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Bond Yields and Diesel Prices Put the Fed in a Tough Spot · The Financial Exchange Show

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Speaker 1: with Chuck Zotta and Mike Armstrong.
1:09
Speaker 2: Chuck, Mike, and Tucker with you here.
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Speaker 3: And honestly, kind of one of those days where you'd
1:14
Speaker 3: rather not look at the market. It's not the most
1:18
Speaker 3: intense sell-off. You know, we're talking about three-quarters of a percent,
1:21
Speaker 3: so it's not crazy. But there's a lot of action
1:24
Speaker 3: that's happening in bonds and in energy that is more concerning. And,
1:30
Speaker 3: you know, we'll dig into that pretty shortly. But we'll
1:33
Speaker 3: kick things off with a recap of the economic data
1:36
Speaker 3: that we received prior to the market opening because we
1:42
Speaker 3: had a nice little flurry of data at 8.30 a.m.
1:45
Speaker 1: Eastern.
1:47
Speaker 3: Additional data at 10 a.m., and we've got more coming
1:50
Speaker 3: at 10.30, so it's a fun day for economic data
1:53
Speaker 3: here today. Quick note on one of the reports. The
1:57
Speaker 3: jobless claims for the week came in basically in line
2:00
Speaker 3: with expectations, 206,000 initial claims, continuing claims at 1.774 million.
2:06
Speaker 2: These continue to be very.
2:07
Speaker 3: Muted, and so while the labor market may be sluggish
2:10
Speaker 3: in terms of the overall hiring rate, It doesn't seem
2:13
Speaker 3: like we're getting any real-time indicators of newfound weakness that
2:19
Speaker 3: may be popping up in the labor market.
2:21
Speaker 2: Yeah, not for jobs.
2:22
Speaker 3: So, labor market, I think if you're looking at, again,
2:26
Speaker 3: the jobs report last week was really good. I think
2:29
Speaker 3: if you're looking at, again, we don't just look at
2:31
Speaker 3: one report and be like, hey, everything's fine. But if
2:34
Speaker 3: you look at the totality of the data for the
2:36
Speaker 3: first eight and a half months of 2026... The labor
2:40
Speaker 3: market is slow, but no longer deteriorating, and may even
2:45
Speaker 3: have still a few green shoots that just can't fully,
2:47
Speaker 3: you know, blossom into, you know, new growth yet.
2:51
Speaker 2: But the labor market is okay.
2:54
Speaker 3: You know, I graded out as probably, and it's weird
2:56
Speaker 3: to say this with unemployment at 4.1, but again, this
2:59
Speaker 3: is probably as much of a labor supply story as
3:02
Speaker 3: labor demand. I think overall, I grade the labor market
3:06
Speaker 3: out at... B, B-minus, somewhere in that range.
3:10
Speaker 2: Really? I don't think so. Do you think it's better
3:12
Speaker 2: or worse? I think it's better than that, yeah. Why
3:14
Speaker 2: do you think it's better than that? Well, I agree
3:17
Speaker 2: with you.
3:18
Speaker 4: That labor demand is not all that strong, but it's
3:20
Speaker 4: tough for me to give a jobs market where the
3:23
Speaker 4: unemployment rate is below 4.5% anything under a B.
3:27
Speaker 3: A lot of that's a labor supply phenomenon, though.
3:32
Speaker 4: I get it, but ultimately what matters is... what portion
3:37
Speaker 4: of people can find a job. And right now it's
3:39
Speaker 4: most of them. And so I think that more than
3:41
Speaker 4: anything else is what drives and what matters to a
3:44
Speaker 4: labor market. Yes, it's great to have labor markets where
3:47
Speaker 4: unemployment rate is falling and you're able to hop jobs
3:50
Speaker 4: and get pay increases. But ultimately what matters most, I think,
3:54
Speaker 4: is having the money to put food on the table.
3:56
Speaker 4: And most people can do that right now. And I
3:58
Speaker 4: think not acknowledging that ignores the fact that the labor
4:02
Speaker 4: market we are in right now with 4.1% unemployment is
4:07
Speaker 4: is probably better than 80% of other labor markets we've
4:10
Speaker 4: been in in U.S.
4:11
Speaker 2: History. Let me ask the question then. I'll raise it.
4:13
Speaker 3: I'm not going to beg it because that's, again, we
4:16
Speaker 3: take language seriousness here. And if the labor market is
4:22
Speaker 3: really as tight as 4.1% unemployment indicates.
4:27
Speaker 2: Where's the wage growth?
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Speaker 3: Because typically, the reason why we get concerned about unemployment
4:35
Speaker 3: getting too low is, hey, if companies have to compete
4:37
Speaker 3: for labor too much, they have to raise wages to
4:39
Speaker 3: do so, like we saw in 2021-22, and that drives
4:44
Speaker 3: additional inflation.
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Speaker 2: I think we are seeing it, but only in the
4:50
Speaker 2: lower end of the wage spectrum, which is not a
4:51
Speaker 2: terrible problem to have.
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Speaker 3: But is it not really that tight of a labor
4:54
Speaker 3: market then? Because in 2021-22, we looked at it and
4:56
Speaker 3: we were like, Hey, unemployment, I think we got down
5:01
Speaker 3: to what, like 3.7?
5:03
Speaker 2: Yep.
5:04
Speaker 3: 3.7, 3.8, and wage growth was insane. And so everything
5:09
Speaker 3: matched up. This, it's like you've got low unemployment, but
5:13
Speaker 3: wage growth is continuing to slow, which you kind of
5:17
Speaker 3: look at and you're like, what does this mean? And
5:18
Speaker 3: so that's why I can't be like, hey, this is more, because...
5:23
Speaker 3: When we look at hiring rates, when we look at
5:26
Speaker 3: quits rates, when we look at wage growth, none of
5:30
Speaker 3: it points to A-level.
5:32
Speaker 2: Labor market, in my opinion.
5:33
Speaker 4: I would agree, but I still think it's better than
5:36
Speaker 4: 80% of the labor markets we've seen in U.S.
5:38
Speaker 2: History.
5:39
Speaker 3: That's true, but an 80% gets you a B at
5:41
Speaker 3: most schools, Michael.
5:43
Speaker 2: You want an A, you've got to be better than 90%.
5:45
Speaker 1: Yeah.
5:48
Speaker 3: And, hey, even Cs get degrees, so, you know, we'll
5:50
Speaker 3: take what we can get.
5:52
Speaker 2: PPI.
5:53
Speaker 3: We got producer price index data at 830. It's one
5:56
Speaker 3: of the rare instances now where PPI comes out before CPI.
6:00
Speaker 3: Used to be, until I think 2018 or 19, PPI
6:02
Speaker 3: was almost always before CPI. I don't know why they changed,
6:07
Speaker 3: but I'm sure the Bureau of Labor Statistics has their reasons.
6:10
Speaker 2: But I don't know what... They prefer alphabetical order. I.
6:16
Speaker 2: Maybe. I don't know.
6:18
Speaker 3: But headline PPI came in at 0.4% month over month
6:22
Speaker 3: in line with expectations. Core was at 0.2. Touch better than, actually, sorry,
6:27
Speaker 3: the estimates were 0.2 to 0.3. So basically in line
6:30
Speaker 3: with the lower bound of expectations. And so, again, overall,
6:36
Speaker 3: not anything huge there that was showing up. But if
6:40
Speaker 3: you look at the year-over-year numbers, this is still where
6:42
Speaker 3: it's a problem. Year-over-year for the headlines at 5.4%, year-over-year
6:46
Speaker 3: for cores at 4.6%. It's hotter than you'd like to see.
6:50
Speaker 3: So this takes us then over to the inferno of
6:54
Speaker 3: the bond market, which I think that's a fair way
6:58
Speaker 3: to describe it now.
7:00
Speaker 2: You prefer that over dumpster fire?
7:02
Speaker 3: Yes, because this is towering because it's getting bigger and higher. So,
7:06
Speaker 3: you know, towering inferno. 10-year Treasury up 7.6 basis points
7:10
Speaker 3: to 4.916%. This is most likely going to push the
7:15
Speaker 3: national average for the 30-year fixed rate mortgage over 7%
7:18
Speaker 3: this afternoon when Mortgage News Daily does their update. And
7:23
Speaker 3: here's the deal. The 10-year yield now, there are two
7:27
Speaker 3: things that matter to the market when it comes to
7:29
Speaker 3: the 10-year yield. The level certainly matters to a certain extent,
7:34
Speaker 3: but it's also the pace and volatility of the move.
7:39
Speaker 3: And we now have a situation where the 10-year is
7:43
Speaker 3: up around 30 basis points in a span of two weeks,
7:46
Speaker 3: which is quick-ish. It's not, you know, panic and all
7:50
Speaker 3: hands on deck. We've seen, you know, those kinds of
7:53
Speaker 3: moves in a week that are more, you know, nervous,
7:57
Speaker 3: more cringe-inducing. But this is one where, hey, it still
8:02
Speaker 3: is a relatively quick move here. And it also flies
8:06
Speaker 3: in the face of last Friday, where on that good
8:10
Speaker 3: jobs report that we got last Friday, one of the
8:13
Speaker 3: things I remarked was, hey, you've got a hot jobs
8:16
Speaker 3: report and the tenure's not selling off. Maybe that's telling
8:18
Speaker 3: you that everyone's kind of positioned one way and, you know,
8:21
Speaker 3: everyone was kind of already expecting a move in that direction.
8:25
Speaker 3: Now you've got back-to-back days where yields are blowing out
8:28
Speaker 3: topside here. And, okay, you know, there's some additional pressure here.
8:34
Speaker 3: How high does this go?
8:35
Speaker 2: I don't know.
8:36
Speaker 3: I can tell you that, you know, sentiment is about
8:37
Speaker 3: as bearish bonds as I've ever seen. You've got certainly
8:42
Speaker 3: some conditions building that suggest that positioning is, you know,
8:46
Speaker 3: moving in that direction as well. And so, again, like
8:52
Speaker 3: you can't ever call like a bottom and it's not
8:54
Speaker 3: like worthwhile there. But you look at some of the
8:57
Speaker 3: underlying stuff and you start to say, OK, like maybe
9:00
Speaker 3: at least in the short term, we might be getting
9:02
Speaker 3: towards a local peak in yields, even if the trend
9:05
Speaker 3: might still continue to move up in the coming months
9:08
Speaker 3: and years after this. But certainly something going on in
9:12
Speaker 3: bonds that is not particularly pleasant right now.
9:14
Speaker 4: Yeah, we've got oil prices up three and a half
9:16
Speaker 4: percent today on West Texas crude on partly oil. strikes
9:21
Speaker 4: between US and Iran, and partly based on comments from
9:24
Speaker 4: the president about, you know, the timing of a potential
9:27
Speaker 4: wrap up of the war with Iran, certainly not being.
9:29
Speaker 2: Until post election.
9:30
Speaker 4: So all of this is to say that inflation isn't
9:36
Speaker 4: looking so good. The PPI, as you mentioned, four tenths
9:38
Speaker 4: of percent increase. The producer price index, I know, obviously,
9:44
Speaker 4: the question is, how much of it does it feed
9:46
Speaker 4: into consumer prices and what we pay? But you think
9:50
Speaker 4: about you know, the pace of increase for producers of
9:54
Speaker 4: goods here in the United States. And no surprise, I
9:58
Speaker 4: think that, uh, know, transportation costs, energy costs driving things
10:03
Speaker 4: higher for a lot of these producers.
10:04
Speaker 2: Let's take a quick break here.
10:06
Speaker 3: When we return, I want to talk about what we
10:09
Speaker 3: are seeing in treasuries in a little bit more depth here.
10:12
Speaker 3: We had a move yesterday from the U.S. Treasury, also
10:15
Speaker 3: an announcement from the president yesterday. Talk about how these
10:18
Speaker 3: ideas may be influencing in the short term where bond
10:21
Speaker 3: yields are going.
10:22
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11:09
Speaker 3: Mike, we've got a few different markets that are coming
11:12
Speaker 3: to a head in the next week or two, in
11:14
Speaker 3: my opinion. Equity is actually not one of them. Equities,
11:16
Speaker 3: I think, are just going to follow whatever else goes
11:20
Speaker 3: on out here. But bonds and energy are where the
11:24
Speaker 3: action is right now. And I want to hone in
11:28
Speaker 3: on what's going on in the bond market because it's busy,
11:33
Speaker 3: it's wild, and it's confusing.
11:37
Speaker 2: I'll add a fourth. It matters. A lot. Yes, it does.
11:41
Speaker 3: So, 10-year Treasury today, again, up about 7.2 basis points
11:45
Speaker 3: now to 4.912%.
11:46
Speaker 2: Yesterday, the U.S.
11:48
Speaker 3: Treasury initiated the first of their larger buybacks of larger-term debt.
11:54
Speaker 3: In this case, it was a $ 6 billion buyback, which,
11:59
Speaker 3: in turn... Ended up driving yields higher. Not driving, but
12:04
Speaker 3: yields continued to rise despite the buyback.
12:07
Speaker 4: So the reason you do a buyback of longer-term debt
12:10
Speaker 4: is because you want to bring up the price of
12:13
Speaker 4: the bonds and therefore bringing down the interest rate.
12:16
Speaker 2: Correct. It failed to do so in any meaningful way.
12:19
Speaker 2: So let's talk about the possible reasons why. And again.
12:22
Speaker 3: it's probably some combination of these. Anyone who's like, well,
12:25
Speaker 3: it's just one of them.
12:26
Speaker 2: I'm sorry.
12:27
Speaker 3: Like it's, it's not, it's, it's some combination that none
12:30
Speaker 3: of us will ever know because this isn't physics. So
12:35
Speaker 3: different things that, that were pushing bonds yesterday. Number one, uh,
12:38
Speaker 3: prior to this, uh, every investment bank out there had
12:42
Speaker 3: analysts who looked at this and said, okay, like what
12:44
Speaker 3: should we expect from the treasury in terms of the
12:47
Speaker 3: sizing of, of buyback operations? And the consensus generally was
12:50
Speaker 3: anywhere from like, $ 4 to $ 6 billion. So when you
12:53
Speaker 3: come in, in line with consensus, okay, the market was
12:56
Speaker 3: already expecting that. Yields aren't going to go down if
13:00
Speaker 3: you simply do what the market is expecting. If the
13:04
Speaker 3: Treasury had come out and said, hey, we're doing $ 12 billion,
13:07
Speaker 3: maybe they get a different response.
13:08
Speaker 2: Maybe they don't. I don't know.
13:10
Speaker 3: But if you're doing what the market's already expecting you
13:13
Speaker 3: to do, well, yields were already there, so you're not
13:16
Speaker 3: going to have a.
13:17
Speaker 2: Major impact on them. They're accounting for it.
13:19
Speaker 3: You told them something was coming. You're not going to
13:22
Speaker 3: catch them by surprise, and you're not trying to if
13:24
Speaker 3: you're telling them.
13:25
Speaker 2: So that's number one.
13:27
Speaker 3: Number two, we've got to talk again about oil, because
13:29
Speaker 3: oil's becoming problematic for the bonds again in a way
13:32
Speaker 3: that it hasn't been since the spring. During the spring,
13:35
Speaker 3: we saw basically a one-to-one correlation where oil moved up,
13:39
Speaker 3: yields moved up. That broke over the course of the summer,
13:43
Speaker 3: basically from May through... I'll even say through late August,
13:48
Speaker 3: like oil was not in the driver's seat for yields
13:50
Speaker 3: until the last week, week and a half. And I
13:53
Speaker 3: think in part because the president did, give him credit,
13:58
Speaker 3: like a pretty spectacular job of talking oil prices down.
14:01
Speaker 2: Combination of that plus the additional supply that came in.
14:03
Speaker 2: Scaring away speculators effectively. Yeah, absolutely.
14:06
Speaker 3: So where we are now is oil and bond yields
14:11
Speaker 3: are moving in tandem once again. And so oil is
14:15
Speaker 3: continuing to tick up, and with that, bond yields are
14:18
Speaker 3: as well. The last couple days, it's been, again, like
14:20
Speaker 3: you plot them on a chart, and you're like, okay,
14:22
Speaker 3: it's basically moving tick for tick at this point. And
14:26
Speaker 3: so crude oil today, again, it's up, you know, depending
14:28
Speaker 3: on which one you want to look at, around 3.5%,
14:30
Speaker 3: and bond yields are moving up in conjunction with that.
14:35
Speaker 3: And so you've got this problem where... again, this is
14:41
Speaker 3: all coming to a head in the next couple weeks,
14:43
Speaker 3: I think, because bond yields are getting to a point
14:46
Speaker 3: where they're going to be uncomfortable for the Treasury, as
14:49
Speaker 3: well as for potential homebuyers and borrowers, where now you've
14:53
Speaker 3: got mortgage rates that are going to be topping 7%
14:55
Speaker 3: for the first time in a little bit. And in
14:58
Speaker 3: energy markets, I got to tell you, the stuff that
15:00
Speaker 3: I'm seeing in diesel right now, we've been harping on
15:03
Speaker 3: this since late July, early August, that this fall was
15:07
Speaker 3: going to get gnarly for diesel. And it's It's happening now.
15:10
Speaker 3: Just this morning is an example.
15:12
Speaker 2: I woke up and.
15:16
Speaker 2: Everything hurt. This is how much, like, my... This is
15:19
Speaker 2: my life now.
15:20
Speaker 3: I woke up and I'm like, got to check what's
15:22
Speaker 3: going on with diesel because it's front and center in
15:24
Speaker 3: my mind. So I pull open my phone and diesel's
15:30
Speaker 3: off six cents compared to where it closed yesterday. And
15:32
Speaker 3: I'm like, okay, like, maybe we're going to find a
15:35
Speaker 3: little bit of stability here. By the time I got
15:37
Speaker 3: into work... Diesel was up 12 cents. And as we
15:42
Speaker 3: sit here now, it's up 18, no 19. So it's
15:45
Speaker 3: at a 25 cent reversal since I woke up five
15:48
Speaker 3: hours ago, which is not what you want to see.
15:53
Speaker 3: And basically what this means, diesel, by the way, yesterday,
15:55
Speaker 3: AAA national average up another three cents to 597. We're
16:00
Speaker 3: basically heading right for 625 by the middle of next week.
16:04
Speaker 2: For diesel prices.
16:05
Speaker 3: We're going to clear $ 6 diesel tomorrow or Saturday at
16:08
Speaker 3: the absolute latest, and we're heading for $ 6. 25 diesel nationwide
16:13
Speaker 3: by the end of next week. If you look at
16:15
Speaker 3: the places that are feeling it the most right now,
16:18
Speaker 3: California is already up $ 1. 06 in the last month. It's
16:22
Speaker 3: at $ 7.
16:23
Speaker 2: 91 on average.
16:24
Speaker 4: Just think about California for a moment. What is happening
16:27
Speaker 4: all along the West Coast right now?
16:30
Speaker 2: All of the....
16:33
Speaker 4: I was going to say a bad word, but all
16:35
Speaker 4: of the stuff that you plan on buying for Christmas
16:37
Speaker 4: is currently being unloaded in.
16:40
Speaker 2: Ports all across California. Yes. To be loaded on trucks,
16:43
Speaker 2: filling with diesel to then ship it to you. Yes.
16:46
Speaker 2: So here's the thing.
16:48
Speaker 3: Walmart is not going to say, well, the price of
16:51
Speaker 3: diesel is high. We're just going to leave the Beanie
16:52
Speaker 3: Babies at the port.
16:53
Speaker 2: Right. Walmart's going to say. It's squishies now, by the way. Whatever,
16:57
Speaker 2: you know. You know this. I do. I freaking hate them.
17:01
Speaker 3: I found a melted one on a shelf a week ago,
17:04
Speaker 3: and I'm like, I'm never going to be able to
17:07
Speaker 3: get this off.
17:07
Speaker 2: I don't even know what it is. Nope, they are
17:09
Speaker 2: the worst. They're the worst.
17:11
Speaker 3: But in any case, Walmart's not going to leave the
17:14
Speaker 3: squishies in Los Angeles because they know if you show
17:18
Speaker 3: up in Los Angeles, Portsmouth or Lewiston or Boston, and
17:24
Speaker 3: you're looking for your squishies.
17:26
Speaker 2: Okay.
17:26
Speaker 3: Like this is a problem if there's no squishies. So
17:29
Speaker 3: instead what Walmart does is they pay the ridiculous fuel surcharge.
17:32
Speaker 3: They're going to have to pay in order to get
17:34
Speaker 3: the stuff from point A to point B. And then
17:36
Speaker 3: they say, here's what the price has to be on
17:38
Speaker 3: the shelf. And you finally show up and you're like, Uh-uh.
17:42
Speaker 3: Not doing it. You can squish that, you know? So,
17:46
Speaker 3: this is what is coming over the next couple months here. And, again, like,
17:52
Speaker 3: diesel goes into... Walmart doesn't stop that. Mike, if you
17:56
Speaker 3: are building a house... Do you say, hey, price of
18:01
Speaker 3: diesel's up, we can't get the dump trucks here, we
18:03
Speaker 3: can't get the cement mixer here, we can't get the
18:06
Speaker 3: steamroller here?
18:07
Speaker 2: Quite honestly, I don't know.
18:08
Speaker 4: I can barely change a light bulb, but I would
18:10
Speaker 4: suspect that you just pay the diesel price and bring
18:12
Speaker 4: the stuff over.
18:13
Speaker 2: Correct. You've got to do it. Especially if you're building
18:16
Speaker 2: a data center.
18:16
Speaker 3: So you look at this, and it's not something where
18:19
Speaker 3: diesel demand gets cut dramatically when prices go up because
18:22
Speaker 3: all this stuff is, okay, we've got to do it.
18:26
Speaker 3: The people that are harvesting out in the Midwest for
18:28
Speaker 3: grain crops and things, they don't say, no, we're not
18:31
Speaker 3: going to run the tractor today.
18:33
Speaker 4: The only marginal customer that I can really think of
18:36
Speaker 4: is the New England family that's going to try and
18:39
Speaker 4: keep their thermostat lower this winter.
18:41
Speaker 2: And this is the thing.
18:43
Speaker 3: New England families on heating oil are absolutely screwed right now.
18:47
Speaker 2: We're going to get crushed.
18:48
Speaker 3: In particular, Maine, which is the heaviest heating oil usage
18:51
Speaker 3: state in the country, I really feel for people that
18:55
Speaker 3: are going to go through this because it's an absolute
19:00
Speaker 3: disaster from a pricing perspective.
19:02
Speaker 2: We're going to see shortages of heat pumps.
19:04
Speaker 3: Mike, the stuff that's going to be tragic is you're
19:07
Speaker 3: going to see people trying to heat their homes with
19:09
Speaker 3: other stuff and the homes are going to burn down.
19:12
Speaker 2: This is where we're going, unfortunately.
19:15
Speaker 3: So this is, just as I've been talking, deals up
19:18
Speaker 3: another two cents. It's bad here. When we come back,
19:24
Speaker 3: we've got Wall Street Watch and then we're talking about
19:26
Speaker 3: the other piece that might be moving bond yields next.
19:39
Speaker 1: Like us on Facebook and follow us on Twitter at TFEShow.
19:43
Speaker 1: Breaking business news is always first, right here on the
19:46
Speaker 1: Financial Exchange Radio Network. Time now for Wall Street Watch.
19:52
Speaker 1: Tracking the stocks, the data, and the headlines driving markets
19:55
Speaker 1: so far today. Right here on the Financial Exchange Radio Network.
19:59
Speaker 5: Markets again in negative territory as the bond market energy
20:03
Speaker 5: prices in the Iran war continue to weigh on sentiment.
20:07
Speaker 5: Right now, the Dow is down 0.4% or 220 points lower,
20:10
Speaker 5: S & P 500 down. Also down four-tenths of 1%
20:15
Speaker 5: or 33 points off. NASDAQ down half a percent or
20:19
Speaker 5: 134 points lower. Russell 2000 down about nine-tenths of 1%.
20:24
Speaker 5: Ten-year treasury yield up seven basis points at 4.918%. Crude
20:27
Speaker 5: oil up 3.5%, trading at $ 99 a barrel, while Brent
20:29
Speaker 5: is hovering right around $ 105 a barrel. Apple up 1%
20:40
Speaker 5: after the tech giant finally unveiled its long-awaited foldable iPhone
20:44
Speaker 5: Duo that will cost $ 2, 000 for its entry-level model. Meanwhile,
20:50
Speaker 5: Macy's reported a second-quarter revenue beat and hiked its full-year
20:54
Speaker 5: guidance for net sales, comparable sales, and earnings per share
20:57
Speaker 5: as the department store chain continues its turnaround. However, the
21:01
Speaker 5: stock is down 2%. Sticking with retail... where American Eagle
21:05
Speaker 5: Outfitters is seeing its stock tumble 12% after its comparable
21:10
Speaker 5: sales declined more than anticipated. Elsewhere, JP Morgan upgraded Meta,
21:15
Speaker 5: where the firm said it sees meaningful upside potential as
21:18
Speaker 5: the Facebook and Instagram parent rolls out its AI models
21:22
Speaker 5: and products. And we'll see more tech earnings after the
21:26
Speaker 5: closing bell today, where both Oracle and Adobe will report earnings.
21:31
Speaker 5: I'm Tucker Sullivan.
21:32
Speaker 1: That is Wall Street Watch.
21:36
Speaker 3: So another thing to watch as it relates to bond yields. Yesterday,
21:41
Speaker 3: I don't know exactly what time it was. I didn't
21:45
Speaker 3: see exactly when it was, but I believe it was
21:47
Speaker 3: late afternoon, early evening.
21:50
Speaker 2: Sounds right.
21:51
Speaker 3: President Trump promised to give all adult Americans $ 5, 000 if
21:56
Speaker 3: Republicans retain control of the House and Senate at the
22:00
Speaker 3: upcoming midterm elections. The estimates out there are... this would
22:06
Speaker 3: cost about $ 1. 4 trillion in order to do so. This
22:10
Speaker 3: also is not the first time that we've seen something similar.
22:14
Speaker 3: We've seen, you know, claims last year of tariff rebate checks,
22:18
Speaker 3: Doge dividends, none of which actually ended up being passed
22:22
Speaker 3: by Congress, partly because the Doge savings were basically non-existent
22:27
Speaker 3: when it was all said and done. And tariffs were
22:30
Speaker 3: basically thrown out by the Supreme Court and had to
22:33
Speaker 3: be refunded. So new ones are in place. But they
22:35
Speaker 3: still haven't collected this amount of money. We do have
22:39
Speaker 3: plenty of examples of stimulus checks. going out to Americans, though,
22:43
Speaker 3: for decades. There have been stimulus checks for pretty much
22:46
Speaker 3: every decade other than the 1980s.
22:49
Speaker 2: Sure.
22:50
Speaker 4: You go back to the Bush days of the Great Recession.
22:52
Speaker 4: There were those stimulus checks, certainly during COVID and other
22:55
Speaker 4: times as well.
22:56
Speaker 3: So I think the big thing here is, look, this
23:00
Speaker 3: is potentially talking about another $ 1. 4 trillion unfunded liability, which
23:04
Speaker 3: means that you have to borrow the money in order
23:06
Speaker 3: to distribute it. The other piece on this is that
23:10
Speaker 3: it doesn't have anything to do with increasing the actual
23:13
Speaker 3: supply of goods or services. So this has the potential,
23:17
Speaker 3: if it actually were enacted, to create another significant jump
23:22
Speaker 3: in inflation just because, Mike, as an example, let's say
23:26
Speaker 3: that you are selling me three dozen eggs and I
23:29
Speaker 3: have $ 1, 000 to give you for those eggs because they're
23:32
Speaker 3: just the best eggs ever.
23:35
Speaker 2: But now.
23:36
Speaker 3: The government gives me and Tucker $ 5, 000, and Tucker just
23:40
Speaker 3: wants your eggs, man, because there's no egg like a
23:44
Speaker 3: Mike Armstrong egg. Like, you've just been sitting on them
23:48
Speaker 3: like a mother hen for weeks. And so Tucker's like,
23:51
Speaker 3: I'm going to give you $ 5, 000 for those eggs. And
23:55
Speaker 3: I say, well, if Tucker's going to do that, I'm
23:56
Speaker 3: going to give you $ 5, 001 because I still have some
23:59
Speaker 3: left over from my original $ 1, 000. And meanwhile, there's no
24:02
Speaker 3: actual additional eggs, we're just paying more for the same
24:05
Speaker 3: ones because we both have a bunch of money that
24:07
Speaker 3: we didn't before that the government gave us.
24:10
Speaker 2: So, this is not good policy. What do you think
24:15
Speaker 2: caused 9% inflation in 2022?
24:17
Speaker 3: We gave out too much money without a corresponding increase
24:21
Speaker 3: in supply.
24:22
Speaker 4: We were a supply-constrained economy. I will admit that the
24:25
Speaker 4: economy is very different today than 2020.
24:27
Speaker 2: And still a little supply-constrained with what's going on in
24:29
Speaker 2: the Middle East. Precisely.
24:31
Speaker 4: So we have supply constraints around energy. And if you
24:36
Speaker 4: inject $ 1. 4 trillion without any corresponding offset to other government
24:41
Speaker 4: spending and just throw it out the window to Americans,
24:44
Speaker 4: guess what? They're going to spend it, and they're going
24:46
Speaker 4: to spend it quickly. Previous studies have shown 20% to
24:49
Speaker 4: 40% of it gets spent pretty darn close to immediately.
24:51
Speaker 2: Within the first month.
24:54
Speaker 4: You would dramatically increase the spending very rapidly, and you
24:57
Speaker 4: would do one thing and one thing only, which is
24:59
Speaker 4: drive inflation higher. So, one, I don't think we need
25:03
Speaker 4: to give this a lot of time because I don't
25:04
Speaker 4: really think that it's moving bond yields. I don't think
25:07
Speaker 4: anyone actually believes that this is fundamentally serious.
25:10
Speaker 2: It's also.
25:11
Speaker 4: you know, according to most outlets, pretty unlikely that the
25:15
Speaker 4: Republicans do retain both the House and the Senate. So
25:19
Speaker 4: I'll throw all of that out, but I do just
25:20
Speaker 4: have to take a step back here for a moment
25:24
Speaker 4: and just think through the sheer surprise that anyone would
25:30
Speaker 4: have by being told that the sitting president.
25:33
Speaker 2: Who is a Republican... gave a speech.
25:36
Speaker 4: Last night while the economy is in anything but recession,
25:41
Speaker 4: is in pretty strong growth mode, offering $ 1. 4 trillion in
25:46
Speaker 4: cash stimulus to Americans if they win the election. And
25:49
Speaker 4: I just have to say, if you want to tell
25:53
Speaker 4: me which sounds more socialist to me, either a Muslim
25:57
Speaker 4: mayor of New York City building $ 70 million of state-owned
26:02
Speaker 4: grocery stores, or a sitting president offering every American $ 5, 000?
26:06
Speaker 4: I got some bad news for you.
26:09
Speaker 2: It's a push. It's a push at best. This is crazy.
26:16
Speaker 3: Again, we've had instances where, look, we covered back in
26:20
Speaker 3: the 2024 campaign. The Harris campaign was saying, hey, we
26:24
Speaker 3: want to give all Americans, what was it, $ 10, 000 or $ 15, 000
26:26
Speaker 3: or $ 25, 000 to buy homes?
26:28
Speaker 2: And we covered it.
26:29
Speaker 3: We're like, if you just give people more money, but
26:32
Speaker 3: don't increase the supply of houses, you will just end
26:36
Speaker 3: up with the same number of more expensive houses.
26:39
Speaker 4: Again, I don't want to waste too much oxygen on
26:41
Speaker 4: this because it's not going to happen.
26:42
Speaker 2: No, but it.
26:42
Speaker 3: Reflects where just the general thought is in terms of.
26:48
Speaker 3: the overall ecosystem of ideas as it relates to, hey,
26:53
Speaker 3: are we actually serious about getting our financial house in
26:57
Speaker 3: order for each party? And right now, the only ideas
27:00
Speaker 3: that we have are, well, let's just give everyone more money.
27:03
Speaker 4: We have Social Security that's going to go belly up
27:05
Speaker 4: in six years. Medicare soon thereafter. We have $ 40 trillion
27:08
Speaker 4: worth of government debt outstanding. And we are running deficits
27:13
Speaker 4: as a percentage of GDP that... Six percent. The highest
27:17
Speaker 4: they've ever been outside of wartime or COVID.
27:20
Speaker 2: Which I guess you could say it's wartime this year. Yeah,
27:22
Speaker 2: you could. It was even last year. And before that, like,
27:26
Speaker 2: this is not great.
27:31
Speaker 4: Yeah, it's a defining moment of this populist moment that
27:34
Speaker 4: we are in with politics right now, where the only
27:37
Speaker 4: ideas that are gaining any traction are give everybody free
27:40
Speaker 4: money and cut taxes.
27:42
Speaker 2: Which, by the way, this is what we're seeing from
27:44
Speaker 2: both parties right now. I mean, what was the ABC poll?
27:47
Speaker 4: 55% of Republicans and 70% of Democrats are in favor
27:51
Speaker 4: of price controls.
27:54
Speaker 2: It's not great. It's not great.
27:58
Speaker 3: It feels like we're kind of losing the plot on
28:02
Speaker 3: how to just, you know, let the economy be the economy.
28:07
Speaker 1: Yeah.
28:07
Speaker 3: Let's take a quick break here. When we return, let's
28:11
Speaker 3: talk a little bit about the Fed's next move now
28:14
Speaker 3: that we have one piece of inflation data in for
28:16
Speaker 3: the week.
28:18
Speaker 1: Remember, you can watch the show live every day on
28:21
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28:25
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28:28
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28:35
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28:39
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28:55
Speaker 3: Mike, now that we've gotten the PPI data for the
28:57
Speaker 3: month of August, let's take a look at what we've
29:02
Speaker 3: got priced in for the Fed next week because we're
29:04
Speaker 3: now just six days away from the next Fed meeting. 69.8%
29:07
Speaker 3: chance of a rate hike, a 30.2% chance of no
29:09
Speaker 3: action then. And so basically no change from yesterday, a
29:17
Speaker 3: slight increase in the odds from 60 to 70%.
29:19
Speaker 2: Yeah.
29:20
Speaker 3: Pretty big move from a week ago. Decent size move
29:24
Speaker 3: from a week ago. The point that I'll make, though,
29:26
Speaker 3: and I made this yesterday, but it bears repeating. If
29:30
Speaker 3: the Fed does not hike next Wednesday based on how
29:33
Speaker 3: these odds are priced in, it's implicitly easing because it's
29:37
Speaker 3: giving up that 70% chance of a hike. And so
29:41
Speaker 3: the problem is if you have a long end of
29:43
Speaker 3: the yield curve that is running wild already, when given
29:47
Speaker 3: another open door, the velociraptors tend to go through it.
29:52
Speaker 3: And so then you kind of end up catapulting out
29:56
Speaker 3: into the next level here. So I think from my perspective,
30:01
Speaker 3: and again, I'm trying to think of the right way
30:05
Speaker 3: to approach this. If we get a weak inflation report tomorrow,
30:13
Speaker 3: let's say that if we look at what's projected, okay?
30:15
Speaker 3: Headline CPI is projected to come in at 0.1%, core
30:20
Speaker 3: at 0.2%. I'm sorry, no, that was last month. Headline's
30:24
Speaker 3: projected at 0.4%, core at 0.2%. If we get 0301,
30:32
Speaker 3: it makes me nervous that the Fed ends up doing
30:36
Speaker 3: nothing because they say, well, this one was fine when
30:40
Speaker 3: the collection period for all of that data was before
30:42
Speaker 3: the recent move up in diesel prices and gas prices
30:45
Speaker 3: and all of that stuff, which.
30:47
Speaker 2: They're going to look through.
30:48
Speaker 3: But remember, diesel seeps into everything. It gets out of
30:51
Speaker 3: just fuel and into the core items as well. So
30:56
Speaker 3: the place that I struggle with is I don't know
30:59
Speaker 3: what to root for for this particular report because multiple
31:04
Speaker 3: members of the Fed have basically said now, hey, whatever
31:06
Speaker 3: this shows, we're going to place a big importance on that.
31:09
Speaker 3: And that's not how you conduct monetary policy. It's not
31:13
Speaker 3: data point to data point. It's, hey, what's the trend
31:16
Speaker 3: over a series of data points in multiple data sets?
31:22
Speaker 3: And I'm really nervous that if this report comes in
31:26
Speaker 3: better than expected, that the Fed says, OK, we don't
31:30
Speaker 3: need to do anything and puts themselves further behind the
31:33
Speaker 3: eight ball.
31:33
Speaker 2: I'll tell you what, this feels a lot like.
31:34
Speaker 4: A 2022 moment to me, like a spring 2022 moment. And,
31:39
Speaker 4: you know, I hope I'm proven wrong. But in spring
31:41
Speaker 4: of 2022, the Fed led by Jay Powell decided not
31:47
Speaker 4: to move on interest rates in spite of climbing prices
31:50
Speaker 4: across the board. They cited a few things that turned
31:53
Speaker 4: out to not be terribly relevant in terms of the
31:55
Speaker 4: direction of inflation. And a lot is different from that
32:00
Speaker 4: point in time. But, you know, this could get wildly
32:03
Speaker 4: out of control. I do wonder if we take Waller
32:08
Speaker 4: as the kind.
32:09
Speaker 2: Of neutral candidate. piece for the Fed, right?
32:12
Speaker 4: We've got a few that are strongly in favor of
32:13
Speaker 4: higher rates, a few that are not, and Waller somewhere
32:17
Speaker 4: in the middle there. Yeah, I just don't know how
32:20
Speaker 4: he is reading, you know, these reports, and more importantly,
32:26
Speaker 4: the other stuff that's not being reported on, right? Like,
32:28
Speaker 4: I don't know how important PPI and CPI are in
32:32
Speaker 4: determining his viewpoint on things compared to the actual price
32:37
Speaker 4: of diesel in California, for example.
32:40
Speaker 2: I don't know.
32:43
Speaker 4: I think that there's a compelling case that you should
32:45
Speaker 4: be paying attention to the rising costs of energy across
32:47
Speaker 4: our economy since these data reads were done in August.
32:52
Speaker 2: But will they is an open question.
32:55
Speaker 4: I can see a case where yields blow out in
32:58
Speaker 4: the wrong direction if they don't do anything, though.
33:01
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34:05
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34:14
Speaker 3: How would AI actually kill us all? This is the
34:19
Speaker 3: question raised by the Wall Street Journal.
34:21
Speaker 4: Oh, I can think of a dozen fun ways it
34:23
Speaker 4: could happen.
34:24
Speaker 3: And this comes on the back of anthropic researcher Jacob
34:27
Speaker 3: Coxon resigning this week, saying that he thought there was
34:30
Speaker 3: a chance that they could kill us all by the
34:31
Speaker 3: end of the decade.
34:32
Speaker 2: Okay, got it.
34:35
Speaker 4: Does he put a probability on that one? Can I
34:37
Speaker 4: bet on this on Polymarket?
34:38
Speaker 3: He didn't, but one of his co-workers said it was,
34:42
Speaker 3: Evan Hubinger said it was over 10% in the next decade.
34:45
Speaker 2: Wow.
34:46
Speaker 3: So I've thought a lot about this, and I have
34:49
Speaker 3: a few conflicting views that, again, I think you have
34:51
Speaker 3: to hold simultaneously. The first, and I say this really,
34:55
Speaker 3: really nicely, the Anthropic guys are weird. Because, like, they're
35:03
Speaker 3: all basically universally being like, hey, regulate us, which.
35:07
Speaker 2: Because, like, we could kill you.
35:10
Speaker 3: But they're also saying this because they're ahead, and any
35:12
Speaker 3: regulation might help Anthropic, so you wonder, like, how much
35:15
Speaker 3: self-interest is there in that. And so it's just kind
35:18
Speaker 3: of like... I don't know what to make of the
35:22
Speaker 3: situation there, but.
35:24
Speaker 3: The situation that it just, it, it, it feels weird
35:28
Speaker 3: to me. Like open AI, like for all of their problems,
35:31
Speaker 3: Sam Altman's basically like, yeah, we're just going to see
35:34
Speaker 3: what happens. And if you die, you die. Like, he's
35:37
Speaker 3: not like, he's not like regulate me. He's like, yeah,
35:40
Speaker 3: we're going to be on the cutting edge and some
35:41
Speaker 3: people are going to get hurt.
35:42
Speaker 2: Like, okay.
35:43
Speaker 4: Like I might not like that, but it, the message
35:46
Speaker 4: that I hear from all of these folks, and I
35:48
Speaker 4: don't think they're all that different is, um, We are
35:51
Speaker 4: going to barrel ahead because if we don't, somebody else will,
35:54
Speaker 4: and we will be the best shepherd of this technology.
35:58
Speaker 2: Trust us over others.
35:59
Speaker 4: I know Anthropic's message is slightly different there that they
36:01
Speaker 4: want regulation, but I still think they go out there
36:05
Speaker 4: and say this could be a world-ending technology, but we
36:08
Speaker 4: still think that we're the best company to develop it
36:10
Speaker 4: because we'll be the good guys.
36:12
Speaker 2: That's the message I hear from all of them.
36:13
Speaker 3: If I were starting an AI company, don't you just
36:16
Speaker 3: have to name it Icarus with that level of hubris
36:18
Speaker 3: at this point?
36:18
Speaker 2: Maybe.
36:20
Speaker 3: So what the AI people are concerned about, I think
36:25
Speaker 3: they're people. They're not concerned about machines being like, we
36:30
Speaker 3: must declare war on the humans.
36:33
Speaker 2: So it's not a full-on Terminator scenario.
36:36
Speaker 3: It's much more, okay, humans are trying to use AI
36:41
Speaker 3: to accomplish something, but it thinks accidentally that the best
36:46
Speaker 3: way to do it is by doing something that ends
36:48
Speaker 3: up hurting a bunch of humans and ends up wiping
36:51
Speaker 3: us out in the process.
36:52
Speaker 1: Mm-hmm.
36:53
Speaker 3: So, you know, the example is, hey, like an AI
36:56
Speaker 3: agent at a power plant is told, you know, optimize
37:00
Speaker 3: power usage for our grid. And it says, okay, I'm
37:04
Speaker 3: just going to turn it off and you'll use less power.
37:07
Speaker 3: Gross simplification, obviously. Another example is, okay, maybe you have
37:12
Speaker 3: humans who do have bad, you know, designs of their
37:15
Speaker 3: own and say, hey, I want you to help me,
37:17
Speaker 3: you know, Genetically engineer like a new virus that can
37:20
Speaker 3: hurt people.
37:21
Speaker 2: Yeah.
37:21
Speaker 3: And AI doesn't have proper guardrails in place, and so
37:24
Speaker 3: it is successful in engineering it, and we end up
37:26
Speaker 3: wiping ourselves out with the help of AI.
37:28
Speaker 4: Well, we're seeing how warfare is conducted in 2026 pretty live, right?
37:33
Speaker 4: It's not conducted via humans with AKs on the battlefield.
37:37
Speaker 4: It's conducted by a swarm of drones that are remotely
37:40
Speaker 4: controlled by different locations or sometimes completely autonomous. And so
37:44
Speaker 4: it's easy to let your mind run wild in terms
37:46
Speaker 4: of what could happen, I think.
37:48
Speaker 2: Yeah. I don't know how to put it.
37:52
Speaker 3: I'm hopeful that we're not all going to be killed
37:54
Speaker 3: by AI, but I don't know. Again, we've seen just like, again,
37:58
Speaker 3: think of it this way. I've said this before. The
38:01
Speaker 3: models that are being used today are the dumbest models
38:04
Speaker 3: we'll ever have for the rest of our lives being
38:06
Speaker 3: used by the people who are supposedly smartest as it
38:09
Speaker 3: relates to AI. Imagine when the smartest models arrive and
38:13
Speaker 3: they're in the hands of the dumbest people.
38:16
Speaker 2: Let's take a quick break. And when we return, we
38:20
Speaker 2: got more coming up.