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Oil Shock Deepens as Fed Faces War-Driven Inflation Risks · The Financial Exchange Show

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Speaker 1: donation today. This is the Financial Exchange with Chuck Zada,
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Speaker 1: and Mike Armstrong.
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Speaker 2: It is Chuck, Mike, and Tucker with you here on
1:15
Speaker 2: what promises to be a busy, busy week as we
1:21
Speaker 2: look through what we've got in the calendar. Hang on, Mike,
1:24
Speaker 2: I'm about to have a coughing fit, so you take
1:26
Speaker 2: it for a while, okay.
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Speaker 3: So, in terms of what we do have on the calendar,
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Speaker 3: the biggest one of the week being the Federal Reserve
1:32
Speaker 3: meeting coming out is that Wednesday is the UH is
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Speaker 3: the good old press conference at two pm?
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Speaker 2: It is Wednesday.
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Speaker 3: Yes, we've got some housing data coming out as well,
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Speaker 3: building building permits.
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Speaker 4: Was there home sales data?
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Speaker 3: Pending home sales data coming out on Tuesday. All of this,
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Speaker 3: of course, having faded to the background of the last two.
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Speaker 2: We're two and a half weeks now, we're day seventeen.
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Speaker 3: Day seventeen of the war in Iran. So the FED
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Speaker 3: stuff is actually going to be relatively important and attention
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Speaker 3: grabbing because on Friday of last week, as we will
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Speaker 3: cover later, the subpoenas against the FED were thrown out
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Speaker 3: by a federal judge, and so a lot more to
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Speaker 3: come on this and some interesting stuff as j Powell
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Speaker 3: leads the FED for one of the last two meetings
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Speaker 3: that he will lead.
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Speaker 2: We've also got updated Producer Price Index data out on
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Speaker 2: Wednesday as well. It is stale because it's from February,
2:31
Speaker 2: which normally be like Chuck, like February was the last month?
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Speaker 2: How is that stale? And the answers well, on the
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Speaker 2: last day of February, the situation for producer prices changed
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Speaker 2: pretty dramatically.
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Speaker 4: What do you mean, I don't know.
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Speaker 2: Like that's I'm just reading what I was. Oh no, like,
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Speaker 2: oh yeah, things are a little bit different as far
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Speaker 2: as you know initial and intermediate goods and their prices potentially,
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Speaker 2: so a lot of changes there. And so I don't
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Speaker 2: know how much stock you place in this PPI reading,
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Speaker 2: not because it's like not right, but just because the
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Speaker 2: world is differ than it was in February when the
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Speaker 2: data was collected. So we turn our eyes now again
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Speaker 2: as we've been doing for the last couple weeks, to
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Speaker 2: kick things off talking about the latest in terms of
3:11
Speaker 2: where we stand with the Iran situation, simply because that
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Speaker 2: is going to dictate basically what happens with the world
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Speaker 2: economy at least until that situation is done, and most
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Speaker 2: likely for a period of months, if not years after
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Speaker 2: the conclusion, depending on what exactly the outcome ends up being.
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Speaker 2: We just don't know what things are going to look
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Speaker 2: like when this is done and how long it's going
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Speaker 2: to go. What we did say at the outset when
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Speaker 2: we came in on Monday, the second of March, we said, look,
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Speaker 2: there are going to be three things that determine how
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Speaker 2: big of an impact this conflict has on the global economy.
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Speaker 2: The first is going to be the duration. The second
4:02
Speaker 2: is going to be the scope you know, really talking
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Speaker 2: about like the geographic region that it encompasses. And the
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Speaker 2: third is going to be the magnitude how much damage
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Speaker 2: is there within that region. And so what we do
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Speaker 2: know is from a duration standpoint, given that we're now
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Speaker 2: in day seventeen, I think we can say, look, this
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Speaker 2: was not you know, a two or three day thing,
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Speaker 2: because we're in day seventeen. So every day that you
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Speaker 2: go at this point and these are estimates that again
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Speaker 2: I kind of did the back of the Napkin math,
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Speaker 2: and now I see you know, energy people popping up
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Speaker 2: on Twitter and you know social media and everything that
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Speaker 2: are doing similar ones. The estimates that we have now
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Speaker 2: are for each day that this is the status quo,
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Speaker 2: meaning horor moves basically closed to traffic except for like
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Speaker 2: one to three transits a day that are happening instead
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Speaker 2: of the normal fifty to sixty. You're looking at about
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Speaker 2: a ten million barrel a day gap in supply versus demand.
5:03
Speaker 2: The first week, first two weeks, that gap was closer
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Speaker 2: to fifteen million barrels a day on average because of
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Speaker 2: a variety of different factors, SPR releases were not happening yet.
5:15
Speaker 2: Saudi Arabia had not yet begun pumping oil across its
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Speaker 2: East West Pipeline to its Red seaports to try to
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Speaker 2: export through there. So basically where I Land is look
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Speaker 2: through last Friday, you probably ran up somewhere around to
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Speaker 2: two hundred to two hundred and thirty million barrel deficit,
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Speaker 2: and each day from there you're adding another ten million barrels.
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Speaker 2: So by the end of this month, if we're still
5:35
Speaker 2: in this situation, you're talking three hundred and seventy to
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Speaker 2: four hundred million barrels that we have, you know, lost
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Speaker 2: in terms of production, and that's pretty much what the
5:44
Speaker 2: SPR releases from the IEA have agreed to replace. But
5:50
Speaker 2: remember they're also replacing from a pre existing stock that's
5:52
Speaker 2: gonna have to be replenished at some point. It's not
5:55
Speaker 2: from new production. But this is where we stand right now.
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Speaker 2: And you're also at a point where today this week
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Speaker 2: I think is a big one because the last ships
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Speaker 2: that were able to get through Horror Moves before this happened,
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Speaker 2: they are now starting to reach their transit destinations in
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Speaker 2: Asia and Europe this week, as an example, transitting from
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Speaker 2: Horror Moves to Rotterdam, which is I believe the biggest
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Speaker 2: port in Europe, if not like top two or three,
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Speaker 2: but I'm pretty sure it's the biggest one. It's a
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Speaker 2: nineteen day journey, got it, which means that we're in
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Speaker 2: day seventeen right now. The last of like any ships
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Speaker 2: that we're heading that way are going to get there
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Speaker 2: over the next couple days. And then you start seeing,
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Speaker 2: you know, where you have to draw from in order
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Speaker 2: to fill reserves and things, whether it's oil, LNG, aluminum, copper,
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Speaker 2: anything else produced in the region, fertilizer, like you go
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Speaker 2: down the list. Likewise, when you're looking at transit to
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Speaker 2: Southeast Asia, you're talking anywhere from like eleven to twenty days,
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Speaker 2: depending on where you're trying to go as well. So
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Speaker 2: this is going to be the week where you start
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Speaker 2: to see the impacts potentially showing up. What I can
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Speaker 2: tell you is that when you look at not futures
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Speaker 2: curves for oil, but the actual prices that are being
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Speaker 2: demanded for spot delivery now, So not hey what are
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Speaker 2: you going to pay for May delivery or June, but
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Speaker 2: you know what does it cost right now? Oil in
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Speaker 2: the basically like in the Middle East for media delivery,
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Speaker 2: you're up into that one fifty a barrel range if
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Speaker 2: you're talking jet fuel and bunker fuel for immediate delivery.
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Speaker 2: In Southeast Asia you're into that one eighty to two
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Speaker 2: fifty a barrel range. And so the prices that are
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Speaker 2: now being demanded in order to satisfy need today are
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Speaker 2: are much higher than what's being priced into futures curves.
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Speaker 2: And to me again, remember a future's curve is not
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Speaker 2: what the market is predicting the price of oil is
7:56
Speaker 2: going to be at a point in the future. And
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Speaker 2: I want to make this clear because I think it's important.
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Speaker 2: If you look at the December Brent crude contract and say, hey,
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Speaker 2: it's it's seventy nine eighty five a barrel right now.
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Speaker 2: That is not predicting that the price of crude is
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Speaker 2: going to be seventy nine eighty five a barrel in December.
8:15
Speaker 2: It's telling you that, if you want to order a
8:17
Speaker 2: barrel of oil for delivery in December right now, that's
8:22
Speaker 2: what you need to pay on a per barrel basis.
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Speaker 2: It does not suggest anything about where the price of
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Speaker 2: crude will be in December. It's telling you based on
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Speaker 2: what suppliers are offering then and what is demanded by
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Speaker 2: buyers right now. This is the happy equilibrium if you
8:38
Speaker 2: want to lock in delivery then, But it doesn't tell
8:42
Speaker 2: you where crude prices are going to be at that
8:45
Speaker 2: point in time. So I think that that's important.
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Speaker 4: I wonder what the risk of.
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Speaker 3: Inability to deliver on a contract like that is in
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Speaker 3: any given point in time, and how elevated is right now?
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Speaker 3: If I buy a futures contract for delivery of oil
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Speaker 3: in December today, presumably at any given point in time,
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Speaker 3: the counterparty that could go bankrupt and fail to deliver
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Speaker 3: and I don't get my oil.
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Speaker 4: Yes, presumably that's elevated right now.
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Speaker 2: Possibly, and this will eventually impact futures prices if that
9:18
Speaker 2: gets priced in things to remember, and I'm pretty sure
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Speaker 2: I have this right. Again. I'm not an energy trader,
9:23
Speaker 2: but I've read enough over the last couple of weeks
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Speaker 2: to at least know my way around a little bit.
9:29
Speaker 2: West Texas Intermediate is a contract that requires physical settle,
9:33
Speaker 2: physical delivery at settlement. Brent is not. Brent can be
9:38
Speaker 2: a cash settled contract, meaning delivery is not required, and
9:42
Speaker 2: so there are some differences there when you look at
9:47
Speaker 2: the contracts for the average person, you're sitting there going
9:49
Speaker 2: what does that mean? What it means is that if
9:51
Speaker 2: you're trading West Texas Intermediate and you are long the
9:55
Speaker 2: May futures at the date of the close, you are
9:58
Speaker 2: going to be obligated to buy however you have, and likewise,
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Speaker 2: if you are selling, you'll be obligated to sell how
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Speaker 2: much you have. With Brent crude. The futures contracts are
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Speaker 2: cash settled, meaning you do not need to settle with
10:11
Speaker 2: physical delivery necessarily. There are different reasons for this, different
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Speaker 2: you know, understandings of how they work, but let's just
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Speaker 2: leave it there, and I think we're good without trying
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Speaker 2: to get into too much complexity there. Quick break here
10:24
Speaker 2: when we come back. We'll talk about what the Trump
10:27
Speaker 2: administration announced last night in terms of plans to try
10:31
Speaker 2: to deal with the higher prices, and we'll cover that
10:36
Speaker 2: right after this.
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11:39
Speaker 2: Yesterday afternoon, the Trump administration came out and indicated that
11:45
Speaker 2: basically what they were looking for was trying to build
11:48
Speaker 2: a coalition of partners to help escort ships through the
11:53
Speaker 2: Strait of Hormuz. Now, again, in terms of my read
11:58
Speaker 2: on what this means, I don't think you're asking countries
12:02
Speaker 2: to become partners on a you know, on an escort
12:05
Speaker 2: mission in the event that you think this is truly
12:07
Speaker 2: going to resolve itself in the next week or two, Okay,
12:12
Speaker 2: I think that's fair. If you thought this would simply
12:14
Speaker 2: be over to the point where that was not required,
12:17
Speaker 2: you would just say, hey, well, you know be able
12:19
Speaker 2: to handle this and we'll move on.
12:21
Speaker 3: That.
12:21
Speaker 2: Coupled with the fact that again you've got this marine
12:23
Speaker 2: expedition expeditionary unit that you are moving into the theater
12:28
Speaker 2: as well, and potentially a third carrier group, these are
12:32
Speaker 2: all things where where again I'm trying to figure out,
12:36
Speaker 2: you know, what is actually happening as opposed to, you know,
12:40
Speaker 2: what's being said by every party. Because if I had
12:43
Speaker 2: a dime for every time that you know, the Iranians
12:45
Speaker 2: posted videos of them destroying a US carrier when it
12:48
Speaker 2: didn't actually happen. I'd be a rich person. Likewise, if
12:52
Speaker 2: I had a dime for you know, every quote from
12:55
Speaker 2: the United States saying, oh, well, this is already done
12:57
Speaker 2: and like there's nothing going on. Well okay, Like that's
13:00
Speaker 2: clearly not the case either. So pay attention to what's
13:02
Speaker 2: being done, not what's being said. And so when I
13:05
Speaker 2: hear about, hey, we're looking for you know, coalition partners
13:09
Speaker 2: to help escort to me, that indicates that this is
13:12
Speaker 2: not going to be something that is simply over done
13:16
Speaker 2: and dusted in the next week or two agreed.
13:19
Speaker 4: And nonetheless having markets.
13:21
Speaker 3: Well, maybe markets are getting better at sniffing that out,
13:23
Speaker 3: because what occurred last week. Remember on Monday of last
13:28
Speaker 3: week the President announced that we were going to escort
13:30
Speaker 3: ships through the Strait. I believe that was Monday of
13:32
Speaker 3: last week, and immediately oil prices fell something No, it
13:35
Speaker 3: was Tuesday when the Energy Secretary said we already have Okay,
13:38
Speaker 3: in either case, it moved markets substantially.
13:41
Speaker 4: Yes, oil prices swung big time. At this stage. You're
13:44
Speaker 4: not you're not seeing that type of thing.
13:46
Speaker 3: Yes, markets are up again today, but they're basically back
13:49
Speaker 3: to where they were on Thursday of last week. Oil
13:52
Speaker 3: prices are relatively stable, and so I think I think
13:55
Speaker 3: investors are starting to read some of this and to
13:59
Speaker 3: better understand and it. But yeah, I mean, look, there
14:03
Speaker 3: are there are massive questions still about when and if,
14:08
Speaker 3: whether it's the US military or a combined native force
14:12
Speaker 3: has any ability to escort ships, deal with all the
14:14
Speaker 3: minds that are presumably now in the strait and uh
14:18
Speaker 3: successfully move tankers through that area in the meantime, what
14:23
Speaker 3: was it? Japan and Australia rejected the request and indicated
14:27
Speaker 3: they would not be able to send assets where there
14:29
Speaker 3: are other countries as well.
14:30
Speaker 2: Yeah, they both did. A Greek government official said that
14:33
Speaker 2: Greece has no plan to engage in operations to the
14:35
Speaker 2: Hormu Strait. The German Defense minister said Germany will not
14:39
Speaker 2: participate with its military and just carrying the Strait of
14:41
Speaker 2: hor moves, and the UK Prime Minister Starmer said we
14:45
Speaker 2: will not be drawn into the wider Iran war. So
14:49
Speaker 2: again not that like the Greek navy is going to
14:52
Speaker 2: be the savior here. If look, if you're betting on
14:55
Speaker 2: the Greek Navy to save you love those guys, but
15:00
Speaker 2: that's just not you know, what's going to happen here.
15:03
Speaker 2: So I think that ultimately where we stand right now
15:09
Speaker 2: is again it's it's unclear that there's anything that moves
15:13
Speaker 2: us off the status quo in the near future. It
15:17
Speaker 2: could like that there's ways where this develops, you know,
15:20
Speaker 2: either positively or negatively over the next you know, over
15:23
Speaker 2: the coming days. But as of right now, basically no
15:27
Speaker 2: transits through Horror Moves save for again. Iran apparently has
15:32
Speaker 2: granted permission on you know, kind of a one off
15:34
Speaker 2: basis for this ship and that ship. But what I
15:37
Speaker 2: can tell you is what the United States absolutely does
15:40
Speaker 2: not want is for Iran to become the de facto
15:43
Speaker 2: toll taker for the Strait of Horror Moves. That would be,
15:47
Speaker 2: by all accounts, a worse outcome than where we were
15:50
Speaker 2: when this started in that, hey, you've got to now
15:54
Speaker 2: pay us otherwise we're gonna shoot at your ships. Right
15:57
Speaker 2: That's not really where where you want this to end up.
16:00
Speaker 2: So it strikes me that where we are right now
16:04
Speaker 2: is kind of an equilibrium that I don't think anyone
16:07
Speaker 2: really wants for the long term. But how do you
16:11
Speaker 2: get that equilibrium to move is an open question here
16:16
Speaker 2: that has not yet been answered.
16:18
Speaker 3: Yeah, for over a decade now the United States, I
16:23
Speaker 3: feel as though the United States main policy goal has
16:27
Speaker 3: been to de emphasize our focus on the Middle East
16:32
Speaker 3: and focus instead on Asia, specifically China and Taiwan.
16:35
Speaker 2: Probably the exact right thing to do.
16:38
Speaker 3: I mean, Hillary Clinton talked about it in twenty eleven.
16:42
Speaker 3: It has been pretty consistent from both sides of the
16:44
Speaker 3: aisle that that is the overall goal. And I think
16:48
Speaker 3: that that's likely the ultimate goal here too. And I
16:52
Speaker 3: think the question running through the Trump administration's mind is
16:55
Speaker 3: at what point.
16:56
Speaker 4: Can we.
16:58
Speaker 3: Successfully convince the public and convince ourselves that that pivot
17:03
Speaker 3: will be possible, because right now it seems the answers
17:05
Speaker 3: you can't.
17:06
Speaker 2: There are gonna be other questions on that as well. Then,
17:09
Speaker 2: in terms of one of the major themes last year
17:14
Speaker 2: from the Trump administration was a significant amount of outreach
17:17
Speaker 2: to the Middle East from an economic perspective. There was
17:20
Speaker 2: the whole tour that went through the Persian Golf. I
17:24
Speaker 2: want to say it was in like May of last year,
17:28
Speaker 2: with you know, significant business commitments and things along those lines.
17:31
Speaker 2: That were made by Persian golf states, and you know,
17:36
Speaker 2: they were combined with you know, defense commitments from the
17:38
Speaker 2: United States and so on and so forth. And one
17:41
Speaker 2: of the things that I think you have to look
17:43
Speaker 2: at in response to this is, Hey, if you are
17:46
Speaker 2: Dubai or the UAE or Oman or whoever it might
17:49
Speaker 2: be that is down there with a whole bunch of
17:51
Speaker 2: oil money, you're sitting there and you're going, Okay, how
17:56
Speaker 2: are we going to come out better than this on
17:58
Speaker 2: the other side, And what does it mean as far
18:01
Speaker 2: as our business commitments to the United States and how
18:04
Speaker 2: we may rethink them in the aftermath of this. They're
18:08
Speaker 2: open questions. I don't have the answers. Like the answer
18:10
Speaker 2: might be there's no change at all, we're reaffirming them. Sure,
18:13
Speaker 2: The answer might be, hey, we'll reaffirm them if you
18:17
Speaker 2: provide X, Y, and Z in the form of you know,
18:19
Speaker 2: additional defense, you know, allocations and contracts that we can
18:23
Speaker 2: sign and so forth. It might be no, we're not
18:26
Speaker 2: sure that this is what we want anymore, because we
18:30
Speaker 2: saw significant disruptions for again, we don't know how long
18:33
Speaker 2: this is going to be the case, but we saw
18:35
Speaker 2: disruptions and we don't know that this is in our
18:39
Speaker 2: best interest anymore, right, I.
18:41
Speaker 3: Mean the very idea of those same countries being a
18:46
Speaker 3: stable investible area for capital to flow. That's all been
18:51
Speaker 3: called into question this over the last three weeks or
18:54
Speaker 3: two and a half weeks, whatever the timeframe is we
18:56
Speaker 3: want to talk about. And so of course the return
18:59
Speaker 3: of flows in the other direction would be called into
19:01
Speaker 3: question two if those same countries cannot continue to I
19:05
Speaker 3: mean all sorts of things like heck, live golf and.
19:09
Speaker 2: Well, look no further than what happened to Kuwait after
19:11
Speaker 2: the First Golf War, Like Kuwait pre Gulf War one
19:15
Speaker 2: was a totally different country that was kind of trying
19:17
Speaker 2: to build itself up the same way that you know,
19:19
Speaker 2: Dubai and like, and it never got back to what
19:22
Speaker 2: it was. Yeah, it just never did. Let's take a
19:25
Speaker 2: quick break here. When we come back, we've got Wall
19:27
Speaker 2: Street Watch, and then let's talk about the FED and
19:30
Speaker 2: their potential responses to this when we return.
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20:03
Speaker 5: The markets are beginning the week with a strong rally
20:06
Speaker 5: as Wall Street keeps a close eye on the war
20:08
Speaker 5: and Iran. With oil prices pulling back today, traders are
20:11
Speaker 5: also rating for a FED meeting that concludes on Wednesday afternoon.
20:17
Speaker 5: Right now, the Dow is up over nine tens one
20:20
Speaker 5: percent to four hundred and thirty two points highre SMP
20:23
Speaker 5: five hundred up over one percent or sixty nine points higher,
20:26
Speaker 5: Nasdaq up one point two percent or two hundred and
20:29
Speaker 5: seventy points. Rust of two thousand is up one point
20:32
Speaker 5: seven percent ten. Your treasreel is down five basis points
20:35
Speaker 5: at four point two to eight percent, and oil pulling
20:39
Speaker 5: back over four and a half percent today, hovering right
20:43
Speaker 5: around ninety four dollars a barrel. Breaking news from Meda
20:46
Speaker 5: this morning after the social media in tech Gina announced
20:49
Speaker 5: a new partnership with Dutch cloud provider Nebius to spend
20:52
Speaker 5: up to twenty seven billion dollars on its AI infrastructure.
20:56
Speaker 5: Nebia shares are surging fourteen percent on that news. Separately,
21:00
Speaker 5: Reuter's reported that Meta is planning sweeping layoffs MetaStock is
21:05
Speaker 5: up by three percent. Meanwhile, in Video, shares are climbing
21:07
Speaker 5: two percent ahead of the AI and Chip giants AI
21:11
Speaker 5: summit this afternoon at two o'clock, where investors will focus
21:14
Speaker 5: on a speech from CEO Jensen Wong. Sticking with tech,
21:17
Speaker 5: where Micron Technology said it plans to build a second
21:20
Speaker 5: manufacturing manufacturing site in Taiwan, sending shares up nearly five percent,
21:26
Speaker 5: and Dollar Tree posted mixed fourth quarter results, beating on
21:29
Speaker 5: rings but its annual outlook disappointed. However, shares are up
21:33
Speaker 5: five percent after Truis reiterated a buyer rating of the
21:36
Speaker 5: discount retailer. I'm Tucker Silva and that is Wall Street Watch.
21:40
Speaker 2: Facing the Financial Times, how will the FED respond to
21:44
Speaker 2: the Iran Wars fallout? Uh, here's my guess. I'm not
21:49
Speaker 2: going to go through what they say because honestly, I
21:55
Speaker 2: don't care who, I don't care. I don't care what
21:59
Speaker 2: the Financial Time says about what the Fed's going to do. Okay,
22:03
Speaker 2: Like the author of this is not a FED whisper.
22:05
Speaker 2: They're smart. I'm not saying they're not. But like, I
22:08
Speaker 2: don't know that their opinion uniquely informative. No, it's just not.
22:14
Speaker 2: Here's what I do know is that when we look
22:16
Speaker 2: at what the FED Fund's futures market looks like right now,
22:21
Speaker 2: it's currently pricing in a ninety nine point one percent
22:24
Speaker 2: chance that there is no cut at the upcoming meeting. Okay,
22:27
Speaker 2: just almost a certainty, and I tend to agree. What
22:30
Speaker 2: I think is interesting is the next meeting after this
22:34
Speaker 2: is on April twenty ninth, and that is going to
22:38
Speaker 2: be the one that ultimately matters when it comes to
22:43
Speaker 2: does the FED start to consider a policy adjustment. I
22:47
Speaker 2: think that the we do get with this week's FED
22:50
Speaker 2: meeting the Summary of Economic Projections, the step otherwise known
22:54
Speaker 2: as the dot plot that shows you, you know, where
22:57
Speaker 2: FED members think inflation is going to be at the
22:59
Speaker 2: end of the year, unemployment, GDP, growth, all these things.
23:03
Speaker 2: I anticipate that being all over the place right now,
23:06
Speaker 2: because I don't The only way that you can have
23:10
Speaker 2: consensus on what you are going to see on those
23:12
Speaker 2: numbers is if you have consensus on how long the
23:16
Speaker 2: war lasts and how you know how widespread the damage
23:19
Speaker 2: from it is. And I don't think we have any
23:21
Speaker 2: sense of that. You know, It's again, there are paths where,
23:26
Speaker 2: depending on what you're willing to accept and not it
23:29
Speaker 2: can be done in a week. I think they're you know,
23:31
Speaker 2: those are unlikely at this point. There are paths where
23:34
Speaker 2: we can still be in this situation at the end
23:36
Speaker 2: of the year, and I think those are unlikely as well.
23:39
Speaker 2: But like, that's a wide range when you're talking about it.
23:42
Speaker 3: So, what are the questions that Jay Powell is going
23:44
Speaker 3: to get asked other than his end of his term
23:47
Speaker 3: and sticking on like actual questions about monetary policy during
23:51
Speaker 3: war in Iran? Like what are the interesting ones to
23:54
Speaker 3: come about?
23:54
Speaker 4: Like, because can we start even before that? Okay, the first.
23:58
Speaker 2: Questions that going he's going to be asked are, Hey,
24:02
Speaker 2: when you look at the most recent jobs report, unemployment
24:06
Speaker 2: went up and you had negative job growth and negative revisions.
24:11
Speaker 2: Do you have concerns about the labor market that have
24:13
Speaker 2: now been rekindled that would cause you to continue the
24:16
Speaker 2: cutting cycle that you were going through in the fall
24:19
Speaker 2: of last year. And my guess then is his answer
24:22
Speaker 2: will dovetail into we're currently seeing, you know, a potential
24:26
Speaker 2: supply shock in a number of different areas, and we
24:30
Speaker 2: need more data to be able to assess what the
24:33
Speaker 2: actual impacts are on the US economy before reacting, which
24:36
Speaker 2: is which is why they're not going to do anything.
24:38
Speaker 2: This baure is he's going to be He will then
24:42
Speaker 2: be asked how much of.
24:46
Speaker 3: The next question is gonna be the hypothetical how much
24:48
Speaker 3: higher does the unemployment rate need to go before you say,
24:53
Speaker 3: you know, regardless of the situation around, we need to
24:55
Speaker 3: cut interest rates.
24:56
Speaker 2: It's going to be there. Or hey, can you give
25:00
Speaker 2: us a comparison to twenty twenty two with the disruptions
25:04
Speaker 2: that you saw in oil and other commodities at that point,
25:08
Speaker 2: and how that influenced your thinking, tell us how that
25:10
Speaker 2: meshes with what we're seeing today, and so ultimately, here
25:15
Speaker 2: here's why Powell can do nothing right now, here's why
25:19
Speaker 2: doing nothing is the best option in the March meeting.
25:23
Speaker 2: Unlike twenty twenty two, where inflation was already running at
25:25
Speaker 2: seven percent and route to nine, inflation's somewhere in the
25:29
Speaker 2: two in the high twos to low threes right now.
25:32
Speaker 2: I don't know exactly where it is, but it's in
25:34
Speaker 2: there because all the metrics are a little bit different.
25:37
Speaker 2: But it's in the high twos to low threes. And
25:39
Speaker 2: you can have a perfectly cromulent economy with inflation in
25:43
Speaker 2: that range, so he doesn't need to be hiking right now.
25:48
Speaker 2: If in January they said, hey, we think we've done
25:51
Speaker 2: enough and we're pretty close to neutral, we don't need
25:53
Speaker 2: to be cutting right now, then he's like, not enough
25:56
Speaker 2: is changed, Like one jobs report since then is not
25:58
Speaker 2: enough to change your mind. It's one jobs report and
26:01
Speaker 2: the other thing Powell can point to unemployment claims, both
26:05
Speaker 2: initial and continuing have remained in really good shape even
26:09
Speaker 2: despite that job's report. The job openings data that we
26:13
Speaker 2: got last week showed improvement from the prior month, and
26:17
Speaker 2: so the job's picture at best right now can be
26:20
Speaker 2: described as, you know, confusing and kind of pointing in
26:23
Speaker 2: different directions with the last month of data. Not hey,
26:26
Speaker 2: it's it's falling apart. I think that's the case that
26:30
Speaker 2: he'll make on that side. So ultimately, I think it's
26:35
Speaker 2: almost a certainty the market's pricing it into that the
26:37
Speaker 2: Fed's gonna punt and just say we don't have enough data. Now.
26:40
Speaker 2: The world is different from what it was, you know,
26:42
Speaker 2: prior to this conflict beginning, and we're gonna sit and
26:46
Speaker 2: wait to see how thing's unfold and get another six
26:48
Speaker 2: weeks of data before we decide to make any moves.
26:54
Speaker 2: It does take us then to the April meeting, which
26:56
Speaker 2: is where I think things are going to be very
26:58
Speaker 2: interesting because the impacts of this are going to start
27:03
Speaker 2: to be more broadly seen and felt. Not as much domestically,
27:07
Speaker 2: but the international picture is going to be dramatically different
27:10
Speaker 2: in terms of Hey, even if countries like South Korean,
27:15
Speaker 2: I'll give you an example South Korea. One of the
27:17
Speaker 2: things that they are doing, because they do rely on
27:20
Speaker 2: L and G as a major fuel stock for electricity
27:24
Speaker 2: production there, they have now removed their caps on coal
27:30
Speaker 2: power production that were previously in place. They were only
27:33
Speaker 2: producing up to eighty percent of what their coal power
27:36
Speaker 2: plants could previously produce, and so they're saying, no, we're
27:39
Speaker 2: gonna spool that up as much as possible to try
27:41
Speaker 2: to offset this. If there's one thing that I know about,
27:45
Speaker 2: you know that extra marginal twenty percent production, it's the
27:49
Speaker 2: most expensive production because you have to go out and
27:51
Speaker 2: find new fuel to power those plants, new people to
27:53
Speaker 2: work in them, and cover those hours and everything. So
27:56
Speaker 2: it's not just oh well, the cost of it was
27:59
Speaker 2: and bit balling here, I have no idea what the
28:01
Speaker 2: cost of electricity is in Korea, but it'd be a
28:04
Speaker 2: fun guessing game. Let's say that it's normally twenty cents
28:08
Speaker 2: per kill a WAT hour, that marginal twenty percent might
28:12
Speaker 2: be thirty to forty cents per kill WAE hour like
28:15
Speaker 2: it is something where it's like it might be fifty
28:17
Speaker 2: to six, like one hundred percent higher, because that's what
28:20
Speaker 2: happens when you're dealing with excess capacity that you're trying
28:22
Speaker 2: to get into the system.
28:24
Speaker 4: Usually they can't tie any of this back to the
28:27
Speaker 4: FED because I.
28:28
Speaker 2: Tie it back to the FED, and that the companies
28:31
Speaker 2: that then rely on that power to make things that
28:33
Speaker 2: they send to the US computer chips, cars, all that
28:38
Speaker 2: other stuff, those prices have to go up in order
28:41
Speaker 2: to be able to pay for that power. If you
28:44
Speaker 2: are if you are Samsung making memory chips, you've already
28:50
Speaker 2: jacked rates through the roof. You're gonna have to go higher, right, Okay,
28:55
Speaker 2: other things Samsung. At some point the Korean government might say, guys,
29:00
Speaker 2: we need to start rationing power because even with firing
29:03
Speaker 2: up all this excess coal capacity, we're still three percent
29:07
Speaker 2: short of where we need to get.
29:08
Speaker 4: To, not that it wasn't already the case.
29:10
Speaker 3: I mean, so all of this points to the possibility
29:14
Speaker 3: of higher car prices, smartphone prices, all these things that
29:17
Speaker 3: we were already dealing with because of RAM costs and
29:20
Speaker 3: chip costs are you know, exacerbated because of energy issues.
29:23
Speaker 1: Sure.
29:24
Speaker 3: The other thing that it really cements for me us
29:27
Speaker 3: and China were already the only two games in town
29:29
Speaker 3: when it came to ai development and production. Obviously Taiwan
29:35
Speaker 3: has a pretty critical role in there too, but not
29:37
Speaker 3: in the development of the actual models and power electricity
29:43
Speaker 3: to power them. This makes it so that nobody else
29:46
Speaker 3: can ever catch up that China has done a pretty
29:48
Speaker 3: incredible job over the last two decades of investing in
29:53
Speaker 3: non oil energy sources. I think now one fifth of
29:56
Speaker 3: their grid is powered by renewables like nukes. They kind of,
30:01
Speaker 3: you know, they got to take credit for it being
30:03
Speaker 3: an environmental thing.
30:04
Speaker 4: It wasn't.
30:04
Speaker 3: It was an energy independence thing because they realized they
30:07
Speaker 3: didn't have any oil and they couldn't rely on countries
30:09
Speaker 3: like Iran forever.
30:11
Speaker 4: So they are in a very solid position.
30:13
Speaker 3: We talked about their oil reserves at what spr of
30:16
Speaker 3: a billion barrels?
30:17
Speaker 2: Like yeah, nine hundred million billions somewhere in that range.
30:20
Speaker 3: They are in excellent shape. In the US is again
30:23
Speaker 3: comparatively in very good energy independence space. And so when
30:28
Speaker 3: we look past all of this, which you can't do
30:33
Speaker 3: in the moment, but when I look past all of
30:35
Speaker 3: this for a year out, two years out, the lead
30:39
Speaker 3: that the US and China have in developing these things
30:42
Speaker 3: that have been the most important thing for the economies
30:44
Speaker 3: of each of them over the last three years, I
30:47
Speaker 3: don't see how anybody possibly catches up.
30:49
Speaker 2: Here's the other thing that you got to watch out
30:50
Speaker 2: for starting in the next week or two, Like, these
30:52
Speaker 2: are the things that you're gonna start seeing. And again
30:57
Speaker 2: this is according to like people that actually like really
31:00
Speaker 2: know this stuff. You're already starting to see signs of
31:04
Speaker 2: you know, pending jet fuel and bunker fuel shortages in
31:09
Speaker 2: Asia and Europe. Yeah, bunker fuel. If you're not familiar
31:12
Speaker 2: with the term, it's fuel used for you know, giant
31:15
Speaker 2: ships getting from point A to point B. Get ready
31:19
Speaker 2: for the return of supply chain issues. And it's like
31:23
Speaker 2: it get ready for the return of supply chain issues
31:25
Speaker 2: because getting stuff from point A to point B. Yes,
31:29
Speaker 2: the best case is just that it gets more expensive.
31:32
Speaker 2: The worst case is that it doesn't happen. It just
31:35
Speaker 2: doesn't happen, not all of it. Like it's not that
31:38
Speaker 2: you're gonna have like no fuel, but oh if there were,
31:41
Speaker 2: you know, previously x number of ships that were you know,
31:44
Speaker 2: traveling through you know, Singapore's port, Now it's x minus
31:48
Speaker 2: ten percent because that's all the fuel that they can produce.
31:51
Speaker 2: And so what does that do to shipping rates? It
31:53
Speaker 2: jacks them up because you will pay anything to get
31:55
Speaker 2: your stuff on a boat as opposed to just having
31:59
Speaker 2: it be stuck and left behind. So these are the
32:03
Speaker 2: things to watch in the coming weeks as well, and
32:06
Speaker 2: that stuff will start then to seep into the global
32:09
Speaker 2: economy as we get into April, May June, but it
32:13
Speaker 2: takes time. Just take a quick break. When we come back.
32:15
Speaker 2: We'll talk about private markets right after this.
32:20
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32:27
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32:48
Speaker 5: Well, I got a new segment coming on the show
32:49
Speaker 5: this week. It's called the Money Matters mail Bag. Here
32:53
Speaker 5: in the Financial Exchange, it's your chance to ask the
32:56
Speaker 5: questions about business and the economy that you want answers to.
33:00
Speaker 5: So all you have to do for the Money Matters
33:02
Speaker 5: mail Bag is give us a call at three three
33:05
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33:10
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33:14
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33:18
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33:22
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33:25
Speaker 2: Well Street Journal with an exclusive for them forgetting that
33:31
Speaker 2: you know, so you'd always like to see it. Top
33:34
Speaker 2: Apollo executive signs off on arrogance in private markets. So Apollo,
33:39
Speaker 2: if you're not familiar with them, they don't run the
33:41
Speaker 2: Space program. They are the guys who run a whole
33:44
Speaker 2: bunch of private market investments for either you know, institutions
33:51
Speaker 2: or very wealthy investors, or more recently they've kind of
33:54
Speaker 2: gone downstream as they have tried to democratie is private markets.
34:03
Speaker 2: Which again, anytime that I hear democratization being talked about
34:06
Speaker 2: in financial markets I read that as, Hey, we're trying
34:10
Speaker 2: to find a new generation of bag holders.
34:12
Speaker 4: Let's pawn this off on somebody else.
34:14
Speaker 2: When the music stops. Make sure someone else is holding this.
34:17
Speaker 2: So h John Zita is the co president of the
34:19
Speaker 2: firm's asset management arm that has you know that that
34:24
Speaker 2: private market exposure under it, and uh, he's just some
34:29
Speaker 2: quotes from him. Obviously, we're in the middle of a
34:32
Speaker 2: private credit party opportunity. If you do well, it's supposed
34:35
Speaker 2: to be pretty boring. If you do stupid things, and
34:37
Speaker 2: you do concentrated things, and you do things that you're
34:39
Speaker 2: not supposed to do in your vehicle, you will probably
34:41
Speaker 2: have a bad ending. Okay, that's that's fine. I get
34:47
Speaker 2: that there's nothing, you know, crazy going on there. And
34:51
Speaker 2: then at this one, uh and talking about, you know,
34:54
Speaker 2: the sell off that you're seeing in you know, large
34:57
Speaker 2: software companies and that you know small all software companies
35:00
Speaker 2: might be held by private equity and private debt firms.
35:03
Speaker 2: I'm not as rosy and I'm not as confident in
35:05
Speaker 2: what will happen with the technology. Anyone who tells you
35:07
Speaker 2: that the earnings last quarter were really good and so
35:10
Speaker 2: all is all good, anyone who says that clearly doesn't
35:13
Speaker 2: understand most of the businesses that were bought from twenty
35:15
Speaker 2: eighteen to twenty twenty two are lower quality than those companies,
35:19
Speaker 2: smaller than those companies, and we're trading in a much
35:21
Speaker 2: higher valuation than those companies, and so I am concerned
35:23
Speaker 2: about many of those take privates. And again, we don't
35:29
Speaker 2: often get insight into what people at private credit firms
35:36
Speaker 2: are thinking because they don't want to tell us usually.
35:40
Speaker 2: But then you get to the real kicker here, which
35:42
Speaker 2: is ask what kind of recovery rates he anticipates on
35:45
Speaker 2: a private credit loan to a generic or mid size
35:48
Speaker 2: Joe software companies. Zito said, Joe Software company, if he's
35:51
Speaker 2: in the wrong place, I think it's going to recover
35:53
Speaker 2: somewhere between twenty and forty cents. So basically, here's the
35:59
Speaker 2: read and this is what like I've kind of put
36:01
Speaker 2: together even anecdotally on this stuff. Back in twenty twenty
36:05
Speaker 2: through twenty twenty two, when interest rates.
36:07
Speaker 4: Were really low, there is money everywhere.
36:09
Speaker 2: Everyone was just trying to like throw money at the
36:12
Speaker 2: private credit in private equity space, and they made a
36:15
Speaker 2: lot of deals that were questionable based on what the
36:18
Speaker 2: economics looked like at that time. Now a lot of
36:21
Speaker 2: those deals are looking much worse and are expected to worse,
36:24
Speaker 2: and as the private credit that's needed to fund those
36:26
Speaker 2: deals is needing to be rolled up to higher interest
36:29
Speaker 2: rates and refinanced, and so the money is just saying Nope,
36:33
Speaker 2: we're not gonna do it, and that is why you
36:36
Speaker 2: are going to end up with a whole bunch of
36:38
Speaker 2: problems in this space.
36:39
Speaker 3: Here is my main problem slash summary of this issue.
36:43
Speaker 3: Everyone who leads a private credit fund of some sort
36:47
Speaker 3: or another is right now trying to convince you that
36:51
Speaker 3: everyone else in the industry is bad at what they do,
36:54
Speaker 3: and they themselves are good at what they do. Yes,
36:56
Speaker 3: this is how this reads to me. Yes, pay our
36:58
Speaker 3: fund is great, but look out for all the other
37:00
Speaker 3: problems that are in the space. But we're going to
37:02
Speaker 3: be okay. And we've heard the same thing echoed from
37:04
Speaker 3: the leaders of Blue Owl Capital from kkrright single one says, no.
37:10
Speaker 4: We're really good at this.
37:11
Speaker 3: We we have our books in order, but watch out
37:14
Speaker 3: because other people.
37:15
Speaker 4: In the industry don't. And there was some bad money
37:17
Speaker 4: loaned out.
37:18
Speaker 3: And it also it just puts you in the place
37:21
Speaker 3: as an investor or, as you know, somebody from the
37:25
Speaker 3: outside looking in, where you just have no idea and
37:28
Speaker 3: you can't possibly know until the tide goes out.
37:31
Speaker 2: You can't all be above average drivers.
37:34
Speaker 3: It's the yeah, yeah, it's the same situation with billions
37:37
Speaker 3: more at risk.
37:38
Speaker 2: It's like, so I don't know, like where the problems
37:43
Speaker 2: are because you don't, like with private credit, you're not
37:46
Speaker 2: going to know until it blows up. Yeah, it's the
37:48
Speaker 2: very nature of it is that it's unfortunately not marked
37:52
Speaker 2: to market and so you can't see where investors are concerned.
37:56
Speaker 3: But it is getting to the point now where even
37:58
Speaker 3: leaders in the space are telling you that it looks
38:00
Speaker 3: like it might blow up.
38:01
Speaker 2: And the other thing that I will say again one
38:03
Speaker 2: day doesn't mean anything. Stocks in general are up around
38:07
Speaker 2: one percent today boo oule at one point today was
38:10
Speaker 2: down too. That doesn't feel great when you can't rally
38:14
Speaker 2: even on you know, kind of a risk one day.
38:16
Speaker 2: So let's take a quick break. We got a whole
38:18
Speaker 2: lot more coming up in just a little bit.