Latest / The Financial Exchange Show / Rising Oil, Fragile Supply Chains, and Growing Economic Risk

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Rising Oil, Fragile Supply Chains, and Growing Economic Risk · The Financial Exchange Show

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Speaker 2: Good morning, Happy Monday, Welcome back to the Financial Exchange.
1:13
Speaker 3: Up.
1:13
Speaker 2: Everyone had a good weekend out there, and obviously our
1:16
Speaker 2: top story of the day is going to continue to
1:18
Speaker 2: be Iran oil prices straight out of horror Mooz talk,
1:23
Speaker 2: But we do kick off bank earnings this week. We
1:25
Speaker 2: heard from Goldman Sachs just this morning and their CEO,
1:29
Speaker 2: David Solomon on the rising volatility and broader market uncertainty.
1:34
Speaker 2: We will get reports from JP Morgan, Chase, Wells, Fargo,
1:38
Speaker 2: City Bank, Bank America, basically every major financial institution you
1:43
Speaker 2: can think of over the course of this week. If
1:46
Speaker 2: they are a large national bank, then they will tell
1:49
Speaker 2: you how they did this quarter. And all of this
1:52
Speaker 2: continue to operate amidst the uncertainty, obviously in the Middle East.
1:56
Speaker 2: It's Mike, Paul and Tucker with you on a Monday,
1:59
Speaker 2: and you know, interestingly, we kicked off the day. You know,
2:03
Speaker 2: when I logged in this morning first thing to take
2:05
Speaker 2: a look at pre market trading, we had the Dow
2:08
Speaker 2: off by more than a percentage point, the S and
2:10
Speaker 2: P down about two thirds of a percentage point. I
2:12
Speaker 2: think that was right around seven am when I was
2:15
Speaker 2: checking in at that point, we've now rallied out of
2:18
Speaker 2: that territory. Nasdak is currently up a quarter of a
2:20
Speaker 2: percent of the S and P is flat. Obviously, with
2:23
Speaker 2: the weekend news, we've got oil prices up, and so
2:27
Speaker 2: as we kick off the week here of the I'm
2:29
Speaker 2: not trying to keep this straight anymore, seventh week of
2:32
Speaker 2: strikes and war in Iran, we've got oil prices for
2:36
Speaker 2: May contracts on West Texas crude sitting at about one
2:40
Speaker 2: hundred and two bucks per barrel, and so big picture here,
2:44
Speaker 2: I'm just trying to define how we contextualize this moment
2:48
Speaker 2: in the in the war in Iran. It is just.
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Speaker 4: Continues to be constant struggle to figure out, Mike, where
2:58
Speaker 4: we stand here. And I believe we're set to set
3:01
Speaker 4: off the blockade it just moments ago in terms of
3:03
Speaker 4: the impact on the Strait of Oromus, and I was
3:06
Speaker 4: a little surprised that markets did sort of pump the
3:10
Speaker 4: brakes on the sell off that we saw earlier this morning,
3:13
Speaker 4: where I did feel as if this was going to
3:15
Speaker 4: be a pretty down day, given that you would think
3:17
Speaker 4: that this is a relative setback for the two weeks
3:21
Speaker 4: easquire that we had in place. There does seem to
3:24
Speaker 4: be several deal points that the US and I ran
3:27
Speaker 4: still seem rather far apart on.
3:30
Speaker 1: So a little surprised.
3:31
Speaker 4: What do you think is the reason behind some of
3:33
Speaker 4: the optimism or the turnaround that we've seen early in
3:37
Speaker 4: markets from what the pre market trading had looked like.
3:40
Speaker 2: Yeah, where I land on that pall is that I
3:41
Speaker 2: don't see US as any substantially worse off from a
3:47
Speaker 2: tension standpoint than we were a week ago. That's kind
3:51
Speaker 2: of where I land is. You know. A week ago
3:53
Speaker 2: we were talking about potential strikes on energy infrastructure throughout Iran,
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Speaker 2: at which point we all know they would taliate and
4:00
Speaker 2: strike infrastructure in surrounding countries, taking a whole bunch more
4:04
Speaker 2: stuff offline. We had these talks set up for over
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Speaker 2: the weekend. They failed. But on the other hand, while
4:10
Speaker 2: they failed, we are not currently looking at the screen
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Speaker 2: and seeing explosions occurring across Iran. We're not seeing you know,
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Speaker 2: any substantial right Like when we talk about the escalation here,
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Speaker 2: the escalation is that the United States Navy is not
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Speaker 2: going to allow ships that pass through Iranian ports out
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Speaker 2: of the strait. Is that substantially different than where we
4:32
Speaker 2: were a week ago. Not really, you know, traffic was
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Speaker 2: barely moving through the straight prior to this may be
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Speaker 2: an escalation intensions that you know, indicates the US and
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Speaker 2: Iran can't reach a deal, but it also has not
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Speaker 2: gotten to the point where we're lobbing bombs and missiles
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Speaker 2: and drones at each other and taking civilian infrastructure offline.
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Speaker 1: And so.
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Speaker 2: I will admit that I've been surprised this entire time
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Speaker 2: about how optimistic investors have been. You know, a resolution
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Speaker 2: will come to this event quickly and won't damage markets,
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Speaker 2: but I just see this as a continuation of that
5:07
Speaker 2: overall overall piece. And you know, also important to acknowledge
5:11
Speaker 2: that what markets are doing forty minutes into trading, which
5:15
Speaker 2: is where we are, signifies nothing about where they'll be
5:18
Speaker 2: at four pm today. So I think we should you know,
5:21
Speaker 2: pump the brakes on that too, because there are plenty
5:24
Speaker 2: of more hours in the day here to see where
5:26
Speaker 2: things go. But in practice here, over the course of
5:30
Speaker 2: the last few weeks, traffic has barely been flowing through
5:33
Speaker 2: the Strait of Hormus. Five six ships a day have
5:37
Speaker 2: been the indications. Maybe you know, certainly under ten with
5:42
Speaker 2: this most recent announcement. Yeah, that does choke off, you know,
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Speaker 2: one remaining supply of oil that the Iranians had been
5:50
Speaker 2: attempting to profit from. It's not just oil, it's other
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Speaker 2: commodities as well, so it does choke off that piece.
5:58
Speaker 2: But in terms of the global supply chain, I'm just
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Speaker 2: unclear about how the actions today change the status quo really,
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Speaker 2: because you know, seemingly traffic wasn't really flowing before and
6:10
Speaker 2: it's still not today, which once again brings us to
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Speaker 2: the overall piece to keep an eye on, which is
6:18
Speaker 2: what matters is not the words. It does not matter
6:22
Speaker 2: that they are announcing talks or announcing a cease fire.
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Speaker 2: Those all might be indications. But what is important to
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Speaker 2: the global economy and what will be important to markets
6:31
Speaker 2: continues to be traffic through the strait and whether or
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Speaker 2: not it is flowing. And I think in spite of
6:36
Speaker 2: the president's words, jeez, was the the the national address
6:42
Speaker 2: by the president two weeks ago now? Or was that
6:44
Speaker 2: last week?
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Speaker 4: That was last week?
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Speaker 2: Times flowing together here a little bit, but you know,
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Speaker 2: the President made the point that you know, we can
6:54
Speaker 2: declare victory here without reopening the Straight, and I think
6:57
Speaker 2: the actions on the ground speak to the fact that
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Speaker 2: I'm not sure he really believes that, And so you
7:03
Speaker 2: know what we're seeing now, the blockade, the not quite
7:09
Speaker 2: sensation of hostilities indicates to me that, yeah, there's some
7:12
Speaker 2: public statements that we can be made, but there are
7:15
Speaker 2: also realities on the ground, and the realities on the
7:17
Speaker 2: ground are dictating the military actions at this point.
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Speaker 4: I just wondered that, likeck you mentioned, there is still
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Speaker 4: some ships going through the Straight from moves and largely
7:26
Speaker 4: it seemed like there was about two million barrels per
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Speaker 4: day from Iran that was going in terms of oil
7:30
Speaker 4: and gas through the Strait and this potential blockade. While
7:34
Speaker 4: I understand that two million barrels per day is not
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Speaker 4: significant in the global oil and gas market scheme of things,
7:40
Speaker 4: but I just was thought the market would be more
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Speaker 4: concerned about perhaps Iran getting irritated with that maneuver and
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Speaker 4: taking other steps to perhaps cause more sort of economic
7:54
Speaker 4: pain through that area and the Persian Gulf as a
7:56
Speaker 4: retaliatory response. And again, granted we're ten minutes into this,
8:00
Speaker 4: so it could be a story that just is nothing
8:03
Speaker 4: by the end of the day here, but I did
8:05
Speaker 4: expect to see a little bit more pessimism, but it's
8:07
Speaker 4: been a surprise, like you said, the whole year to
8:10
Speaker 4: date really from what we've seen on the market, a
8:12
Speaker 4: market that's barely negative on the S and P five
8:14
Speaker 4: hundred four months into the year and a month plus
8:18
Speaker 4: into this conflict.
8:19
Speaker 2: Yeah, to be clear, the S and P five hundred
8:21
Speaker 2: for the year currently sitting down six tens of a percent. Yeah,
8:25
Speaker 2: after all this, right, I mean, we have private credit concerns,
8:29
Speaker 2: we have inflation concerns, we have supply chain disruption concerns,
8:33
Speaker 2: AI tech value labor market concerns, stagnant labor market, and
8:37
Speaker 2: a you know, pretty significant all out conflict in the
8:41
Speaker 2: Middle East, and equity investors are saying, yes, stocks appear
8:45
Speaker 2: to be worth you know, less than one percent less
8:49
Speaker 2: than they were on December thirty first, is the answer here,
8:52
Speaker 2: And so I think my point would be investors right
8:56
Speaker 2: now are not willing to sell their stocks unless they
8:59
Speaker 2: see the evidence of the disruption that is going to
9:02
Speaker 2: hurt those companies. And we've talked at length about how
9:05
Speaker 2: the US is more insulated from that than just about
9:08
Speaker 2: any other country in the world. And so the actions
9:12
Speaker 2: of investors may not be logical, but I'm not sure
9:15
Speaker 2: there is a very logical response to these events right now.
9:18
Speaker 2: It's a pretty binary choice. And even those you know
9:22
Speaker 2: analysts and CEOs out there that I've listened to that
9:26
Speaker 2: are talking about, you know, being good stewards of their
9:29
Speaker 2: clients' money, are all asking the same question, like, what
9:32
Speaker 2: advantage do we have here if we decide to pull
9:35
Speaker 2: back on stock risk or load up on cash or treasuries.
9:39
Speaker 2: When you have such a binary choice that is being
9:41
Speaker 2: made by a very select limited group of people, the
9:46
Speaker 2: lesson that investors are taking for the time being continues
9:49
Speaker 2: to be hold pat and hope that all things resolve
9:52
Speaker 2: themselves in a reasonable fashion. We got to take quick break.
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Speaker 2: When we come back, a few more thoughts just on
9:58
Speaker 2: chow point, supply chain disruptions and what these events could
10:01
Speaker 2: mean for the US economy. That's next on the Financial Exchange.
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11:07
Speaker 2: Well again, if you're just joining us here on the
11:09
Speaker 2: Financial Exchange, the US blockade of the Straight of Horror
11:12
Speaker 2: moves just began at ten am Eastern time. To quote
11:16
Speaker 2: any end all ships trying to enter or leave the
11:19
Speaker 2: Straight of Horror moves. That's what the President spoke of
11:22
Speaker 2: the US Central Command Center. Later add the caveat that
11:26
Speaker 2: we will not be forced, will not be impeding freedom
11:29
Speaker 2: of navigation for vessels transiting the Straight to and from
11:32
Speaker 2: non Iranian ports. So I believe that that's The real
11:36
Speaker 2: answer here is that the US is blockading anything that
11:39
Speaker 2: stops at Iranian ports. But frankly, there wasn't a whole
11:43
Speaker 2: lot moving through the strait that wasn't stopping like that
11:46
Speaker 2: was the whole limited ships that we're navigating the strait.
11:50
Speaker 2: We're only navigating because they kind of had the blessing
11:53
Speaker 2: of Iran, and we're stopping at those ports and probably
11:56
Speaker 2: paying some sort of bribe in crypto. And so the
12:00
Speaker 2: the presumption that I'm seeing by most parts is that
12:04
Speaker 2: traffic simply will not be flowing through the Strait of
12:06
Speaker 2: Horn Mooz so long as this blockade is occurring. In reaction,
12:10
Speaker 2: oil prices are moving up. Today. You've got the May
12:13
Speaker 2: contract for West Texas crude sitting at about one hundred
12:17
Speaker 2: and one dollars per barrel, up four and three quarters percent.
12:19
Speaker 2: And Paul, are you on CNBC right now? Yes, have
12:26
Speaker 2: you ever seen CNBC break out the West the May
12:29
Speaker 2: versus June contract for crude oil, because this is the
12:32
Speaker 2: first time I've ever seen it, which again is only
12:36
Speaker 2: interesting in the context of this is a site that
12:38
Speaker 2: we visit every single day, and they are getting nuanced
12:43
Speaker 2: enough to say, yeah, we need to be breaking out
12:46
Speaker 2: what it's going to cost for oil to be delivered
12:48
Speaker 2: on the May contract versus the June contract. Right now,
12:51
Speaker 2: there's about an eight dollars difference between the two, and
12:55
Speaker 2: you're seeing them move in tandem. But it is pretty
12:58
Speaker 2: fascinating to see that broke out for again, first time
13:01
Speaker 2: that I've ever seen really any site other than some
13:05
Speaker 2: serious commodities trading sites break that out. I think there's
13:11
Speaker 2: all sorts of pieces being written right now, and Wall
13:14
Speaker 2: Street Journal has, you know, a panel of economists to
13:18
Speaker 2: forecast the war's impact, which I can't think of a
13:21
Speaker 2: whole lot of stuff that would be more useless than
13:25
Speaker 2: a panel of economists telling me how the war's impact
13:28
Speaker 2: is going to play out because they don't have any
13:30
Speaker 2: better idea, Like all we.
13:32
Speaker 4: Could be lumped in that group honestly has any better
13:35
Speaker 4: idea than them or us. We're all in the same
13:38
Speaker 4: playing field besides the administration.
13:40
Speaker 2: Of course, economists cavy out the living hell out of
13:43
Speaker 2: everything they say to begin with, and to ask them
13:46
Speaker 2: to play out how the war's impact might disrupt the
13:50
Speaker 2: global markets or economy is just not terribly useful. And
13:55
Speaker 2: I say this with all due respect to economists who
13:59
Speaker 2: are you know, better, are trained and more well educated
14:01
Speaker 2: and smarter by all accounts than I am. You're asking
14:05
Speaker 2: them to do something that they are not capable of doing. Instead,
14:09
Speaker 2: what they're going to tell you as well, should this,
14:11
Speaker 2: you know, straight, remain blocked for eight weeks, then these
14:13
Speaker 2: are the potential disruptions that you might see. And that's
14:16
Speaker 2: how that plays out into inflation. It's not a terribly
14:20
Speaker 2: useful exercise in my mind. I did find the first
14:24
Speaker 2: paragraph of their article to be interesting, though, in something
14:26
Speaker 2: that I kind of disagree with you. They say recent
14:29
Speaker 2: months have been marked by slower growth, stubborn inflation, and
14:32
Speaker 2: a weaker job market, and they kind of identify those
14:35
Speaker 2: as the main key threats. And I think those are
14:39
Speaker 2: things that we could result in. But when I think
14:42
Speaker 2: about this economy today and the triple threat that exists
14:45
Speaker 2: for US equity markets, that's too general to me. It's
14:51
Speaker 2: three things for me that I am looking at right now.
14:53
Speaker 2: It's private credit. What's happening there? Is it really as
14:59
Speaker 2: bad as some of the who are trying to pull
15:01
Speaker 2: their money out of those funds seem to think it is.
15:05
Speaker 2: We've got artificial intelligence as just a general threat to
15:09
Speaker 2: the market. It also happens to be the biggest potential
15:13
Speaker 2: upsurge to markets or catalyst to markets in the future.
15:17
Speaker 2: But you know, we've talked at length about the threat
15:19
Speaker 2: to the job market. There, threat to energy infrastructure here
15:22
Speaker 2: in the US and the ability to build that out,
15:25
Speaker 2: the existence of you know, chips and other sort of equipment.
15:30
Speaker 2: And then finally, just how expensive the companies are that
15:33
Speaker 2: are benefiting from AI from a historical valuation perspective, and
15:37
Speaker 2: you have some degree of threat there, you know, not
15:39
Speaker 2: even starting in on if you operate a software company
15:42
Speaker 2: who could be decimated by the new technology. And then
15:45
Speaker 2: finally would be supply chains, and the supply chains is
15:49
Speaker 2: entirely because of this event in Iran. But those are
15:53
Speaker 2: to me the real triple threats, and they could result
15:57
Speaker 2: in shortages, They could result in aimingly stubborn inflation. It
16:01
Speaker 2: could result in problems with the labor market. But I
16:05
Speaker 2: think just talking about those generally without identifying, like what
16:07
Speaker 2: are the potential culprits here, isn't a terribly useful exercise.
16:12
Speaker 2: The supply chain piece, to me, continues to be the
16:16
Speaker 2: most underappreciated piece by US investors because we are just
16:21
Speaker 2: not living it today in the way that other countries are.
16:25
Speaker 1: No question about it.
16:26
Speaker 4: I mean, what I learned most from the pandemic is
16:30
Speaker 4: how truly it is a global supply chain. And we've
16:32
Speaker 4: seen on numerous occasions, whether it's rare earth, rare earth minerals,
16:37
Speaker 4: and other examples out there, that if you get shut
16:40
Speaker 4: off from one access point or pipeline to a certain
16:44
Speaker 4: critical good, for whether it's F thirty five jet flightors
16:48
Speaker 4: or for components of cars, it really can have a
16:52
Speaker 4: lasting effect on all sorts of pricing across the US economy.
16:56
Speaker 4: And that's the risk that we run here. We've talked
16:58
Speaker 4: about the impact of fertile we've talked about the impact
17:01
Speaker 4: of helium on potentially semiconductor manufacturing. It just continues to
17:06
Speaker 4: asound me how intertwined everything is, and I feel as
17:09
Speaker 4: if with some of the market action that we were
17:11
Speaker 4: talking about early in the show, that that hasn't been
17:14
Speaker 4: fully realized. Yes, the US is a net exporter of
17:17
Speaker 4: oil and gas, but some of these other knock on
17:21
Speaker 4: effects from the closure of the strait has me concerned.
17:25
Speaker 4: Potentially the longer this goes on semiconductor manufacturing, if there's
17:29
Speaker 4: any disruption there, then we are in really a difficult spot. Again,
17:33
Speaker 4: this is all early on to make a huge jump
17:36
Speaker 4: that this could be the crux of a you know,
17:39
Speaker 4: collapse or anything like that, but it is really something
17:42
Speaker 4: that needs to be taken into account.
17:44
Speaker 2: The severity of I guess, the ability for countries to
17:50
Speaker 2: choke supply chains and really cause global economic problems, I
17:56
Speaker 2: think was just one of those things that was underappreciated
17:58
Speaker 2: by most people, myself included, up until the last couple
18:01
Speaker 2: of years. And I'm not just talking about Iran and
18:03
Speaker 2: the straight up horror moves, which is very clearly you
18:06
Speaker 2: know what we are living today. But I think back
18:09
Speaker 2: to the last couple of years and the you know,
18:13
Speaker 2: defining moments of what has caused US policy to pivot.
18:17
Speaker 2: It's been these supply chain disruptions and the choke points
18:21
Speaker 2: and the threat of what might be to come. So,
18:23
Speaker 2: for example, when we talk about the US China trade battle,
18:30
Speaker 2: what really pivoted us away from that was the threat that, oh,
18:33
Speaker 2: the United States might not be able to get any
18:35
Speaker 2: rare earths because there's this massive choke point in China
18:39
Speaker 2: where they pretty much produce everything, and unless We're willing
18:42
Speaker 2: to invest, you know, billions of dollars for the better
18:46
Speaker 2: part of a decade. We aren't going to be able
18:47
Speaker 2: to get battery technology. We're not going to be able
18:49
Speaker 2: to get magnets, and those things are a massive choke point.
18:53
Speaker 2: And I think, more than anything else that has been
18:55
Speaker 2: the lesson over the last few years is when we
18:58
Speaker 2: go and stage these events, country's responses are now going
19:03
Speaker 2: to be, Hey, what is the critical item that I
19:06
Speaker 2: produce or can threaten that will take down the rest
19:09
Speaker 2: of the global economy. Because that's what Iron's doing this time,
19:12
Speaker 2: That's what China did last time, and there will be
19:15
Speaker 2: another one next depending on the events that take place.
19:19
Speaker 2: So that to me is the bigger lesson than anything else.
19:22
Speaker 2: In any case, we got to take quick break. We're
19:23
Speaker 2: going to have a full market update next with Wall
19:26
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19:58
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20:01
Speaker 5: After peace talks with Iran came up short over the weekend.
20:04
Speaker 5: Marcus today are mixed after President Trump ordered a blockade
20:08
Speaker 5: of the straight up hooor mouz that took effect at
20:10
Speaker 5: ten am, sending oil prices higher. Wall Street also sifting
20:14
Speaker 5: through the first batch of bank earnings from Goldman Sachs
20:17
Speaker 5: to kickoff first quarter earning season. Right now, the Dow
20:22
Speaker 5: is up four tenths or excuse me, down four tenths
20:25
Speaker 5: of a percent to one hundred and eighty three points.
20:27
Speaker 5: SMP five hundred edging three points higher, NASDAC up two
20:31
Speaker 5: tenths of a percent or fifty four points higher. RUSS
20:34
Speaker 5: two thousand is up two tenths of percent. Ten Your
20:37
Speaker 5: Treasure reeled flat at four point three one nine percent,
20:42
Speaker 5: in oil jumping five percent higher, trading at one hundred
20:45
Speaker 5: and one dollars a barrel. Goldman Sachs share is dropping
20:48
Speaker 5: three percent after the bank reported a nineteen percent increase
20:53
Speaker 5: in first quarter profit driven by record banking in market revenue.
20:56
Speaker 5: Goldman's revenue climb fourteen percent to north of seventeen billion
21:01
Speaker 5: dollars compared with about fifteen billion dollars last year. More
21:05
Speaker 5: bank earnings will follow tomorrow morning, with JP Morgan Chase Wells,
21:10
Speaker 5: Fargo City Group, and Blackrock. Meanwhile, after sliding more than
21:14
Speaker 5: twelve percent last week over fears that it will lose
21:16
Speaker 5: out to newer AI competitors Pall Andeer, stock rebounding over
21:20
Speaker 5: three percent today. Elsewhere, Williams Snoma upgraded by Goldman Sachs,
21:25
Speaker 5: setting shares up by two percent. Furthermore, Goldman Sacks downgraded
21:29
Speaker 5: best Buy, citing risk two sales post Q one as
21:33
Speaker 5: higher memory costs work their way into the price of computers.
21:38
Speaker 5: Best Buy stock is down three percent on that downgrade.
21:42
Speaker 5: I'm Tucker Silva and that is Wall Street Watch.
21:44
Speaker 2: As Tucker mentioned Tierry, we are officially kicking off earning season.
21:48
Speaker 2: We had Goldman report this morning, a bunch of banks
21:50
Speaker 2: later this week. Next week, we have some interesting ones
21:53
Speaker 2: too that are particularly relevant right now. So ge Aerospace
21:56
Speaker 2: will be reporting on Tuesday of next week, that's the
21:59
Speaker 2: twenty first April, as will Raytheon Corporation RTX Corporation rather
22:04
Speaker 2: these days, So that's obviously of interest given the events
22:08
Speaker 2: in the Middle East right now, not so much their
22:10
Speaker 2: previous earnings but their statements about you know, forward looking stuff.
22:14
Speaker 2: Tesla will be reporting Wednesday, the twenty second after the bell.
22:18
Speaker 2: That's your first trillion dollar company to go of the
22:20
Speaker 2: earning season. And you know Elon Musk has spoken about
22:26
Speaker 2: the space x ipo and how that might someday be
22:31
Speaker 2: combined with Tesla in some meaningful way. So that's you know,
22:34
Speaker 2: that's obviously of interest for investors. Intel and others reporting
22:38
Speaker 2: next week as well. So big bank earnings week. This week,
22:41
Speaker 2: we do get some other non bank companies reporting. I
22:43
Speaker 2: think is it Netflix that goes later this week if
22:46
Speaker 2: I'm not mistaken, So all of those are of interest,
22:49
Speaker 2: but really as things kick into high gear, it's those
22:52
Speaker 2: trillion plus.
22:53
Speaker 5: Dollar Contflix Thursday after the bell.
22:55
Speaker 2: Thursday after the bell. Yeah, so some some big heavy
22:57
Speaker 2: hitters that will be reporting throughout the course of the
23:00
Speaker 2: next few weeks and will certainly test markets in a
23:04
Speaker 2: new and different way, you know the Goldman News Here,
23:07
Speaker 2: I was trying to figure out, like what exactly could
23:11
Speaker 2: be driving the stock down three and a quarter percent
23:13
Speaker 2: in early trading so far. The biggest thing that I
23:16
Speaker 2: could point to, based on a comment from a Wells
23:19
Speaker 2: Fargo analyst Mike Mayo, was about loan loss provisions. So
23:23
Speaker 2: banks bank earnings are different from any other sector, any
23:27
Speaker 2: other company out there. But one of the things they're
23:29
Speaker 2: required to do is basically guess at all times how
23:33
Speaker 2: many of their loans are going to go bad, and
23:35
Speaker 2: then take provisions for credit losses on their current earnings
23:40
Speaker 2: to account for those future loans maybe going bad. Which
23:43
Speaker 2: if it sounds like weird accounting stuff, you're right, it
23:46
Speaker 2: is weird accounting stuff, and it's tough to explain. But
23:49
Speaker 2: the point that the Wells Fargo analysts made is, look,
23:53
Speaker 2: the bank just made three hundred and fifteen million dollars
23:57
Speaker 2: in loan loss provisions. It's an increase of ten percent
24:00
Speaker 2: from a year earlier, and it's the bank's largest increase
24:03
Speaker 2: in loan loss provisions since twenty twenty. And there's this
24:07
Speaker 2: weird thing going on in twenty twenty that you might recall,
24:09
Speaker 2: where the entire economy shut down for you know, better
24:13
Speaker 2: part of a year. So that seems to be the
24:15
Speaker 2: insinuation there. I'm sure that I did not get to
24:19
Speaker 2: listen to the earnings call, but I think the single
24:21
Speaker 2: most interesting thing that any of these CEOs are going
24:24
Speaker 2: to talk about is private credit. Their opinions on private credit,
24:30
Speaker 2: what they're hearing from their clients on private credit and
24:33
Speaker 2: you know what exposure, if any, they have to the
24:36
Speaker 2: private credit space. I think all of them are going
24:38
Speaker 2: to face questions about that and far more. You know,
24:41
Speaker 2: it's not going to be impactful in the most recent quarter,
24:44
Speaker 2: but it's probably far more interesting than trading revenue, wealth
24:47
Speaker 2: management revenue, all those other things that you can pretty
24:49
Speaker 2: easily forecast anything else. You're taking a look at, Paul
24:51
Speaker 2: when it comes to bank earnings this quarter, because as
24:54
Speaker 2: we've talked about, you have to be pretty nuanced to
24:57
Speaker 2: get into the weeds of bank earnings.
24:58
Speaker 4: Yeah, the ultimately the main focus has got to be
25:01
Speaker 4: on anything in the private credit space and any impact
25:04
Speaker 4: ripple effects on some of the major finance institutions. That's
25:07
Speaker 4: what we're really going to be looking at, because again,
25:10
Speaker 4: they weren't directly lending to some of these companies that
25:13
Speaker 4: we've talked about before that got into hot water, whether
25:16
Speaker 4: it be Tricolor or some of these other ones out there,
25:19
Speaker 4: but they were lending to companies that were lending to
25:21
Speaker 4: those companies, kind of acting as an intermediary. So any
25:25
Speaker 4: comment that they sort of diagram or diagnosed there on
25:29
Speaker 4: the private credit space is important, even In Solomon's earnings
25:32
Speaker 4: release this morning, he did have a quote saying that
25:35
Speaker 4: the geopolitical land shape remains very complex, so discipline risk
25:39
Speaker 4: management must remain core to how we operate. So that
25:42
Speaker 4: last sentence there, I take out discipline risk management with
25:45
Speaker 4: the loss provision increase in that sentiment, it seems like
25:49
Speaker 4: he's perhaps just flagging that as something that they're trying
25:52
Speaker 4: to be disciplined on their losses and their debt exposure
25:55
Speaker 4: out there given all the concerns in the private credit
25:58
Speaker 4: space at the moment.
25:59
Speaker 2: Yeah, I think that will remain the focus. I guess
26:02
Speaker 2: the only other piece that's interesting to me for some
26:04
Speaker 2: of these banks, JP Morgan and Goldman Sachs especially would
26:08
Speaker 2: be does what we're seeing right now in the Middle
26:11
Speaker 2: East and the market turmoil related to it delay any
26:15
Speaker 2: big events like IPOs this year? Right, so you know,
26:18
Speaker 2: in terms of you know, big names that are on
26:20
Speaker 2: the list for you know, potentially going public this year
26:24
Speaker 2: beginning of next year, it includes list companies like SpaceX,
26:28
Speaker 2: which would probably be the largest IPO in history. It
26:31
Speaker 2: includes companies like open Ai, the maker of chat gpt
26:37
Speaker 2: Anthropping probably took the creator of Claude so all of
26:41
Speaker 2: these have been tossed out as potential ideas, and these
26:44
Speaker 2: companies a make a boatload of money on those transactions.
26:48
Speaker 2: But I think more importantly, I look at those as
26:52
Speaker 2: potential upside catalysts to this market continuing to rally. And
26:57
Speaker 2: if we get news that, oh they might not happen,
26:59
Speaker 2: we might hear from these banks about it first. So
27:02
Speaker 2: that's another piece worth paying attention to. Paul. One of
27:06
Speaker 2: everyone's favorite parts of the pandemic is coming on back
27:10
Speaker 2: searcharges popping up all over the place, first time really
27:16
Speaker 2: since peak COVID when these things were becoming popular. But
27:18
Speaker 2: we've got all sorts of new gasolan search charges. Airlines
27:22
Speaker 2: are doing it. I don't think I've seen anything at restaurants,
27:26
Speaker 2: But what are we seeing when it comes to fun
27:29
Speaker 2: little search charges everywhere we shop these days?
27:31
Speaker 4: Yeah, it seems like the fuel search charges are back.
27:34
Speaker 4: I know that I just have a local trash pickup
27:38
Speaker 4: service and that they'll typically throw on a five dollars
27:40
Speaker 4: surcharge to the monthly bill. When gas prices took up
27:44
Speaker 4: those smaller businesses like a gas pickup that I don't
27:47
Speaker 4: have waste management or something that's a huge kind of
27:50
Speaker 4: conglomerate of waste pickup. Those smaller businesses tend to get
27:54
Speaker 4: a little bit more of a pass. I can psychologically say, yeah,
27:56
Speaker 4: I understand why they're charging me five bucks more a
27:59
Speaker 4: month because gases at four dollars a gallon. But you're
28:02
Speaker 4: also seeing it like you mentioned with the airlines on
28:05
Speaker 4: the baggage costs, and that's what tends to irritate people
28:08
Speaker 4: is you think you've paid for your flight and then
28:09
Speaker 4: all of a sudden, it's fifty five dollars a bag
28:12
Speaker 4: to check your bags. And really, what this is hitting
28:16
Speaker 4: on is this phenomenon that we saw really around the pandemic,
28:20
Speaker 4: and the biggest purveyors of this have been over the years,
28:22
Speaker 4: short term lodging companies and live event ticketing. I think
28:26
Speaker 4: we've all had the experience mic where you go to
28:28
Speaker 4: buy concert tickets and you're very locked in at it
28:31
Speaker 4: being one hundred and fifty dollars a ticket or whatever
28:33
Speaker 4: the number is, but then all of a sudden, you
28:34
Speaker 4: get to that checkout point and it's all the way
28:37
Speaker 4: up to two hundred twenty five dollars a ticket. And
28:39
Speaker 4: this phenomenon is this lock in effect. I've already committed
28:42
Speaker 4: to buy these tickets, but all of a sudden they
28:44
Speaker 4: throw this up charge on me because psychologically, in my mind,
28:48
Speaker 4: I'm locked into making this purchase. They hit me with
28:50
Speaker 4: another fee at the end, and I'm less likely to
28:53
Speaker 4: back out at that point in time. Now. To be clear,
28:55
Speaker 4: in twenty twenty five, the FTC banned the use of
28:58
Speaker 4: that on short term log and on live event ticketing.
29:01
Speaker 4: But this, what we're talking about now is more systemic
29:04
Speaker 4: in airline fares or you know, restaurants and things like that.
29:08
Speaker 4: It is something that really irritates people quite a bit.
29:13
Speaker 4: The bigger the company, I think, the more frustrated people get.
29:16
Speaker 4: I don't know how much this plays into it, but
29:18
Speaker 4: we did see a really low consumer sentiment reading back
29:21
Speaker 4: from the University of Michigan on Friday. It just is
29:24
Speaker 4: something that really grinds people's gears and fully get it.
29:28
Speaker 4: But I don't think I've seen it as prevalent as
29:30
Speaker 4: it was before. But I don't know where people are
29:35
Speaker 4: seeing it, but I've just seen it airlines. I've seen it,
29:38
Speaker 4: but not as big as before.
29:40
Speaker 2: I would say one area that I actually am totally
29:42
Speaker 2: fine with it and actually like it there's a restaurant
29:44
Speaker 2: that I go to, it's like a lunch place in
29:47
Speaker 2: an office that I attend that I go to pretty regularly,
29:49
Speaker 2: and all they do is they just say, hey, if
29:51
Speaker 2: you pay cash, we're giving you a three percent discount.
29:53
Speaker 1: Yep.
29:54
Speaker 2: And you know, like, obviously what they're doing there is
29:58
Speaker 2: avoiding tax. I'm kidding what they're doing there.
30:01
Speaker 4: I did things the credit card.
30:04
Speaker 2: The credit card these are three percent, and so these
30:06
Speaker 2: tiny businesses that have zero leverage with VISA, I just say,
30:09
Speaker 2: you know what, we're not going to charge you extra.
30:12
Speaker 2: We're not going to charge you the three percent. I
30:14
Speaker 2: think because the credit card companies don't allow it. We're
30:16
Speaker 2: just going to say, yeah, if you pay cash, you
30:17
Speaker 2: get three percent discount. And I almost never remember to
30:21
Speaker 2: carry any cash with me, but I can at least
30:23
Speaker 2: appreciate it from the small business perspective of, yeah, this
30:26
Speaker 2: is actually really serious cost and for low margin businesses
30:30
Speaker 2: like restaurants and other type of shops, it can really
30:33
Speaker 2: eat into things. So give it for them.
30:35
Speaker 4: You know what the worst lock in effect is. I've
30:37
Speaker 4: used one a hundred junk before, and what they do
30:39
Speaker 4: is they'll give you a free estimate so you make
30:41
Speaker 4: they make sure you take on all your junk to
30:43
Speaker 4: the corner of your driver or wherever you're going to
30:44
Speaker 4: put it, and then they give you the quote.
30:47
Speaker 2: And this happened to me before.
30:48
Speaker 4: I had a mattress that I wanted to get rid of,
30:50
Speaker 4: and they said, well, that's going to be an extra
30:51
Speaker 4: fee to take it to the dump and sext to
30:53
Speaker 4: seventy bucks. So I called them on their bluff. I said,
30:55
Speaker 4: all right, see you guys, thanks for coming out. And
30:57
Speaker 4: then of course the fee matically magically gets way by
31:00
Speaker 4: some supervisor, but that company really really sticks. You know,
31:05
Speaker 4: you gotta stand top, Mike, you gotta stand down.
31:08
Speaker 2: Let's take a quick break. When we come back, we're
31:10
Speaker 2: talking property tax hikes in Massachusetts. That's next on The
31:13
Speaker 2: Financial Exchange.
31:15
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31:43
Speaker 2: Networks, tiny little town called South Hadley and Western Massachusetts,
31:59
Speaker 2: and they're featured Wall Street Journal today, so I thought
32:01
Speaker 2: might be worth talking about. So South Hadley has about
32:05
Speaker 2: eighteen thousand residents, and in Massachusetts there's a there's a
32:10
Speaker 2: rule where if you raise your property taxes by more
32:14
Speaker 2: than two and a half percent, you have to get
32:16
Speaker 2: an override from the town's voters. And that's what they
32:19
Speaker 2: are doing there. But they're asking for a little bit
32:22
Speaker 2: more than two and a half percent here, Paul, what's
32:26
Speaker 2: the story.
32:27
Speaker 4: They are looking for a fifty percent property tax increase
32:31
Speaker 4: over the period to be phased in for five years.
32:34
Speaker 4: So for people that are in South Hadley, where you've
32:37
Speaker 4: got a meeting home value of about four hundred and
32:39
Speaker 4: seventeen thousand, these are substantial increases to a population that
32:44
Speaker 4: doesn't want these almost you know, fifty percent sixty percent
32:48
Speaker 4: increases on their property taxes for the average home that
32:51
Speaker 4: was four hundred seventeen thousand. They have property taxes right
32:55
Speaker 4: now of about fifty six hundred bucks. With this proposal,
32:58
Speaker 4: they would jump up to eighty five hundred bucks over
33:01
Speaker 4: the course of that five year period, and so the
33:04
Speaker 4: concerns that you have is on one end, for residents,
33:07
Speaker 4: you don't want to see those increased costs. But also
33:09
Speaker 4: there are some pretty big risks at hand here in
33:12
Speaker 4: terms of cuts for people who take participation in after
33:16
Speaker 4: school activities like sports and other really essential town services.
33:20
Speaker 4: And so it's this really big debate that you have
33:23
Speaker 4: where in this piece they outline, of course, older residents
33:26
Speaker 4: who perhaps don't have kids that are benefiting from the
33:29
Speaker 4: school system are adverse to it because they're probably living
33:32
Speaker 4: on some sort of fixed income, whether it be social
33:34
Speaker 4: Security or pension or others. They don't want that absorb,
33:37
Speaker 4: you know, crazy costs increase. But on the other hand,
33:40
Speaker 4: you've got families that really want to lean on this
33:43
Speaker 4: increase in property taxes to fund the things that are
33:45
Speaker 4: so critical for the kids. And that's every town. They're
33:47
Speaker 4: no different than that. But it points to a bigger
33:50
Speaker 4: sort of canary in the coal mine issue potentially over
33:53
Speaker 4: the United States that many towns are going to face
33:55
Speaker 4: these similar problems where you are less in terms of
33:59
Speaker 4: state A for these towns. The federal funding for the
34:03
Speaker 4: pandemic posts that period has really come down quite substantially
34:06
Speaker 4: so you're in this difficult spot where the only way
34:09
Speaker 4: that you can get this funding is to increase property taxes,
34:13
Speaker 4: but it puts residents in a bit of a bond.
34:14
Speaker 2: Mic. Yeah, what's amazing here is that this is not,
34:17
Speaker 2: like you said, it's not terribly unique, and there's nothing
34:19
Speaker 2: special going on in this town. It's not that they
34:21
Speaker 2: are building some new fifty million dollars school. It's not
34:25
Speaker 2: that the you know, it's that their health insurance costs
34:28
Speaker 2: are up forty two percent for state for town employees.
34:31
Speaker 2: It's that, you know, all of the funding that was
34:33
Speaker 2: previously provided by the state has started to dry up.
34:37
Speaker 2: And that's the part about this that I think is
34:40
Speaker 2: a fair point. It could very well be a canary
34:42
Speaker 2: in the coal mine. Not that every town is going
34:44
Speaker 2: to approve overrides like this, but I think more and
34:49
Speaker 2: more town budgets are going to be faced with the
34:51
Speaker 2: necessity of raising taxes, and how their residents vote will,
34:57
Speaker 2: you know, largely drive the quality of education, the number
35:02
Speaker 2: of people on staff and what benefits they receive, and
35:04
Speaker 2: their ability to attract real talents like teachers, police officers, firefighters, etc.
35:09
Speaker 4: I also wonder with Boston, just on the city front.
35:12
Speaker 4: They're staring at a commercial real estate market for the
35:15
Speaker 4: office space that is in a real freefall, and so
35:18
Speaker 4: how does that impact cities that are falling under similar
35:21
Speaker 4: conditions where they've just seen the property values of their
35:23
Speaker 4: office space plummet too. You're just looking at deficits and
35:26
Speaker 4: shortfalls all across the board, mic whether you're talking about
35:28
Speaker 4: cities or a town in western Massachusetts.
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36:41
Speaker 2: It actually making a connection here, Paul, with that South
36:44
Speaker 2: Hapley story for a moment, back to one of the
36:47
Speaker 2: topics we talk about all the time. These AI companies
36:51
Speaker 2: are having a really tough time finding places to build
36:54
Speaker 2: AI data centers. They need adequate water supply, electricity supply,
36:59
Speaker 2: and and you know they're sweeping the nation trying to
37:02
Speaker 2: find places to build these things out and find communities
37:05
Speaker 2: that are willing to do so. If this article is right,
37:09
Speaker 2: that this is a canary in the coal mine, and
37:11
Speaker 2: many other towns and cities are going to face these
37:14
Speaker 2: same sort of shortfalls because of rising costs in all
37:17
Speaker 2: sorts of areas and an inability to get funds from
37:20
Speaker 2: the state or federal government to cover those costs. It
37:24
Speaker 2: does seem to me that you have the potential to,
37:27
Speaker 2: you know, solve that problem with the very deep pockets
37:30
Speaker 2: of the American tech industry, right.
37:32
Speaker 4: Like making a deal with the devil.
37:34
Speaker 2: Yeah, I mean really though, Like if you know how
37:36
Speaker 2: many residents there would say, Okay, would I rather have,
37:42
Speaker 2: you know, my property tax bill go up by fifty
37:44
Speaker 2: percent or I could actually see it go down by
37:47
Speaker 2: twenty percent, But I'm going to be living next to
37:49
Speaker 2: a giant data warehouse. I don't know that.
37:53
Speaker 4: I don't think they're saying for that.
37:55
Speaker 2: No, I don't think they'd say yes. But you think
37:57
Speaker 2: about how many other towns across the country are going
37:59
Speaker 2: to be in a similar position, Boston included, and what
38:03
Speaker 2: solutions they have to fix those problems. We got to
38:06
Speaker 2: take a quick break, but a lot more to cover
38:08
Speaker 2: in the second hour of the Financial Exchange. Stay tuned, everybody,
38:10
Speaker 2: We'll be right back