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What could make the Fed wrong? · The Financial Exchange Show

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Speaker 2: Kicking off the final week of August here on the
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Speaker 2: Financial Exchange. That's right, it's almost time to get the
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Speaker 2: pumpkin spice out and uh head to the apple or chine.
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Speaker 2: I mean, heck, I gotta start decorating for Christmas.
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Speaker 3: In about two weeks, right, I'm surprised you haven't already started, Chuck.
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Speaker 2: I've I got the boxes out. I'm kind of eyeing
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Speaker 2: the situation and seeing, you know, how things look. But
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Speaker 2: we're still in the planning phase for this year.
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Speaker 3: Home depots had twenty foot skeletons out since July fourth.
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Speaker 2: So I will say, I was I pop by, you know,
1:43
Speaker 2: the grocery store yesterday and you walk into Halloween Candi
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Speaker 2: is just fun center right.
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Speaker 4: Now, that's been out for three weeks now, three weeks.
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Speaker 2: I guess I just wasn't paying attention before. But I
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Speaker 2: saw yesterday. I'm like, oh, like yeah, it's I actually
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Speaker 2: don't think last week in August is that early for it.
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Speaker 2: Maybe I'm just like skewed by how bad everything's gotten now.
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Speaker 2: But I kind of sit there and I go, it's
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Speaker 2: almost September. It's almost one of the year.
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Speaker 3: Things where you stop complaining about because we're not going
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Speaker 3: to change it, right, you know, the the Christmas staff
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Speaker 3: will be out before Thanksgiving. There is no real Thanksgiving
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Speaker 3: stuff other than turkeys, and you know, you know, I
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Speaker 3: guess you can put those out as early as you want,
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Speaker 3: throw all frozen. But yeah, it's just going to continue
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Speaker 3: to creep and there's nothing we can do about it.
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Speaker 2: I mean, right next to it, right next to the
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Speaker 2: Halloween stuff, it was you know, Happy Year three thousand
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Speaker 2: right out there. So we're you know, it's yeah, we're
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Speaker 2: just we're looking forward to the next millennium. At this point,
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Speaker 2: it's fine. Let's talk a little bit about the upcoming week.
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Speaker 2: Last week, for all of the fireworks on Friday, I
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Speaker 2: do like to point out that the S and P
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Speaker 2: five hundred right, like it's like, why did we even
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Speaker 2: get dressed? Like what was the point of all this?
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Speaker 1: It was?
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Speaker 2: Okay, So we had five days where the market slid down,
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Speaker 2: and then it recooped all those losses in a single day,
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Speaker 2: which meant it quite honestly, as I feel, you know,
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Speaker 2: often about myself, I didn't really need to be there,
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Speaker 2: you know, like I could have been doing something else,
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Speaker 2: and it would have been fine. In any case, We're
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Speaker 2: here this week, and you know, everyone was all hyped
3:16
Speaker 2: up for Jackson Hole, which is interesting because the Fed
3:18
Speaker 2: never actually does anything at Jackson Hole. They just talk.
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Speaker 2: They talk about their policy framework, and so they never
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Speaker 2: actually go and raise or lower interest rates or change anything.
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Speaker 3: Why do we get so hyped up about Jackson Hole
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Speaker 3: is just because it's pretty.
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Speaker 2: They never report on it for weeks ahead of time. No,
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Speaker 2: because look, it is pretty, but like we don't really
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Speaker 2: like Davos doesn't get the same excitement, and Davos looks
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Speaker 2: way nicer than Jackson Hole. It's just the snow on
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Speaker 2: the trees and everything. You know, Jackson Hole beautiful country.
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Speaker 2: I've been out there once actually, and the wild thing
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Speaker 2: is it actually is a hole. Have you have you
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Speaker 2: ever been there? No, it's just this, it's this these
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Speaker 2: mountains that surround it three and a half sides, and
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Speaker 2: it's just this hole in the ground. The interesting thing
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Speaker 2: the one time I was out there, I was at
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Speaker 2: the top of the ski mountain and it's kind of
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Speaker 2: wild because you see planes landing below you because the
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Speaker 2: airport's in the valley and I've never seen planes land
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Speaker 2: below me before that, I'm looking at it and I'm going, oh,
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Speaker 2: that doesn't look good. You shouldn't do it like that,
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Speaker 2: like because you've just never seen them from above. But
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Speaker 2: I digress. This week we've got two market moving events. Actually,
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Speaker 2: we've got Nvidia earnings on Wednesday, and then we've got
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Speaker 2: PCE data coming out on Friday. The more likely to
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Speaker 2: be the market moving event is in Nvidia on Wednesday,
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Speaker 2: just because it's more unpredictable at this point. Quite honestly,
4:41
Speaker 2: markets have gotten really good at predicting PCE because of
4:44
Speaker 2: the pass throughs from CPI and PPI, and so it's
4:48
Speaker 2: rare to have a PCE surprise, whereas in video. I
4:52
Speaker 2: think there are a few really interesting questions that are
4:55
Speaker 2: out there, the number one question being is anyone from
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Speaker 2: China actually buying your chips now that they are allowed
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Speaker 2: to do so? And to toot our own horn, which
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Speaker 2: we do love to do here after the Trump administration
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Speaker 2: reauthorized the selling of this, I said, the funniest thing
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Speaker 2: that could happen would be if China says, now we're
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Speaker 2: not interested, And that's exactly what they're saying.
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Speaker 3: Right now, you know, supporting evidence that this would be
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Speaker 3: the H twenty chips that they are able to say
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Speaker 3: to call it to H two oh to to China.
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Speaker 3: And there's been reporting that Nvidia has ordered suppliers to
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Speaker 3: halt the production of those Age twenty chips from China. Yeah,
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Speaker 3: after a seeming lack of demand. Now obviously pretty early,
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Speaker 3: and I don't know how much. I don't know how
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Speaker 3: much to see always even going to address it because
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Speaker 3: it is so recent in terms of information that I
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Speaker 3: think the only thing he can say is we're just
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Speaker 3: not sure at this stage. But he'll have he'll be
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Speaker 3: asked most certainly about production production halts on these age twenties,
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Speaker 3: and will certainly be asked about his outlook on China.
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Speaker 3: And I'm not sure how investors digest that.
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Speaker 2: Yeah, So I think that's going to be an open
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Speaker 2: question there. Obviously. The other piece that I've been wondering
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Speaker 2: about is you see all of these what are called
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Speaker 2: the hyper scalers, the guys who are just buying tens
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Speaker 2: of thousands of these chips. You've seen them upping their
6:13
Speaker 2: capex estimates for next year yep. And the assumption that
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Speaker 2: goes in this is that, hey, that means they're upping
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Speaker 2: the number of chips that they're buying. What if it's
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Speaker 2: just getting more expensive to build this stuff is a
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Speaker 2: thought that went through my head.
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Speaker 3: The main thing that's been going through my head, Chuck,
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Speaker 3: is to this point, when it comes to artificial intelligence
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Speaker 3: and the ramp up of companies like Nvidia, it's largely
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Speaker 3: been a cash transfer from the biggest tech companies out
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Speaker 3: there over to another tech company. I can't look at
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Speaker 3: all this and say, oh, look at all this wealth
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Speaker 3: creation and productivity creation that's come from the use of
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Speaker 3: artificial intelligence and the development of these chips. It's largely
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Speaker 3: been Microsoft and Facebook, Apple to some extent but not
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Speaker 3: much had a huge amount of cash. They continue to
7:08
Speaker 3: create more and more cash, and they finally found something
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Speaker 3: to spend it on that they think is going to
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Speaker 3: be productive in the future but hasn't been yet. And
7:15
Speaker 3: so when does that massive transfer of wealth is not
7:21
Speaker 3: wealth transfer, but massive transfer of balance sheet cash from
7:24
Speaker 3: these tech behemoths actually produce something profitable. And plenty of
7:32
Speaker 3: people would argue with me about this. I think you
7:34
Speaker 3: can point to Meta, for instance, because they have talked
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Speaker 3: at length about how much AI is revolutionizing their business.
7:41
Speaker 3: I just would push back on that a little bit.
7:43
Speaker 3: I just don't think that we have seen it all
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Speaker 3: that much yet from any of these folks. And so
7:47
Speaker 3: that's my main question about all of this is, Yes,
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Speaker 3: and Video has turned into this first or second largest
7:53
Speaker 3: company in the world based on which day you measure it,
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Speaker 3: But have we actually seen anything other than a transfer
7:59
Speaker 3: from one place to another.
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Speaker 2: Here's the thing, there's going to be a ton of
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Speaker 2: growth in AI spending and it's gonna do some really
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Speaker 2: cool things. I have no doubt about that. The question is,
8:12
Speaker 2: given the projected spend on an annual basis in order
8:19
Speaker 2: to actually build these data centers, at what point does
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Speaker 2: this start to become problematic for the company's financials? And
8:27
Speaker 2: I which companies they spending? Companies? The guy's building the
8:30
Speaker 2: data centers and I went through this last week. There's
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Speaker 2: a guy by the name is of Harris Kuperman who
8:35
Speaker 2: published this last week. So that this is not an
8:37
Speaker 2: original thought of mine, but it it kind of puts
8:40
Speaker 2: some some firm numbers that are out there which are
8:43
Speaker 2: look right now, next year in twenty twenty six, you
8:47
Speaker 2: are going to have four hundred billion dollars of data
8:53
Speaker 2: centers built by these companies on average, the depreciator for
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Speaker 2: those's gonna happen over a ten year period. The chips
9:02
Speaker 2: might be three to five years, the facility might be
9:04
Speaker 2: twenty average, it's ten years in terms of depreciation, which
9:08
Speaker 2: means that, look, there's things get obsolete and you have
9:10
Speaker 2: to replace them, like there's a cost associated with doing so,
9:12
Speaker 2: is basically what it is. So if you've got four
9:16
Speaker 2: hundred billion dollars that's being built next year, it means
9:18
Speaker 2: you've got forty billion dollars in depreciation that you got
9:21
Speaker 2: to account for. Okay, in order to actually get the
9:27
Speaker 2: money to cover just the depreciation cost, not to actually
9:30
Speaker 2: make any money, but just to cover the depreciation cost,
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Speaker 2: you now need forty billion dollars in margin in order
9:38
Speaker 2: to do so. Well, look, based on what we see
9:40
Speaker 2: from these companies, you probably need one hundred and sixty
9:42
Speaker 2: billion dollars in revenue in order to just cover the
9:45
Speaker 2: depreciation from next year. What happens when you get the
9:49
Speaker 2: year after and you've got another you know, forty eight
9:51
Speaker 2: billion dollars. Now you got like ninety billion dollars in
9:54
Speaker 2: depreciation that you need to cover, and you need what
9:56
Speaker 2: like one point five trillion dollars in revenue in order
9:59
Speaker 2: to to do so, you're not gonna get that from AI,
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Speaker 2: and so at some point, not immediately, No, Michael ever, Michael,
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Speaker 2: Michael ever, Michael, one point five trillion dollars. To put
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Speaker 2: this in perspective, that is more like you do the
10:15
Speaker 2: math on this, and you say, okay, like show me
10:19
Speaker 2: the revenue from all of these hyperscalers right now. And again,
10:24
Speaker 2: I'm just talking revenue. I'm not talking anything crazy here.
10:27
Speaker 2: I'm just talking like, overall total revenue. Microsoft does two
10:32
Speaker 2: hundred and eighty one billion dollars in revenue right now.
10:36
Speaker 2: Meta does one hundred and seventy eight billion dollars in
10:41
Speaker 2: revenue right now. Even if I toss in Apple and yeah,
10:45
Speaker 2: you're tossing Google. Even if I toss in Google, and
10:49
Speaker 2: even if I toss in Amazon, I think those are
10:52
Speaker 2: the only ones that are playing at the scale. If
10:56
Speaker 2: you look at the total revenue from all of those companies,
10:59
Speaker 2: it's like one point seven trillion dollars. So we're not
11:03
Speaker 2: going to get one point five trillion in revenue from
11:05
Speaker 2: AI on a short enough timeframe to like, yeah, sure,
11:08
Speaker 2: like fifteen years fromw Okay, that doesn't really do anyone
11:10
Speaker 2: any good. So the point that Kupperman makes is not
11:15
Speaker 2: that AI is going to be useless. He thinks it's
11:18
Speaker 2: going to be really useful, but that the cost of
11:20
Speaker 2: this development ultimately is probably not going to be supported
11:24
Speaker 2: by the revenues that generates quickly enough. And it's just
11:28
Speaker 2: so reminiscent to the dot com body. And this is
11:30
Speaker 2: what he brings up is, Look, you had these companies
11:33
Speaker 2: that were like laying all of the fiber optic cable
11:35
Speaker 2: and building all of the back end. They went out
11:38
Speaker 2: of business. Now, Microsoft is not going to go out
11:40
Speaker 2: of business. We're I'm not suggesting that, but they went
11:42
Speaker 2: out of business. We're still using the fiber today that
11:45
Speaker 2: they laid twenty five years ago. And the internet is
11:49
Speaker 2: hugely productive. We can do all kinds of immense productivity
11:52
Speaker 2: improving things, including using AI.
11:55
Speaker 3: All sorts of companies that couldn't have existed without it. Uber, Amazon,
12:00
Speaker 3: It's current state. None of these could have existed today
12:02
Speaker 3: without the advent of that groundwork.
12:04
Speaker 2: But who today looks at their global crossing stock and says, ah,
12:08
Speaker 2: I'm glad that I owned that. None of us because
12:10
Speaker 2: they went out of business, even though they were laying
12:13
Speaker 2: all the fiber that we use to do everything. You
12:17
Speaker 2: couldn't listen to our show right now without the fiber
12:21
Speaker 2: that Global Crossing laid. Yeah, and so this is the
12:25
Speaker 2: stuff that I look at, which is, hey, it's not
12:28
Speaker 2: the Microsoft's gonna go out of business. There's too much
12:30
Speaker 2: else going on there. But at some point investors are
12:33
Speaker 2: going to look at this and say, hey, where's the beef?
12:38
Speaker 2: And you can't come back and be like, eh, beyond me,
12:44
Speaker 2: Let's take a quick break. When we return, let's talk
12:47
Speaker 2: a little bit more about what Jerome Powell and the
12:49
Speaker 2: gang said on Friday.
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13:39
Speaker 2: So Mike on on Friday, Powell clearly took a douvish tack.
13:45
Speaker 2: I know that. The funny thing, and this has been
13:47
Speaker 2: pointed out by a few people, if you fed Powell's
13:50
Speaker 2: speech into large language models, they said he was being hawkish.
13:54
Speaker 2: But every human was like, no, this is dubvish's as heck,
13:59
Speaker 2: this is what we're doing here, like just a Bloomberg's
14:04
Speaker 2: own Yeah, LM spit out like, oh this is hawkish.
14:08
Speaker 2: You plug this into a bunch of them, It's like,
14:10
Speaker 2: this is hawkish. But actual humans looked at it and went, hey,
14:15
Speaker 2: this is really duvish.
14:16
Speaker 3: And okay, that's something that say something about our bias
14:20
Speaker 3: or crappy large language models both.
14:22
Speaker 2: Yeah, okay, I don't know exactly what, but it says
14:25
Speaker 2: something about both. Yeah, certainly in any case, the key
14:30
Speaker 2: line in the takeaway and this is here's why I
14:34
Speaker 2: thought J. Powell was duvish. I don't care about the FEDS,
14:39
Speaker 2: you know, policy framework and everything I do. But not
14:42
Speaker 2: in so far as hey, what does it mean for
14:45
Speaker 2: things today? For things today, it's very simple. Nonetheless, with
14:50
Speaker 2: policy and restrictive territory, the baseline outlook and shifting balance
14:54
Speaker 2: of risks may warrant adjusting our policy stance hard stop. Yeah,
14:59
Speaker 2: nothing else. It's Pala saying, look, I think we're a
15:02
Speaker 2: little bit restrictive now. As such, given the data, we
15:05
Speaker 2: might need to adjust that full stop. Everything else is noise.
15:12
Speaker 2: It's I is Tucker is a Game of Thrones where
15:16
Speaker 2: you know, he makes the line like everything before the
15:18
Speaker 2: butt is BS.
15:20
Speaker 4: Couldn't tell you.
15:21
Speaker 2: It's some show or movie where they say that. It's like, look,
15:23
Speaker 2: if you hear the word button a sentence, everything before
15:25
Speaker 2: the butt, you can basically get rid of this was Hey,
15:29
Speaker 2: everything before then? Nonetheless, forget about it. It was Game
15:33
Speaker 2: of Thrones, thank you.
15:35
Speaker 3: So let's let's put this in context once again. Twelve
15:39
Speaker 3: voting members, yes, two of them have felt this way
15:43
Speaker 3: for the last couple of meetings. It seems ten of
15:45
Speaker 3: them have not.
15:47
Speaker 2: Jase trying to build consensus, Yeah, Jase trying to build
15:50
Speaker 2: consensus towards that, and which, by the way, is completely justifiable.
15:56
Speaker 2: I said, going into Friday. You could look at the
16:00
Speaker 2: Fed's dual mandate stable prices, maximum employment, and you could
16:05
Speaker 2: say both sides of those are being threatened right now.
16:09
Speaker 2: If you want to prioritize one set over the other
16:11
Speaker 2: because you think one is the more immediate threat, I
16:14
Speaker 2: think you could be justified in going in either direction.
16:17
Speaker 2: Quite honestly, it's just I'm pretty much saying, look, this
16:20
Speaker 2: is a toss up, and you're not going to know
16:23
Speaker 2: until later whether or not you're right on it.
16:25
Speaker 3: Yeah, So that's I guess. My main question is if
16:29
Speaker 3: clearly J. Powell doesn't think it's a toss up, if
16:31
Speaker 3: he's making this kind of statement, clearly others on the
16:34
Speaker 3: federal Reserve also don't think it's a toss up. They
16:37
Speaker 3: are favoring the employment side based on these comments. Sure,
16:40
Speaker 3: but if I think it's a toss up.
16:41
Speaker 2: I'm doing nothing.
16:43
Speaker 3: And they are seemingly concluding something different than what you are,
16:48
Speaker 3: which is they don't think it's a toss up. J
16:51
Speaker 3: Powell seems to think, or at least our interpretation and
16:55
Speaker 3: most investors' interpretations of J. Powell's speech, or that they
16:59
Speaker 3: are now more worried about the employment side. And again,
17:03
Speaker 3: to speak to what this contextually means is that J.
17:08
Speaker 3: Powell is worried more about a recession right now than
17:11
Speaker 3: he is about the economy heating up to the point
17:13
Speaker 3: of inflation, which is not capitulating to the President, I
17:18
Speaker 3: would say, is what you're talking about here? And I
17:21
Speaker 3: bring that up because another piece wrote about it that way,
17:23
Speaker 3: which is no. I think they are genuinely concerned about
17:26
Speaker 3: growth in this economy, the poor job market data that
17:30
Speaker 3: came out over the course of the spring, and they
17:33
Speaker 3: are now saying, look, our job is to stabilize that
17:36
Speaker 3: and maintain the stability, and so we think we might need.
17:38
Speaker 2: To cut Look, we've talked a lot about FED independence
17:41
Speaker 2: here on the show. Anyone who looks at the data
17:45
Speaker 2: in the aggregate and says, hey, this is the FED
17:48
Speaker 2: doing what the president wants, I don't think that's an
17:50
Speaker 2: accurate read. Sure, there is convincing data that the labor
17:55
Speaker 2: market is slowing meaningfully and could become problematic in the
18:00
Speaker 2: next three to five months. There's also some convincing data
18:04
Speaker 2: that inflation is starting to pop up back in some
18:07
Speaker 2: places that we haven't seen it in a little bit,
18:09
Speaker 2: and that that could become a problem in three to
18:11
Speaker 2: five months. The FED is weighing this, and maybe it's
18:14
Speaker 2: sixty forty or seventy thirty, but they're saying, hey, there's
18:16
Speaker 2: more concern on the employment side here for us, and
18:20
Speaker 2: that's something that is bothersome. I think that's a completely
18:25
Speaker 2: reasonable take for them to have at this point. And
18:29
Speaker 2: I think it's also reasonable that they didn't necessarily do
18:32
Speaker 2: anything over the last few months. Yet. The other thing
18:35
Speaker 2: that I'll point out on this, for all of the
18:37
Speaker 2: talk about you know, hey, was this speech this, or
18:40
Speaker 2: that they ain't done anything yet. True. Okay, if the
18:46
Speaker 2: data comes in really hot the next three weeks we
18:49
Speaker 2: get a hot job support in hot CPI, they're probably
18:53
Speaker 2: not cutting in September. If we get a month of
18:57
Speaker 2: job loss and CPI is muted, they might go fifty
19:01
Speaker 2: bases points in September. I know, we gotta go to
19:03
Speaker 2: Wallstreet Watch.
19:04
Speaker 3: I do want to continue this conversation because I want
19:06
Speaker 3: to get into how they might be wrong quick Break
19:09
Speaker 3: Wallstreet Watches next.
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Speaker 1: Street Watch. A complete look at what's moving markets so
19:36
Speaker 1: far today right here on the Financial Exchange Radio Network.
19:39
Speaker 4: After a fed fuel rally on Friday, markets beginning of
19:42
Speaker 4: the week in mixed territory is Wall Street awaits pivotal
19:46
Speaker 4: and video earnings on Wednesday after the bill, in addition
19:48
Speaker 4: to an inflation reading on Friday, when the core PC
19:53
Speaker 4: index is unveiled at the moment that Dow is off
19:57
Speaker 4: by four tenths of one percent, one hundred and eighty
20:01
Speaker 4: seven points lower, SMP five hundred is down nearly two
20:04
Speaker 4: tenths of one percent, Nasdaq edging eleven points higher, Russell
20:08
Speaker 4: two thousands off by a quarter of a percent, tenyure
20:11
Speaker 4: treas reeled up three basis points now at four point
20:14
Speaker 4: two nine three percent, and crude oil up one and
20:17
Speaker 4: a half percent higher, trading at sixty four dollars and
20:20
Speaker 4: fifty nine cents A barrel. Big acquisition news in the
20:24
Speaker 4: beverage space this morning after Currig Doctor Pepper agreed to
20:28
Speaker 4: purchase the owner of Pete's Coffee JdE Pets for eighteen
20:33
Speaker 4: billion dollars. Once the acquisition completes, the combined company is
20:37
Speaker 4: set to separate into two independent US listed Coffee and
20:41
Speaker 4: beverage firms Cured Doctor Pepper shares dropping seven percent, while
20:46
Speaker 4: JdE Pete stock is jumping eighteen percent. Meanwhile, Intel stock
20:51
Speaker 4: is up over one percent on the heels of confirmation
20:54
Speaker 4: that the US government has taken a ten percent stake
20:57
Speaker 4: in this struggling chip maker. Elsewhere, furniture stocks taking a
21:01
Speaker 4: hit following comments from President Trump that his administration would
21:04
Speaker 4: launch an investigation into imported units. Williams Sonoma down by
21:09
Speaker 4: over two percent, Wayfair tumbling seven percent, and Our eight
21:12
Speaker 4: shares are falling by six percent. According to Bloomberg, Tom
21:16
Speaker 4: of Bravo nearing a deal to acquire call center software
21:19
Speaker 4: maker Varn Systems, which would value Verarent at about two
21:23
Speaker 4: billion dollars including debt and shares in American Eagle Outfitters
21:27
Speaker 4: pulling back three percent after Bank of America downgraded the
21:30
Speaker 4: stock to underperform. The analyst noted that while the retailer's
21:34
Speaker 4: Sidney Sweeney ad campaign me boost sales in the near term,
21:38
Speaker 4: the momentum will be sapped by tariffs. I'm Tucker Silva
21:43
Speaker 4: and that is Wall Street Watch.
21:45
Speaker 2: Mike. You mentioned that you wanted to talk about the
21:50
Speaker 2: FED and kind of what they what Ja Powell said
21:52
Speaker 2: on Friday, in the context of was it how will
21:55
Speaker 2: we know if they're wrong or what could make what
21:57
Speaker 2: could make them wrong? Yeah, So I want to start with.
22:01
Speaker 3: The job market data in the spring turned out to
22:05
Speaker 3: be really weak and no contact needed.
22:09
Speaker 2: It was really quite bad and.
22:11
Speaker 3: In any normal environment would probably indicate if it continued
22:15
Speaker 3: a recession, right. I mean, we had basically no job
22:18
Speaker 3: creation for three months. That ap April May June timeframe
22:24
Speaker 3: is when we had like the twenty five thousand, was
22:26
Speaker 3: it May June July? Either way, we were splitting hairs
22:29
Speaker 3: would continue The FED I think is right to take
22:32
Speaker 3: a look at that and say, wow, that that is
22:34
Speaker 3: an indication of something really not that great. On the
22:38
Speaker 3: other hand, I know that they are well aware of this.
22:40
Speaker 3: May June July, May June July. Okay, I thought it
22:42
Speaker 3: was April May June. It was May June July. The
22:46
Speaker 3: other side of the context of all this would be
22:49
Speaker 3: we are currently seeing and have been for a while,
22:53
Speaker 3: but currently seeing a massive number of baby boomers retire
22:56
Speaker 3: every single month, combined with one of the largest changes
23:00
Speaker 3: and net migration in a short time period, actually probably
23:03
Speaker 3: the largest change in net migration to this country that
23:06
Speaker 3: we have ever seen, and so at least in the
23:08
Speaker 3: negative sense, right, Well, I mean from where we started
23:12
Speaker 3: in twenty twenty three to where we are now. Yeah, well, kids,
23:15
Speaker 3: I guess where I'm going is like twenty three was
23:17
Speaker 3: a huge acceleration over where it was previously. This is,
23:20
Speaker 3: this is probably the biggest deceleration, yes, in migration on
23:24
Speaker 3: on a net basis, at any point in time for
23:26
Speaker 3: some estimates of this, just so everybody understands how severe
23:29
Speaker 3: this is. During the twenty tens decade, we averaged about
23:33
Speaker 3: nine hundred and seventeen thousand people entering the country on
23:36
Speaker 3: average annually. In twenty twenty three that was three point
23:40
Speaker 3: three million, and in twenty twenty four and estimated two
23:42
Speaker 3: point seven million. YEP for twenty twenty five were estimated
23:46
Speaker 3: to see net out migration of two hundred five thousand.
23:50
Speaker 2: Correct. And so, so how do you judge a labor market?
23:53
Speaker 2: That is? And this is the tough thing in these.
23:55
Speaker 3: Things, right, I don't know how anyone, no matter how
23:59
Speaker 3: well you are, no matter how much great data you
24:02
Speaker 3: think you have, can contextualize what that does to a
24:05
Speaker 3: labor market when you see that.
24:07
Speaker 2: Degree of change in migration. And here's how you have
24:09
Speaker 2: to think about this in terms of what it means
24:12
Speaker 2: for the labor market. That there are a couple things
24:14
Speaker 2: that I think we need to work through on this
24:17
Speaker 2: because economics is hard, yo, is what I come back to.
24:24
Speaker 2: Here's the first piece. The first thing that I always
24:26
Speaker 2: like to kind of reset is when we talk about
24:30
Speaker 2: the number of jobs added each month, you're better off
24:33
Speaker 2: not looking at the number of jobs and better off
24:36
Speaker 2: looking at and you're better off not looking at the
24:38
Speaker 2: number of jobs added and better off looking at the
24:40
Speaker 2: total number. It makes It makes things cleaner. If you're saying, hey,
24:45
Speaker 2: on average, there's revisions of seventy thousand jobs each month,
24:49
Speaker 2: and you normally see like one hundred and forty thousand
24:53
Speaker 2: jobs added, You're like, well, there's a fifty percent error
24:55
Speaker 2: on that. The fact is, what the DL is trying
24:58
Speaker 2: to measure through the BLS is not how many jobs
25:01
Speaker 2: are at it each month, but just the total number
25:03
Speaker 2: of people that are working. So that's a great they're
25:06
Speaker 2: pretty close. So a seventy thousand person ERA one hundred
25:08
Speaker 2: and fifty million jobs, it's actually pretty darn close. Number one.
25:13
Speaker 2: The second piece is there's a reason why, like for
25:16
Speaker 2: all of the talk about like oh, like the jobs
25:18
Speaker 2: are visioning this and that, there's a reason why the
25:21
Speaker 2: FED doesn't focus on the number of jobs created. And
25:24
Speaker 2: the reason why is because the FED cannot create people.
25:29
Speaker 2: J Powell.
25:31
Speaker 3: Well, J Powell can have kids, but you cannot create
25:34
Speaker 3: enough people to make it statistically. That is, that is
25:37
Speaker 3: separate from his duties at the FED. Hell, even Elon
25:40
Speaker 3: Musk can't create enough kids.
25:41
Speaker 2: Correct. Okay, that is separate from J. Powell's duties at
25:44
Speaker 2: the FED as to whether or not he has one, three, five,
25:48
Speaker 2: or one hundred million kids. Okay, completely separate. What I
25:53
Speaker 2: mean by this is let's say. Let's say that you
25:56
Speaker 2: have a labor market that has one hundred people in
25:59
Speaker 2: it and ninety six of them have jobs. You got
26:02
Speaker 2: a four percent unemployment rate, and the FED says, hey,
26:06
Speaker 2: this is great, unemployment's low. If one of the unemployed
26:10
Speaker 2: people leaves the country just is gone, and now you
26:15
Speaker 2: have ninety six people working out of ninety nine, did
26:19
Speaker 2: the labor market get better or worse? Hold that thought,
26:23
Speaker 2: I don't want an answer yet. Now let's say that
26:25
Speaker 2: one of the employed people left and now you have
26:27
Speaker 2: ninety five people employed out of ninety nine because you
26:32
Speaker 2: lost one job, does that mean the labor market got worse? Well, no,
26:37
Speaker 2: you still have anunemployment rate of four percent. You just
26:39
Speaker 2: have one fewer person. Maybe that person died or whatever
26:43
Speaker 2: other side of the equation. Let's say that you add
26:46
Speaker 2: a person and they get a job, So now you
26:48
Speaker 2: get ninety seven people employed out of one hundred and one.
26:53
Speaker 2: Does the FED need to hike because you added one
26:56
Speaker 2: job that month or is it just the unemployment rate
27:00
Speaker 2: is stable? And this is why the FED target's unemployment
27:02
Speaker 2: is because they can't affect migrations or berths or the
27:07
Speaker 2: labor force. The FED cannot do that. They just can't,
27:11
Speaker 2: and so the FED focuses on the unemployment rate, which
27:14
Speaker 2: does make it interesting that they're talking about cutting here,
27:17
Speaker 2: because if there's one thing that the unemployment rate has
27:19
Speaker 2: done this.
27:20
Speaker 3: Year, it's nothing. Right, It's been very stable. The unemployed
27:23
Speaker 3: train four to one, and actually between four one and
27:26
Speaker 3: a half and.
27:26
Speaker 2: Four two and a half. Basically, the unemployment rate right
27:28
Speaker 2: now is at four point two percent. The unemployment rate
27:32
Speaker 2: a year ago was at four point two percent and
27:36
Speaker 2: hasn't gotten over four to three. I think correct. Now.
27:40
Speaker 2: The interesting thing is that if the labor force participation
27:43
Speaker 2: rate were the same as it was earlier in this year,
27:47
Speaker 2: the unemployment rate would be four to nine, would have
27:50
Speaker 2: gone up by over half a percent. So there are
27:54
Speaker 2: a couple of ways you can look at this number. One,
27:57
Speaker 2: maybe the FED thinks that that is not a long
28:00
Speaker 2: term shift and that the labor force participation rate is
28:03
Speaker 2: going to go back to where it was, in which
28:06
Speaker 2: case the unemployment rate's going to a rise just by
28:08
Speaker 2: virtue of that, and they want to get ahead of that. Yep.
28:11
Speaker 2: Kind of a reasonable case. But in the context of
28:15
Speaker 2: a bunch of boomers retiring, not enough gen z is
28:18
Speaker 2: coming into the workforce to replace them, and a net
28:21
Speaker 2: outflow potentially of immigration, I don't know how how plausible
28:26
Speaker 2: that is. So that's the I think this is what
28:29
Speaker 2: you were getting at in terms of the potential wrong
28:31
Speaker 2: path for the FED is Hey, maybe they're trying to
28:35
Speaker 2: view something is transitory that isn't and they think the
28:40
Speaker 2: labor market's weaker than it is because of that. Yeah,
28:44
Speaker 2: it's not transitory inflation that they're thinking. It's they're thinking, Hey,
28:48
Speaker 2: the shift in the labor force is transitory and we
28:50
Speaker 2: want to get ahead of that, and maybe that the
28:53
Speaker 2: problem is if they're wrong and we have lower labor supply,
28:57
Speaker 2: then businesses, even with less demand, still have to compete
28:59
Speaker 2: for that lower labor supply, and that drives wages up.
29:03
Speaker 3: Yeah, my concern would be that the weakness that we
29:07
Speaker 3: saw in May, June, July was primarily caused by policy
29:11
Speaker 3: uncertainty from the White House, which there was plenty of
29:15
Speaker 3: go rill the tape and were maybe about as that
29:21
Speaker 3: whole Internet conversation we had earlier. We may be on
29:23
Speaker 3: the cusp of a hiring boom that we just aren't
29:27
Speaker 3: seeing yet, and it could be occurring into a supply
29:32
Speaker 3: of labor that is diminishing.
29:33
Speaker 2: The counterpoint to this, and again this is why, like,
29:36
Speaker 2: I think it's totally reasonable to have any view at
29:38
Speaker 2: this point as to like what you think the Fed
29:40
Speaker 2: should be doing. The counterpoint to this is that in
29:45
Speaker 2: the last four weeks, weekly unemployment claims have gone from
29:47
Speaker 2: two hundred and seventeen thousand two thirty five and are
29:49
Speaker 2: starting to show signs of ratcheting back up. Yep, And
29:52
Speaker 2: so maybe the FED should be cutting yep. I don't
29:56
Speaker 2: think it's unreasonable to either say the FED should be cutting,
29:58
Speaker 2: doing nothing or hiking at this point right now. Ultimately
30:03
Speaker 2: whether your good FED or bad FED is gonna depend
30:07
Speaker 2: on you getting that right. And I don't know enough
30:10
Speaker 2: looking at the data to be right. Like that's that's
30:15
Speaker 2: how it is. Yeah, I think there's a reasonable case
30:17
Speaker 2: for all three. If you told me end of this year,
30:21
Speaker 2: unemployment's going to be four to seven and inflation is
30:23
Speaker 2: going to be two five reasonable view. If you told
30:27
Speaker 2: me unemployment's going to be three to nine and inflation's
30:29
Speaker 2: going to be three eight reasonable view. If you told
30:33
Speaker 2: me somewhere in the middle, Hey, unemployment's still four to two,
30:35
Speaker 2: in inflation's three to three. Yeah, that's reasonable too. I
30:39
Speaker 2: don't think any of these are off the table, and
30:42
Speaker 2: that's what makes this point in time so hard and
30:44
Speaker 2: also why I think the FED is perfectly justified in
30:47
Speaker 2: doing what they're doing if they have information that they believe. Hey,
30:50
Speaker 2: labor is you know the bigger threat right now? Take
30:54
Speaker 2: a quick break here. When we come back, should we
30:57
Speaker 2: talk about businesses bringing back recession specials? Yeah? Oh, can't
31:01
Speaker 2: wait to do that right after this business.
31:04
Speaker 1: And financial news affecting the markets and your wallet We've
31:08
Speaker 1: got it all straight from Wall Street right here on
31:11
Speaker 1: the Financial Exchange Radio Network.
31:25
Speaker 2: Piece in CNBC today, businesses are bringing back recession specials.
31:33
Speaker 2: Apparently this is popping up ball through Google search now,
31:37
Speaker 2: And I don't know that this actually means anything. Yeah,
31:43
Speaker 2: why are we so.
31:45
Speaker 3: Obsessed with the word because we don't know that what
31:49
Speaker 3: it actually means.
31:51
Speaker 2: Yeah, here's the thing about recessions. When you actually go
31:55
Speaker 2: through one, they suck. You don't have specials during them.
32:00
Speaker 2: You see business closures, you see firings, you see stuff
32:03
Speaker 2: like that. Not hey, the New York coffee shop Clever
32:08
Speaker 2: Blend having a six dollars gelato and espresso recession special.
32:15
Speaker 2: You don't make jokes about recession when you're actually in one.
32:20
Speaker 2: I think is where I would land, right, because they
32:23
Speaker 2: suck and your friends get laid off and your family,
32:26
Speaker 2: you know, gets nervous about how are we going to
32:28
Speaker 2: pay the bills? And I know this is stuff that
32:30
Speaker 2: a lot of Americans have been feeling for the last
32:31
Speaker 2: few years anyways, but it's it's different in recession. And
32:37
Speaker 2: I think that when you actually enter recession, this stuff
32:43
Speaker 2: goes away because people are too busy trying to figure
32:45
Speaker 2: out how to survive.
32:46
Speaker 3: Not the deals, just the obsession with the idea of
32:49
Speaker 3: the deals. Yes, like, yeah, when recession happens, yes, certainly,
32:52
Speaker 3: all sorts of things go on sale and businesses have
32:55
Speaker 3: to run promotions and cut into their profit markets. They're
32:57
Speaker 3: too busy to be fun and it's just not terribly
33:01
Speaker 3: humorous at the time. It's it's kind of funny like
33:04
Speaker 3: ten years after it sometimes not for the person that
33:08
Speaker 3: lost their job, but you know, like some of the
33:11
Speaker 3: things that you look at back then, like oh, Mike
33:14
Speaker 3: buying his first home in twenty eleven for like two
33:17
Speaker 3: nickels and a paper clip like that. Yeah, that part
33:19
Speaker 3: is a little bit funny in context, but not the
33:21
Speaker 3: guy who lost his job and lost his home back
33:23
Speaker 3: in twenty eleven.
33:24
Speaker 2: I'm a big believer that comedians often have some of
33:26
Speaker 2: the best insights on this stuff. And I keep going
33:29
Speaker 2: back on this story too. I think it was Chris
33:31
Speaker 2: Rock's first CD okay and he goes, how much of
33:35
Speaker 2: this can you actually say on air? Go ahead? Probably
33:38
Speaker 2: this is it. He goes, Look, if a homeless person
33:40
Speaker 2: has a funny sign, he hasn't been homeless too long,
33:44
Speaker 2: you know, long term homeless people are too hungry to
33:46
Speaker 2: be funny, is the point that he makes. It's kind
33:49
Speaker 2: of the same thing with these recession deals. Yeah, if
33:53
Speaker 2: your business is really struggling, you don't write recession deal.
33:57
Speaker 2: You're just marking stuff down and laying people off because
33:59
Speaker 2: you got to survive. And so yeah, I think that's
34:04
Speaker 2: kind of the situation here.
34:07
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35:24
Speaker 2: BJ's Wholesale Club reported earnings, and this was on Friday.
35:28
Speaker 2: Their shares fell about eight percent on the news. Big
35:32
Speaker 2: thing is that their same store sales climbed by two
35:35
Speaker 2: point three percent excluding gas sales, but that was below
35:38
Speaker 2: the three point two percent increase that was expected, and
35:42
Speaker 2: so ultimately they ended up reaffirming their guidance for the
35:46
Speaker 2: rest of the year. But just not enough there. This
35:49
Speaker 2: is a company. Look, I'm a member myself. I buy
35:52
Speaker 2: basically all my groceries there because my daughters eat through
35:55
Speaker 2: more fruit than is humanly possible. But ultimately, you can
35:59
Speaker 2: only buy so many raspberries in a week. And you
36:03
Speaker 2: know my question part.
36:04
Speaker 3: My question for you, Chuck Bjay's problem or consumer problem.
36:10
Speaker 3: You've shopped at both Costco and bjays, do you notice
36:13
Speaker 3: a demographic difference between the two. I'm just wondering, Like,
36:17
Speaker 3: these are two very comparable companies that do business in
36:20
Speaker 3: each other's backyards.
36:21
Speaker 2: Costco tends to target a higher income consumer a little bit,
36:25
Speaker 2: so maybe there's something there on that front.
36:28
Speaker 3: But I just you know, the temptation is always with Like,
36:31
Speaker 3: for instance, if you looked at Target and Walmart ten
36:34
Speaker 3: years ago, you would look at the two of them
36:35
Speaker 3: and say, okay, both are pretty good indicators of what
36:39
Speaker 3: the consumer economy is doing. Twenty twenty five, you're looking
36:44
Speaker 3: at him saying, okay, Walmart has executed perfectly on most things.
36:47
Speaker 3: Target has executed horrendously on most things, and so not
36:51
Speaker 3: exactly a good read. And that's kind of my question
36:53
Speaker 3: is are we faced with a BJ's wholesale club that
36:56
Speaker 3: is not executing in the same way as it's competitors,
36:59
Speaker 3: or is an indication that hey, consumers are struggling and
37:03
Speaker 3: pulling back.
37:04
Speaker 2: I don't have an answer. It's hard to tell. Costco
37:07
Speaker 2: typically targets a little bit more up market, but like
37:09
Speaker 2: the pricing and selection is pretty comparable across them. So
37:12
Speaker 2: I look at it and I go, I don't really
37:15
Speaker 2: know what to make of this. I get the biggest thing,
37:17
Speaker 2: BJ is a lot smaller, like they don't have the
37:19
Speaker 2: economy or scale that the costco can get to, and
37:22
Speaker 2: so they might have some levers that they can't pull
37:25
Speaker 2: just because they're not available to them. Let's take a
37:28
Speaker 2: quick break here, but we got our two coming up
37:31
Speaker 2: in just a little bit.