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OpenAI and SpaceX Test Wall Street’s Appetite for Mega IPOs · The Financial Exchange Show

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Speaker 1: making a donation Today. Face is the Financial Exchange with
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Speaker 1: Mike Armstrong and Mark Vandetti.
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Speaker 2: Good morning, Welcome back to the Financial Exchange here on
1:13
Speaker 2: a Tuesday where markets are continuing to claw back their
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Speaker 2: losses from a steep sell off on Friday. The SMP
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Speaker 2: Friday down more than two percent, NASDAK off more than
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Speaker 2: four We had markets clawbacks some of that yesterday, although
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Speaker 2: they ended up closing the day a lot lower than
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Speaker 2: where they started the morning, and this morning in early trading,
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Speaker 2: we're seeing the S and P five hundred up about
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Speaker 2: seven tenths of a percent so far. It's a CPI week.
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Speaker 2: We'll be getting inflation data tomorrow morning. We got data
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Speaker 2: on existing home sales today. But the story of the week,
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Speaker 2: in my opinion at least, is the continued AI mania.
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Speaker 2: We've got the SpaceX ipo heating up, and today it's
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Speaker 2: being announced that OpenAI has filed to go public in
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Speaker 2: a continued test of investors appetite for these AI behemoths.
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Speaker 2: And you know, I shouldn't really lump SpaceX into the
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Speaker 2: same category as Anthropic and Open Ai, but they're clearly
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Speaker 2: making a bunch of statements about their business that they
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Speaker 2: want to be considered that way. And so nonetheless, we
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Speaker 2: have big names raising a lot of money today, and
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Speaker 2: I wanted to start off right there, Mark, before we
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Speaker 2: get into inflation or home sales or you know, giving
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Speaker 2: you the opportunity to beat up on the new fed
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Speaker 2: chair that hasn't even had a press conference yet. I
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Speaker 2: thought we would talk about the numbers here for a moment,
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Speaker 2: and just the scale of what we're talking about, because
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Speaker 2: everyone's aware that some very big names are going public.
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Speaker 2: I would have to argue that SpaceX in terms of
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Speaker 2: name recognition has to be the most brand recognized names
2:54
Speaker 2: since Facebook went public over a decade ago. Now might
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Speaker 2: have been mid twenty tens. It was a long time
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Speaker 2: ago though, No, it was over a decade again, it
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Speaker 2: was early twenty tens that Facebook went public. And between
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Speaker 2: the three of them, right, SpaceX is raising seventy five
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Speaker 2: billion dollars. Open Ai and Anthropic are rumored to be
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Speaker 2: raising sixty billion a piece. So between those three you're
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Speaker 2: pushing two hundred billion dollars. Google's parent company, Alphabet announced
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Speaker 2: an eighty billion dollar fundraising round via stock sales, again
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Speaker 2: already a public company, but raising new money. And we're
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Speaker 2: sitting here looking at a you know, a series of
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Speaker 2: offerings here I only named four of them. Obviously, all
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Speaker 2: sorts of tech players have been issuing shares, borrowing money
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Speaker 2: to do this AI build out, And I guess I'm
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Speaker 2: just wondering, and I think others are too. Where precisely
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Speaker 2: does two hundred and seventy billion dollars come from to
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Speaker 2: absorb these stock sales into public markets? Because it's not
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Speaker 2: a I mean, I was trying to get some comparisons.
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Speaker 2: The American public spends between mean two hundred and thirty
4:00
Speaker 2: and two hundred and fifty billion dollars a year on
4:03
Speaker 2: alcohol we pay, we donate about five hundred and ninety
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Speaker 2: billion dollars a year to charity, and pay about five
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Speaker 2: hundred billion dollars in state income taxes every year. So
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Speaker 2: to give you the scale of this stuff, you know,
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Speaker 2: these are massive dollar amounts that these companies are looking
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Speaker 2: for new money to come from somewhere. I don't think
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Speaker 2: it's coming from alcohol sales, but where do we How
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Speaker 2: big is this for these companies to be raising this
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Speaker 2: much money? And are other assets going to fall in
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Speaker 2: value in order to afford it? I guess is part
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Speaker 2: of the question.
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Speaker 3: No, not necessarily. People could take it from any number
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Speaker 3: of so SpaceX is raising about five hundred and fifty
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Speaker 3: six million a billion.
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Speaker 2: So I think the total initial raises seventy excuse me,
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Speaker 2: seventy five six million shares. Excuse seventy five billion.
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Speaker 3: Dollars five a share, pardon me.
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Speaker 2: Yeah, and then the other two are like six the apiece.
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Speaker 1: Ye.
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Speaker 3: So so they're selling about five hundred and sixty million
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Speaker 3: years for one thirty five inch. That's how you get
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Speaker 3: to the capital raise. It's just the product of those
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Speaker 3: two things. Where will the money come from? I mean,
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Speaker 3: who knows. People might sell a little bit of something else,
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Speaker 3: they might sell some cash money from a savings account.
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Speaker 3: But you're right, the overall the world economy is sort
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Speaker 3: of a closed system. So it's it's not going to
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Speaker 3: come it's going to come from somewhere.
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Speaker 2: That just doesn't the treasure doesn't just print more dollars
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Speaker 2: for IPOs. That's not what happens, right, And so I
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Speaker 2: guess I've just been left pondering, like, where where does
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Speaker 2: all this come from? Right? We've seen bitcoins sell off
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Speaker 2: substantially this year. It's down to about sixty two thousand
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Speaker 2: dollars per coin after topping out at one hundred and
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Speaker 2: fifteen thousand a coin back in October of last year.
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Speaker 2: We've seen bond yields rise, but I think that's largely
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Speaker 2: attributable to inflation concerns. But I suppose some of it
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Speaker 2: could be selling the bonds for this type of thing,
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Speaker 2: but it is I don't know. I don't know that
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Speaker 2: there's been another time in a short period of time
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Speaker 2: where all of these new assets are raising money this rapidly,
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Speaker 2: And I'm just curious as to what the net results
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Speaker 2: will be. I don't think we know.
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Speaker 3: Well, if they don't live up to their promise, the
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Speaker 3: net result is going to be a massive misallocation of
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Speaker 3: capital and a big bust at some point, right, And
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Speaker 3: that may be in the cards already if AI doesn't.
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Speaker 3: If the gains from AI don't accrue to the companies
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Speaker 3: that are today making these investments, and history suggests they
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Speaker 3: probably won't, others will move into that space do things better.
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Speaker 3: AI may have big economic benefits, but the provision of
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Speaker 3: it may become commoditized. I just said the same thing,
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Speaker 3: I think in two slightly different ways.
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Speaker 2: Yeah, but it is a fair point that historically speaking,
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Speaker 2: no the game that have been that have gone to
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Speaker 2: society as a whole from new technology have not necessarily
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Speaker 2: been the companies that have been raising all the money
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Speaker 2: in the first time, and a lot does need to
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Speaker 2: go right for this to be executed upon right. Like
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Speaker 2: you know, when people are talking about buying computing power
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Speaker 2: in the future, it's being talked about as though it's
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Speaker 2: a foregone conclusion that Google and Facebook and all these
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Speaker 2: companies will be successful in building out data centers, that
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Speaker 2: they will be, you know, successful in charging what they
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Speaker 2: think they will be able to, and that is all
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Speaker 2: remains an open question. But for the moment, yeah, we
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Speaker 2: are going to be piling on IPO after IPO, And yeah,
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Speaker 2: the SpaceX one, I think would be fascinating because it's
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Speaker 2: an Elon Musk company and everybody has seen how his
7:47
Speaker 2: other company, Tesla, has been able to just draw evaluation
7:53
Speaker 2: that is richer than any car company in history, and
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Speaker 2: any car company you know that does the same type
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Speaker 2: of thing because he's Elon Musk and seems to be
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Speaker 2: able to demand that sort of thing. So I think
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Speaker 2: the SpaceX one, you know, based on the very lofty
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Speaker 2: goals that they have set out for themselves, will be
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Speaker 2: fascinating to watch. I have no real guess as to
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Speaker 2: whether it'll be deemed successful or not. But more interesting
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Speaker 2: than that the fact that open ai and Anthropic two
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Speaker 2: companies that effectively do the exact same thing. They might
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Speaker 2: have different structures, they were founded under different principles. All
8:29
Speaker 2: those things might be true, but they both design AI
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Speaker 2: models SpaceX too.
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Speaker 3: Right, most of their revenues, according to gol Ben, who's
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Speaker 3: underwriting this, are expected to come not from launches and
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Speaker 3: stuff like that, but from Yeah, artificial intelligence.
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Speaker 2: It's expected to but I'm not sure I buy it. Right,
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Speaker 2: You go take a look. You go take a look
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Speaker 2: at their business today. What drives the bottom line. It's
8:51
Speaker 2: Starlink launching satellites for internet service. So I know they
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Speaker 2: have very lofty expectations about where the revenue is going
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Speaker 2: to come from. But today you're buying a rocket company
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Speaker 2: and whether or not they can act. That's true.
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Speaker 3: The markets are being told by the people peddling this thing.
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Speaker 2: Yeah, that markets are being told and buying.
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Speaker 3: That valuation is an AI evaluation.
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Speaker 2: Right, absolutely, absolutely, so. We do have a lot of
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Speaker 2: this coming to market over the course the next several months.
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Speaker 2: And I guess the point that I would make is
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Speaker 2: you know, any one ipo. We tend to think of
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Speaker 2: it purely in terms of, hey, what's going to happen
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Speaker 2: with the price of the IPO on the day of
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Speaker 2: and the months after. Oftentimes they are quite volatile. With
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Speaker 2: the scale of these, I'm starting to wonder not only
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Speaker 2: what is going to happen with those companies, but where
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Speaker 2: is the money going to come from in order to
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Speaker 2: afford this again, you know two hundred.
9:41
Speaker 3: And eighty for the investments they want to make in
9:42
Speaker 3: data centers, or to afford the condel they want to
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Speaker 3: raise from market.
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Speaker 2: Capital if they want to raise from markets. You know,
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Speaker 2: increasingly I'm wondering about that. And not to say that
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Speaker 2: there isn't plenty to go around. It's not as though
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Speaker 2: margin balances appear to be stretched thin or you know,
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Speaker 2: could people borrow off of homes or also sorts of
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Speaker 2: sources in order to afford this? Yes, absolutely, but it
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Speaker 2: is not an insignificant amount of money that we're talking.
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Speaker 3: I mean, some of it is mechanically going to come
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Speaker 3: from other publicly listed companies. When you think about how
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Speaker 3: Nasdaq is handling the inclusion of SpaceX, you and Chuck
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Speaker 3: Zata probably talked about the fact that they're waiving their
10:20
Speaker 3: usual requirements for inclusion in the Nasdaq one hundred or
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Speaker 3: the Nasdaq composite. Many people own the QQQ. It's going
10:27
Speaker 3: in there. It's going in there.
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Speaker 2: Own one of these Nasdaq tracked funds. Then naturally you're
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Speaker 2: going to set but.
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Speaker 3: It ain't going in at two trillion. It's going in
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Speaker 3: it three times. The free float. The free float is
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Speaker 3: what you and I could anybody who gets in on
10:41
Speaker 3: this could buy. That's the five hundred and sixty all
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Speaker 3: round up million shares. That's about two hundred and fifty
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Speaker 3: billion dollars at one thirty five a share. So it's
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Speaker 3: going to be like top twenty five in the Nasdaq
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Speaker 3: one hundred, I think, and it's going to displace well
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Speaker 3: a little you could think of it this way. A
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Speaker 3: little bit of that is going to come from everything else.
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Speaker 3: So that's one answer to your question.
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Speaker 2: Mike. Let's take a quick break. When we come back,
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Speaker 2: I want to get to a little bit of the
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Speaker 2: data that was released this morning, including existing home sales.
11:10
Speaker 2: That's next here on the Financial Exchange.
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12:00
Speaker 2: The National Association of Realtors this morning published their used
12:06
Speaker 2: home data like that better than existing homes, but they
12:10
Speaker 2: published their information on home sales across the country and
12:15
Speaker 2: what we saw was not a huge surprise. And I
12:19
Speaker 2: don't know, I don't think either great news or bad
12:23
Speaker 2: terrible news, but does confirm what we're seeing as a
12:27
Speaker 2: sluggish home sales market. So, first off, the data nationally
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Speaker 2: three point two percent increase in existing home sales that
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Speaker 2: came at a seasonally adjusted rate of four point one
12:39
Speaker 2: seven million homes in the month of May. The price
12:43
Speaker 2: went up a little bit to about four hundred and
12:46
Speaker 2: twenty nine thousand. That's the median price of all home
12:49
Speaker 2: sold in May across the country. The regional data, I
12:54
Speaker 2: think is also telling here in terms of where this
12:57
Speaker 2: is happening. No supply, no surprise. But in the Northeast
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Speaker 2: we are seeing year over year sales down eight percent
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Speaker 2: and median price up. In the Midwest you're seeing year
13:09
Speaker 2: over year increase of only two percent. In the South,
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Speaker 2: that's where you're seeing some of the uptick here, So
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Speaker 2: sales were up nearly six percent year over year and
13:20
Speaker 2: prices were just about flat, only up one percent. In
13:23
Speaker 2: the West as well, you saw price sales up five
13:26
Speaker 2: point six percent and the median price moved down. So overall,
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Speaker 2: I think this paints the same narrative that we have
13:33
Speaker 2: been seeing and why some have been disappointed by the
13:38
Speaker 2: housing market this year. We saw last year a pretty
13:40
Speaker 2: big uptick in sales, uptick in inventory this year for
13:45
Speaker 2: a number of different reasons, but largely mortgage rates, which
13:48
Speaker 2: are a byproduct of both inflation that we're seeing, which
13:53
Speaker 2: is partly related to the war in Iran and everything
13:55
Speaker 2: else going on. We've seen mortgage rates for the spring
13:58
Speaker 2: housing market, you know, move between you know, a low
14:04
Speaker 2: of let's call it six and a third percent and
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Speaker 2: a high of nearly seven And so you know, in
14:10
Speaker 2: that environment where I think a lot of people because
14:13
Speaker 2: this is where rates were back in February, were anticipating
14:16
Speaker 2: getting a mortgage at five point nine percent or somewhere
14:19
Speaker 2: in that range, are now facing down a mortgage that's
14:22
Speaker 2: you know, half a percent higher than they were anticipating
14:25
Speaker 2: and struggling to worries about gas prices and everything else
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Speaker 2: that might be stripping out their budget.
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Speaker 3: This is one of the reason why some commentators have
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Speaker 3: observed that the demand for capital by AI companies, for
14:40
Speaker 3: data centers or to launch data centers in a space whatever,
14:44
Speaker 3: this will all oil SQL and that's an important caveat
14:47
Speaker 3: put upward pressure on interest rates. The example that we
14:51
Speaker 3: talked about in the first segment of money flowing out
14:53
Speaker 3: of other asset classes and into stocks for for example,
14:56
Speaker 3: the SPACEXIPO or whatever they're going to be others if
15:00
Speaker 3: money comes out of say bonds, and that's probably an
15:02
Speaker 3: unrealistic assumption because capital markets are far more complex, but
15:06
Speaker 3: some of it could, that will push up the yield
15:09
Speaker 3: on bonds because of the inverse relationship between price and yield.
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Speaker 3: So that's one. That's one answer to the question you
15:16
Speaker 3: asked earlier, where's the money going to come from? And
15:18
Speaker 3: it also illustrates an implication of this voracious appetite for
15:23
Speaker 3: capital on the part of AI companies.
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Speaker 2: The other you know, planer to understand I think implication here.
15:31
Speaker 2: And we're going to cover a story later about Facebook's
15:33
Speaker 2: parenting company Meta rolling out a training program for you know,
15:38
Speaker 2: basically getting your electrician, plumbing, HVAC training up up and
15:43
Speaker 2: running so you can get a job building up. One
15:45
Speaker 2: of their data centers is if you are, you know,
15:48
Speaker 2: a big home builder trying to start a two thousand
15:52
Speaker 2: unit development, it can't be easy right now to find
15:55
Speaker 2: the labor let alone, all of the physical supplies that
15:58
Speaker 2: go into building a home that are getting driven up
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Speaker 2: in price. It's easier and easier to look at this
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Speaker 2: AI boom, at least in the short term, as inflationary
16:07
Speaker 2: rather than disinflationary, right, Like, I know that you've never
16:12
Speaker 2: bought that this was going to be disinflationary in the
16:13
Speaker 2: first place, but you know that has been touted as
16:17
Speaker 2: especially by Kevin Warsh, as a potential outcome here and
16:20
Speaker 2: more and more in the short term. I'm buying into
16:22
Speaker 2: the fact that this is going to be one direction
16:24
Speaker 2: only in its inflation.
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Speaker 3: Look, you could what Warsh means by that is that
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Speaker 3: it's possible AI increases productivity it a rate and excess
16:34
Speaker 3: of the rate at which wages are going up. If
16:37
Speaker 3: workers get more productive at a faster rate than their
16:40
Speaker 3: salary increases, all else equal, that should isn't that should
16:45
Speaker 3: mitigate inflation. That's what Warsh means. Of course, that hasn't
16:48
Speaker 3: happened yet. We don't know, right, and there are lots
16:50
Speaker 3: of good arguments on much stronger arguments on the other
16:53
Speaker 3: side of that.
16:54
Speaker 2: Market Watch has what I might deem the useless piece
16:57
Speaker 2: of the day. The latest rally may only be a
16:59
Speaker 2: dead cat bounce, warns a normally bullish boutique. So the
17:03
Speaker 2: technical analysis points to a summer slide, says fund Strats Newton.
17:08
Speaker 2: And here is one of the quotes that I'll pull
17:10
Speaker 2: from it. Quote my SPX cycle composite projected a peak
17:14
Speaker 2: right around current levels and now has rolled over, turning
17:17
Speaker 2: negative between now and at least July, with the risk
17:20
Speaker 2: of lower something or another mark. Do you know what
17:23
Speaker 2: that means? What I just said do you have any
17:26
Speaker 2: idea with this?
17:27
Speaker 3: I'm sorry I didn't. I didn't read the piece, to.
17:28
Speaker 2: Be honest, because, yeah, it's useless.
17:30
Speaker 3: It was based on technical analysis, and that's fine. The
17:33
Speaker 3: technical analysis tends to be very subjective. People tend to
17:35
Speaker 3: see things in charts differently depending on the observer.
17:39
Speaker 2: Sorry, Tarker, do you know what that means? No? I
17:41
Speaker 2: don't know what that means.
17:43
Speaker 3: Here's my leading again. Maybe we can figure it out.
17:45
Speaker 2: Okay. My SPX cycle composite projected a peak right around
17:49
Speaker 2: current levels and has now rolled over, turning negative between
17:52
Speaker 2: now and at least late July.
17:54
Speaker 3: I understand what they're saying, but that's not very revealing.
17:58
Speaker 2: Yeah. I think my main message here, like we cover
18:01
Speaker 2: with a lot of these pieces, is if you too
18:04
Speaker 2: don't know what that means, because I don't have the
18:06
Speaker 2: context to understand what his cycle composite is. That's modeling
18:09
Speaker 2: out future returns and if you don't either, and you
18:12
Speaker 2: should probably ignore a piece.
18:14
Speaker 3: Like this, So technical one else has nothing to do
18:15
Speaker 3: with future returns. They're interested in is there a turning
18:18
Speaker 3: point YEP coming or is there room for more growth?
18:22
Speaker 3: A simpler way to put it is the two hundred
18:26
Speaker 3: day moving average because you get the same I mean,
18:28
Speaker 3: I occasionally full around technical indicators because they're fun. Sure
18:30
Speaker 3: you can get in your spreadsheet or your statistical program
18:33
Speaker 3: and create your own world. What he's saying is stocks
18:38
Speaker 3: have run up by a lot, say two hundred day
18:41
Speaker 3: moving average relative to a shorter term moving average, or
18:43
Speaker 3: vice versa. Everybody's got a different measure. That's all that.
18:47
Speaker 3: That's all that that little word salad is is trying
18:49
Speaker 3: to convey.
18:51
Speaker 2: This market that had earlier started off out of the
18:54
Speaker 2: gates pretty strong, has weakened pretty substantially. Now as we
18:58
Speaker 2: head towards the tenth towards ten thirty here, the NASDAC
19:03
Speaker 2: now barely holding on to gains, the S and P
19:06
Speaker 2: five hundred up only a thirty percent. I don't see
19:09
Speaker 2: any breaking news out there, just you know, a turn
19:11
Speaker 2: in markets in early trading here, which is not dissimilar
19:15
Speaker 2: to what we saw yesterday afternoon. We're gonna take a
19:17
Speaker 2: quick break, but when we come back, Tucker's gonna have
19:20
Speaker 2: a full recap here with Wall Street.
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19:45
Speaker 1: here on the Financial Exchange Radio Network time now full
19:50
Speaker 1: Wall Street Watch trecking the stocks, the data, and the
19:53
Speaker 1: headlines driving markets so far today right here on the
19:56
Speaker 1: Financial Exchange Radio Network.
19:58
Speaker 4: Our markets are now giving back as after a strong
20:01
Speaker 4: start to the day. Oil prices also pulling back after
20:04
Speaker 4: President Trump said that a deal with Iran was only
20:07
Speaker 4: days away. Right now, the Dow is up about six
20:11
Speaker 4: tenths of a percent, or two hundred and ninety five points,
20:13
Speaker 4: SMP five hundred is up about a quarter percent or
20:16
Speaker 4: twenty points higher. NASDAC now down by seven points, RUSS
20:21
Speaker 4: of two thousand is up about one and a half percent,
20:23
Speaker 4: Tenure Treasure reeled down one basis point at four point
20:26
Speaker 4: five to three percent, and Oil pulling back nearly four percent,
20:30
Speaker 4: now trading at eighty seven dollars a barrel after rallying
20:34
Speaker 4: nearly ten percent yesterday. Marvel Technology shares a down over
20:37
Speaker 4: six percent today. The recent games come following news that
20:41
Speaker 4: Marvel will be included in the SMP five hundred later
20:44
Speaker 4: this month. Meanwhile, shares a US drugmaker, New Valence, surging
20:48
Speaker 4: thirty eight percent after UK buyer pharmaceutical company GSK announced
20:54
Speaker 4: at ten point six billion dollar agreement to acquire the
20:57
Speaker 4: Boston based cancer drug developer Elsewhere Ski operator Veil Resorts
21:02
Speaker 4: cut its full year forecast where a low snowfall wait
21:05
Speaker 4: on visits and revenue that stock down by five percent.
21:08
Speaker 4: Jam Smucker beat earnings and revenue expectations for the previous quarter,
21:12
Speaker 4: sending shares up by eleven percent. In Apple now down
21:17
Speaker 4: by three percent. Following the Tech Giants Well Why Developers
21:20
Speaker 4: conference yesterday, Apple revealed a new AI powered version of
21:24
Speaker 4: its Serie Digital Assistant that includes a variety of upgrades
21:28
Speaker 4: that bring it closer to open AIS Chat, GPT, and
21:31
Speaker 4: Google's Gemini, enabling Apple users to have back and forth
21:35
Speaker 4: conversations and complete task Again, Apple down by three percent.
21:40
Speaker 4: I'm Tucker Silva and that is Wall Street Watch.
21:42
Speaker 2: All right, Mark Bloomberg reporting, the treasury market is telling
21:46
Speaker 2: Kevin Warsh that rates need to be higher for all
21:50
Speaker 2: of us that don't speak treasury. Can you can you
21:53
Speaker 2: translate this to us? Because the target rate right now
21:57
Speaker 2: is between three five and three seven five. So what's
21:59
Speaker 2: the t treasury market telling Kevin Walsh.
22:03
Speaker 3: When you want to put money in a place where
22:06
Speaker 3: it's likely to be returned, you probably look to the
22:07
Speaker 3: treasury market. First, one option is just to put in
22:09
Speaker 3: a very short term treasury obligation. A T bill matures
22:14
Speaker 3: in a year or less, and it pays something more
22:18
Speaker 3: than what you put in at the end. There's no
22:19
Speaker 3: coupon in between, because it's very short term. You could
22:22
Speaker 3: do that.
22:22
Speaker 2: The one year yield on a US treasure right now
22:25
Speaker 2: is three point eight one two percent according to the NBC.
22:28
Speaker 3: Yeah, so you could do that, or you could buy,
22:31
Speaker 3: say a ten year treasury and get about four point
22:33
Speaker 3: five ish percent. So why would you ever buy the
22:37
Speaker 3: one year instead of the tenure You get a higher
22:39
Speaker 3: yeld on the tenure. The short answer is that between
22:42
Speaker 3: now and ten years, a lot of things could happen.
22:44
Speaker 3: Inflation could go up, the fiscal situation in the US
22:47
Speaker 3: could deteriorate further, resulting in people demanding more to buy
22:52
Speaker 3: treasuries stuff, and interest rates could go up. Yeah, for
22:54
Speaker 3: different reasons. Let's forget about why keep this simple. The
22:57
Speaker 3: reason why you hold a one year and roll that
23:00
Speaker 3: over every year, just like with a bank CD, is
23:03
Speaker 3: that there's risk in holding a ten year. Rates could
23:05
Speaker 3: go up in the interim. It could go the other
23:07
Speaker 3: way and work for you, which is in the early eighties,
23:09
Speaker 3: but most people view it as risk. Youed old a
23:12
Speaker 3: ten year for that reason. So when rates longer than
23:17
Speaker 3: say six months or so start creeping up, it's because
23:21
Speaker 3: one interpretation you never know for sure, is that markets
23:24
Speaker 3: think the Fed's going to have to raise rates to
23:26
Speaker 3: fight inflation.
23:27
Speaker 2: And to be clear, like we said, the Fed's target
23:29
Speaker 2: rate is between three and a half and three seven five,
23:32
Speaker 2: and so when I look at the one month treasury,
23:34
Speaker 2: it's at like three points. That's what you should get
23:37
Speaker 2: right around there, That's what you should When I look
23:38
Speaker 2: at the two year, though, we're looking at a rate
23:41
Speaker 2: over four percent.
23:42
Speaker 3: That's interesting. So why is there a half a percentage
23:43
Speaker 3: point call it half, I'm rounding up a little bit
23:46
Speaker 3: or down difference there Because there's an increasing probability chance
23:51
Speaker 3: that the Fed's going to have to raise rates to
23:53
Speaker 3: staunch inflation. And that's really the full explanation. It's the
23:58
Speaker 3: only reason why a longer term rate would be higher
24:01
Speaker 3: than a shorter term rate. And you could extend that
24:03
Speaker 3: logic to the not just the two year, but the
24:05
Speaker 3: five year, the seven year. There are various You could
24:08
Speaker 3: buy a treasury that matures at any time. If you
24:11
Speaker 3: want to buy a use one, so to speak, and
24:14
Speaker 3: off the run treasury on the run. They come in
24:16
Speaker 3: specific terms to maturity. That's why people often talk about
24:20
Speaker 3: it as a one to three, a five, a seven or.
24:22
Speaker 2: Something, which is actually like how bond markets traditionally work.
24:26
Speaker 2: We've talked in the past about yield curve in version.
24:28
Speaker 2: Right when the ten year yield is lot, that's right,
24:30
Speaker 2: the two year yield.
24:31
Speaker 3: And so that's like the opposite of what we're just
24:33
Speaker 3: talking about.
24:33
Speaker 2: You think that the economy is going to crash in
24:35
Speaker 2: that case, people think intertrates would.
24:37
Speaker 3: Be lower in ten years all ls equal than today,
24:40
Speaker 3: or it's or they'll get a lot lower in the interim,
24:43
Speaker 3: which in turn drags down even longer term rates. I'm
24:47
Speaker 3: making it probably sound a little bit more complicated than
24:49
Speaker 3: it is. It's really common sense. It's the same calculation
24:52
Speaker 3: you go through when you go to the bank and say, sure,
24:54
Speaker 3: should I go for the twelve month CD or the
24:57
Speaker 3: sixty month CD? I get a slightly high yield on
24:59
Speaker 3: the sixty month. Boy, I don't think this FED is
25:01
Speaker 3: going to be able to control inflation. It's at four today.
25:04
Speaker 3: I think it's going to be five, in which case
25:06
Speaker 3: you want to buy the one year and then see
25:07
Speaker 3: what happens.
25:08
Speaker 2: So, speaking of which, now we're talking about Kevin Walsh
25:13
Speaker 2: in his new role and basically just got to choose
25:18
Speaker 2: who is he going to disappoint? And that's what Bloomberg
25:21
Speaker 2: is betting on the President is who he's going to disappoint.
25:25
Speaker 2: Who has been pushing for substantially lower interest rates from
25:28
Speaker 2: the Fed for pretty much the day aft since the
25:32
Speaker 2: day after nineteen he was born, Yeah, or more specifically,
25:36
Speaker 2: since he appointed j. Powell to head the FED. He's
25:39
Speaker 2: been pushing for lower interest rates and hasn't largely gotten them.
25:44
Speaker 2: And the question is is he going to disappoint the
25:48
Speaker 2: President on that front or is he going to disappoint
25:50
Speaker 2: the other eleven voting members right twelve total, eleven others
25:55
Speaker 2: on the Federal Reserve who want him to be considered
25:59
Speaker 2: a serious per so non monetary policy and to actually
26:03
Speaker 2: stamp out the inflation that we're starting to see in
26:07
Speaker 2: you more earnestly here in twenty twenty six. I don't
26:10
Speaker 2: see how you can appease both parties right now.
26:12
Speaker 3: It's a weird question to even have to ask, should
26:15
Speaker 3: an officer of the federal government be more concerned with
26:18
Speaker 3: his duty to the Americans and his constitutional indirectly because
26:23
Speaker 3: the FED wasn't obviously part of the original constitutional scheme.
26:26
Speaker 3: But anyway, you know what I mean, who should he
26:27
Speaker 3: be more worried about all of us and inflation and
26:31
Speaker 3: the hardships that inflation imposes, or the President tweeting nasty
26:36
Speaker 3: things about him. I assume if he's got any spine
26:39
Speaker 3: at all, and I'm not sure that he does, I'll
26:41
Speaker 3: say the jury's out. Sure if he's got spine, he'll
26:44
Speaker 3: do his duty. If he doesn't, he'll be cowed by
26:47
Speaker 3: the president. Keep interest rates too low, inflation will spiral
26:49
Speaker 3: a lot of control, and then somebody's going to have
26:51
Speaker 3: to come in and clean up the mess.
26:53
Speaker 2: It appears that markets at least are buying that he's
26:55
Speaker 2: going to do his duty, because when we take a
26:57
Speaker 2: look now at the likelihood of interest rate moves, and
27:00
Speaker 2: I'm not going to look at the short term because
27:02
Speaker 2: the June meeting is now eight days away and so
27:05
Speaker 2: there's not much to be seen there. But when we
27:06
Speaker 2: look forward all the way to December and the markets
27:10
Speaker 2: and how you bet on these things, there is currently
27:14
Speaker 2: a ninety nine and a half percent chance being priced
27:17
Speaker 2: into markets that rates are either where they are now
27:20
Speaker 2: or higher. And I think the point that many are
27:23
Speaker 2: now making is that rates right now aren't restrictive. And
27:29
Speaker 2: I think you probably fall into that camp.
27:30
Speaker 3: And well there's the reason for that. It's just not
27:33
Speaker 3: like my opinion. And higher inflation goes, the lower the
27:35
Speaker 3: real rate becomes. By that, I mean what matters for
27:41
Speaker 3: all of us is the real rate of interest that
27:44
Speaker 3: the stated rate minus inflation.
27:47
Speaker 2: So what I can earn on a CD minus the
27:49
Speaker 2: rate of inflation.
27:49
Speaker 3: That affects my standard of living. And if the thing
27:52
Speaker 3: you are minusing inflation is going up, the real rate
27:56
Speaker 3: is coming down. So Warsh may do nothing for a
27:58
Speaker 3: year and still be presiding over any You've got to
28:01
Speaker 3: raise rates with inflation.
28:03
Speaker 2: Right and I think right now, well, we will say
28:06
Speaker 2: what he has to say in just about a week's time.
28:09
Speaker 2: I don't want to guess too much about this, but
28:12
Speaker 2: I think there are plenty on the Federal Reserve Board
28:14
Speaker 2: who would like to take a wait and see approach
28:17
Speaker 2: here with Hey, what happens with oil price shock inflation?
28:21
Speaker 2: Can we wait this out a few months and then
28:25
Speaker 2: crashing down. They definitely want to take that approach because
28:27
Speaker 2: the risk. But we've been talking about the risks to
28:30
Speaker 2: the upside of inflation. The risk to the other side
28:34
Speaker 2: of this if the Fed goes forward with a raid
28:36
Speaker 2: hiking cycle is recession. It's a crashing down of the
28:40
Speaker 2: economy that ultimately does defeat the inflation that we're presiding over,
28:44
Speaker 2: but also result in a bunch of people unemployed and
28:47
Speaker 2: probably election is not going terribly well for those in power.
28:50
Speaker 2: Let's take a quick break. When we come back, I've
28:54
Speaker 2: got to report from the Federal Reserve about how people
28:56
Speaker 2: are feeling about this economy. We've got Michigan sentiment do
29:00
Speaker 2: out is that last week or this week? I think
29:02
Speaker 2: it's for Friday of this week. So talking a little
29:05
Speaker 2: bit about people's feelings. Next on the Financial Exchange.
29:08
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30:17
Speaker 2: I'm gonna read three headlines here that Tucker put in
30:20
Speaker 2: a row, and I want everybody to listen and guess
30:24
Speaker 2: which side of the bed Tucker woke up on this morning,
30:27
Speaker 2: if you don't mind. So. First, from CNBC, household worries
30:30
Speaker 2: over finances hit highest level since July twenty twenty two,
30:34
Speaker 2: New York Fed survey shows. Next from CNBC, fifty one
30:39
Speaker 2: percent of US adults say the American dream is out
30:42
Speaker 2: of reach for most people right now. Number three from
30:45
Speaker 2: Bloomberg US small business optimism falls to lowest level since
30:49
Speaker 2: October twenty twenty four. Tucker, what are you okay?
30:53
Speaker 1: Yeah, I'm fine.
30:54
Speaker 4: I'm just I'm just putting in what the people want
30:57
Speaker 4: to hear, man, Tucker, because this is what people think.
30:59
Speaker 2: Tucker, what look at me? Are you okay?
31:04
Speaker 1: I'm fine, Man, I'm fine.
31:06
Speaker 2: So we've got there, people, We've got these three pieces
31:09
Speaker 2: about how unhappy Americans are. That's being confirmed by the
31:12
Speaker 2: University of Michigan and their sentiment surveys. And I continue
31:15
Speaker 2: to still have no idea what to do about any
31:18
Speaker 2: of this information, because it continues to repeat that this
31:22
Speaker 2: economy is as bad as it's been since twenty twenty two, or,
31:26
Speaker 2: in the case of the University of Michigan Sentiment Survey,
31:29
Speaker 2: literally ever worst economy we've ever had, according to the
31:33
Speaker 2: University of Michigan Sentiment Survey, worse than the depths of
31:37
Speaker 2: the Great Recession of eight, worse than when we are
31:40
Speaker 2: all sitting at home in March of twenty twenty from COVID,
31:45
Speaker 2: worse than the nineteen seventies oil crisis, and in spite
31:49
Speaker 2: of that, maybe more incite the data better than I
31:52
Speaker 2: can but consumer spending is up. People are still buying homes, cars,
31:59
Speaker 2: big ticket items in an increased pace compared to year prior.
32:04
Speaker 2: And so I continue to sit here and say, what
32:07
Speaker 2: do I do with data that tells me that everyone
32:10
Speaker 2: is pessimistic but keep spending anyway? I don't know how
32:16
Speaker 2: to square.
32:17
Speaker 3: What's the question we should be trying?
32:19
Speaker 2: We need to Why is everybody so pissed? No?
32:22
Speaker 3: No, no, no, no, what do we want to know? I
32:24
Speaker 3: think we need to step back. We're deluged with I'm
32:28
Speaker 3: not using that verb right, but you know what, we're flooded.
32:31
Speaker 2: Sounds like it's better.
32:32
Speaker 3: Yes, I think they mean the same thing, but for
32:34
Speaker 3: some reason, flooded doesn't sound wrong in that context.
32:36
Speaker 2: Yeah, if you're an English teacher, you can text you whatever.
32:38
Speaker 3: Well, I'll ask Chuck when he's three six, two thirteen. Yeah, yeah, yeah,
32:42
Speaker 3: that's that's that's that's totally fair. Please correct me. What
32:46
Speaker 3: are we trying to answer here? We're trying to get
32:48
Speaker 3: some measure, and measure means a number, so these every
32:52
Speaker 3: gift to parse every word here. Yeah, we're trying to
32:54
Speaker 3: get some measure a statistic. Statistic means an estimate by
32:57
Speaker 3: the way, we don't know the actual population value. Again,
33:00
Speaker 3: I'm parsing here deliberately. I'm not just being pedantic. Well
33:02
Speaker 3: i am, but for a reason, we want to know
33:04
Speaker 3: where people happy or not they're telling. One way to
33:07
Speaker 3: do that is just to ask them, are you satisfied?
33:09
Speaker 3: They're saying no. So clearly there's a disconnect between measures,
33:17
Speaker 3: and people have known this for a long time. This
33:18
Speaker 3: is not like a deep insight on my part. A
33:20
Speaker 3: disconnect between the typical measures of economic health, unemployment, inflation,
33:27
Speaker 3: and GDP on employments low epically low. Inflation is rising bad.
33:33
Speaker 3: GDP was a little bit below trend, but okay last quarter.
33:37
Speaker 3: So if you want to connect surveys to hard data,
33:41
Speaker 3: I guess what you could do. You could There is
33:43
Speaker 3: a one to one correspondence right now between the direction
33:46
Speaker 3: inflation is going in and what people are saying about
33:49
Speaker 3: the economy. We witnessed the same connection two. Yeah. So
33:55
Speaker 3: when people answer a question like that the way they're
33:57
Speaker 3: answering it, you look at the holy Trinity. Forgive me
34:01
Speaker 3: for the sacrilege of economic statistics, GDP, unemployment, inflation, there
34:06
Speaker 3: are three of them, that's the trinity. You look at
34:09
Speaker 3: those three and ask which is going in the wrong direction. Inflation.
34:12
Speaker 3: People clearly wait that very heavily because it hits you
34:14
Speaker 3: in the face every single day when you fill up,
34:17
Speaker 3: when you go to the supermarket, when you notice that
34:20
Speaker 3: your standard of living. You get your tax bill that's
34:22
Speaker 3: gone up. I get my water bill that's gone up.
34:24
Speaker 3: They're going up in percentage terms faster than my salary.
34:27
Speaker 3: That's actually been the case for the past few years.
34:29
Speaker 3: Others can figure that out to me, and this is
34:33
Speaker 3: not a profound observation. It comes down to the rate
34:38
Speaker 3: at which prices are increasing relative to wages. You know,
34:42
Speaker 3: GDP could be above or below trend. Nobody understand that
34:45
Speaker 3: the president doesn't even know what the rate of GDP
34:46
Speaker 3: growth is. No, that could have been true, but I
34:48
Speaker 3: could be speaking about Biden, Bush Obama. They don't know
34:51
Speaker 3: for the most part. But everybody knows what the rate
34:53
Speaker 3: of inflation, Mike and slightly more people know what the
34:56
Speaker 3: rate of unemployment is, but not as many who know
34:58
Speaker 3: what the rate of inflation is. Tucker is at You
35:00
Speaker 3: don't do this for a living. You're an engineer, a
35:02
Speaker 3: radio engineer. Is what I just described is that resonate
35:06
Speaker 3: with you yes, okay.
35:07
Speaker 2: Yeah, I think that's right.
35:08
Speaker 4: And Mike, you say that people are spending and they are, Yeah, absolutely,
35:11
Speaker 4: But then you can also point the other fring and
35:14
Speaker 4: be like, well, credit card debt levels at their highest
35:16
Speaker 4: level of all time. They are, but so they're spending
35:19
Speaker 4: and just going further into debt. Yeah, they are going
35:21
Speaker 4: further into debt.
35:22
Speaker 2: Feel bad. I don't even see discretionary items getting pulled back, right.
35:26
Speaker 2: We talked about first class cabin tickets and luxury hotels
35:29
Speaker 2: and all sorts of things that people are clearly still
35:31
Speaker 2: spending on owners at record levels. Yeah, it could be
35:34
Speaker 2: just that the shop owners. You know, I heard this.
35:36
Speaker 2: I'm forgetting which FED official pulled this from their beige books.
35:40
Speaker 2: So the beige book that the FED puts together is
35:41
Speaker 2: basically interviews that they do with business owners and individuals
35:45
Speaker 2: in their community and then they put it together. And
35:47
Speaker 2: it's not data. I don't think you could consider the
35:49
Speaker 2: page book to right. It's it's the surveys of how
35:53
Speaker 2: people feel.
35:53
Speaker 3: Yeah, I mean it is data, it's numbers in a spreadsheet,
35:56
Speaker 3: I guess, but it's it's not hard data.
35:58
Speaker 2: And I think it was a FED Reserve member from
36:00
Speaker 2: either Saint Louis or Chicago that brought it up that
36:03
Speaker 2: he went out to the community and talked to, you know,
36:05
Speaker 2: tried to answer that question of why do people feel
36:08
Speaker 2: that inflation is so much more difficult than in recession.
36:10
Speaker 2: And one person summarized it pretty well to him, which
36:13
Speaker 2: was in two thousand and eight, when unemployment was way
36:16
Speaker 2: higher and we were all afraid of what was going on.
36:21
Speaker 2: I could still have people in my community that were
36:24
Speaker 2: doing all right financially because they had kept their job.
36:27
Speaker 2: Even if I hadn't, I could go to them, and
36:29
Speaker 2: maybe it was borrow money from them or lean on
36:31
Speaker 2: them for financial support. In my own community in twenty
36:35
Speaker 2: twenty two, when inflation was up nine percent, every one
36:40
Speaker 2: of my socioeconomic background, one hundred percent of us experienced inflation,
36:44
Speaker 2: and that was not the case with recession. And I
36:47
Speaker 2: think that is a key insight as to why people
36:50
Speaker 2: hate inflation so much more. We always tend to think
36:54
Speaker 2: that our outcomes are going to be better than society's
36:58
Speaker 2: outcomes as a whole. And so even when I fear,
37:02
Speaker 2: you know, recession, even when I fear one in ten
37:04
Speaker 2: people losing their jobs, not everybody loses their job and
37:08
Speaker 2: not everybody experiences that financial devastation, whereas inflation might not
37:14
Speaker 2: be complete financial devastation, but every single person feels it.
37:17
Speaker 3: Inflation is also perceived as a symptom of bad policy,
37:20
Speaker 3: bad leadership. It's somebody's fault, it's the Fed's fault, it's
37:24
Speaker 3: the guy that started the war's fault, no offense. You
37:26
Speaker 3: may like the war, you might not, but this inflation
37:28
Speaker 3: falls squarely in the lap of the president who started
37:32
Speaker 3: a war that has driven up energy prices that are
37:34
Speaker 3: now seeping through the economy. You may say that's great,
37:36
Speaker 3: Iran can never have this, or that I don't care
37:38
Speaker 3: about the inflation, or you may hate it. Either way,
37:40
Speaker 3: it's undeniable. Inflation can always be pinned on somebody. Recessions
37:44
Speaker 3: are often perceived as acts of God.
37:47
Speaker 2: You think so, I do.
37:48
Speaker 3: I don't think any You get blamed if you're in power,
37:51
Speaker 3: but I don't think anybody would say hw Bush caused
37:54
Speaker 3: the nineteen ninety recession.
37:55
Speaker 2: I think you still get blamed, but maybe maybe you get.
37:58
Speaker 3: Blamed for not being decisive and being able to fix it.
38:01
Speaker 2: Markets have turned strongly negative now. NASDAK now off eight
38:05
Speaker 2: tenths of a percent, smp off a third will be
38:08
Speaker 2: back after a few minutes here getting you a full
38:10
Speaker 2: market update as markets have swung strongly into negative territory.
38:14
Speaker 2: We'll be right back