Latest / The Financial Exchange Show / Markets still don't believe Trump's tariffs

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Markets still don't believe Trump's tariffs · 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 Mark Vandebbi.
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Speaker 2: Chuck and Mark and Tucker with you today as we
1:14
Speaker 2: wrap up and admittedly slow news week. As far as
1:19
Speaker 2: you know, generally items, we didn't really have anything in
1:23
Speaker 2: the way of meaningful economic data. We didn't really have
1:26
Speaker 2: anything meaningful in the way of earnings. The closest I
1:28
Speaker 2: think you could say is Delta, who did give us
1:30
Speaker 2: a little bit of insight into what's going on with
1:33
Speaker 2: the travel industry. But this is all preparation for next week,
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Speaker 2: which again you don't tell everyone that it's the most
1:40
Speaker 2: important week in economics, because then people just get tired
1:43
Speaker 2: of you saying that all the time. Next week is
1:45
Speaker 2: going to be a fun week. We got CPI on Tuesday,
1:48
Speaker 2: We've got PPI on Wednesday, we got retail sales and
1:52
Speaker 2: initial claims in Philly fed manufacturing on Thursday, and then
1:56
Speaker 2: on Friday, building permits, housing starts, consumer sentiments, So we're
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Speaker 2: jammed from it from an economic data standpoint. Next week
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Speaker 2: and and and and and and we got earnings kicking
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Speaker 2: off JP Morgan, Blackrocks, City Groups, Wells, Fargo Bank, New
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Speaker 2: York Mellon All on Tuesday, Wednesday, Jay and J. Bank
2:16
Speaker 2: of America Morgan, Stanley, Goldman, Sachs Thursday, Netflix, Abbott Labs,
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Speaker 2: ge Aerospace, Pepsi Friday, American Express, Charles Schwab three M.
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Speaker 2: So we we were getting into it next week. So
2:28
Speaker 2: to those of you who like begrudgingly listen to us
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Speaker 2: for ten hours this week, sorry, but next week we've
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Speaker 2: got some real stuff. And the Trump administration was awfully
2:39
Speaker 2: nice to, you know, start sending out tariff letters this
2:41
Speaker 2: week in order to continue to give us something to
2:43
Speaker 2: talk about on the show. And we got another one
2:45
Speaker 2: of those late yesterday when the Trump Administration announced a
2:50
Speaker 2: thirty five percent tariff on imports from Canada effective August first. Uh,
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Speaker 2: this will not apply to us MCA compliant good goods,
3:00
Speaker 2: so that's the same as the previous agreement, which basically
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Speaker 2: takes most of the stuff that Canada sends to.
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Speaker 3: Us off the table.
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Speaker 2: But this would be a rise from a twenty five
3:08
Speaker 2: percent tariff on other goods up to thirty five percent,
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Speaker 2: and a the fact that this doesn't include us MCA
3:15
Speaker 2: compliant goods, and be the fact that it's still three
3:17
Speaker 2: weeks out and the language of the letter leaves room
3:20
Speaker 2: for this to be adjusted. Has markets in a very
3:23
Speaker 2: modest sell off today because once again, Mark, I don't
3:26
Speaker 2: think markets are really believing that this is going to
3:29
Speaker 2: go into effect because we've seen this before.
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Speaker 4: Yeah, these letters are all self neutralizing, their meaningless when
3:35
Speaker 4: you end your lengthy commentary on the history of the
3:42
Speaker 4: relationships between the two countries and the alleged justification for
3:44
Speaker 4: these tariffs with of course, all this could change if
3:47
Speaker 4: you guys change your policy. It makes the prior fifteen
3:51
Speaker 4: sentences meaningless.
3:53
Speaker 3: Right it does.
3:55
Speaker 2: I think the thing that I take away from this,
3:57
Speaker 2: and also from a report from Blueberg on the Vietnam
4:03
Speaker 2: deal or no deal we'll get into that is if
4:06
Speaker 2: I'm a trading partner of the US, I don't really
4:10
Speaker 2: know what I'm negotiating at this point. And I'll talk
4:12
Speaker 2: about this Bloomberg piece here and again. How much of
4:16
Speaker 2: this is Vietnam trying to say face, how much of
4:18
Speaker 2: it is you know something else. I'll leave that to
4:20
Speaker 2: anyone's imagination, but I'm gonna quote here. Vietnam's leadership was
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Speaker 2: caught off guard by US President Donald Trump's announcement last
4:27
Speaker 2: week that it agreed to a twenty percent tariff, and
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Speaker 2: the Southeast Asian nation is still seeking to.
4:33
Speaker 3: Lower the rate, according to people familiar with the matter.
4:35
Speaker 2: Straight after last Wednesday's call with Trump, Vietnam's party chief
4:38
Speaker 2: to Lamb told his negotiating team to keep working to
4:41
Speaker 2: bring the tariff ray down. The twenty percent figure came
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Speaker 2: as a surprise to Vietnam, who had believed it had
4:46
Speaker 2: secured a more favorable tariff range that people said before
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Speaker 2: the call, Vietnam had been pushing for a tariff in
4:52
Speaker 2: the ten to fifteen percent range. And it goes on
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Speaker 2: to say, look, we still haven't seen anything in print
4:58
Speaker 2: from either Vietnam or the United States, so we don't
5:03
Speaker 2: even know if this is real. It's like it's it's
5:05
Speaker 2: not actually in effect at this point. There's nothing from
5:08
Speaker 2: the US Trade Representative. There's no executive order, there's no
5:11
Speaker 2: signed memorandum of understanding. And so I think the thing
5:16
Speaker 2: that I keep coming back to on this is if
5:21
Speaker 2: I'm a country that's trying to negotiate where my my
5:24
Speaker 2: tariff rate is going to land, what am I actually
5:28
Speaker 2: negotiating And how long does that even stay in effect for?
5:31
Speaker 2: Because none of these are binding documents, even the one
5:34
Speaker 2: with the UK, which we do have. I think it's
5:37
Speaker 2: like a six or seven page memorandum of understanding. Even
5:40
Speaker 2: in there it says this is not a legally binding document.
5:44
Speaker 2: And so I guess what I'm wondering is what do
5:48
Speaker 2: you really.
5:48
Speaker 3: Do with this?
5:49
Speaker 2: And at what point do you just say okay, like,
5:53
Speaker 2: do what you want? Because we need some certainty. We
5:57
Speaker 2: can't just keep changing this every month or so. That's
6:00
Speaker 2: not really a good way to give businesses the stability
6:03
Speaker 2: they need to actually conduct business with our country.
6:06
Speaker 4: If I were a proponent of tariffs for raising revenue,
6:09
Speaker 4: which I sort of am, I'm a consumption tax guy.
6:11
Speaker 4: I'm a bit of a free market fanatic, Chuck, as
6:13
Speaker 4: you may know, I don't like the income tax. I
6:15
Speaker 4: think it distorts decision making.
6:16
Speaker 3: Would you be more of a VAT guy than a Yeah.
6:19
Speaker 4: You could call me a VAT guy. I think that's
6:21
Speaker 4: fair anything but taxing income and all the contortions and
6:25
Speaker 4: machinations that that forces people to undertake. Sure to avoid it, right,
6:30
Speaker 4: I mean, you know better than anybody, not because you
6:32
Speaker 4: avoid taxes, but because you work with people there and Chuck,
6:37
Speaker 4: as you know, of abating taxes is a full time job. No,
6:40
Speaker 4: you know what I mean it's incredibly distortionary. The left
6:44
Speaker 4: gets a hold of it and they want to enact
6:46
Speaker 4: their social views through the tax code. I've for a
6:50
Speaker 4: whole lot of reasons, I would love if we just
6:52
Speaker 4: took the sixteenth Amendment to the Constitution through it out
6:54
Speaker 4: the window. That's not going to happen anytime soon. But
6:57
Speaker 4: if you're in that camp, if you're an anti tax,
6:59
Speaker 4: anti income tax fanatic like I am, you would hope
7:02
Speaker 4: the tariffs could actually or something like it, at consumption
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Speaker 4: tax more broadly, could replace the income tax. That doesn't
7:07
Speaker 4: appear to be happening. So we're not satisfied. If you're
7:10
Speaker 4: a I want manufacturing to be restored. I want to
7:13
Speaker 4: restore the economy. To some I think it's misguided, but personally,
7:17
Speaker 4: but people want to restore the economy of the nineteen fifties,
7:20
Speaker 4: when everybody took a lunch pail to a job and
7:22
Speaker 4: they ate their lunch working up on a steel girder
7:25
Speaker 4: thirty you know, stories up or something like that. I
7:28
Speaker 4: don't know what they want, but they think we're going
7:29
Speaker 4: to restore the economy the fifties. Fine, honest, people can disagree,
7:32
Speaker 4: but that ain't happening. Either, So, who is this, who
7:35
Speaker 4: is this tariff theater making happy? Other than news outlets
7:40
Speaker 4: and maybe people like us who have something to talk
7:41
Speaker 4: about every day because nothing's actually happening.
7:44
Speaker 3: Well.
7:45
Speaker 2: And look, if I'm being completely honest, I get kind
7:48
Speaker 2: of tired of talking about it because my message is
7:49
Speaker 2: always Okay, we'll see if it goes into effect, and
7:52
Speaker 2: then we'll figure out what happens, because we've seen this
7:55
Speaker 2: for the last six months now, where if you get
7:57
Speaker 2: too excited about what's announced, that's not where it usually
8:03
Speaker 2: ends up being a month from now.
8:05
Speaker 3: Now, the danger in.
8:06
Speaker 2: This is that what if this is a new approach
8:12
Speaker 2: from the Trump administration with regards to how they plan
8:18
Speaker 2: to implement. And the reason that I bring this up
8:20
Speaker 2: is because of one key thing, and that is that
8:23
Speaker 2: the Reconciliation Bill passed a week ago on Friday, on
8:27
Speaker 2: fourth July, President Trump signed the BBB into law. And
8:33
Speaker 2: I guess I kind of look at this and I go,
8:35
Speaker 2: President doesn't need anything from Congress anymore.
8:39
Speaker 3: He got what he wanted.
8:41
Speaker 2: He doesn't need anything from Congress anymore. Does he have
8:44
Speaker 2: to play nice? I don't know, maybe, maybe not, But
8:48
Speaker 2: like that's a meaningful shift and by the way, this
8:50
Speaker 2: goes a couple different ways. The BBB passed do businesses
8:56
Speaker 2: need anything from Congress now, either.
9:01
Speaker 3: They don't like do they have to play nice thing?
9:03
Speaker 4: I'm trying to think they need heat Trump needs his
9:06
Speaker 4: judicial appointments confirmed.
9:07
Speaker 3: Obviously I'm talking business.
9:09
Speaker 4: Yeah, No, I know I'm stretching here. You know, you're right.
9:11
Speaker 3: I'm sorry.
9:12
Speaker 2: And so if I look at it, I go, okay,
9:15
Speaker 2: if you're a business who's previously been you know, towing though,
9:18
Speaker 2: there's a couple different ways that I can look at this.
9:20
Speaker 2: The first is President Trump might say, look, I don't
9:23
Speaker 2: need support from Congress to do anything else that I
9:25
Speaker 2: want to do. I'm going forward on the tariffs this time.
9:27
Speaker 2: Maybe he does, maybe he doesn't.
9:29
Speaker 3: I don't know.
9:30
Speaker 2: If I'm a business, I might say, look, I've been
9:32
Speaker 2: playing nice with you know, the Trump administration, even though
9:35
Speaker 2: I don't like these tariffs. I'm gonna start laying people
9:38
Speaker 2: off because honestly, my margins are being hit.
9:42
Speaker 4: And may like, can can we talk about that point, Chuck,
9:44
Speaker 4: who somebody's got to eat the tariffs? I think we
9:46
Speaker 4: agree that.
9:47
Speaker 2: Yeah, it's not There's there's no such thing as in
9:50
Speaker 2: immaculate revenue rays. The money has to come from somewhere,
9:55
Speaker 2: and so when you look at the places that can
9:58
Speaker 2: come from, they're generally four different places that you can identify.
10:03
Speaker 2: The first is the person the company that's actually making
10:08
Speaker 2: the stuff overseas. Do they eat it either by reducing
10:12
Speaker 2: their price or by you know, offering to pay a
10:16
Speaker 2: portion of the tariff? Okay, that's possible. Number two, any
10:20
Speaker 2: part of the shipping chain. Does the boat that's carrying
10:24
Speaker 2: the stuff over from China eat part of it?
10:27
Speaker 3: Do railroads do? Truckers?
10:29
Speaker 2: That's another place that you could see it. The third
10:32
Speaker 2: place companies do they say hey, we're going to absorb
10:35
Speaker 2: some of the cost. And the fourth one is does
10:37
Speaker 2: the end buyer end up paying it? There's no way
10:40
Speaker 2: that you can get through the entire chain with it
10:42
Speaker 2: not happening, simply because again, here's the example I'll give
10:46
Speaker 2: my buddy imports. You know, fifty thousand dollars of stuff
10:49
Speaker 2: from China gets hit with a fifteen thousand dollars tariff.
10:53
Speaker 2: That money has to come from somewhere. It doesn't just
10:57
Speaker 2: disappear into the ether. It's not just out there. And
11:01
Speaker 2: so one of the things that I've also wondered about
11:04
Speaker 2: in this is look, it's it's pretty clear that if
11:10
Speaker 2: if you've criticized the tariff implementation as a company that
11:15
Speaker 2: has been, you know, selling tariff products. You remember when
11:17
Speaker 2: Amazon a couple months ago originally like was gonna post
11:20
Speaker 2: like tariff prices on their one of their sites. That
11:23
Speaker 2: went It lasted for like two hours because the Trump
11:25
Speaker 2: administration was like, no, you're not doing this, and they
11:27
Speaker 2: backed off.
11:27
Speaker 3: They're like, no, we're not going to do it.
11:30
Speaker 2: So part of me wonders, are we not getting a
11:32
Speaker 2: great signal from companies because they don't want to risk
11:35
Speaker 2: the ire of the Trump administration. But at some point
11:38
Speaker 2: it's going to come out in the earnings and we're
11:40
Speaker 2: just gonna be surprised by it.
11:42
Speaker 3: Another thing I kind of just wonder.
11:44
Speaker 2: About the other possibility on this again, it's it's not
11:49
Speaker 2: that the tariff just doesn't matter, because there's no way
11:55
Speaker 2: that with the dollars you're talking about, it just doesn't matter.
11:58
Speaker 2: But tariff's on one and you can say, Okay, they
12:01
Speaker 2: raise the prices of goods because obviously it's adding an
12:04
Speaker 2: additional cost somewhere in the ecosystem. But if they're also
12:08
Speaker 2: depressing demand for those goods. Do price increases not end
12:12
Speaker 2: up coming through? And does it show up in like
12:15
Speaker 2: the economy slowing because there's just not as much consumption.
12:18
Speaker 2: There are a lot of different ways that you can
12:20
Speaker 2: shake this thing, and something's gonna show up in the
12:23
Speaker 2: second half of the year.
12:24
Speaker 3: I just don't know what.
12:26
Speaker 2: I just can't see us going the next six months
12:29
Speaker 2: and being like, well, the US government raised three hundred
12:31
Speaker 2: billion dollars in additional revenue and nothing happened, right.
12:36
Speaker 4: Yeah, And I don't know. I know, we got a
12:37
Speaker 4: break here. I'll make a quick point. Maybe we talk
12:39
Speaker 4: about it on the other side. Deficit's going up, not down.
12:41
Speaker 4: You can track this stuff through May. We've spent about
12:44
Speaker 4: fifteen billion more this the deficit has increased about fifteen
12:48
Speaker 4: billion dollars. I'm talking about the overall deficit. So you
12:50
Speaker 4: can tout revenue from this or that, or you can
12:53
Speaker 4: tout this or that spending cut, but at the end
12:56
Speaker 4: of the day, the deficit is growing, and thus so
13:00
Speaker 4: is the debt. So what is the point of all
13:02
Speaker 4: this if your objective is to raise revenue.
13:05
Speaker 3: Let's take a quick break here.
13:07
Speaker 2: When we come back let's do a little preview of
13:10
Speaker 2: next week's CPI right after this.
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14:13
Speaker 3: Mark next week. We've got CPI data on Tuesday.
14:17
Speaker 2: As I mentioned in the first segment, the expectations that
14:19
Speaker 2: I'm seeing out there are for a point three percent
14:23
Speaker 2: number for both headline and core those would both be
14:27
Speaker 2: hotter than the point one we received on those numbers
14:29
Speaker 2: for the month of May. And look to this point,
14:35
Speaker 2: through the first five months of the year, the inflation data,
14:37
Speaker 2: it's been unambiguously good. There's been nothing in there that
14:42
Speaker 2: has been caused for meaningful concern. I think the question is, look,
14:48
Speaker 2: as you start to get into June, clearly there's some
14:51
Speaker 2: products that you know you might have seen price increases
14:53
Speaker 2: on because of tariffs. Again, it takes a couple months
14:55
Speaker 2: for this to all kind of work its way through
14:57
Speaker 2: the system, even before out for you know, inventory that
15:02
Speaker 2: was front loaded in order to try to avoid this.
15:05
Speaker 2: And so it does seem if we end up starting
15:09
Speaker 2: to print, you know, in that point three percent monthly range,
15:12
Speaker 2: that maybe we start seeing the tariff impact showing up
15:15
Speaker 2: in the June, July, August data as we go deeper
15:18
Speaker 2: into the summer, and the idea that's been tossed around
15:20
Speaker 2: this week that hey, tariffs don't cause inflation just because
15:23
Speaker 2: you know, we didn't see it in May, which is
15:25
Speaker 2: the only month that it might have showed up in,
15:27
Speaker 2: you know, in any way, shape or form, it starts
15:31
Speaker 2: to probably show up over the next few months.
15:33
Speaker 4: Here, probably it might be a little hard to tease
15:35
Speaker 4: that out. You'd have to you'd have to isolate I
15:38
Speaker 4: guess the sectors likely affected by tariffs. I imagine model
15:42
Speaker 4: or researchers are working feversually to come up with some
15:45
Speaker 4: measure of tariff driven inflation. All I could tell you,
15:48
Speaker 4: Chuck is as a generalist, and forecasting inflation is really hard.
15:53
Speaker 4: I just ran a model really fast just to give
15:55
Speaker 4: you a sense for how big the errors are versus
15:58
Speaker 4: your your estimate, and an ensemble of models gives you
16:03
Speaker 4: a projection of about zero point two month over month,
16:07
Speaker 4: so a fraction of a percent, about a fifth of
16:10
Speaker 4: a percent, which is about where it's been. But the
16:15
Speaker 4: errors are really big, and I'm just using sort of
16:18
Speaker 4: a conventional statistical prediction method here. The errors are like
16:22
Speaker 4: twice as big as your estimate of what inflation is
16:25
Speaker 4: going to be, and words it could be twice that
16:27
Speaker 4: it could be zero. And that's really the best that
16:30
Speaker 4: you could say, just using past values of inflation. Not
16:33
Speaker 4: getting too fancy. My point is when I do exercises
16:37
Speaker 4: like this, it reminds me of the importance of humility.
16:41
Speaker 4: Despite the overwhelming opinion of economists that tariffs are taxes
16:46
Speaker 4: on imported goods. They should all else equal increase prices.
16:50
Speaker 4: You got to take into account what's going on in
16:52
Speaker 4: other parts of the economy. There could be deflationary forces
16:55
Speaker 4: that act to offset the effects of tariffs, and they
16:58
Speaker 4: may not show up in the next few months or
17:01
Speaker 4: at all. I'm not in that camp, but it could
17:05
Speaker 4: be the case.
17:06
Speaker 3: So I think where it is.
17:08
Speaker 2: Look, it's it's very much just kind of wait and
17:11
Speaker 2: see here and again it's I hate to just keep
17:16
Speaker 2: saying that, but that's that's kind of what it is.
17:18
Speaker 1: Like.
17:19
Speaker 2: It's it's this is not a situation. It's not a
17:24
Speaker 2: situation like March of twenty twenty with with COVID, where
17:27
Speaker 2: it's just hard stop and you know, twenty million people
17:30
Speaker 2: apply for unemployment in the next two weeks. This is
17:34
Speaker 2: something it's a very dynamic system that the inputs are
17:38
Speaker 2: being changed on a daily basis basically, and so you're
17:42
Speaker 2: just not quite sure what you're going to see here,
17:45
Speaker 2: and we need to give it a little bit of
17:47
Speaker 2: time to play out in order to see what happens.
17:51
Speaker 2: But again, like you just do that, you look at
17:55
Speaker 2: the numbers, and you say, there's no way that this
17:58
Speaker 2: just has no impact. It's just I don't know exactly
18:01
Speaker 2: how the impact is going to show up.
18:02
Speaker 3: Yet you brought up.
18:03
Speaker 4: The last recession. I think that's a key point. Our
18:06
Speaker 4: expectations are most influenced, arguably by the most recent salient convulsion.
18:14
Speaker 4: So in this case, we had a recession, and you've
18:16
Speaker 4: talked about this before. We've talked about it before, COVID recession.
18:19
Speaker 3: Everybody knew it.
18:19
Speaker 4: Was coming because the government basically dictated it by FIAT stopped.
18:23
Speaker 4: As Trump said at the time, we're telling everybody stop
18:25
Speaker 4: doing what you're doing. He did it anyway. He was
18:27
Speaker 4: critical at the time of that idea, but he ended
18:30
Speaker 4: up doing it anyway anyway. It was The point is
18:32
Speaker 4: it was really foreseeable, the Great Recession. A lot of
18:35
Speaker 4: people saw that coming, The Fed saw it coming. They
18:37
Speaker 4: were easing before the data told them to do so.
18:40
Speaker 4: I wonder if maybe we're not conditioned to thinking, oh,
18:42
Speaker 4: it's going to be obvious when there's another big economic
18:46
Speaker 4: upheaval around, or a milder, more typical recession like nineteen
18:50
Speaker 4: ninety ninety one or like two thousand and one. I
18:54
Speaker 4: wonder if we're not spoiled a little bit by how
18:56
Speaker 4: conspicuous the signs were for the last couple.
19:01
Speaker 2: Yeah, it's and look, this has been a really this
19:06
Speaker 2: has been a really challenging business cycle for a lot
19:08
Speaker 2: of people to analyze.
19:09
Speaker 3: Anyways.
19:09
Speaker 2: I mean, think about the last two years with all
19:13
Speaker 2: of the people who were calling for recession that again
19:18
Speaker 2: we were kind of looking at the data we were
19:19
Speaker 2: going out. I don't really think so it's not there
19:21
Speaker 2: like based on what you're seeing. But you know, we
19:24
Speaker 2: had all to talk about the sam rule last year
19:26
Speaker 2: and turns out, hey, this is the one time it
19:28
Speaker 2: hasn't worked since World War Two. So it's it's been
19:31
Speaker 2: a weird cycle and a lot of people have been
19:34
Speaker 2: fooled by it.
19:35
Speaker 3: Quick break here Wall Street watches next.
19:41
Speaker 1: Like us on Facebook and follow us on Twitter at
19:44
Speaker 1: TFE show. Breaking business news is always first right here
19:49
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall Street.
19:56
Speaker 1: Watch a complete look at what's moving market so far
19:59
Speaker 1: today right here on the Financial Exchange Radio Network.
20:03
Speaker 3: You guessed it.
20:03
Speaker 5: More tariff developments to report today after President Trump threatening
20:07
Speaker 5: a thirty five percent levy on Canadian imports to begin
20:10
Speaker 5: on August first, up from the current twenty five percent rate.
20:16
Speaker 5: Markets at the moment in negative territory across the board
20:19
Speaker 5: dows off by half a percent or two hundred and
20:22
Speaker 5: twenty five points.
20:23
Speaker 3: S and P five hundred.
20:24
Speaker 5: Is down by a quarter of a percent or sixteen points.
20:27
Speaker 5: In the NASDAC dipping into negative territory mostly flat, Russell
20:32
Speaker 5: two thousand is down by eight tenths of a percent
20:35
Speaker 5: or eighteen points. A ten year treas reeled up five
20:39
Speaker 5: basis points this morning at four point four zero percent.
20:42
Speaker 5: In crude oil up two percent higher today, trading just
20:45
Speaker 5: below sixty eight dollars a barrel. Levi shares are up
20:51
Speaker 5: eleven percent after the genes maker reported strong results for
20:54
Speaker 5: the first half of the year. The company also increase
20:57
Speaker 5: its dividend and raise its full year guy it's on
21:00
Speaker 5: several key metrics. Levi said it was still able to
21:04
Speaker 5: raise guidance despite tariffs because consumers, especially women, are buying
21:09
Speaker 5: more directly with the company. Meanwhile, Energy Giant BP said
21:13
Speaker 5: it anticipates up to one and a half billion dollars
21:16
Speaker 5: in after tax impairment charges and said lower oil and
21:19
Speaker 5: gas prices will drag on its quarterly results that stock
21:23
Speaker 5: is up by three percent. Elsewhere, the box company Real
21:28
Speaker 5: Sense completed its spinoff from Intel, closing a fifty million
21:32
Speaker 5: dollar funding round. Intel stock is retreating by one and
21:35
Speaker 5: a half percent and shares a movie theater chain AMC Entertainment,
21:40
Speaker 5: climbing over nine percent higher after Webbush upgraded the stock
21:44
Speaker 5: to outperform from neutral, saying AMC is poised to benefit
21:49
Speaker 5: from a more consistent release slate over the next several quarters.
21:53
Speaker 5: I'm Tucker Silva and that is Wall Street watch Mark.
21:57
Speaker 3: We got a piece here today.
21:59
Speaker 2: It's title the White House just took its most aggressive
22:02
Speaker 2: stance yet against Jerome Powell. And basically what it lays
22:06
Speaker 2: out is that Russell Vatt, who is the director of OMB,
22:11
Speaker 2: the Office of Management and Budget, has basically said, look,
22:15
Speaker 2: we think that you are breaking the law when it
22:19
Speaker 2: comes to oversight of the renovation that's going on of
22:25
Speaker 2: the FED headquarters. I'll quote here the President is extremely
22:29
Speaker 2: troubled by the management of the Federal Reserve system. Instead
22:32
Speaker 2: of attempting to write the FEDS fiscal ship, you've plot
22:34
Speaker 2: ahead with ostentatious overhaul of your Washington these DC headquarters.
22:37
Speaker 2: It goes through a whole bunch of different things, And
22:39
Speaker 2: of course it gets to the speculation of.
22:40
Speaker 3: Hey, are they going to try to fire J.
22:43
Speaker 2: Powell for cause rather than just you know, letting them
22:46
Speaker 2: go because the president wants someone else? And President was
22:51
Speaker 2: asked about this today they I for you don't know
22:54
Speaker 2: the reporter, but I saw the transcript. They asked him,
22:56
Speaker 2: are you going to fire J?
22:57
Speaker 3: Powell? And he said no? And I kind of believe.
23:01
Speaker 2: I really think that what the White House wants to
23:04
Speaker 2: do is just make things absolutely miserable for J. Powell
23:07
Speaker 2: so that he either quits or just has an awful last.
23:10
Speaker 3: Eight months on the job. Basically is kind of where
23:12
Speaker 3: I think they're going.
23:14
Speaker 4: Yeah, why not just I don't look, we all know
23:17
Speaker 4: he wants to replace Paul with a puppet who will
23:20
Speaker 4: lower interest rates and keep them low, and so they
23:22
Speaker 4: can finance the debt using short term debt, relatively using
23:27
Speaker 4: a greater percentage of short term debt. He thinks that's
23:30
Speaker 4: going to be some kind of panacea.
23:31
Speaker 3: Can we talk about that? That's not? Yeah?
23:33
Speaker 4: Sure? In short, no pun, or maybe the pun should
23:37
Speaker 4: be intended. The President thinks that he can shift financing
23:42
Speaker 4: the difference between what the government takes in and what
23:43
Speaker 4: it spends, which we call the deficit. Using very short
23:47
Speaker 4: term to maturity instruments, he can shift the term to
23:49
Speaker 4: maturity of new debt in favor of short term. If
23:54
Speaker 4: the Fed keeps short term interest rates low, which they
23:56
Speaker 4: have the power to do, they can print money. They
23:58
Speaker 4: put it non banks balance sheets. Bank can lend to
24:01
Speaker 4: one another at lower overnight rates. So the Fed can
24:03
Speaker 4: do this, the Treasury can do this. In theory, it'll work.
24:06
Speaker 4: The problem, of course, is that it will probably result
24:09
Speaker 4: in not just high, but rapidly increasing inflation.
24:12
Speaker 3: At least.
24:13
Speaker 4: I say that because it's the way it's always happened
24:15
Speaker 4: here and elsewhere, so I think that's the present. I
24:19
Speaker 4: don't think. I know because he said it. Economists have
24:21
Speaker 4: a term for it, those who study monetary policy. They
24:25
Speaker 4: call it fiscal dominance, and the meaning is straightforward. It's
24:27
Speaker 4: when fiscal policy dominates monetary policy. Monetary policy is no
24:31
Speaker 4: longer focused on keeping inflation low and stable and keeping
24:34
Speaker 4: output as close as possible to trend output. Those considerations
24:38
Speaker 4: go out the window. Monetary policy sole objective is helping
24:42
Speaker 4: the government finance it's deficit. That's Trump's end goal. I
24:45
Speaker 4: wish you would just say that, why remove Powell now?
24:49
Speaker 4: Why not wait another few months until his terms up?
24:51
Speaker 4: It would be less disruptive. I don't know.
24:56
Speaker 2: Well, and I think I want to get more just
24:59
Speaker 2: about this, you know, this idea of more moving more
25:02
Speaker 2: issuance to to short duration debt and and cutting interest
25:05
Speaker 2: rates in tandem with that. So just like, let's let's
25:11
Speaker 2: look at where things are right now in the United States.
25:14
Speaker 2: The Fed funds rate is between four and a quarter
25:16
Speaker 2: and four and a half and the ten year Treasury
25:18
Speaker 2: right now is at four point four percent, So they're
25:21
Speaker 2: both basically in the same ballpark.
25:24
Speaker 3: So what what the president's.
25:26
Speaker 2: Talking about doing, as you mentioned, is, Hey, I want
25:29
Speaker 2: someone in there who's gonna cut that Fed funds rate
25:31
Speaker 2: I think he said the other day by three percent points. Yeah, okay,
25:35
Speaker 2: take it down to one and a quarter and then
25:36
Speaker 2: I want to issue more debt at one and a
25:39
Speaker 2: quarter percent instead of having to pay.
25:42
Speaker 3: Four percent on long term debt.
25:45
Speaker 2: So the first question that that you immediately think of is, Okay,
25:51
Speaker 2: if it's that easy, why doesn't.
25:53
Speaker 3: Every country do that?
25:54
Speaker 4: Many have tried.
25:56
Speaker 3: What's happened to them?
25:57
Speaker 4: Inflation? Is the short answer. For a followed by price
26:00
Speaker 4: controls well when THEED. When the FED puts money into
26:04
Speaker 4: the economy, we think of the FED as lowering interest rates,
26:07
Speaker 4: and everybody says that. It's even in economics research papers,
26:10
Speaker 4: So even the people who have strong technical knowledge just
26:13
Speaker 4: use lowering interest rates as a shorthand for what the
26:16
Speaker 4: FED does. But what they really do behind the scenes
26:18
Speaker 4: is they print money. They give that money to banks,
26:21
Speaker 4: they credit to more specifically, they credit it to their accounts,
26:25
Speaker 4: and banks in turn lend it. That's how the FED
26:28
Speaker 4: affects demand. Technically, aggregate demand, total demands, that's what the
26:34
Speaker 4: FED does. They also have regulatory responsibilities. They can also
26:37
Speaker 4: target longer term interest rates. But in a nutshell, that's
26:39
Speaker 4: what the FED does. They print money to stimulate or
26:42
Speaker 4: take money out of the economy by reversing the process
26:45
Speaker 4: I just described to reduce demand problem with the president's strategy,
26:51
Speaker 4: and I suspect they'll I suspect we're going to try
26:53
Speaker 4: this again, because every every couple generations, people forget the
26:59
Speaker 4: lessons learned and then we have to try stupid things again.
27:02
Speaker 4: In that sense, we're like children. When the FED does that,
27:05
Speaker 4: it will stimulate demand that will push the economy beyond
27:09
Speaker 4: its speed. Limited. The FED will either be forced to
27:13
Speaker 4: hike rates to address this, or if the President doesn't
27:15
Speaker 4: let them, or his success or if it's someone cut
27:18
Speaker 4: from the same cloth, doesn't let them, we're going to
27:20
Speaker 4: try price controls and browbeating companies into not raising prices,
27:25
Speaker 4: similar to what the President did to Amazon and other
27:27
Speaker 4: companies when they said they passed tariffs along. Again, these
27:32
Speaker 4: things have been tried before. I'm jumping back and forth
27:34
Speaker 4: between tariff and monetary policy here, but the mindset is
27:37
Speaker 4: the same.
27:39
Speaker 2: The other piece that I come back to on this is,
27:43
Speaker 2: let's say that they even you know, it goes far
27:46
Speaker 2: as doing that and imposing, you know, yield curve control
27:49
Speaker 2: to control the price of money across the yield curve,
27:52
Speaker 2: you know, in an attempt to try to get things
27:54
Speaker 2: like mortgage rates down. Yeah, the Fed does not control
27:59
Speaker 2: mortgage nor would you want them to. You know, in
28:03
Speaker 2: what world do you want the twelve people that are
28:06
Speaker 2: sitting at the Federal Reserve to simply be able to say,
28:09
Speaker 2: this is what mortgage rates are going to be. And
28:12
Speaker 2: the reason why we know that they don't control them
28:13
Speaker 2: is because we have a really clear measure that you
28:20
Speaker 2: can look at if you want to. We actually have
28:23
Speaker 2: a couple that you can look at on this. The
28:26
Speaker 2: first is you could say, okay, let me look at
28:29
Speaker 2: the thirty year mortgage rate and compare it to the
28:33
Speaker 2: effective Federal funds rate and show me the difference that
28:39
Speaker 2: we have between them. And what you see is that
28:43
Speaker 2: basically this is it's a range that you see from
28:47
Speaker 2: anywhere from mortgage rates can be anywhere from like five
28:50
Speaker 2: to six percent above the Fed funds rate. The lowest
28:53
Speaker 2: I've seen is about one percent above the Fed funds rate.
28:56
Speaker 2: But the reason why that happens is ultimately because bangs
29:01
Speaker 2: are in charge of the amount of risk that they
29:02
Speaker 2: want to take on, and so banks might see where
29:06
Speaker 2: interest rates are either the Fed Funds rate, more commonly
29:09
Speaker 2: the tenure treasury, because really the question isn't hey can
29:12
Speaker 2: I park this money at the Fed for thirty years?
29:14
Speaker 2: It's do I want to lend this money to the
29:15
Speaker 2: federal government for ten years? Do I want to lend
29:17
Speaker 2: it to an individual for thirty likes? That's how banks
29:20
Speaker 2: think about their balance sheet. But so what you see
29:24
Speaker 2: is banks don't simply say okay, tenure treasury is at four,
29:29
Speaker 2: we're going to charge five. It varies, and I'll show
29:32
Speaker 2: you how much this can vary. Back in May of
29:35
Speaker 2: twenty twenty one, the spread between the average thirty year
29:39
Speaker 2: mortgage rate and the tenure treasury was one point three
29:42
Speaker 2: four percent. And you think about it, and the reason
29:44
Speaker 2: why was in May of twenty one, there still wasn't
29:47
Speaker 2: really much inflation, interest rates were low, unemployment was falling,
29:51
Speaker 2: and so banks might have looked at the situation and said, hey,
29:53
Speaker 2: there's no inflation, we don't really need much premium. Financial
29:57
Speaker 2: conditions are good. Sure, if we can get you know,
30:00
Speaker 2: so two percent on a ten year treasury right now
30:02
Speaker 2: by lending to the federal government, that's fine. We'll charge
30:05
Speaker 2: you three and a half on your mortgage in the
30:07
Speaker 2: first half of twenty one, and that's what they did.
30:10
Speaker 3: Even below that.
30:11
Speaker 2: I mean again, the ten year treasury I think was
30:12
Speaker 2: at like one to six then, and this is when
30:14
Speaker 2: you had like the two point nine percent mortgages that
30:16
Speaker 2: were out there. Fast forward a year to May. Actually,
30:21
Speaker 2: let's go a year and a half forward October of
30:23
Speaker 2: twenty two, inflation rippin' where at like nine percent on inflation,
30:28
Speaker 2: I think we were down a little bit from there
30:29
Speaker 2: at that point where at like seven, but inflation's still high.
30:33
Speaker 2: It's been high for about a year. And banks are
30:35
Speaker 2: no longer saying yeah, we'll take one in a third
30:38
Speaker 2: percent over the ten year treasury. Instead they're saying, no,
30:42
Speaker 2: we need three point one percent over the ten year
30:45
Speaker 2: treasury because the ten year right now is at four.
30:48
Speaker 2: Inflation's running at seven, and man, we need seven percent
30:51
Speaker 2: because if inflation stays hot, we don't want to be
30:54
Speaker 2: holding the bag on this. And so that's how you
30:56
Speaker 2: end up with, you know, seven percent mortgages. Today, inflations
30:59
Speaker 2: come down, but there's still you know, concerns this and that.
31:02
Speaker 2: The spread between the ten year, the thirty year mortgage
31:04
Speaker 2: and the tenure treasury is about two point three percent.
31:07
Speaker 2: The long term average is one seven. But it doesn't
31:09
Speaker 2: just stay there. And so this is the thing that
31:12
Speaker 2: I come back to when we're talking about interest rates,
31:15
Speaker 2: is look, even if you move all of the issuance
31:18
Speaker 2: to the to the short end and cut interest rates
31:21
Speaker 2: dramatically there, yes, maybe you have an impact on the
31:25
Speaker 2: US budget, but it might come at the cost of
31:27
Speaker 2: reigniting inflation, which ends up making you know, lending for
31:30
Speaker 2: other for individuals and businesses, more expensive because banks are
31:35
Speaker 2: going to demand more premium. And on top of that
31:38
Speaker 2: that inflation could actually end up making your budget situation
31:41
Speaker 2: worse because now you have to borrow more in order
31:44
Speaker 2: to actually fund the government. Yeah, so there's no free
31:50
Speaker 2: lunch on all this. If if it were as simple
31:52
Speaker 2: as hey, let's just issue all three month debt and
31:55
Speaker 2: cut interest rates to zero, well, I'm sure that the
31:58
Speaker 2: Brazilians would have figured it out by now. I'm I'm
32:00
Speaker 2: sure the Argentinians would have figured it out by now.
32:02
Speaker 2: I'm sure the Italians would have figured it out. Oh yes,
32:05
Speaker 2: you know, And I say I say this as a
32:08
Speaker 2: proud Italian because.
32:09
Speaker 4: We pioneered with fiscal recklessness. Check we figured this out
32:13
Speaker 4: the hard way seventy two times. We tried every hundred
32:16
Speaker 4: years for the Pastni.
32:17
Speaker 2: Yes, this this is what Italians do. We say, well,
32:20
Speaker 2: maybe it's different this time.
32:23
Speaker 3: Try Come on, you know, I just don't meetball on
32:27
Speaker 3: the rate.
32:28
Speaker 4: You know, like put to the money, Jack, you putting
32:30
Speaker 4: through the money would be fine food to the money.
32:34
Speaker 2: Anyways, Sorry to anyone who just had to listen to
32:38
Speaker 2: us do that.
32:39
Speaker 3: That's what happens when you get three Italians in a
32:40
Speaker 3: room together.
32:41
Speaker 4: Couldn't help ourselves. It's like birds starting to turp, and
32:44
Speaker 4: they all chirp, they all chime in.
32:46
Speaker 3: A lot of hands were weird. We're all talking with
32:48
Speaker 3: our hands too, of course, you know.
32:49
Speaker 4: It's like it's a dangerous are in here all of
32:52
Speaker 4: a sudden, very loud.
32:53
Speaker 3: Yeah.
32:54
Speaker 2: Anyways, So that's why you don't do that, is because
32:58
Speaker 2: we Italians have tried it and it doesn't work.
33:01
Speaker 3: You can't just cut your way out of paying, you know,
33:05
Speaker 3: paying on the debtity. It doesn't work that way.
33:08
Speaker 2: We've been there for a couple thousand years. It's it's
33:12
Speaker 2: pretty hard. Let's take a quick break here. When we
33:15
Speaker 2: come back, let's talk about Earning season.
33:17
Speaker 1: Right after this, find daily interviews and full shows of
33:20
Speaker 1: the Financial Exchange on our YouTube page. Like us on
33:24
Speaker 1: YouTube and get caught up on anything and everything you
33:27
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33:31
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33:34
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33:37
Speaker 1: on anything you might have missed. This is the Financial
33:40
Speaker 1: Exchange Radio Network.
33:46
Speaker 2: Next week, Earning season kicks off for Q two expectations
33:51
Speaker 2: according to Factset Earnings Insight is for a five percent
33:55
Speaker 2: annual earnings growth. That would be the slowest that we've
33:58
Speaker 2: seen since the fourth quarter of twenty two twenty three.
34:01
Speaker 2: But a reminder, typically the way the game is played,
34:04
Speaker 2: earning's estimates come down heading into the reporting and then
34:07
Speaker 2: usually see the beats anywhere from about.
34:09
Speaker 3: One and a half to three and a half percent.
34:11
Speaker 2: So realistically, you'd expect this to come in somewhere in
34:13
Speaker 2: the six and a half to you know, eight and
34:16
Speaker 2: a half percent range. But obviously this is something where
34:21
Speaker 2: I'm not so much interested in what companies are saying
34:23
Speaker 2: about second quarter earnings. I want to hear, Hey, what
34:26
Speaker 2: are they seeing in their business and how has it
34:28
Speaker 2: evolved over the last three months, because the last time
34:31
Speaker 2: the companies reported was in early April, well mid to
34:34
Speaker 2: late April, and we just didn't have much information about
34:37
Speaker 2: how the US economy was evolving after you know, different
34:41
Speaker 2: tariffs and changes, and I want to hear what companies
34:43
Speaker 2: are saying about the second after the year.
34:45
Speaker 4: Personally, I think that's where the skill comes in. It's
34:47
Speaker 4: not the quantitative stuff that's that's already that's already happened.
34:52
Speaker 4: When you see data, it's about something that's happened. That
34:55
Speaker 4: sounds trivial, but think about it for a second. Sure
34:58
Speaker 4: The value in this for those who possess the skill
35:01
Speaker 4: to parse words and extract their true meaning is to
35:05
Speaker 4: take the forward looking statements and do something a little
35:08
Speaker 4: different than everybody else is doing with them. For example,
35:11
Speaker 4: on the subject of tariffs, who's eating them? As we
35:15
Speaker 4: talked about in the last segment.
35:17
Speaker 3: So I guess we'll.
35:18
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36:17
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36:26
Speaker 2: Goldman Sachs apparently is testing an autonomous software engineer powered
36:32
Speaker 2: by a company named Cognition, and they are going to
36:36
Speaker 2: be putting this AI engineer into the metaphorical room with
36:41
Speaker 2: their twelve thousand other developers. The program is named Devin.
36:46
Speaker 3: Devin is that an acronym?
36:48
Speaker 4: Sorry? Okay, no, it's just devil like you look like
36:52
Speaker 4: a devon?
36:52
Speaker 3: Oh okay, yeah.
36:54
Speaker 2: And apparently look, we're gonna see how this ends up
36:58
Speaker 2: playing out here. The what I've gathered from actual software
37:02
Speaker 2: engineers is you can generally use and again this even
37:06
Speaker 2: like off the rack like AI programs to do an
37:10
Speaker 2: awful lot of coding. It's called vibe coding because basically,
37:12
Speaker 2: you tell the thing what to do and it comes
37:14
Speaker 2: up with your app or your your code for whatever
37:16
Speaker 2: it is that you're trying to make. But you do
37:19
Speaker 2: still need supervision simply for a couple of reasons. The
37:22
Speaker 2: first is, hey, is this you know, kind of the
37:23
Speaker 2: most optimized way to do this? That's number one. But
37:26
Speaker 2: also from a security perspective, there may be things that
37:30
Speaker 2: you see AI coding miss and that can obviously be
37:35
Speaker 2: you know, a pretty big deal when you're dealing with
37:36
Speaker 2: the financial system and all the privacy regulations and know
37:38
Speaker 2: your customer and and this and that. But guys, I'm
37:42
Speaker 2: I'm telling you this, this is going to be a story.
37:47
Speaker 2: I just I still wonder if this ultimately is where
37:51
Speaker 2: the biggest impact is. Because everyone's looking at large language
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Speaker 2: models and saying white collar jobs are going to be replaced,
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Speaker 2: and I'm not saying they won't be, but I really
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Speaker 2: think there's a lot of meat on this robotics, you know,
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Speaker 2: and sensors piece there that could really have a bigger
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Speaker 2: impact on more manual labor jobs than people are thinking
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Speaker 2: right now. Just because it hasn't gotten to that point yet.
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Speaker 2: I think that is the next frontier. It may actually
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Speaker 2: be more interesting. Let's take a quick break here. We
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Speaker 2: got more coming up in just a bit.