker 2: Let's take a quick break here when we come back.
8:39
Speaker 2: I want to move on from the FED and the
8:41
Speaker 2: job market and just talk about this economy and its
8:43
Speaker 2: possibility of recession. It seems pretty far off. I know
8:48
Speaker 2: that seems ludicrous to talk about when we're sitting at
8:50
Speaker 2: four point three percent unemployment and the most reading on
8:53
Speaker 2: most recent reading on GDP was three point eight percent.
8:56
Speaker 2: But a few pieces about recession and what seems to
8:59
Speaker 2: be holding it back at this stage. That's next on
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Speaker 2: So two different pieces about the economy and where it stands,
10:03
Speaker 2: and the conclusion of both of them seems to be that, yeah,
10:06
Speaker 2: recession is seeming pretty far off, but a lot of
10:09
Speaker 2: the potential reason for that is the spending among the wealthy.
10:14
Speaker 2: And then drawing that further down, the spending from the
10:18
Speaker 2: wealthy seems to be coming from a I don't want
10:22
Speaker 2: to say inflated, but compared to a few years ago
10:24
Speaker 2: inflated self assessment of their overall net worth. And that's
10:30
Speaker 2: coming from a number of different areas, stocks, real estate, crypto,
10:33
Speaker 2: just to name a few of them. But this is
10:36
Speaker 2: the trend that has been playing out right. We have
10:38
Speaker 2: a large swath of Americans who are struggling to make
10:43
Speaker 2: ends meet. You're seeing that through all sorts of survey
10:47
Speaker 2: data from credit card issuers, from auto loan issuers. Tricolor,
10:52
Speaker 2: a relatively unknown company that mainly issued car loans to
10:58
Speaker 2: subprime borrowers, went bank just a couple of weeks ago.
11:01
Speaker 2: You're seeing cracks in the foundations for that demo. The
11:06
Speaker 2: other story is that the top ten percent of income
11:09
Speaker 2: earners now account for half of total consumer spending. And yeah,
11:14
Speaker 2: subprime auto loan, you know, doesn't seem to matter to
11:17
Speaker 2: them whatsoever. They keep on spending, going on vacation and
11:22
Speaker 2: driving this economy forward. So I guess the question is
11:27
Speaker 2: is that uniquely different than other times in history and
11:30
Speaker 2: is it something to actually be concerned about? Is the
11:33
Speaker 2: very difficult question to answer.
11:35
Speaker 3: Yeah, that's statistic. Obviously, we've talked about it a lot.
11:38
Speaker 4: Half of the consumer spending, you know, consolidated between that
11:42
Speaker 4: top ten percent of income earners. But it's always been
11:45
Speaker 4: relatively high, Like if you look back over the last decade,
11:48
Speaker 4: so it's been forty percent and it's grown. But to
11:52
Speaker 4: your point, you know, perhaps is it different, It's more
11:56
Speaker 4: than it was before. I do just have this underlying
11:59
Speaker 4: suspicion and I wish that there could perhaps be more
12:02
Speaker 4: data on this.
12:02
Speaker 3: It's just it does feel like because.
12:05
Speaker 4: You're accounting for so much spending from those people who
12:09
Speaker 4: are likely pretty heavily invested in the stock market and
12:12
Speaker 4: have a lot of investment savings, that because the market
12:15
Speaker 4: has fared so well over the last few years, that
12:18
Speaker 4: it does have them in such a good place from
12:20
Speaker 4: a financial perspective when they're studying their portfolio growth that
12:23
Speaker 4: it allows for whether it be retirees or some of
12:27
Speaker 4: those higher income eernce to spend more frequently. I do
12:30
Speaker 4: think that back in April, when the market did see
12:33
Speaker 4: a very abrupt correction, that there was stories that we
12:37
Speaker 4: covered Mike about leisure, travel and some of these other
12:41
Speaker 4: spending areas that were showing weakening demand. But because we
12:45
Speaker 4: saw a pretty quick correction on that market downturn, it
12:48
Speaker 4: resumed and there was continued evidence that April through June
12:52
Speaker 4: was a good period for spending. So in terms of
12:56
Speaker 4: the recession in the future, it just doesn't it seems
13:00
Speaker 4: like a lot would need to go wrong in a
13:03
Speaker 4: short period of time to trigger that. I mean, you
13:05
Speaker 4: could certainly make the argument for maybe some malaise where
13:09
Speaker 4: we just don't really see a ton of economic growth,
13:11
Speaker 4: but it's harder to foresee that occurring, at least in
13:16
Speaker 4: the nearer term. Here inflation looms a risk out there,
13:21
Speaker 4: and so does the labor market. But it's incredible how
13:24
Speaker 4: resilient the consumer has been for what's been the last
13:27
Speaker 4: four or five years.
13:28
Speaker 2: So I'm gonna quote Mark Xandy, he's the chief economist
13:31
Speaker 2: at Moody's Analytics. I do think that goes to the
13:34
Speaker 2: bounce in the stock market and the wealth effect. I
13:37
Speaker 2: think all the spending is coming from well to do,
13:39
Speaker 2: high income, high net worthhouseholds that are seeing their stock
13:42
Speaker 2: portfolios are up and they're feeling a lot better off,
13:45
Speaker 2: and they're spending. The article goes on, but they're then
13:50
Speaker 2: quoted as saying, let me see, the economy is very
13:55
Speaker 2: vulnerable if the stock market does turn south for whatever reason.
13:59
Speaker 2: So I guess the question to me is is it
14:03
Speaker 2: more elevated than it normally is? Is that risk more
14:06
Speaker 2: elevated than it normally is? Or is Zandy just calling
14:09
Speaker 2: out a fact that is always true. Wealthy owned stocks,
14:11
Speaker 2: wealthy contribute a lot more to the economy than low
14:14
Speaker 2: income earners, and so therefore it's a more appreciable reason.
14:20
Speaker 2: The other question I have is do you need just
14:25
Speaker 2: the stock market to fall or you know, do you
14:27
Speaker 2: also need real estate values? Do you need crypto markets
14:32
Speaker 2: to fall too? These have been Crypto is not you know,
14:35
Speaker 2: nearly the size of the stock market in terms of
14:37
Speaker 2: its concentration or spending power, But you know, those are
14:40
Speaker 2: all intertwined as well when it comes to this wealth
14:43
Speaker 2: effect that we are seeing, and so I remain unconvinced
14:46
Speaker 2: that just a drop in those areas put us more
14:49
Speaker 2: at risk than normal. What I do think perhaps puts
14:53
Speaker 2: us more at risk than normal, though, is the fact
14:55
Speaker 2: that we are, and we've mentioned this before, in the
14:58
Speaker 2: ninety eighth percentile. Ever, of how pricey the stock market
15:01
Speaker 2: is right now, that doesn't necessarily make it more susceptible
15:06
Speaker 2: to an imminent downturn. It does perhaps make it more
15:11
Speaker 2: susceptible to a larger downturn, sure, in the event of
15:14
Speaker 2: some big disruption that, let's be honest, nobody ever is
15:18
Speaker 2: able to predict ahead of time you'll only see in
15:20
Speaker 2: the rear view mirror. Does being in the ninety eighth
15:22
Speaker 2: percentile'll make you more susceptible and therefore contribute to a
15:26
Speaker 2: bigger pullback and spending and all these other tag along factors. Possibly,
15:32
Speaker 2: I guess That's where I'll put it is. I'm not
15:34
Speaker 2: really sure. I buy that this situation is terribly unique.
15:39
Speaker 3: That's fair.
15:39
Speaker 4: I think that the things I was just thinking about
15:42
Speaker 4: from an example perspective twenty twenty two was a very
15:44
Speaker 4: bad year for stocks where the market was down eighteen percent,
15:48
Speaker 4: and the overwhelming story there wouldn't be a significant declinent
15:53
Speaker 4: consumer spending because of market related factors. It was the
15:56
Speaker 4: inflationary pressure that you'd see pullbacks from. But the sentiment
16:00
Speaker 4: around that time wasn't OG's the market's really getting beat up.
16:03
Speaker 4: We're slowing down our spending. It was more so the
16:06
Speaker 4: cost of lumber or you know, all these different items,
16:10
Speaker 4: cars and other things are so expensive that perhaps that
16:13
Speaker 4: would slow down the stone. But even that didn't really
16:16
Speaker 4: put us into a recessionary period. We dodged that bullet
16:21
Speaker 4: with eight or nine percent inflation at that period of time.
16:24
Speaker 2: Yeah, So look, I think there's plenty of reasons to
16:27
Speaker 2: be concerned both about the wealth effect and what that
16:30
Speaker 2: could do to stock valuations, as well as a somewhat
16:35
Speaker 2: frothy market. And I'm not trying to do that myself.
16:39
Speaker 2: I think that is the description that many analysts are
16:42
Speaker 2: describing of this market right now is pretty top heavy,
16:45
Speaker 2: pretty frothy, and if some sort of narrative changes, the
16:49
Speaker 2: overall one which you know, the narrative right now that
16:52
Speaker 2: to me is playing out in markets is AI is
16:54
Speaker 2: going to change everyone's life and so get on the
16:57
Speaker 2: bandwid That is the narrative that I think need to
17:00
Speaker 2: change to kind of reverse where the market is going
17:02
Speaker 2: over the next few years.
17:03
Speaker 3: And I was having a conversation with someone last night.
17:05
Speaker 4: It's just I don't know when there would be a
17:08
Speaker 4: moment in time to question that sort of way of thought.
17:12
Speaker 4: The way of thought now is that, like you said,
17:14
Speaker 4: AI is going to allow for an increased enhancements of
17:17
Speaker 4: productivity and a lot of revenue growth.
17:20
Speaker 3: And I feel as if.
17:21
Speaker 4: We're in the early innings to a point that the
17:25
Speaker 4: market is not going to be overly critical without revenue progress.
17:29
Speaker 4: Yet I think that there's some time to go on
17:32
Speaker 4: that end of things unless there is some abrupt event
17:34
Speaker 4: that comes unexpected. But the one hundred billion dollars of
17:37
Speaker 4: capital expenditures to building these data centers, that's going to
17:39
Speaker 4: take some time to work its way through the system,
17:41
Speaker 4: and it's going to be hard to have some event
17:44
Speaker 4: that would really thwart the confidence there just yet.
17:47
Speaker 2: Yeah, I think the event that well, there could be
17:49
Speaker 2: any number of it, but if it's about that, it's
17:51
Speaker 2: about funding drying up for all this development.
17:56
Speaker 3: The event would be a.
17:57
Speaker 4: Huge technological advancement like a deep sea that we had
18:00
Speaker 4: previously the questions how much computing capacity do you need?
18:06
Speaker 4: Or pricing that's what well?
18:08
Speaker 2: That or the willingness of these lenders to say, yeah,
18:11
Speaker 2: go ahead and spend like wildfire on getting this stuff
18:14
Speaker 2: up and running right right, And that seems unlikely to
18:17
Speaker 2: me when it's Microsoft and Google and Amazon that are
18:19
Speaker 2: funding all of this. But you know, any anything is
18:23
Speaker 2: possible on that front, and they're not funding every piece
18:25
Speaker 2: of it. So I think the narrative can change rapidly
18:29
Speaker 2: when you're talking about something as emerging as artificial intelligence,
18:32
Speaker 2: just like it did with the Internet. And the longer
18:35
Speaker 2: you go without companies coming out and saying, here is
18:42
Speaker 2: the impact to our bottom line.
18:44
Speaker 3: This is transforming.
18:45
Speaker 2: Here is the clear increase in sales and therefore the
18:48
Speaker 2: increase in profit from this transformational emerging technology. The longer
18:52
Speaker 2: you go without that breakthrough story, the longer you go
18:55
Speaker 2: without that new startup that is like CHATGPT has getting
18:59
Speaker 2: more users than it is, you know, than ever been
19:01
Speaker 2: gained on any tech platform in history. That's when investors
19:06
Speaker 2: start to call it into question, and we are you know,
19:08
Speaker 2: seemingly not even close to that today. Let's take a
19:12
Speaker 2: quick break here. When we come back, a lot more
19:15
Speaker 2: to cover on tariffs and everything else, but we're gonna
19:17
Speaker 2: be doing Wall Street Watch coming up next, and then
19:19
Speaker 2: I do want to get to this kind of hidden
19:22
Speaker 2: story on a company called First Brands. That's next after
19:25
Speaker 2: Wall Street Watch.
19:40
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 market so
19:56
Speaker 1: far today right here on the Financial Exchange Radio Network.
20:00
Speaker 5: Markets are mostly positive to begin the week, with the
20:03
Speaker 5: AI sector rebounding after seeing recent pressure. Trader is also
20:07
Speaker 5: keeping an eye on the potential government shutdown, and we
20:11
Speaker 5: have a significant September jobs report due out later this
20:14
Speaker 5: week on Friday morning. Right now, the Dow is dipping
20:17
Speaker 5: into negative territory mostly flat. SMP five hundred is up
20:21
Speaker 5: nearly half a percent or thirty points higher, Nasdaq up
20:25
Speaker 5: nearly nine tenths one percent, or one hundred and ninety
20:28
Speaker 5: three points higher. Rust two thousand is up a tenth
20:31
Speaker 5: of a percent. Ten year Treasure Reel down four basis
20:34
Speaker 5: points and now is at four point one four six percent,
20:38
Speaker 5: and crude oil down three percent today trading at sixty
20:42
Speaker 5: three dollars and sixty six cents a barrel. We start
20:45
Speaker 5: today with some major news in the video game space,
20:48
Speaker 5: where Electronic Arts said it is going private for fifty
20:51
Speaker 5: five billion dollars, marking the largest private equity backed buyout
20:55
Speaker 5: in history. The video game maker this morning said it
20:59
Speaker 5: agreed to be acquired by public Investment Fund of Saudi Arabia,
21:02
Speaker 5: silver Lake and Infinity Partners. Shareholders of the company will
21:06
Speaker 5: receive two hundred and ten dollars per share in cash.
21:09
Speaker 5: EA stock is jumping five percent on that news. Meanwhile,
21:13
Speaker 5: cruise operator Carnival report a quarterly results ahead of the
21:16
Speaker 5: open this morning, beating earnings in revenue expectations driven by
21:20
Speaker 5: resilient crews demand in strong advanced bookings for twenty twenty six,
21:24
Speaker 5: in line with record twenty twenty five levels and at
21:28
Speaker 5: historical high prices. However, shares it down over two percent
21:31
Speaker 5: at the moment. Elsewhere, global drug maker Astrazenka said it
21:35
Speaker 5: plans to list directly on the New York Stock Exchange
21:38
Speaker 5: in a push to broaden its investor base. Separately, on Friday,
21:42
Speaker 5: the company said it would offer discounted asthma and diabetes
21:45
Speaker 5: drugs in the US as President Trump pressures pharmaceutical companies
21:49
Speaker 5: to cut drug prices. In cannabis stocks are seeing gains
21:53
Speaker 5: today after Trump to out of the benefits of CBD
21:56
Speaker 5: for seniors. Advisor shares Pure US Cannabis ETF is jumping
22:01
Speaker 5: by twenty one percent. Rower Cannabis is up by twenty
22:05
Speaker 5: four percent, until Race shares are surging forty percent. I'm
22:09
Speaker 5: Tucker Silva, and that is Wall Street Watch.
22:11
Speaker 2: All right, Well, we're going to cover now is a
22:13
Speaker 2: story of a company that I had not heard of
22:15
Speaker 2: until this weekend. I don't think most people have heard
22:17
Speaker 2: of them, a Midwest auto parts supplier called First Brands.
22:22
Speaker 2: That company today intersected with another story that we've been
22:26
Speaker 2: talking about, which is private credit markets. I do think
22:29
Speaker 2: we've been giving these two stories a fair bit of
22:32
Speaker 2: attention recently. One is the auto market and some struggles
22:36
Speaker 2: that we're seeing there. Two is the private credit market
22:39
Speaker 2: and where that's gotten to. I want to start off
22:42
Speaker 2: with the private credit market just to explain what that
22:45
Speaker 2: is and why that's a big deal today. And to
22:48
Speaker 2: do that, I'm going back twenty years to five. In
22:51
Speaker 2: two thousand and five, there was about a point nine
22:54
Speaker 2: hundred billion dollar industry for US below investment grade debt,
23:01
Speaker 2: So that was, you know, prior to the Great Recession,
23:04
Speaker 2: that's the market for you know, below investment grade meaning
23:08
Speaker 2: you know, it's not your Walmarts and your Berkshire Hathaway borrowing,
23:11
Speaker 2: it's your smaller companies. And that was dominated by high
23:14
Speaker 2: yield and leveraged loans. A lot of the banks owned
23:17
Speaker 2: this stuff, and then when it blew up, that stuff
23:21
Speaker 2: was also looked at pretty critically, and the banks especially
23:24
Speaker 2: were looked at critically and said, we don't want you
23:26
Speaker 2: holding this type of stuff. To that end, this is
23:30
Speaker 2: more complex than I'm making it. But that type of
23:33
Speaker 2: debt issuanes didn't stop. It just moved from one place
23:37
Speaker 2: to another because it basically regularly said it can't happen
23:40
Speaker 2: at the bank, so we need this to go elsewhere. Today,
23:44
Speaker 2: the total estimate for below investment grade debt is about
23:49
Speaker 2: three point eight trillion dollars, again compared to nine hundred
23:53
Speaker 2: billion back before the Great Recession. More than a quarter
23:57
Speaker 2: of that is made up in private credit, so again,
24:01
Speaker 2: high yield and leverage alone still exists, but back then
24:04
Speaker 2: they were making up ninety percent of this ninety two
24:08
Speaker 2: percent of it. Today those two categories are making up
24:11
Speaker 2: seventy ish percent of the total. So private credit has
24:14
Speaker 2: grown tremendously and is one of the fastest growing areas
24:17
Speaker 2: of debt issuans out there, and you know, dominated by
24:20
Speaker 2: some companies that you might not have heard of, right
24:22
Speaker 2: Apollo Global Management, Blackstone Areas KKR. These are not exactly
24:27
Speaker 2: household names in the same way that JP, Morgan Chase
24:30
Speaker 2: and Goldman Sacks are. In any case, it has ballooned tremendously.
24:37
Speaker 2: Going to conferences in the financial services industry, I can
24:39
Speaker 2: tell you that it is other than artificial intelligence. Probably
24:42
Speaker 2: the most talked about thing is private credit and who's
24:46
Speaker 2: playing what and what the opportunities look like. And sometimes
24:50
Speaker 2: you know some of the concerns about the landscape. But
24:53
Speaker 2: it's very opaque. You know, these companies go and issue
24:56
Speaker 2: debt that's not available on public markets. It doesn't trade,
24:59
Speaker 2: It's held by a lot of big institutions like insurance
25:01
Speaker 2: companies and pension funds, and it's just not something that
25:05
Speaker 2: you get to read on because it doesn't trade every
25:07
Speaker 2: day like you would publicly traded bond. What happened over
25:12
Speaker 2: the weekend was this little known car parts supplier out
25:17
Speaker 2: of the Midwest, making like windshield wipers or and things
25:20
Speaker 2: like that, declared bankruptcy. And Financial Times, by the way,
25:26
Speaker 2: has done the best reporting on this if you're looking
25:28
Speaker 2: to check out some of the stories yourself. They declared bankruptcy,
25:32
Speaker 2: and it was quickly This is a private company, by
25:35
Speaker 2: the way, not publicly traded, and it was quickly discovered
25:38
Speaker 2: that they had a lot more debt than anybody was
25:41
Speaker 2: really aware of. So estimates that I've seen so far
25:46
Speaker 2: put their total liabilities somewhere in the ten to fifty
25:49
Speaker 2: billion range. This is a company whose assets are estimated
25:53
Speaker 2: between one and ten billion dollars. Now they do this
25:56
Speaker 2: with all sorts of kind of weird mechanisms to you know,
26:01
Speaker 2: put this off their balance sheet make their balance sheet
26:04
Speaker 2: look more attractive. It's kind of like IOU stuff. Hey,
26:08
Speaker 2: you know, we're going to get this piece from a
26:10
Speaker 2: part supplier over in China, and we've got a contract
26:13
Speaker 2: to pay that part supplier over the course of a
26:15
Speaker 2: couple of years. It's more of an IOU, but it
26:18
Speaker 2: is a debt. It just didn't end up on their
26:20
Speaker 2: balance sheet in some cases. But here is what I
26:23
Speaker 2: suspect is happening all of a sudden at all of
26:26
Speaker 2: these debt issuers, who, by the way, we don't even know,
26:28
Speaker 2: you know, who necessarily has the biggest ownership of this debt.
26:33
Speaker 2: I would suspect that if I were one of them,
26:36
Speaker 2: I would be calling out to all of my you know, issuers,
26:39
Speaker 2: all my loan underwriters, and to all of my analysts
26:42
Speaker 2: of these companies saying, is this unique to First Brands?
26:47
Speaker 2: Was there something fraudulent going on here where they weren't
26:50
Speaker 2: properly disclosing or is this you know, is this a
26:56
Speaker 2: canary in the coal mine of the type of companies
26:58
Speaker 2: that we are lending to right now? Because First Brand
27:01
Speaker 2: situation was unique, right, I mean, it's operating in the
27:04
Speaker 2: auto industry, which has been under a lot of pressure recently. Tricolor,
27:07
Speaker 2: this other company went bankrupt a couple of weeks ago
27:10
Speaker 2: because the auto industry because of tariffs, because of a
27:15
Speaker 2: weak consumer that you contributes a lot to this sector, right.
27:19
Speaker 2: We talked about irresponsible car buying solutions and people borrowing
27:23
Speaker 2: a lot of money to do so, like not surprising
27:26
Speaker 2: that the auto industry is under pressure, so this is
27:28
Speaker 2: particularly unique. But what if what's not unique is a
27:33
Speaker 2: bunch of really small companies borrowing a crap ton of
27:36
Speaker 2: money and nobody knowing about how much is on their balance.
27:39
Speaker 3: Sheets, right exactly.
27:40
Speaker 4: I mean, some of these measures that are used with
27:43
Speaker 4: these private credit financing make your head spind in terms
27:46
Speaker 4: of how intricriate and how are some of these allowable. Like,
27:49
Speaker 4: there's one particular technique out there that's called payment in
27:52
Speaker 4: kind financing, where basically, think about if you had a
27:55
Speaker 4: credit card balance out there and then they came to
27:58
Speaker 4: you got ten grand on credit card, and the interest
28:01
Speaker 4: payment comes through, and I say, Mike, all right, it's time.
28:03
Speaker 3: To pony up.
28:04
Speaker 4: You owe me twenty percent on your ten grand interests
28:06
Speaker 4: here say you know what, Paul, I'm gonna use payment
28:08
Speaker 4: kind financing. What I'm gonna do is that interest just
28:11
Speaker 4: tacking onto the balance that ten grand is gonna jump
28:14
Speaker 4: to that whatever that monthly payment was of that twenty
28:16
Speaker 4: two percent or twenty percent, that could balloon your debt
28:19
Speaker 4: over a course of a year from ten grand to
28:21
Speaker 4: twelve grand, just because you effectually gave me an iou
28:25
Speaker 4: you know that interest, Paul, you were looking for for me,
28:27
Speaker 4: We're gonna just roll it into the balance and there's
28:30
Speaker 4: similar to the tab put it on the tab. There's
28:32
Speaker 4: similar types of practices here in other means and inventory
28:36
Speaker 4: and things like that. And so that's what we're we're
28:38
Speaker 4: focused on, not specific to these companies. It's alarming, but
28:42
Speaker 4: are there other instances out there? Because there has been
28:45
Speaker 4: so much fuel behind this private credit market? And typically
28:48
Speaker 4: Howard Marx, who is a specialist in this area. He's
28:51
Speaker 4: the co chairman of oak Tree Capital Management and has
28:54
Speaker 4: just been a high yield investor debt investor for years,
28:57
Speaker 4: very successful, said it very simply, the worst loans are
29:01
Speaker 4: made in the best of times. It's been the best
29:02
Speaker 4: of times for the last ten or fifteen years for
29:05
Speaker 4: private credit. And usually you can tell by going to
29:07
Speaker 4: industry conferences what they're talking about the most usually has
29:11
Speaker 4: run up the most and there's the most demand behind.
29:14
Speaker 4: And so that's why we cover this story so much,
29:17
Speaker 4: is because does this have broader implications?
29:20
Speaker 3: Does have broader impact?
29:21
Speaker 4: I think to asshare listeners a little bit. This is
29:24
Speaker 4: private credit market. So we're not talking about the what
29:28
Speaker 4: we're the Lehman's or what are today the Goldman, Sachs
29:31
Speaker 4: and JP Morgan that have significant exposure to this. But
29:34
Speaker 4: that's subprime auto lending that dried up for a lot
29:38
Speaker 4: of big banks out there, has shifted to other parts
29:40
Speaker 4: of the market. That's what we're talking about here. The
29:42
Speaker 4: person who has a credit score under six twenty, who
29:45
Speaker 4: needs a loan from a lending perspective for a car,
29:47
Speaker 4: they're not getting it from the major financial institutions out there.
29:50
Speaker 4: They're looking elsewhere for those types of loans in some instances.
29:54
Speaker 2: Let's take a quick break. I do want to get
29:56
Speaker 2: back into the implications of all this. Yes, small unknown
30:00
Speaker 2: own Midwest car parts manufacturer going belly up probably doesn't
30:04
Speaker 2: matter much for you. But if this is some form
30:09
Speaker 2: of contagion, if there's other stuff, what to worry about,
30:11
Speaker 2: What not to worry about when it comes to private
30:13
Speaker 2: credit and the economy generally. That's next on the Financial Exchange.
30:17
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30:48
Speaker 2: If you're just join us. We've been talking about the
30:50
Speaker 2: bankruptcy of this little known autoparts supplier, First Brands out
30:55
Speaker 2: of the Midwest and the potential implications that they might
30:59
Speaker 2: have for the broader economy. If you missed the last segment,
31:03
Speaker 2: you go check out some information on the Financial Time
31:05
Speaker 2: check got the podcasted version of this show wherever you
31:08
Speaker 2: listen to podcasts. But First Brands, which is this relatively
31:13
Speaker 2: unknown company, relatively small, privately held, declared bankruptcy and all
31:16
Speaker 2: of a sudden everyone's figuring out just how much debt
31:20
Speaker 2: they were carrying, and nobody was seemingly aware of it.
31:23
Speaker 2: One to ten billion dollar company and assets ten to
31:26
Speaker 2: fifty billion dollars in total debt out there. And here's
31:30
Speaker 2: where it comes to. I do not believe, even in
31:34
Speaker 2: the event of a private credit scenario, a blow up
31:37
Speaker 2: in that private credit space, that we have a worry
31:39
Speaker 2: about our most important financial institutions. Even if this gets
31:45
Speaker 2: way worse, this does not appear to be a problem
31:47
Speaker 2: for Bank of America or JP Morgan Chase, and I
31:49
Speaker 2: think that is one of the things you can point
31:51
Speaker 2: to as a success from the rules coming out of
31:55
Speaker 2: the Great Financial Crisis is these very important institutions that
31:59
Speaker 2: are out there seem like they are not at all
32:03
Speaker 2: exposed to all of this, and a lot of retail
32:05
Speaker 2: investors are not terribly exposed to this space either. So
32:08
Speaker 2: I take that as a as a win that if
32:13
Speaker 2: this stuff gets worse, I don't think that we have
32:15
Speaker 2: much of an issue there in terms of where this
32:18
Speaker 2: stuff is exposed to, so private credit generally, right, if
32:21
Speaker 2: you take this story to be a canary in the
32:25
Speaker 2: coal mine for the private credit space, which I got
32:27
Speaker 2: to be clear, I don't know that it is. This
32:29
Speaker 2: could be just a blow up in the auto industry,
32:31
Speaker 2: and maybe it just stays confined to other areas that
32:34
Speaker 2: are specifically exposed to tariffs and a weakening consumer on
32:39
Speaker 2: the lower spectrum of the credit worthiness, right, because that's
32:42
Speaker 2: what we've seen so far. As sure, a lender called
32:44
Speaker 2: Tricolor go bankrupt mainly because of subprime borrowers and in
32:50
Speaker 2: many cases undocumented immigrants borrowing from that company. And then
32:54
Speaker 2: this one case where we have an autopart supplier going belly.
32:57
Speaker 4: Up shades of Silicon Valley Bank and First Republic in
33:00
Speaker 4: twenty two was where we we mentioned, hey, perhaps this
33:03
Speaker 4: could be wirespread or it could be contained in a
33:05
Speaker 4: couple companies, and that's how we moved on from there.
33:08
Speaker 2: If if instead, what this is is a come to
33:12
Speaker 2: Jesus moment for a bunch of private lenders out there
33:15
Speaker 2: to say, hey, this is interesting this First Brands company. Yeah,
33:19
Speaker 2: we lend money to them. We didn't really realize how
33:22
Speaker 2: many other people were involved in lending money to them,
33:24
Speaker 2: and we certainly didn't know these other credit arrangements they
33:26
Speaker 2: had with all of their parts. Suppliers, Let's go look
33:29
Speaker 2: at our book and comb through it. If this is
33:32
Speaker 2: repeated everywhere and suddenly private credit dries up to even
33:38
Speaker 2: a small degree or pauses right like, we're just our
33:41
Speaker 2: investors want us to go comb through everything before we
33:44
Speaker 2: make any new loans. There are broad implications for the
33:46
Speaker 2: rest of the market in the economy. One, the holders
33:49
Speaker 2: of all these package loans, right, these companies go issue
33:52
Speaker 2: it and then they resell it. Who do they resell
33:53
Speaker 2: it to? Pension funds, insurance companies, other institutions. Sometimes retail investors,
33:58
Speaker 2: but not often, so you know, big questions about where
34:01
Speaker 2: all this stuff is held if it goes bad. Second
34:04
Speaker 2: piece would be this stuff is funding a whole bunch
34:08
Speaker 2: of the growth in this economy right now.
34:10
Speaker 3: That's important to point out that it's it's not all bad.
34:13
Speaker 4: This is there's a lot of positive examples that have
34:15
Speaker 4: come from the expansion of private credit.
34:18
Speaker 2: For it's a necessary thing that happened because the banks
34:20
Speaker 2: weren't doing.
34:21
Speaker 4: It exactly for small businesses and for areas of opportunity
34:24
Speaker 4: that have helped businesses grow. So it's important to paint
34:27
Speaker 4: that other side of the picture is just because the
34:29
Speaker 4: financing wasn't available from your behemoths out there, doesn't mean
34:32
Speaker 4: that this didn't solve the problem, and in a lot
34:34
Speaker 4: of places has worked effectively.
34:36
Speaker 2: But I'll ask, can you have a continued AI buildout
34:40
Speaker 2: boom without the participation of private credit if it's going
34:43
Speaker 2: through its own moment of crisis, Like, how could this
34:46
Speaker 2: go and affect me and my portfolio? Well, that that
34:48
Speaker 2: would be an area that it could. Again, this is
34:50
Speaker 2: all very early, and I think again it could be
34:54
Speaker 2: weeks or months before we have a real sense from
34:56
Speaker 2: these companies what happened here and what lessons were learned.
35:01
Speaker 2: But to me, I don't know the way that that
35:04
Speaker 2: space started panicking this morning and looking at things was
35:09
Speaker 2: a bit of a canary in the coal mine on
35:11
Speaker 2: two converging stories that we've been paying a lot of
35:13
Speaker 2: attention to. And I don't think that this is getting
35:16
Speaker 2: the coverage right now that it probably deserves for its significance.
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36:27
Speaker 2: The other story that has just been getting absolutely no play.
36:30
Speaker 2: And I get why because we don't do any of
36:31
Speaker 2: this manufacturing in the United States. But Jagaguar land Rover Auto,
36:36
Speaker 2: which has plants for manufacturing the Range Rover in the UK, Slovakia, India, Brazil.
36:43
Speaker 2: They have been out of action, meaning not producing anything
36:47
Speaker 2: since the beginning of the month. Wow, it's now September
36:51
Speaker 2: twenty ninth and this company has not been producing cars
36:54
Speaker 2: for a month. They just targeted restarting some of these
36:58
Speaker 2: things on Wednesday. All of this is the seeming result
37:01
Speaker 2: of a cyber attack that we are still getting some
37:04
Speaker 2: more details on. It's become so bad that the UK
37:08
Speaker 2: government just provided a loan guarantee of one and a
37:12
Speaker 2: half billion dollars and then the company's also seeking to
37:15
Speaker 2: raise a further two billion dollars from banks to shore
37:18
Speaker 2: up their finances during this shutdown. This is not the
37:21
Speaker 2: only problem that is plaguing this carmaker. They're owned, by
37:26
Speaker 2: the way, by India's Tata Motors. But this is a
37:29
Speaker 2: huge part of the UK economy, a huge part of
37:31
Speaker 2: the UK auto industry, and a cyber attack has basically
37:35
Speaker 2: taken them down and caused their operations to fully stop
37:40
Speaker 2: now for about a month. Obviously, companies also facing big
37:45
Speaker 2: problems when it comes to tariffs imposed by the Trump
37:47
Speaker 2: administration and other pressures that they are looking at. But wow,
37:52
Speaker 2: the cyber attack taking down a company this large that has,
37:55
Speaker 2: by the way, nothing to do with technology, right. We
37:57
Speaker 2: always think about this in terms of, oh, what if
37:59
Speaker 2: Google go down or what if you know, Facebook gets
38:02
Speaker 2: hit and they can't sell ads. Like there's a car
38:04
Speaker 2: manufacturer that can't build cars Jaguar.
38:07
Speaker 4: I feel like just his loss doesn't have the same
38:08
Speaker 4: luster it did ten twenty years ago. The Jaguar brand
38:11
Speaker 4: land Rover definitely does.
38:12
Speaker 2: But quick Break a lot more to cover in the
38:15
Speaker 2: second hour the Financial Exchange, we'll have a full market
38:17
Speaker 2: update and more for you, and Corey Adams from Robert
38:20
Speaker 2: Half join us to talk about the labor market that's
38:22
Speaker 2: next to the financial exchange