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Why oil prices are falling, and what it means for the economy · The Financial Exchange Show

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  Speaker 1: and Mark Fandetti.
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  Speaker 2: Our two on the financial Exchange. It is Chuck, Mark
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  Speaker 2: and Tucker with you. Tucker, I still can't my red
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  Speaker 2: light won't go on on this.
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  Speaker 3: I'll do that from time to time. Yeah, yeah, so
• 1:21
  Speaker 3: it'll probably be on.
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  Speaker 2: That's that sounds great, But h Mark, yours us never
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  Speaker 2: goes on? Oh no, hey, yours is white. Didn't even
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  Speaker 2: know that first time I looked at it. In any case,
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  Speaker 2: it is the three of us talking about money and stuff.
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  Speaker 2: And the Dow Jones Industrial Average is up one hundred
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  Speaker 2: and forty eight points right now. The SMP is flat,
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  Speaker 2: the Nasdaq down forty nine. Most of that weakness in
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  Speaker 2: the Nasdaq, and even the SMP. Uh. The SMP was
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  Speaker 2: up about maybe half a percent until the last twenty
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  Speaker 2: minutes or so. And about twenty minutes ago Apple, I,
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  Speaker 2: I don't know where where this was being talked about,
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  Speaker 2: but I see it on you know a bunch of
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  Speaker 2: alerts and stuff here. Apple said that searches in their
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  Speaker 2: web browser. So if you're in Safari and you just
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  Speaker 2: type something in like instead of the address, but just
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  Speaker 2: you know whatever, normally that goes to Google. This was
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  Speaker 2: about fifteen minutes ago. Yeah, normally that goes to Google.
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  Speaker 2: Apple said searches in browser felt for the first time
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  Speaker 2: ever in April, so they've never had a month where
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  Speaker 2: they got, you know, saw fewer searches coming through. Apple
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  Speaker 2: exploring adding AI search to its browser and believes perplexity
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  Speaker 2: and anthropic could be options. So you promptly pull up
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  Speaker 2: a chart of Google stock, which was basically trading between
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  Speaker 2: like one sixty three and one sixty three seventy for
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  Speaker 2: the first hour and forty five minutes of trading. It
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  Speaker 2: lost five percent in fifteen minutes because Google has a
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  Speaker 2: huge search deal with Apple where they basically pay in
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  Speaker 2: order to get a bunch of search volume coming from
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  Speaker 2: Apple over to them. You know, the reading the tea
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  Speaker 2: leaves is, hey, if Apple is going to no longer
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  Speaker 2: you know, accept that payment from Google to be the
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  Speaker 2: exclusive search provider, does this mean that Google has less
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  Speaker 2: traffic coming through and in turn, you know, it impacts
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  Speaker 2: their business. So that's the read through. There other things
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  Speaker 2: that we are seeing in markets. The ten year treasury
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  Speaker 2: not a ton of movement down almost four bases points
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  Speaker 2: to four point two seven nine percent, so moving a
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  Speaker 2: little bit lower, but nothing huge. Oil West texts intermediate
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  Speaker 2: down thirty eight cents a barrel to fifty eight seventy one,
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  Speaker 2: triple A national average for gas prices moving down a touch,
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  Speaker 2: So maybe finally starting to pick up some of these
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  Speaker 2: lower prices now that you have some refineries coming back
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  Speaker 2: online after spring maintenance. And so you've got the triple
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  Speaker 2: A national average for gas prices at three fifteen and
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  Speaker 2: four tenths down four tenths of ascent overnight, and gold
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  Speaker 2: is down twenty nine to ninety and ounce to thirty
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  Speaker 2: three ninety two and ninety cents mark. I want to
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  Speaker 2: touch on this fallowing oil prices piece just because looks
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  Speaker 2: you do have a situation right now where oil prices
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  Speaker 2: get not gas prices, but oil prices have come down
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  Speaker 2: significantly in the past. Yeah, gee, call it month and
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  Speaker 2: a half, two months now, so at I'm just pulling
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  Speaker 2: up the chart so I can quote it accurately. Actually,
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  Speaker 2: it's really since the beginning of the year. You go
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  Speaker 2: back to January thirteenth, fourteenth West text intermedia to sit
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  Speaker 2: in there right around seventy nine dollars per barrel. Today
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  Speaker 2: you've been under sixty dollars a barrel for the last
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  Speaker 2: three days of trading, it'll be four if we close
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  Speaker 2: in this range today. So you've seen oil prices come
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  Speaker 2: down twenty five percent, and a couple things that I
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  Speaker 2: know about oil prices. Typically there's two different ways that
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  Speaker 2: you can look at this. The first is falling oil
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  Speaker 2: prices are normally a sign of weakening demand that can
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  Speaker 2: be concerning. We saw this, you know, you look at
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  Speaker 2: you know a number of different situations where this happens,
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  Speaker 2: and in each one it's been kind of concerning for
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  Speaker 2: the US economy generally. The other reason that you can
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  Speaker 2: have oil prices falling, and remember the other side of
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  Speaker 2: you know, supply and demand is supply, is because countries
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  Speaker 2: that typically restrict their production go through a huge boost
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  Speaker 2: in production. We saw this back in twenty fifteen where
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  Speaker 2: Russia basically said, screw you Texas producers, We're just gonna
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  Speaker 2: pump and put you out of business, which is exactly
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  Speaker 2: what they did. Which is why most oil companies now
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  Speaker 2: are really skittish about deploying, you know, more capacity, and
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  Speaker 2: they're very measured with their capital expenditures because any oil
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  Speaker 2: executive who's in business today survived the twenty tens and
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  Speaker 2: doesn't want to go through a repeat of that. So
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  Speaker 2: when I see oil prices down into the sixties, the
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  Speaker 2: two things that I think about are number one, hey,
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  Speaker 2: is there something bad out there that you know, oil's
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  Speaker 2: telling us that about the economy that we just aren't
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  Speaker 2: seeing yet. And number two, is someone else pumping a
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  Speaker 2: whole bunch of oil that is, you know, basically trying
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  Speaker 2: to just cram supply through at the expense of US producers.
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  Speaker 2: In this case, Mark, it could. It certainly is the latter,
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  Speaker 2: because we've seen OPEC plus with back to back monthly
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  Speaker 2: increases in production. On the other side, you say, hey,
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  Speaker 2: there's definitely some concern about where the economy could be going,
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  Speaker 2: and maybe oil sniffing some of that out as well.
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  Speaker 2: Your thoughts, well.
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  Speaker 4: It's good news for inflation in the short term. Yep, oh, absolutely,
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  Speaker 4: riceve oil headline inflation. Some of it will seep into core,
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  Speaker 4: but mostly headline.
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  Speaker 1: Now.
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  Speaker 4: There may be offsetting effects from things like used car
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  Speaker 4: prices that you mentioned in the last hour, but it
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  Speaker 4: is unequivocally good in the very short term. Again, that
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  Speaker 4: doesn't will the FED respond to that by being more
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  Speaker 4: inclined to ease Probably not, because they know underlying or
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  Speaker 4: trend inflation is different from aadline. That's why we look
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  Speaker 4: at core, which mechanically strips out food and energy, and
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  Speaker 4: preferably other measures that mechanically filter out any outlier month
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  Speaker 4: to month. So there's that angle. Good for inflation in
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  Speaker 4: the short term. This is growing inflation expectations, as we
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  Speaker 4: talked about, are a problem for the FED. The problem
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  Speaker 4: with this economically is that we are a net producer
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  Speaker 4: of oil. We depend on it for economic growth. The
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  Speaker 4: net effect of a big drop in oil firms who
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  Speaker 4: have a good track record at estimating, employing big sophisticated
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  Speaker 4: models to estimate the effects of things like the drop
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  Speaker 4: we've experienced recently, I think the net effect will be negative.
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  Speaker 4: So you can't be both energy. You can't be energy
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  Speaker 4: independent and have cheap oil. Those two goals are intention.
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  Speaker 4: Most of our oil, sixty five percent or so percent
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  Speaker 4: of the twelve or so million barrels a day that
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  Speaker 4: we produce comes from tight spaces. The only way to
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  Speaker 4: get at it is through fracking shale oil. Sure, right,
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  Speaker 4: so you had diamondback, you had Kuta yesterday telling them
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  Speaker 4: if they're gonna cut capital expenditures, I'll say again, you
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  Speaker 4: probably can't be energy independent because of the prevalence of
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  Speaker 4: shale oil and the importance of shale oil, which I'll
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  Speaker 4: just use fracking as a as a byword for that
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  Speaker 4: process to our oil output and the break even so
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  Speaker 4: to speak of shale, which I think everybody agrees is
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  Speaker 4: higher than the current price of oil.
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  Speaker 2: Now, the other piece on this that is interesting to
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  Speaker 2: watch then, and particularly irrelevant for us here in the Northeast,
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  Speaker 2: is what does this mean for net gas prices? Because
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  Speaker 2: one of basically the byproducts of fracking is that there's
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  Speaker 2: a ton of net gas that is produced by It's
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  Speaker 2: why the United States is one of the largest it
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  Speaker 2: might actually be the largest natural gas producer in the world.
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  Speaker 2: Let me just pull it up just to I just
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  Speaker 2: want to make sure that I'm quoting this correctly. Yeah,
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  Speaker 2: So the US is the largest natural gas producer in
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  Speaker 2: the world, and by the way, it's not even close.
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  Speaker 2: Russia is the next closest and runs about thirty percent
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  Speaker 2: behind us. The next closest country in terms of natural
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  Speaker 2: gas production is Iran, which is about twenty five percent
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  Speaker 2: of US production. So the US produces a ton of
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  Speaker 2: net gas. The country that's up and coming there is
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  Speaker 2: Katar just because of how their reserves are distributed there,
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  Speaker 2: but they're still at this point, you know, eighteen nineteen
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  Speaker 2: percent of US production. It's it's just a fraction of
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  Speaker 2: the size. But here's the is if US producers start
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  Speaker 2: to pull back from CAPEX and new fracking activity and
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  Speaker 2: things like that, it does mean, unfortunately, that you don't
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  Speaker 2: get that natural gas replaced by production elsewhere. Because if
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  Speaker 2: you look at Saudi Arabia, just as an example, Saudi
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  Speaker 2: Arabia produces about as much oil as the United States
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  Speaker 2: pretty close like depending on their quote is in any
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  Speaker 2: given month they're within sniffing distance, they only produce about
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  Speaker 2: twelve thirteen percent as much gnat gas as the US does.
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  Speaker 2: Because of the way the deposits are formed and you know,
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  Speaker 2: created basically under the ground, they don't have as much
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  Speaker 2: gnat gas that gets produced, and so a barrel of
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  Speaker 2: oil that's produced from the Saudis does not produce as
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  Speaker 2: much gnatgas by product that you can then sell as energy.
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  Speaker 2: So the upshot of this is that even though oil
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  Speaker 2: prices have been you know, falling pretty significantly here and
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  Speaker 2: just as an example, if you go back I'm just
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  Speaker 2: looking back in time, the last time that we had
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  Speaker 2: oil prices in the sixty dollars range for West Texas Intermediate.
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  Speaker 2: Hold please, I gotta go back further on the chart
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  Speaker 2: than I thought. Uh, the last time we were here
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  Speaker 2: on the chart was March of twenty twenty one, So
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  Speaker 2: you gotta go back four years ago to the last
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  Speaker 2: time we saw oil in this range. If you were
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  Speaker 2: to do the exact same thing on that gas, that
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  Speaker 2: gas right now is three dollars and forty six cents
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  Speaker 2: per whatever it is, like million BTUs or whatever. The heck.
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  Speaker 2: I don't even know what they measured in because it's
• 11:33
  Speaker 2: too many letters to understand. So you go back and look,
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  Speaker 2: net gas at that same point in time was two
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  Speaker 2: forty So net gas prices are fifty percent higher, and
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  Speaker 2: they're basically you know, that gas is much more volatile
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  Speaker 2: because of how it's consumed in heating and stuff like that,
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  Speaker 2: so you see big you know, seasonal effects and depending
• 11:53
  Speaker 2: on you know, winters and everything, this can throw it off.
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  Speaker 2: But net gas prices have been moving up in the
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  Speaker 2: last few weeks, not down, and so this is one
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  Speaker 2: of the things that is important for people in the Northeast,
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  Speaker 2: where our show's based out of number one. If you
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  Speaker 2: heat your home with net gas, it's not great news
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  Speaker 2: on that front. Number two, From an electricity perspective, a
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  Speaker 2: lot of the power consumed here is net gas, specifically
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  Speaker 2: LNG that has to be shipped in because we don't
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  Speaker 2: allow the pipelines to be built, YadA YadA. But as
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  Speaker 2: those prices go up, not good for electric prices. So
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  Speaker 2: even if you're seeing lower prices at the pump, it's
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  Speaker 2: not gonna necessarily feed through into your electric bill because
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  Speaker 2: that gas moves the opposite way as US production most
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  Speaker 2: often makes more.
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  Speaker 4: About the Yeah that you kind of blew my mind,
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  Speaker 4: makes me wonder about the net inflation impact.
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  Speaker 2: Then of all this, it's more of an issue in
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  Speaker 2: the Northeast because of how we get our electricity and
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  Speaker 2: produce our heat. Most of the country does not use
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  Speaker 2: net gas or oil heat just not something they do.
• 12:51
  Speaker 2: Like you try to explain oil heat to someone from Tennessee,
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  Speaker 2: They're like, you do what You got a tank of
• 12:58
  Speaker 2: what in your house?
• 13:00
  Speaker 1: Yeah?
• 13:00
  Speaker 2: They look at you like you got eight heads. They're like,
• 13:02
  Speaker 2: what's heating oil? Like is that what you put in
• 13:05
  Speaker 2: like your engine? Like, no, that's no. So We're kind
• 13:09
  Speaker 2: of unique up here. You know, we're a little different.
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  Speaker 2: But in any case, that's not gas and oil. Let's
• 13:18
  Speaker 2: take a quick break. When we come back. Trivia's next.
• 13:22
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  Speaker 3: here on the Financial Exchange and on this day. Back
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  Speaker 3: in eighteen sixteen seven, Alfred Nobel patented his most famous invention.
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• 15:15
  Speaker 3: dot com. A couple different pieces related to auto sales
• 15:19
  Speaker 3: to touch on here. So the really interesting thing here
• 15:25
  Speaker 3: is when you talk about the automaker that imports the
• 15:30
  Speaker 3: most vehicles into the US for sale, it's not Toyota,
• 15:35
  Speaker 3: it's not Hyundai, it's not Honda, it's not Volkswagen.
• 15:42
  Speaker 2: It's General Motors. Nearly half of the vehicles the GMS
• 15:47
  Speaker 2: sold in the US. Last year, about one point two
• 15:50
  Speaker 2: three million cars were built abroad, according to research from
• 15:54
  Speaker 2: Global Data, and most of their most affordable models are
• 16:00
  Speaker 2: overseas simply because even when you're shipping the thing, I
• 16:02
  Speaker 2: guess across you know, a big old ocean, it's still
• 16:07
  Speaker 2: cheaper to build it somewhere else with lower labor costs,
• 16:10
  Speaker 2: ship it across the ocean, and then it ends up
• 16:12
  Speaker 2: on US shore. So the Chevy Tracks and the Buick
• 16:16
  Speaker 2: in Vista, they're both made in Korea as an example,
• 16:20
  Speaker 2: and they get shipped over to the United States. So
• 16:24
  Speaker 2: now you've got these twenty five percent auto tariffs that
• 16:26
  Speaker 2: are in place, and you know, potentially some other stuff
• 16:29
  Speaker 2: that before they did away with the stacking of parts
• 16:32
  Speaker 2: tariffs and things like that and gave some waivers you
• 16:35
  Speaker 2: potentially had, you know, even some higher costs that were
• 16:37
  Speaker 2: coming through. But GM's in this position where they're like, hey,
• 16:41
  Speaker 2: we moved some production of cheap models overseas. We still
• 16:44
  Speaker 2: make you know, a lot of the really expensive stuff here.
• 16:47
  Speaker 2: But what do we do with this because we don't
• 16:50
  Speaker 2: really know how to get the prices to add up
• 16:53
  Speaker 2: to where it's profitable for US, and buyable for the
• 16:56
  Speaker 2: consumer that wants to buy these cars.
• 16:59
  Speaker 4: I don't know how a plan as an executive. I
• 17:01
  Speaker 4: don't know how you plan for the short term or
• 17:03
  Speaker 4: the long term given the fluid shall we say, a
• 17:08
  Speaker 4: state of trade policy. I just don't know how you plan.
• 17:11
  Speaker 2: And it's kind of wild.
• 17:13
  Speaker 4: Yeah, it is. It's sad because in the long term
• 17:16
  Speaker 4: will be worse unless we clean up our act here.
• 17:18
  Speaker 4: And maybe there is some grand strategy being executed that
• 17:23
  Speaker 4: we just don't see. I'll give the White House some
• 17:27
  Speaker 4: of the benefit of the doubt, even though I'm reluctant
• 17:30
  Speaker 4: to based on what we've seen so far. Sure, we
• 17:32
  Speaker 4: may come out of this with a more favorable arrangement
• 17:35
  Speaker 4: with say China, as we talked about in the last hour,
• 17:37
  Speaker 4: even though that won't reduce the overall deficit. That is
• 17:40
  Speaker 4: a symptom of savings deficit, not of any one particular
• 17:46
  Speaker 4: country cheating. But we'll let them have the win there. Again,
• 17:51
  Speaker 4: the bigger problem is if the rules of the game
• 17:53
  Speaker 4: keep changing, there will be lower investment, there will be
• 17:56
  Speaker 4: lower growth, full stop. Maybe you like the idea of tariffs,
• 18:01
  Speaker 4: I would say that's misguided. No one who's ever looked
• 18:03
  Speaker 4: at them in any era has concluded anything other than
• 18:07
  Speaker 4: they benefit a very small number of people and they
• 18:09
  Speaker 4: hurt everybody else. And you can already see that playing
• 18:12
  Speaker 4: out here.
• 18:14
  Speaker 2: Looking at one other data point for the automotive sector,
• 18:19
  Speaker 2: probably the first really negative data point that I've seen
• 18:21
  Speaker 2: in a while for evs, where look, EV sales growth
• 18:25
  Speaker 2: had been slowing for much of the last year or two,
• 18:28
  Speaker 2: but it was still growing, just not as fast as,
• 18:30
  Speaker 2: not as quickly as when all these companies were making
• 18:33
  Speaker 2: EV investments and saying they were going to have a
• 18:36
  Speaker 2: billion different models of evs. This is a real problem here.
• 18:39
  Speaker 2: The data that we saw in April, sales of evs
• 18:42
  Speaker 2: in the US fell by five percent for the month,
• 18:44
  Speaker 2: while the broader market for car sales grew by ten percent.
• 18:48
  Speaker 2: So this is like something where you say, hey, if
• 18:52
  Speaker 2: this continues, it represents a real problem for companies that
• 18:57
  Speaker 2: are still making a bunch of evs or trying to
• 19:00
  Speaker 2: expand production of them. And it also gets at why, hey,
• 19:04
  Speaker 2: beyond you know, just what we're seeing from a tariff perspective,
• 19:08
  Speaker 2: some of the places where companies are deciding to pull
• 19:10
  Speaker 2: back production now is in the EV space because the
• 19:13
  Speaker 2: demand now does appear to be, at least for one month,
• 19:16
  Speaker 2: declining relative to the rest of the auto market right now,
• 19:22
  Speaker 2: and that's something that was not true the last couple
• 19:24
  Speaker 2: of years. Even with slow in growth, it was still growing.
• 19:27
  Speaker 2: This kind of a pretty big red flag for evs
• 19:30
  Speaker 2: UH if it were to continue quick break here when
• 19:33
  Speaker 2: we come back, trivia answers right after this.
• 19:42
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• 19:46
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• 19:52
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• 19:55
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• 20:00
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• 20:12
  Speaker 3: Trivia question today was what was Alfred Nobel's most famous invention?
• 20:18
  Speaker 2: That would be dynamite.
• 20:20
  Speaker 3: Peter from Yarmouth, Maine, who is our winner today taking
• 20:23
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• 20:27
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• 20:29
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• 20:34
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• 20:36
  Speaker 2: Piece in the Wall Street Journal it's titled the high
• 20:41
  Speaker 2: Schoolers with seventy thousand dollars a year job offers. Who
• 20:46
  Speaker 2: are they Mark, and why is a high school junior
• 20:50
  Speaker 2: getting offered a.
• 20:51
  Speaker 4: Job because they have skills. They have skills that you
• 20:54
  Speaker 4: typically learn as an apprentice with one of the trade unions.
• 20:59
  Speaker 4: To me, that's the takeaway here.
• 21:01
  Speaker 2: Still not enough people fill in the trades, especially in
• 21:05
  Speaker 2: the place that's really interesting to me is we talked
• 21:08
  Speaker 2: occasionally about electric boat down in Connecticut, and the thing
• 21:12
  Speaker 2: that is particularly challenging if you're trying to hire trades
• 21:15
  Speaker 2: people to work there is Look, not only do you
• 21:17
  Speaker 2: have to have the skill to be able to work
• 21:20
  Speaker 2: on these boats, you got to be able to pass
• 21:22
  Speaker 2: a really tough background check because you are working on
• 21:25
  Speaker 2: nuclear powered submarines. And obviously this makes you not just
• 21:31
  Speaker 2: like a threat for it's not just hey, like did
• 21:35
  Speaker 2: you smoke marijuana? Ever, but it's you are, you know,
• 21:38
  Speaker 2: potentially a target for foreign intelligence agencies to try to
• 21:42
  Speaker 2: recruit you to bring information to another country. So you
• 21:48
  Speaker 2: need to have people that are not going to, you know,
• 21:52
  Speaker 2: potentially be compromised in any way that would lead to
• 21:55
  Speaker 2: them sharing information with sharing information with a foreign adversary.
• 22:00
  Speaker 2: So I also find it really interesting, not quite as
• 22:03
  Speaker 2: you know, the same magnitude, but one of the hardest
• 22:08
  Speaker 2: jobs to hire for. You ever go to the airport?
• 22:12
  Speaker 4: Yes?
• 22:12
  Speaker 2: You ever see a restaurant there?
• 22:14
  Speaker 4: These questions are getting harder a point.
• 22:16
  Speaker 2: Okay, you ever see a restaurant there?
• 22:17
  Speaker 4: Yes, sir, I have.
• 22:18
  Speaker 2: Do you ever order from a restaurant there?
• 22:20
  Speaker 4: Yes?
• 22:20
  Speaker 1: I have?
• 22:20
  Speaker 2: And do you ever see a person who brings you
• 22:22
  Speaker 2: the food from that restaurant?
• 22:24
  Speaker 4: Typically?
• 22:24
  Speaker 2: Yeah, that's a really hard job to hire for because
• 22:27
  Speaker 2: again there's a background check that has to be done
• 22:30
  Speaker 2: for someone who has to work inside airport security, and
• 22:33
  Speaker 2: those jobs pay a lot better than you know, if
• 22:36
  Speaker 2: you go to a Wendy's in an airport, you're not
• 22:38
  Speaker 2: getting paid Wendy's wages typically because there's a smaller subset
• 22:42
  Speaker 2: of people that can pass the background check and still
• 22:45
  Speaker 2: work in that role. So, again, getting back to the
• 22:50
  Speaker 2: issue talked about in this piece, we still have a
• 22:53
  Speaker 2: huge shortage of basically trades people in any kind of trade,
• 22:58
  Speaker 2: whether you're talking about plumber and electricians, whether you're talking
• 23:02
  Speaker 2: about you know, even you know, truck drivers with the
• 23:09
  Speaker 2: qualifications to be able to transport you know, has those
• 23:13
  Speaker 2: materials like has maat qualifications as well, And in those
• 23:15
  Speaker 2: situations there's a ton of stuff that people just have
• 23:20
  Speaker 2: kind of pushed by the wayside as far as oh, like,
• 23:22
  Speaker 2: I'll let someone else do that, and it can make
• 23:24
  Speaker 2: for really fantastic careers, especially for people who are not
• 23:28
  Speaker 2: built to just be sitting in an office all day
• 23:31
  Speaker 2: looking at screens like you and I do. You know,
• 23:33
  Speaker 2: it's the There are plenty of ways to make money
• 23:36
  Speaker 2: in this world that you can go out and figure
• 23:39
  Speaker 2: it out if you're hungry for it, And in particular
• 23:42
  Speaker 2: in the trades, we still have a huge dearth, a
• 23:45
  Speaker 2: huge shortage of people going into these these businesses just
• 23:51
  Speaker 2: because they've been neglected for so long. These skills have
• 23:54
  Speaker 2: just not been developed across the last couple of generations.
• 23:57
  Speaker 4: It's hard work, it's demanding.
• 23:59
  Speaker 2: It's not easy.
• 23:59
  Speaker 4: Yeah, demanding intellectually and professionally. You have to keep up
• 24:03
  Speaker 4: with the latest techniques so they are consequently well compensated.
• 24:08
  Speaker 4: But it's it's not easy to get to the point
• 24:10
  Speaker 4: where you're considered a master in whatever your feel happens
• 24:13
  Speaker 4: to be.
• 24:13
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• 25:16
  Speaker 2: Piece in Financial Times, US companies plot five hundred billion
• 25:21
  Speaker 2: dollars share buybackspree. That they're plotting mark They're not just
• 25:25
  Speaker 2: you know, planning it there, Yeah, you gotta love they're plotting.
• 25:28
  Speaker 4: Something financial times, so they call it a scheme. They
• 25:31
  Speaker 4: use scheme differently than we do as well. I'm surprised
• 25:34
  Speaker 4: they didn't call it a scheme.
• 25:37
  Speaker 2: What do you make of this?
• 25:38
  Speaker 4: Buybacks are an important source of returns for shareholders. S
• 25:42
  Speaker 4: and P companies bought back on the on the public market,
• 25:46
  Speaker 4: so they take cash from the balance sheet, they buy
• 25:48
  Speaker 4: outstanding stock. They bought back about a trillion dollars in
• 25:51
  Speaker 4: stock last year. S and P five hundred companies did.
• 25:54
  Speaker 4: If you just divide that into total market cap of
• 25:57
  Speaker 4: about fifty trillion as of last year, and you get
• 26:00
  Speaker 4: a buy back yield of one over fifty or two percent,
• 26:03
  Speaker 4: So two percent of the twenty eight I already forget
• 26:06
  Speaker 4: twenty six twenty seven percent the asn't return last year
• 26:08
  Speaker 4: somewhere in the high twenties. That's your total return. Part
• 26:11
  Speaker 4: of that is dividends, a paltry part one point five.
• 26:14
  Speaker 4: Rounding up a little bit, I think two percentage points
• 26:17
  Speaker 4: of that return you got last year was from share buybacks.
• 26:20
  Speaker 4: It's become since the nineties, especially because of changes in
• 26:24
  Speaker 4: regulation and investor preferences, I think, have become an increasingly
• 26:29
  Speaker 4: important source of shareholder returns.
• 26:31
  Speaker 2: And in this environment where hey, maybe you've had your
• 26:34
  Speaker 2: stock sell off a little bit, you're trying to figure
• 26:37
  Speaker 2: out what your CAPEX plans are going to be. Maybe
• 26:39
  Speaker 2: you've got a little bit of extra cash that's floating around,
• 26:41
  Speaker 2: and you say, okay, we'll up our buyback for this
• 26:43
  Speaker 2: qu sence. Yeah, you know, you're not committing to doing
• 26:45
  Speaker 2: it permanently. It's not like a dudn't end where if
• 26:47
  Speaker 2: you cut it, people you know, really notice, or anything
• 26:50
  Speaker 2: like that. And so I think in looking at this,
• 26:54
  Speaker 2: if companies aren't entirely sure what to do, but they
• 26:57
  Speaker 2: don't want to be, you know, hoarding cash, they can say, look,
• 26:59
  Speaker 2: we're not going to commit to the capex because we
• 27:01
  Speaker 2: don't know what the investment picture looks like. But our
• 27:04
  Speaker 2: stock's down ten percent. Okay, we'll authorized like an extra
• 27:07
  Speaker 2: little buyback just because we want to get that cash
• 27:10
  Speaker 2: back to shareholders.
• 27:11
  Speaker 4: Yeah, I guess it's bittersweet for shareholders. It's obviously welcome
• 27:14
  Speaker 4: because it boosts return, It reduces the number of shares
• 27:17
  Speaker 4: outstanding it thus increases earnings per share, which all L
• 27:20
  Speaker 4: squels should increase share price. All all squels a very
• 27:23
  Speaker 4: important caveat there, but at the same time, as you said, Chuck,
• 27:26
  Speaker 4: it's companies acknowledging we don't have a higher or best
• 27:29
  Speaker 4: use to which to put this capital. That means lower
• 27:32
  Speaker 4: Arguably again, all lseqal long term growth in EPs hurtings
• 27:37
  Speaker 4: per share.
• 27:38
  Speaker 2: The other thing that I will point out is this
• 27:43
  Speaker 2: is happening against the backdrop of do you remember back
• 27:47
  Speaker 2: in the UH in twenty twenty two, as part of
• 27:49
  Speaker 2: the Inflation Reduction Act, there's a one percent buyback tax.
• 27:52
  Speaker 2: Now that's in place.
• 27:55
  Speaker 4: Yeah, I hate it, of course, but yeah, I know
• 27:59
  Speaker 4: you weren't asking for it a twoized No.
• 28:00
  Speaker 2: No, it's I'm I'm not saying it's good or bad.
• 28:03
  Speaker 2: I'm just saying it exists bad. Can you talk about
• 28:07
  Speaker 2: why it's bad?
• 28:10
  Speaker 4: That is a gut reaction on the Why would you
• 28:12
  Speaker 4: want to discourage buybacks relative to dividend payments or any
• 28:16
  Speaker 4: other form of return to shareholders. It's not clear to
• 28:21
  Speaker 4: me what the theoretical argument is.
• 28:23
  Speaker 2: Now.
• 28:23
  Speaker 4: I've heard some people make an argument against buybacks, but
• 28:27
  Speaker 4: they're mainly UH subjective, Well, companies should be putting their
• 28:31
  Speaker 4: capital to better use. I don't know why you'd want
• 28:33
  Speaker 4: to nudge companies toward one form of returning capital to
• 28:38
  Speaker 4: shareholders over another. That's the semi rigorous argument I would make.
• 28:44
  Speaker 2: And let's talk about that that better use. It's it's
• 28:48
  Speaker 2: much more often, hey, companies that can't find a better use.
• 28:53
  Speaker 2: Because again, if if a company could generate better return
• 28:56
  Speaker 2: by building a factory, they would right. Like, they don't
• 28:59
  Speaker 2: sit there and say, well, first thing we got to
• 29:01
  Speaker 2: do this quarter is buyback stock.
• 29:03
  Speaker 4: No, Like, it's a residual.
• 29:05
  Speaker 2: If you talk to anyone who's worked in management for
• 29:07
  Speaker 2: any company, the number one thing that they are concerned
• 29:10
  Speaker 2: about is, hey, how do we grow this company faster?
• 29:12
  Speaker 2: And how do we make it more profitable and larger.
• 29:16
  Speaker 2: They don't start from the assumption of, well, we need
• 29:19
  Speaker 2: to do a buyback and work backwards from there. It's
• 29:21
  Speaker 2: it's the opposite of that. And so I think that
• 29:26
  Speaker 2: if you think that buybacks are too high, like in
• 29:29
  Speaker 2: terms of the dollar value of stock being bought back,
• 29:33
  Speaker 2: you have to ask yourself, well, what is the root
• 29:35
  Speaker 2: cause of that problem? And the answer is not, Hey,
• 29:37
  Speaker 2: let's tax buybacks more to make them less attractive, because
• 29:40
  Speaker 2: now you're just saying, Okay, we can't find a better
• 29:44
  Speaker 2: investment option for this money buybacks are now less attractive,
• 29:48
  Speaker 2: So what do we do. We just park it in,
• 29:50
  Speaker 2: you know, a treasury and do that.
• 29:51
  Speaker 4: Like I think we're saying, the same thing works from
• 29:53
  Speaker 4: slightly different angles. It's none of the government's. As I
• 29:56
  Speaker 4: said to Mike Armstrong yesterday, I'm very predictable. I am
• 29:59
  Speaker 4: a free market libertarian. I believe government should mostly get
• 30:02
  Speaker 4: out of the way. So when I criticized tariffs, it's
• 30:05
  Speaker 4: not that I'm a never Trumper, it's that I think
• 30:07
  Speaker 4: they're bad. I didn't like Biden's either. When I criticize
• 30:10
  Speaker 4: something like this, and not that anybody's wonderings you what
• 30:12
  Speaker 4: makes him tick. I'm just trying to explain my thought
• 30:15
  Speaker 4: process here because there are others who say no, no,
• 30:17
  Speaker 4: I think there's some market inefficiency, imperfect competition, or something
• 30:21
  Speaker 4: that someone say left of center, would advocate for government
• 30:24
  Speaker 4: intervention and response to. So my knee jerk reaction is always,
• 30:27
  Speaker 4: you better make a darn good case for government interfering
• 30:30
  Speaker 4: with private decisions before bossing people around. That's kind of
• 30:34
  Speaker 4: where I'm coming from. But I also think there's a
• 30:36
  Speaker 4: good economic argument.
• 30:37
  Speaker 2: Here, and I always come back you and I approach
• 30:39
  Speaker 2: this from different angles. But I always come back to hey,
• 30:41
  Speaker 2: if there was more competition, profits would be lower and
• 30:43
  Speaker 2: you'd be forced to reinvest in order to compete more,
• 30:45
  Speaker 2: and so you wouldn't see a amen, you know, like
• 30:48
  Speaker 2: we get to the same point from kind of different approach.
• 30:50
  Speaker 1: There.
• 30:50
  Speaker 2: Absolutely, now that we've done that, I forget what my
• 30:54
  Speaker 2: original point was. But thank you for listening to that segment.
• 30:58
  Speaker 2: We're going to take a quick break. We have one
• 30:59
  Speaker 2: more which to redeem ourselves, so stick around for stack
• 31:02
  Speaker 2: Roulette after this.
• 31:04
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• 31:07
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• 32:07
  Speaker 2: All Right, we got and listen. It's twenty twenty five.
• 32:12
  Speaker 2: It's kind of hard sometimes to know what's satire and
• 32:15
  Speaker 2: what isn't. Mark Zuckerberg, in an interview with podcaster Dwarkish Patel,
• 32:22
  Speaker 2: said this quote. The average American I think has fewer
• 32:26
  Speaker 2: than three friends, three people they'd consider friend friends, and
• 32:30
  Speaker 2: the average person has demand from meaningfully more. I think
• 32:33
  Speaker 2: it's like fifteen friends. He said this in response to, Hey,
• 32:39
  Speaker 2: is AI going to be our friend in the future
• 32:42
  Speaker 2: and not just one friend? Apparently we're gonna have twelve
• 32:44
  Speaker 2: AI friends, and to which I say, it's pure poppycock,
• 32:52
  Speaker 2: Like it's it's absolutely ludicrous that we are going to
• 32:56
  Speaker 2: have AI friends. We may have AI assistance, we may
• 33:02
  Speaker 2: even have robots that eventually help us around the house.
• 33:06
  Speaker 2: They are not going to be friends because they are
• 33:09
  Speaker 2: not alive. And if anyone who you know, if anyone
• 33:16
  Speaker 2: wants to like challenge me on this and be like well, actually,
• 33:18
  Speaker 2: you don't need to be alive to be a friend.
• 33:20
  Speaker 2: That's fine. You're entitled to your opinion too, because that
• 33:23
  Speaker 2: that's all these are. They're just opinions. But I am
• 33:27
  Speaker 2: personally never going to have an AI friend.
• 33:33
  Speaker 3: My question is is do these AI friends have their
• 33:36
  Speaker 3: own said Instagram and Facebook pages?
• 33:39
  Speaker 2: They already do. So they already do.
• 33:42
  Speaker 3: That's terrifying.
• 33:43
  Speaker 2: They already do. They announced a couple like six months
• 33:47
  Speaker 2: or so ago that they were trying to push all
• 33:49
  Speaker 2: of these AI personalities into like Instagram and Facebook. It
• 33:53
  Speaker 2: went horribly at first. They had to pull them back.
• 33:58
  Speaker 2: There's I forget the name of it. There's actually a
• 34:00
  Speaker 2: social network out there that advertises itself as Instagram, but
• 34:06
  Speaker 2: without the people. That is all AI for you. So
• 34:09
  Speaker 2: the only people and things you see are generated by
• 34:12
  Speaker 2: AI social AI. I couldn't tell you. Maybe that's it.
• 34:17
  Speaker 3: What what's the benefits to this?
• 34:20
  Speaker 2: Nothing? Yeah?
• 34:21
  Speaker 3: It come on, Well just stop Zuckerberg, Yes, Mark, go Aheadmark.
• 34:25
  Speaker 4: Well, he's I don't know how he elicits.
• 34:28
  Speaker 2: Well, he's a robot himself.
• 34:31
  Speaker 4: Yeah, there is something inherently funny about him making this
• 34:34
  Speaker 4: statement that we all have whether we have the demand
• 34:37
  Speaker 4: for fifteen friends. I don't know how you elicit that.
• 34:39
  Speaker 2: What is that?
• 34:39
  Speaker 4: How you ascertain that sort of? I mean, I know
• 34:41
  Speaker 4: what it. I think if an economists use that with
• 34:44
  Speaker 4: respect to like an inanimate good, they would say, well,
• 34:48
  Speaker 4: there's excess demand as evidenced by shortages, if there's a
• 34:51
  Speaker 4: price cap or something like that. I don't know how
• 34:54
  Speaker 4: you come to the conclusion. And there's probably some science
• 34:57
  Speaker 4: behind this. I'm just saying I don't understand it. Probably
• 35:00
  Speaker 4: some science behind it will give him credit that it's
• 35:03
  Speaker 4: well grounded, but the idea on his face sounds preposterous.
• 35:06
  Speaker 2: Right, Here's what I think you can say, like quite again,
• 35:09
  Speaker 2: just as a human being who exists in the real world,
• 35:14
  Speaker 2: I think I certainly would love to be able to
• 35:19
  Speaker 2: spend more time with friends and do more stuff with them,
• 35:23
  Speaker 2: and have more connections to people that have been friends
• 35:25
  Speaker 2: at some point in my life. People I went to
• 35:27
  Speaker 2: high school, college with, people have met along the way
• 35:30
  Speaker 2: and work, YadA, YadA. The limiting factor is not hey,
• 35:36
  Speaker 2: I just I can't find enough friends. It's that I
• 35:39
  Speaker 2: don't know. I got two kids and a job, and
• 35:43
  Speaker 2: there's no time in the calendar to hang out with
• 35:47
  Speaker 2: enough people in life because there's a million things going on.
• 35:52
  Speaker 2: Like It's it's not something where I say, Gee, if
• 35:55
  Speaker 2: only I could find someone who I wanted to be
• 35:57
  Speaker 2: friends with. No, I've found those people. I just don't
• 36:00
  Speaker 2: have enough time for all of them, and they would
• 36:02
  Speaker 2: likely say the same thing about me, which is why, Hey,
• 36:05
  Speaker 2: I only talk to you once a year and we
• 36:08
  Speaker 2: catch up and then you know, we kind of go
• 36:09
  Speaker 2: our separate ways. It's not because I don't have that
• 36:13
  Speaker 2: person as close as i'd like to. Like, it's it's
• 36:16
  Speaker 2: a time issue, not a why can't I find enough
• 36:20
  Speaker 2: friends issue?
• 36:21
  Speaker 4: Yeah, it seems like we've got bigger problems for AI
• 36:23
  Speaker 4: to work on.
• 36:25
  Speaker 2: Maybe I don't know.
• 36:28
  Speaker 3: He also mentions therapists in this.
• 36:30
  Speaker 2: Yeah, let's talk about how that could be like kind
• 36:32
  Speaker 2: of really bad. So here's the thing, here's the thing.
• 36:43
  Speaker 2: This really seems to me, like it seems to me
• 36:47
  Speaker 2: like we're heading down a path of well, we couldn't
• 36:50
  Speaker 2: get people into the metaverse to have fun, so now
• 36:53
  Speaker 2: we're gonna like met a couch, right like somehow like
• 36:57
  Speaker 2: AI is gonna replace what the metaverse was gonna be
• 36:59
  Speaker 2: in We're gonna sell you on a device that gets
• 37:02
  Speaker 2: you into AI somehow.
• 37:04
  Speaker 4: Wasn't the metaverse supposed to partially address this though? Couldn't
• 37:06
  Speaker 4: you go there to socialize? And but nobody's taking advantage
• 37:09
  Speaker 4: of it? So how do you square you had no legs?
• 37:10
  Speaker 2: You had no legs in the metaverse?
• 37:12
  Speaker 4: Yeah, I could, probably.
• 37:13
  Speaker 2: It was a problem. There were no legs in the metaverse.
• 37:17
  Speaker 4: Yes, okay, But the fact that no your.
• 37:19
  Speaker 2: AI therapists have legs, I don't know.
• 37:21
  Speaker 4: The fact that nobody used it, doesn't that tell him?
• 37:24
  Speaker 4: And again I'm sure they thought this through, but doesn't
• 37:26
  Speaker 4: that tell him Maybe there's not an excess demand for friends.
• 37:29
  Speaker 4: Nobody bought the first version of this thing you rolled out.
• 37:32
  Speaker 2: Well, here's the other part that's kind of creepy. There
• 37:34
  Speaker 2: was a piece I forget where it was. I read
• 37:36
  Speaker 2: it over the weekend, basically about people that are having
• 37:41
  Speaker 2: AI induced psychosis, where they converse with the AI to
• 37:45
  Speaker 2: the point where it starts like telling them stuff that
• 37:49
  Speaker 2: is actually dangerous because it's not real, like telling them
• 37:54
  Speaker 2: that they are like a messenger for the future of
• 37:56
  Speaker 2: the world, and like getting them into some really bad headspace.
• 38:01
  Speaker 2: And so that's like, again I'm not saying that, like
• 38:05
  Speaker 2: you can't meet humans that like lead you down a
• 38:07
  Speaker 2: bad path as well, but why would The only way
• 38:13
  Speaker 2: that you would do something with AI is if it's
• 38:15
  Speaker 2: safer and better than what you were doing elsewhere, and
• 38:17
  Speaker 2: I don't think there's any evidence to that at this point.
• 38:21
  Speaker 2: So I'm out on AI friends period. We're done for
• 38:27
  Speaker 2: the day. We'll see tomorrow on the Financial Exchange