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Diesel Prices Are Making Almost Everything More Expensive · The Financial Exchange Show

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  Speaker 1: is The Financial Exchange with Chuck Zotta and Mike Armstrong.
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  Speaker 2: It is Chuck, Michael, and Tucker with you today. How
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  Speaker 2: am I Michael and you're not Charles? What do you mean?
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  Speaker 2: I don't understand. Michael is the diminutive of your full name, Michelangelo.
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  Speaker 2: Not many people know that he is. My legal name
• 1:34
  Speaker 2: is Mike, but I go by Michael. I don't know.
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  Speaker 2: It's Michelangelo Armstrong, the great Italian Scottish philosopher. Who brought
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  Speaker 2: us such things as, hey, it's not haggis, it's pizza.
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  Speaker 2: And I don't have anything else after that. Let's talk
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  Speaker 2: a little bit about what we're seeing in markets today,
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  Speaker 2: because basically, if you liked yesterday's market action, you won't
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  Speaker 2: like today's. Yesterday, we had stocks rallying, bonds rallying, oil
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  Speaker 2: selling off, and diesel selling off. Today, we've got stocks
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  Speaker 2: down modestly. Let's not pretend that this is any kind
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  Speaker 2: of calamity. Bonds have given back all of yesterday's gains.
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  Speaker 2: Gold is holding steady despite that, which I find interesting.
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  Speaker 2: Crude oil, West Texas Intermediate, back up $ 1. 18 a barrel.
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  Speaker 2: Diesel back up $ 0. 05 a gallon. And so this is
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  Speaker 2: a great segue into this piece here from the Wall
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  Speaker 2: Street Journal. Weeks before the midterms, almost everything is getting
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  Speaker 2: more expensive. And look, the reason is diesel.
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  Speaker 3: Yes. Yeah, it is causing just about everything to move
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  Speaker 3: up in price here. And as we do update you regularly,
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  Speaker 3: that new price of diesel that AAA has listed out
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  Speaker 3: there is now $ 6. 45 a gallon. I'm rounding to the
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  Speaker 3: nearest penny here. Gasoline at $ 4. 47. Makes nobody comfortable. But
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  Speaker 3: as we've talked about at length, Chuck, there's a crucial
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  Speaker 3: difference between gasoline prices being high and diesel prices being high.
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  Speaker 3: And it has to do with this term we call
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  Speaker 3: elasticity of demand.
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  Speaker 2: Yeah, and here's the basic premise of it. If the
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  Speaker 2: price of gasoline moves up meaningfully, people start changing their behaviors.
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  Speaker 2: Not all of us, but remember, things are priced at
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  Speaker 2: the margin, and so a 1% reduction in demand can
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  Speaker 2: make a big difference in price. So, as an example,
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  Speaker 2: if the price of gas goes from, as it has
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  Speaker 2: in the last month, 405 to 445, you get the
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  Speaker 2: stories of, well, I was gonna, you know, take a
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  Speaker 2: road trip to go and see X, but now it's
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  Speaker 2: gotten a little bit too expensive, so I'm not going
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  Speaker 2: to do it. Again, not everyone changes their plans, and
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  Speaker 2: there are some plans, by the way, that you can't change. Hey, if,
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  Speaker 2: you know, your kid's got a, you know, you're on
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  Speaker 2: a travel team and here are the games that you're playing, great,
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  Speaker 2: you're still playing that schedule. Like, I get it, but
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  Speaker 2: the stuff around the margins changes, and, you know, that
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  Speaker 2: happens at you know, a fairly meaningful level at certain
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  Speaker 2: price points with gasoline. With diesel, it is fundamentally different.
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  Speaker 2: And I happen to be in my local BJ's Wholesale
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  Speaker 2: Club over the weekend last weekend. And do you know
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  Speaker 2: what I saw there, Mike?
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  Speaker 3: A lot of people.
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  Speaker 2: Always a lot of people. No, that's Costco, which is
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  Speaker 2: why I'm not a Costco member, in addition to it
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  Speaker 2: being five minutes further from my house than BJ's. But
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  Speaker 2: what I saw there... were Christmas decorations because it's, you know,
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  Speaker 2: the middle of September. And so time for Christmas.
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  Speaker 1: Got it.
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  Speaker 2: Got to be honest. Gonna pick some up this weekend
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  Speaker 2: because I just had to scout out where I was
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  Speaker 2: gonna put them in my house now that I see
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  Speaker 2: what the supply is, you know, looking like.
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  Speaker 3: Of course you are.
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  Speaker 2: Listen, you know, you gotta get ahead of the curve
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  Speaker 2: on this. But my point is, hey, those are the
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  Speaker 2: early things that are rolling out. All the shipping for
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  Speaker 2: all of the Black Friday deals and all that stuff,
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  Speaker 2: that is happening right now. And you know what I
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  Speaker 2: can tell you is that Target and Walmart and Dick's
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  Speaker 2: Sporting Goods and whoever else sells stuff that people want
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  Speaker 2: to buy for Christmas... They are not going to look
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  Speaker 2: at it and say, well, you know what? Ship came
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  Speaker 2: into Port of Los Angeles. And, you know, before all this,
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  Speaker 2: it cost $ 700 to put that stuff on a truck
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  Speaker 2: and get it to Dallas. Now it costs $ 1, 400 to
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  Speaker 2: do so. Well, we're not going to know that they
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  Speaker 2: don't say that. They say, great, we got to get
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  Speaker 2: the stuff to Dallas because otherwise we don't have a
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  Speaker 2: Black Friday.
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  Speaker 3: Yeah. If you're a farmer, it's either fill up the
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  Speaker 3: combine or let your crops die in the field.
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  Speaker 2: If you are, I was driving this morning behind a
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  Speaker 2: big cement mixer that happened to pull into a lot
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  Speaker 2: where they were pouring a foundation. I'm guessing, not guessing,
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  Speaker 2: I know that that thing does not run on gasoline.
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  Speaker 2: It runs on diesel. They didn't simply say, okay, we're
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  Speaker 2: not going to build the house because the price of
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  Speaker 2: diesel is too high. You got to get that thing
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  Speaker 2: framed before the winter. And so move right on ahead.
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  Speaker 2: Like that is what happens with a lot of things
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  Speaker 2: that are fueled using diesel. So effectively, we have this
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  Speaker 2: question of, hey, at what point do we start to
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  Speaker 2: see meaningful demand destruction happening? on diesel that starts to,
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  Speaker 2: you know, figure out where that price cap is. And
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  Speaker 2: we don't really know because we've never gotten there before.
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  Speaker 3: Right now.
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  Speaker 1: Okay.
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  Speaker 3: I don't want to over-exaggerate. Not every single price is
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  Speaker 3: tied to diesel. I don't really know how, uh, you know, uh,
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  Speaker 3: Sam who cuts my hair was going to justify the higher, uh,
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  Speaker 3: the higher price for.
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  Speaker 2: How you think that shampoo gets there.
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  Speaker 4: Yeah.
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  Speaker 3: I mean, it really does seep into just about everything
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  Speaker 3: because you're right to, to replace the clippers and to
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  Speaker 3: have the whatever hair gel sitting on the table there.
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  Speaker 3: And for Sam himself to drive to the barbershop, all
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  Speaker 3: of these things are going to come up in price.
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  Speaker 3: And so we are not dealing with 2022 levels inflation.
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  Speaker 3: I don't want to exaggerate things. No, we are dealing
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  Speaker 3: with increasing inflation. and very high diesel prices at a
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  Speaker 3: time of very high diesel usage.
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  Speaker 2: And likely to broaden out as a result of that
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  Speaker 2: in terms of where inflation can seep to. Now, here's
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  Speaker 2: some interesting things that I think about when I think
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  Speaker 2: about this. Number one, if you look over the last month,
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  Speaker 2: and Mike, I'm going to show you a chart that
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  Speaker 2: I've never shown before. To all of you listening, you
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  Speaker 2: don't get to see it.
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  Speaker 3: Well, if you're watching on YouTube, you could turn your
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  Speaker 3: I don't think I'm going to.
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  Speaker 2: Turn my computer around. Who knows? But in any case,
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  Speaker 2: I'm going to show you a chart, Mike. The orange
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  Speaker 2: line is the diesel crack spread. The white one is
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  Speaker 2: the 10-year treasury yield. How closely have those lines been
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  Speaker 2: following each other over the last month?
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  Speaker 3: Very closely. Very close. Explain again what the diesel crack
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  Speaker 3: spread is to folks.
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  Speaker 2: Diesel crack spread is a fancy way of saying, hey,
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  Speaker 2: if you're a refiner, what's the difference in what you
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  Speaker 2: receive for a barrel of diesel that you make versus
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  Speaker 2: what you had to pay for the crude that goes
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  Speaker 2: into it? And right now, those crack spreads are around $ 110. Normally,
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  Speaker 2: they're somewhere in the range of $ 20 to $ 25, $ 20
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  Speaker 2: to $ 30. So you're running anywhere from $ 3 to $ 5x
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  Speaker 2: normal spreads that refiners are making. And basically, tick for tick,
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  Speaker 2: you are seeing 10-year treasury yields following the price, the
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  Speaker 2: crack spreads of diesel over the last month, because even
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  Speaker 2: markets have picked up on, hey, unlike gasoline or unlike crude,
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  Speaker 2: the price of diesel does have an impact on a
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  Speaker 2: broad swath of pricing. And so this matters. And this
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  Speaker 2: is why, if we're being 100% honest, like you look at,
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  Speaker 2: you know, hey, why are mortgage rates going up? Diesel's
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  Speaker 2: at least correlating highly there. It's not driving the whole ship,
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  Speaker 2: but yeah, there's a really strong correlation on that side.
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  Speaker 2: The other piece that I think is.
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  Speaker 2: The other piece that makes this kind of uniquely suck
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  Speaker 2: right now is the fact that if there's one industry
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  Speaker 2: that is not impacted by rising diesel prices... It's artificial
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  Speaker 2: intelligence and the construction that is powering that industry right now.
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  Speaker 2: Because if you really believe that you are building the
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  Speaker 2: smartest thing known to man and you're willing to spend
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  Speaker 2: trillions of dollars to do so, a few hundred extra
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  Speaker 2: dollars per load of whatever it is that's being delivered
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  Speaker 2: doesn't matter to you because the business opportunity is so great.
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  Speaker 2: And so this gets at the crux of, I think,
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  Speaker 2: the entire problem, which is Okay, so you've got diesel
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  Speaker 2: that's starting to seep in everywhere else. It's creating additional
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  Speaker 2: inflation in the economy. And the Fed comes along and says, again,
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  Speaker 2: this week, and I'm not saying this is wrong, but
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  Speaker 2: I'm saying this is what they said. Okay, we're seeing
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  Speaker 2: some additional signs of inflation.
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  Speaker 1: Great.
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  Speaker 2: We've got to hike interest rates. Mike, if the price
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  Speaker 2: of diesel going up isn't going to slow the development
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  Speaker 2: of AI data centers, is the price of money going
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  Speaker 2: up going to do it?
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  Speaker 3: Certainly not in the short term, Chuck.
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  Speaker 2: And so what we end up with here is where
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  Speaker 2: the one industry that you actually need to slow in
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  Speaker 2: order to slow some of the other inflationary pressures that
• 10:26
  Speaker 2: are building and maybe see some weakness in the labor
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  Speaker 2: market that would lead to the Fed not hiking rates
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  Speaker 2: is is the one industry that's not going to be
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  Speaker 2: slowed by either higher rates or higher diesel prices, which
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  Speaker 2: means that everyone else in the economy is going to
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  Speaker 2: bear those costs. And that kind of... Sucks. So sorry
• 10:49
  Speaker 2: for us. But listen, we can't get all downbeat and
• 10:53
  Speaker 2: be victims about this. Ultimately, we got to figure out, okay,
• 10:56
  Speaker 2: what do we do? Because this is the world that
• 11:00
  Speaker 2: we exist in right now. Simply throwing our hands up
• 11:02
  Speaker 2: and giving up isn't a choice. And so the question becomes, okay,
• 11:06
  Speaker 2: what do we do? And how do we make the
• 11:08
  Speaker 2: hard choices like heating our home for the winter? How
• 11:10
  Speaker 2: do we navigate these things? Let's take a quick break,
• 11:13
  Speaker 2: and we'll discuss that when we return.
• 11:17
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  Speaker 2: All right, so we talked last segment about how we've
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  Speaker 2: got these two prices in particular that are moving up.
• 12:03
  Speaker 2: Price of diesel and price of money through interest rates
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  Speaker 2: that are creating problems for lots of people these days.
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  Speaker 2: I think that's fundamentally it. The one that's also unique
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  Speaker 2: on this to the New England region is the fact that...
• 12:23
  Speaker 2: About 25% of New England uses home heating oil as
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  Speaker 2: its fuel to heat houses during the winter. In Maine,
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  Speaker 2: it's about 50%. In Vermont, it's about 35%. The other
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  Speaker 2: New England states are lower, but this is a problem
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  Speaker 2: because the price of diesel pretty much tracks tick for
• 12:40
  Speaker 2: tick with the price of home heating oil. So expect
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  Speaker 2: those costs to be like 2x what they were last
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  Speaker 2: year in a lot of cases, maybe sometimes a little less,
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  Speaker 2: maybe sometimes a little more, but really big cost increases.
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  Speaker 2: So the question is, what do we do with this?
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  Speaker 2: And one of the things that's being talked about publicly
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  Speaker 2: now is some type of export ban on diesel in particular.
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  Speaker 3: It was tossed around by Senate Majority Leader, and I
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  Speaker 3: haven't heard the president tweet anything about it, but I
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  Speaker 3: can't honestly keep up with all of his social media posts,
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  Speaker 3: so I'm not sure.
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  Speaker 2: The president from reporting on it, I don't think we've
• 13:17
  Speaker 2: had any public comments, but the president seems to be,
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  Speaker 2: from the reporting I've gathered... against it. And I tend
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  Speaker 2: to agree with that for this specific reason. If you
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  Speaker 2: look at what a diesel export ban does, basically what
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  Speaker 2: you have right now is about 1.5 million barrels per
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  Speaker 2: day of diesel gets exported from the United States. So
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  Speaker 2: if you put any kind of ban in place on
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  Speaker 2: exports of it, immediately you have another 1.5 million barrels
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  Speaker 2: of diesel domestically. What does that do based on what
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  Speaker 2: we know about supply and demand, Mike?
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  Speaker 3: Brings down price.
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  Speaker 2: Brings down the price of diesel, which is what you
• 13:54
  Speaker 2: want to see, which is why I do agree with
• 13:56
  Speaker 2: the proponents of this. They're like, oh, it'll bring down prices,
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  Speaker 2: and I say yes, it will in the short term.
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  Speaker 3: Short term, definitely, yeah.
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  Speaker 2: Here is the problem. Mike, if you are cutting off 1.5
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  Speaker 2: million barrels of diesel that you are exporting, what happens
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  Speaker 2: to the price of diesel everywhere else in the world?
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  Speaker 3: Skyrockets.
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  Speaker 2: It goes up. Now, I'm not to say that the
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  Speaker 2: United States exists in order to provide cheap diesel to Europe.
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  Speaker 2: That's not what I'm saying here. I'm going to make
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  Speaker 2: the economic argument for why this is bad, and here
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  Speaker 2: it is. It's not because stuff from Europe is going
• 14:23
  Speaker 2: to get more expensive for us to import. It's not
• 14:25
  Speaker 2: any of that. It's that if you look at the
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  Speaker 2: mechanics then. So let's say that I am a refiner
• 14:31
  Speaker 2: in the U.S. right now that gets $ 100 per barrel
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  Speaker 2: in order to make diesel. When the price comes down,
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  Speaker 2: let's say that my crack goes from $ 100 down to $ 50.
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  Speaker 3: Yep, crack spread again being the difference in price between
• 14:45
  Speaker 3: the sold barrel of diesel versus the purchased barrel of oil.
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  Speaker 2: On the other hand, what I end up with overseas,
• 14:53
  Speaker 2: let's say I'm a refiner in Europe, my spread that
• 14:56
  Speaker 2: I get goes from $ 100 a barrel up to $ 150
• 14:58
  Speaker 2: or $ 200.
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  Speaker 3: Sure.
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  Speaker 2: What I then say is, okay, these are crazy, insane
• 15:05
  Speaker 2: numbers that I am getting paid to make diesel. You
• 15:08
  Speaker 2: know what I can do? I can bid up every
• 15:11
  Speaker 2: freaking barrel of oil I can get my hands on
• 15:14
  Speaker 2: in order to get it to my refinery because this
• 15:18
  Speaker 2: is my winter to make a killing.
• 15:20
  Speaker 1: Yep.
• 15:21
  Speaker 2: And so what you end up seeing then is that
• 15:23
  Speaker 2: in the United States, hey, what's the one thing that
• 15:26
  Speaker 2: has built up a little bit in the last couple months, fortunately?
• 15:30
  Speaker 2: Crude oil. You notice that we haven't been talking about
• 15:31
  Speaker 2: crude oil quite as much. Again, it's not in a
• 15:33
  Speaker 2: great spot, but it's better than it was over the
• 15:36
  Speaker 2: course of the summer heading into 4th of July. And
• 15:40
  Speaker 2: so all those barrels, remember, if we're only doing a
• 15:42
  Speaker 2: diesel export ban, hey, if someone overseas says, you know what,
• 15:47
  Speaker 2: I'm going to pay $ 200 for that barrel of U.S. crude, okay,
• 15:53
  Speaker 2: it's going to go overseas because no one's going to
• 15:55
  Speaker 2: pay for it domestically because the cracks aren't as high.
• 15:58
  Speaker 2: Which then in turn means... that you work through that
• 16:01
  Speaker 2: excess crude inventory that you have, which isn't much again,
• 16:04
  Speaker 2: but it's, you know, again, 40, 50 million barrels now,
• 16:07
  Speaker 2: better than the 15 to 20 million we had earlier,
• 16:10
  Speaker 2: which then gets you to a point where you say, okay,
• 16:13
  Speaker 2: now barrels of crude, their price domestically goes through the roof,
• 16:17
  Speaker 2: which turns into pushing up diesel and gas prices. And
• 16:21
  Speaker 2: this is why a diesel ban is not a long-term
• 16:25
  Speaker 2: solution to this. but rather a short-term stopgap that eventually
• 16:29
  Speaker 2: ends up making the problem worse.
• 16:30
  Speaker 3: Yeah, I'll take a few other side effects here too, Chuck,
• 16:33
  Speaker 3: because let's put ourselves in the shoes of the, I believe,
• 16:36
  Speaker 3: the largest diesel refiner in the country, which is the
• 16:38
  Speaker 3: Motiva Port Arthur Refinery in Port Arthur, Texas.
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  Speaker 2: Which does what? I think it's like 750 or 800,000
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  Speaker 2: barrels a day.
• 16:47
  Speaker 3: 640 to 730,000 barrels a day. A bunch of that diesel,
• 16:50
  Speaker 3: but all sorts of other products too. They can make gasoline,
• 16:52
  Speaker 3: they can make jet fuel. They're probably cranking out diesel
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  Speaker 3: right now because that's where the profit margins are. If
• 16:57
  Speaker 3: you remove those profit margins by banning the export, they're
• 17:01
  Speaker 3: not going to keep cranking out diesel. They're going to
• 17:04
  Speaker 3: respond to the market conditions and try and match up
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  Speaker 3: supply with demand. So if you do get this drop
• 17:10
  Speaker 3: in diesel, which you probably would from an export ban,
• 17:14
  Speaker 3: then the executives here at Motiva Enterprises are probably going
• 17:19
  Speaker 3: to say, okay, let's start producing gasoline and jet fuel
• 17:23
  Speaker 3: in higher quantities and reduce what we're producing in diesel,
• 17:26
  Speaker 3: which eventually just leads to, again, a balanced market domestically,
• 17:31
  Speaker 3: and those prices probably increasing again due to the other
• 17:33
  Speaker 3: effects outside. Not to mention, if I'm a foreign country
• 17:37
  Speaker 3: that produces some critical material that's also expensive right now
• 17:41
  Speaker 3: that we do need here domestically, and you're telling me
• 17:43
  Speaker 3: I can't have your diesel, I might respond by saying
• 17:47
  Speaker 3: that you can't have my XYZ product.
• 17:48
  Speaker 2: Well, and just as an example... canada might say you
• 17:53
  Speaker 2: know what you're not going to send us any diesel
• 17:55
  Speaker 2: anymore great we're turning off the crude flows yeah i'm
• 18:02
  Speaker 2: not saying it will happen but like this is what
• 18:04
  Speaker 2: happens when you start getting into these types of of
• 18:08
  Speaker 2: situations here now there are countries that have put in
• 18:12
  Speaker 2: place export bans on various some of these items you
• 18:16
  Speaker 2: know over the last six to nine months russia definitely
• 18:20
  Speaker 2: china to some degree Russia has. China had some limited
• 18:24
  Speaker 2: ones earlier. But again, these are closed economic systems to
• 18:27
  Speaker 2: begin with. You talk about like, oh, like Thailand's putting
• 18:30
  Speaker 2: in place like a diesel export ban. That's just because
• 18:33
  Speaker 2: they don't want barrels that have already come into the
• 18:34
  Speaker 2: country going back out. Like Thailand is not producing lots
• 18:39
  Speaker 2: of diesel and being like, well, like, no, no, no, no, no.
• 18:43
  Speaker 2: That's not what's happening there. So when you look at
• 18:48
  Speaker 2: the options on this, They're very limited. And to anyone
• 18:53
  Speaker 2: who says, well, what if we just build more refineries? Okay,
• 18:56
  Speaker 2: I'll see you in 2030 at the earliest.
• 18:59
  Speaker 3: Yeah, the export ban, I really dislike the idea. I
• 19:03
  Speaker 3: don't think it's going to be long-term effective. It does
• 19:06
  Speaker 3: give you what you might want in the short term,
• 19:09
  Speaker 3: and that's the danger part to me. If you're looking
• 19:11
  Speaker 3: for a quick fix ahead of midterms, then an export
• 19:14
  Speaker 3: ban kind of checks the box.
• 19:15
  Speaker 4: It does.
• 19:15
  Speaker 1: Yeah.
• 19:16
  Speaker 3: Has pretty ugly consequences down the road.
• 19:19
  Speaker 2: It can make things look better for a month or
• 19:21
  Speaker 2: two at the cost of long-term supply after that. Let's
• 19:26
  Speaker 2: take a quick break. When we return, we got Wall
• 19:28
  Speaker 2: Street Watch and we're talking about Microsoft and OpenAI.
• 19:38
  Speaker 1: Like us on Facebook and follow us on Twitter at TFEShow.
• 19:43
  Speaker 1: Breaking business news is always first, right here on the
• 19:46
  Speaker 1: Financial Exchange Radio Network. Time now for Wall Street Watch.
• 19:52
  Speaker 1: Tracking the stocks, the data, and the headlines driving markets
• 19:55
  Speaker 1: so far today, right here on the Financial Exchange Radio Network.
• 19:59
  Speaker 4: Well, after yesterday's rally, markets today are dipping into negative territory.
• 20:04
  Speaker 4: The Dow is down over a third of a percent
• 20:07
  Speaker 4: or 194 points off. S & P 500 down about
• 20:10
  Speaker 4: two tenths of one percent or 14 points lower. NASDAQ
• 20:14
  Speaker 4: down about a tenth of a percent or 34 points off.
• 20:17
  Speaker 4: Russell 2000 is down over three quarters of a percent.
• 20:20
  Speaker 4: 10-year treasury yield is up 5 basis points, now at 5.004%.
• 20:25
  Speaker 4: Crude oil up 1.3% at $ 103 a barrel, while Brent
• 20:30
  Speaker 4: is trading right around $ 104 a barrel. Breaking news from
• 20:34
  Speaker 4: Berkshire Hathaway this morning. After famed investor Warren Buffett announced
• 20:37
  Speaker 4: he is stepping down as chairman, Buffett's son Howard Buffett
• 20:40
  Speaker 4: will replace the 96-year-old legend, Effective immediately. Meanwhile, steel producers
• 20:46
  Speaker 4: Steel Dynamics and Nucor are sliding anywhere between 3% and
• 20:49
  Speaker 4: 5% after they delivered third quarter earnings guidance that showed
• 20:52
  Speaker 4: weaker than expected results. Elsewhere, Wells Fargo downgraded Netflix to underweight,
• 20:58
  Speaker 4: where the bank said that worrying engagement trends in weaker
• 21:01
  Speaker 4: content expected to be released in the second half of
• 21:05
  Speaker 4: the year will lead to lower margin expansion in 2027.
• 21:08
  Speaker 4: In 2028, Netflix shares are down 4%. and shares in
• 21:14
  Speaker 4: Xenon Pharmaceuticals are tanking 29% after it announced it was
• 21:18
  Speaker 4: pausing enrollment for new patients in its clinical studies for
• 21:22
  Speaker 4: treatment for major.
• 21:23
  Speaker 2: And bipolar depression.
• 21:25
  Speaker 4: Long reports of mental and nervous system-related side effects. I'm
• 21:30
  Speaker 4: Tucker Silva, and that is Wall Street Watch.
• 21:34
  Speaker 2: Mike, late yesterday, a judge unsealed the summary judgment motions
• 21:42
  Speaker 2: in the New York Times versus OpenAI and Microsoft case.
• 21:46
  Speaker 2: And I got to tell you, it's basically a horrible
• 21:50
  Speaker 2: look for OpenAI and Microsoft. And here's the deal. When
• 21:58
  Speaker 2: we talk about what's at stake here, We have to
• 22:02
  Speaker 2: first talk about an idea that's known as fair use
• 22:07
  Speaker 2: in the legal world. Fair use relates to copyrighted works
• 22:11
  Speaker 2: and basically is the line where something goes from, hey,
• 22:19
  Speaker 2: you haven't infringed on the copyright of that work to, okay,
• 22:23
  Speaker 2: you are infringing on it. And an example that I'll
• 22:26
  Speaker 2: give is, let's say that you are someone who watches
• 22:34
  Speaker 2: the NHL for years you watch NHL games.
• 22:38
  Speaker 1: Sure.
• 22:39
  Speaker 2: You can take video of those games and, you know,
• 22:43
  Speaker 2: use that to teach people about what's going on in
• 22:46
  Speaker 2: an NHL game. You can make clips on YouTube and
• 22:49
  Speaker 2: put them on, you know, you can put them on
• 22:52
  Speaker 2: Twitter and, you know, wherever and you modify them with,
• 22:54
  Speaker 2: you know, oh, circle this player and look what's happening
• 22:56
  Speaker 2: here and yada yada. Fair use generally allows for that
• 23:00
  Speaker 2: because fair use has four key tests that you have
• 23:05
  Speaker 2: to pass in order for it to become copyright infringement.
• 23:08
  Speaker 2: The first is, what's the purpose and character of the use?
• 23:10
  Speaker 2: Is it commercial in nature, or is it for non-profit
• 23:13
  Speaker 2: educational purposes? You could be crossing a line on YouTube there, depending.
• 23:17
  Speaker 2: You could be, but again, if you're just doing it,
• 23:21
  Speaker 2: it's generally fine. The second is the nature of the
• 23:24
  Speaker 2: copyrighted work. What is it and what are you using?
• 23:27
  Speaker 2: If you just published a whole NHL game to YouTube,
• 23:31
  Speaker 2: that would be a copyright violation. If it's, hey, here's
• 23:33
  Speaker 2: this three-second clip and then here's what I'm doing to it, okay,
• 23:36
  Speaker 2: that's obviously different. This is the next one. The amount
• 23:39
  Speaker 2: and substantiality of the portion used related to the copyright
• 23:43
  Speaker 2: work as a whole. So again, if you've got a
• 23:45
  Speaker 2: three-second clip and you turn that into a 20-minute video
• 23:48
  Speaker 2: that you're doing on what happened there, more of the
• 23:51
  Speaker 2: work is your own than what it was, you know,
• 23:53
  Speaker 2: than the original work. And the last one is the
• 23:55
  Speaker 2: effect of the use upon the potential market for the
• 23:58
  Speaker 2: copyrighted work. Again, if you put the full NHL game
• 24:01
  Speaker 2: on YouTube... hey, then the NHL is not going to
• 24:04
  Speaker 2: get the revenue from rebroadcasts of that game and things,
• 24:07
  Speaker 2: whereas a three-second clip does not affect someone wanting to
• 24:09
  Speaker 2: watch that full game in a negative way. So fair
• 24:13
  Speaker 2: use is the doctrine that is used in the legal
• 24:15
  Speaker 2: world to determine whether someone has violated copyright through their
• 24:20
  Speaker 2: reproduction of a portion or all of a copyrighted work.
• 24:24
  Speaker 1: Weird.
• 24:24
  Speaker 3: We just got sued by the NHL.
• 24:26
  Speaker 2: Now, news articles are generally copyrighted based on the way
• 24:33
  Speaker 2: that the legal structure works.
• 24:38
  Speaker 3: It's also pretty obvious that they're copyrighted, given that they
• 24:40
  Speaker 3: make you pay to access most of them. Correct. Especially
• 24:44
  Speaker 3: the New York Times.
• 24:45
  Speaker 2: Here's what you get here, is that Microsoft's director of
• 24:48
  Speaker 2: applied science, back during the initial development of ChatGPT, said, again,
• 24:58
  Speaker 2: this is perhaps the largest theft of labor in human
• 25:02
  Speaker 2: history and an astonishing theft of unprecedented proportions. Not things
• 25:06
  Speaker 2: that you want to hear from Microsoft's Director of Applied Sciences.
• 25:10
  Speaker 2: This thing gets topped by OpenAI's head of chat, GPT,
• 25:13
  Speaker 2: who says, quote, which are largely substantive, period, and will
• 25:21
  Speaker 2: get more and more substantive as they get better. Remember,
• 25:24
  Speaker 2: part of the fair use doctrine is, hey, can the
• 25:29
  Speaker 2: portion that's used substitute for the original work as a whole?
• 25:33
  Speaker 2: And this is an open AI guy basically saying, yes,
• 25:36
  Speaker 2: it will be able to. But this isn't the worst
• 25:39
  Speaker 2: part of it, quite honestly. I'm going to read an
• 25:42
  Speaker 2: entire paragraph from the summary judgment here. That is the
• 25:49
  Speaker 2: most damning out of the whole thing. The transgressive and
• 25:52
  Speaker 2: deceptive nature of the defendants efforts to acquire plaintiffs content
• 25:56
  Speaker 2: confirms that their purpose in doing so was to fundamentally
• 25:59
  Speaker 2: avoid the cost of acquiring lawful copies. So the New
• 26:02
  Speaker 2: York Times and other publishers most likely said, like, oh,
• 26:05
  Speaker 2: you want this content here? You like you can pay
• 26:07
  Speaker 2: us for it and give us, you know, royalty or whatever,
• 26:09
  Speaker 2: however they wanted to set it up. OpenAI employees devised
• 26:13
  Speaker 2: and implemented strategies to circumvent paywalls without detection when scraping websites. Well, gee,
• 26:21
  Speaker 2: that's not good. For example, when Nick Ryder informed Mr. Brockman, Mr.
• 26:26
  Speaker 2: Brockman refers to Greg Brockman, who is the, I want
• 26:31
  Speaker 2: to make sure I get his title correct, he is
• 26:35
  Speaker 2: the co-founder and president of OpenAI. Okay, pretty high level.
• 26:39
  Speaker 2: Pretty high level. For example, when Nick Ryder informed Mr.
• 26:44
  Speaker 2: Brockman about, quote, a hack to get around New York
• 26:46
  Speaker 2: Times paywall to help with Mr. Brockman's efforts to scrape
• 26:49
  Speaker 2: the Times site, Mr. Brockman responded, ah, nice.
• 26:56
  Speaker 3: Sounds like every tech AI executive I can think of.
• 27:00
  Speaker 2: Guys, I got to be honest. This is bad. And
• 27:07
  Speaker 2: I say this, by the way, as someone who, again,
• 27:09
  Speaker 2: I'm a big believer that, look, all of us learn
• 27:11
  Speaker 2: by reading other things, but we're limited by the speed
• 27:13
  Speaker 2: and pace with which we can read, and there's only
• 27:16
  Speaker 2: so many pages a human can read in a day.
• 27:18
  Speaker 2: It's different when you're training a data set and deliberately
• 27:22
  Speaker 2: devising methods to not pay the creators for the work
• 27:27
  Speaker 2: they did on that data set. And that is the
• 27:30
  Speaker 2: fundamental problem here, which then opens up a whole can
• 27:33
  Speaker 2: of worms in terms of, OK, if they've done this
• 27:38
  Speaker 2: with The New York Times, who The New York Times,
• 27:41
  Speaker 2: like whatever your personal thoughts are about, like the nature
• 27:44
  Speaker 2: of their coverage. Is it safe to say that The
• 27:47
  Speaker 2: New York Times is probably one of like the three
• 27:51
  Speaker 2: or four most recognizable publishers of any content in the world?
• 27:56
  Speaker 3: Yeah, I don't think you can exclude them from that list.
• 27:59
  Speaker 2: It's on that short list somewhere. Guys, if they're going
• 28:02
  Speaker 2: to do it with the New York Times.
• 28:05
  Speaker 3: They're certainly doing it with everything else.
• 28:06
  Speaker 2: They're going to do it with you.
• 28:07
  Speaker 1: Yeah.
• 28:09
  Speaker 2: And so it raises a real question, in my opinion, then. Okay,
• 28:13
  Speaker 2: if they deliberately... engaged in efforts to prevent the Times
• 28:19
  Speaker 2: from being paid for their content, how much money could
• 28:23
  Speaker 2: these companies owe to not just the Times, but to
• 28:26
  Speaker 2: anyone else who they might have scraped this content illegally from?
• 28:32
  Speaker 2: And then, depending on how much they owe them going forward,
• 28:36
  Speaker 2: what does that do to the business model for these
• 28:38
  Speaker 2: companies if the very foundational models that they have built
• 28:43
  Speaker 2: now have another expense that they have to pay because
• 28:47
  Speaker 2: they couldn't pay a few dollars to these companies because, gosh,
• 28:52
  Speaker 2: it would have just been too slow or too expensive
• 28:55
  Speaker 2: then or... Ah, nice.
• 28:59
  Speaker 3: It is an open question... I guess my response, Chuck,
• 29:03
  Speaker 3: would be I see nothing about recent court cases that
• 29:08
  Speaker 3: indicates judges are willing to impose any sort of strict
• 29:11
  Speaker 3: penalties on tech companies.
• 29:12
  Speaker 2: I don't either, but it just continues to reinforce something
• 29:15
  Speaker 2: I've been saying for a while, which is these guys suck.
• 29:18
  Speaker 3: Yeah, sure.
• 29:19
  Speaker 2: Like, if you want to know why Americans don't want
• 29:22
  Speaker 2: data centers, it's not the noise. It's not the water.
• 29:26
  Speaker 2: There's plenty of stuff that we put up with that's
• 29:28
  Speaker 2: noisy and uses lots of water. Maybe not pickleball, which
• 29:31
  Speaker 2: is noisy, which we don't like. But, hey, lots of
• 29:34
  Speaker 2: us play golf. Ever see a water bill from a
• 29:36
  Speaker 2: golf course? It's freaking astronomical, and no one's like, oh,
• 29:39
  Speaker 2: get this golf course. out of my yard. No, people
• 29:41
  Speaker 2: are like, oh, I want to go move next to that.
• 29:43
  Speaker 2: That sounds nice. So my point is, look, these guys,
• 29:49
  Speaker 2: I use that term for tech companies as a whole,
• 29:51
  Speaker 2: not necessarily open AI execs, but tech companies as a whole,
• 29:56
  Speaker 2: they have absolutely... not acted in a good public interest
• 30:00
  Speaker 2: for the last 20 years, and we are right to
• 30:03
  Speaker 2: not trust them.
• 30:04
  Speaker 3: Yeah. My prediction, unmeaningful fine.
• 30:09
  Speaker 2: $ 6 and a subscription to the New York Times.
• 30:11
  Speaker 1: Yeah.
• 30:12
  Speaker 3: That's what it's going to cost them. Which is disappointing.
• 30:15
  Speaker 1: It is.
• 30:16
  Speaker 2: Now, maybe we're proven wrong on that, but as Mike said, like, look,
• 30:20
  Speaker 2: Google was found guilty of a whole bunch of antitrust stuff,
• 30:22
  Speaker 2: and the judge basically said, well, I'm not really going
• 30:25
  Speaker 2: to impose much because your business could be changing. Could
• 30:28
  Speaker 2: be changing, like, my goodness. It could be changing because
• 30:31
  Speaker 2: a bunch of other guys stole a bunch of content
• 30:33
  Speaker 2: that they were willing to pay for.
• 30:33
  Speaker 3: I broke a lot of get here, but now that
• 30:35
  Speaker 3: I'm here and my business is under threat, I shouldn't
• 30:37
  Speaker 3: be penalized.
• 30:38
  Speaker 1: Oh.
• 30:40
  Speaker 2: Got it.
• 30:41
  Speaker 1: Right.
• 30:42
  Speaker 2: So you created a fake identity in order to embezzle
• 30:46
  Speaker 2: this money, but now that money could be taken away because.
• 30:48
  Speaker 3: Well, no, like.
• 30:50
  Speaker 2: I mean, like, what are we doing here?
• 30:52
  Speaker 1: Right.
• 30:53
  Speaker 2: I'm just sorry.
• 30:54
  Speaker 3: The practicalities, when you bring it back to, like, an
• 30:56
  Speaker 3: individual's crimes, are so preposterous.
• 31:00
  Speaker 2: Like, yeah.
• 31:01
  Speaker 3: You know, I robbed a bunch of banks, and I
• 31:04
  Speaker 3: became very wealthy. But if you take all this money
• 31:07
  Speaker 3: away from me, I won't be wealthy anymore.
• 31:09
  Speaker 2: Right, then I'll be poor, and I'll have to go
• 31:10
  Speaker 2: to jail. Well, we can't have that.
• 31:13
  Speaker 3: We know.
• 31:13
  Speaker 2: Like... I mean, it's just.
• 31:15
  Speaker 3: This is effectively what was decided with Google.
• 31:18
  Speaker 2: Alphabet. I don't know. These companies are not good stewards
• 31:23
  Speaker 2: of the technology that they're developing. And this is true
• 31:26
  Speaker 2: when it was far less powerful than what they're developing today. So,
• 31:29
  Speaker 2: I don't know. It's just... It's a little gross, to
• 31:35
  Speaker 2: be honest, and a little disappointing.
• 31:37
  Speaker 1: But.
• 31:38
  Speaker 2: Again, this is the world we live in, and we've
• 31:42
  Speaker 2: got to figure out how to deal with it.
• 31:47
  Speaker 3: Yuck.
• 31:47
  Speaker 2: I still maintain, look, if there's any time that you'd
• 31:49
  Speaker 2: want to be alive in human history, it's now. Go
• 31:53
  Speaker 2: back any other time, and people, yeah, they wouldn't be
• 31:55
  Speaker 2: complaining about data centers. They'd be complaining about polio. They
• 31:58
  Speaker 2: wouldn't be complaining about data centers. They'd be complaining about,
• 32:02
  Speaker 2: you know... Take your pick. Take your pick.
• 32:06
  Speaker 1: Like.
• 32:08
  Speaker 3: Being a serf.
• 32:09
  Speaker 2: Yeah, like serfdom, you know?
• 32:12
  Speaker 3: This is better.
• 32:13
  Speaker 2: Yeah, you know, stuff like that. Let's take a quick break,
• 32:16
  Speaker 2: and when we return, let's see, what do we want
• 32:19
  Speaker 2: to talk about? Oh, Warren Buffett stepping down as chair
• 32:22
  Speaker 2: of Berkshire. Let's discuss next.
• 32:24
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• 32:27
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• 32:30
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• 32:35
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• 32:37
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• 32:41
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• 32:43
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• 32:55
  Speaker 2: Warren Buffett is now stepping down as the chairman of
• 33:01
  Speaker 2: the board of directors for Berkshire Hathaway. At the beginning
• 33:04
  Speaker 2: of the year, he stepped down as CEO.
• 33:05
  Speaker 3: Was it that recently?
• 33:06
  Speaker 2: Yeah, it was just the beginning of the year. And
• 33:09
  Speaker 2: so pretty much saying, look, any type of day-to-day or
• 33:15
  Speaker 2: even quarter-to-quarter operations, not my time anymore. He's 96 years old.
• 33:19
  Speaker 3: Justified.
• 33:20
  Speaker 2: He's earned it. Take a day, Warren. It's okay. But, again, like,
• 33:24
  Speaker 2: you know who Warren actually is, and, you know, it
• 33:28
  Speaker 2: makes sense that he wanted to work this long. I mean,
• 33:30
  Speaker 2: I know that he comes off as, like, this folksy, well,
• 33:33
  Speaker 2: I live in, like, the same, like, three-bedroom home, and,
• 33:36
  Speaker 2: you know, I drink my Diet Cokes and yada yada.
• 33:39
  Speaker 2: But make no mistake, like, Warren Buffett is an absolute shark.
• 33:42
  Speaker 2: He loved the game. He loved everything about it. And
• 33:48
  Speaker 2: it's finally, I guess, time for him to call it here.
• 33:50
  Speaker 3: He played it for a good 76 years, so.
• 33:53
  Speaker 2: The piece that I got to be honest, and look,
• 33:58
  Speaker 2: it caught my eye, so I have to mention it.
• 34:01
  Speaker 2: His son Howard, who's been a Berkshire director since 93,
• 34:04
  Speaker 2: so clearly like no dummy himself. His son Howard's going
• 34:07
  Speaker 2: to assume the chairman role. How old is he?
• 34:10
  Speaker 3: 71.
• 34:12
  Speaker 2: I mean, like, what? Like, listen, listen. Who's going to
• 34:16
  Speaker 2: replace him? Like, I'm sorry for any other company. It'd
• 34:20
  Speaker 2: be like, who's on deck? Who are we talking about here? Like.
• 34:23
  Speaker 2: What are we doing? There's multiple reasons why you just
• 34:29
  Speaker 2: look at it and you're like, okay, I'm not sure
• 34:31
  Speaker 2: about this one, but hey, I guess we'll see how
• 34:34
  Speaker 2: it goes. So congratulations, Howard, or as he's known apparently,
• 34:39
  Speaker 2: this is from the Wall Street Journal, Howie. So good luck, Howie.
• 34:42
  Speaker 4: Leaving your IRA to your children may sound like the
• 34:45
  Speaker 4: obvious choice, but how they receive that money could have
• 34:49
  Speaker 4: important tax consequences. Cushing and Dolan has a new guide
• 34:53
  Speaker 4: called Why Name Your Estate an IRA Beneficiary. Under current rules,
• 34:57
  Speaker 4: most adult children who inherit an IRA must withdraw their
• 35:00
  Speaker 4: money within 10 years. That could mean taking retirement distributions
• 35:04
  Speaker 4: while they're still working and earning income, potentially creating a
• 35:08
  Speaker 4: larger tax bill. That's one reason why your IRA beneficiary
• 35:12
  Speaker 4: should be part of your overall estate plan. Who receives
• 35:15
  Speaker 4: the account, how they receive it, and the tax consequences
• 35:19
  Speaker 4: that may follow all deserve careful consideration. Get Cushing &
• 35:23
  Speaker 4: Dolan's new guide called Why Name Your Estate an IRA
• 35:26
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• 35:28
  Speaker 2: That's 866-848-5699.
• 35:35
  Speaker 4: Or you can request the guide from their website, LegalExchangeShow.com.
• 35:40
  Speaker 1: The proceeding was paid for and the views expressed are
• 35:41
  Speaker 1: solely those of Cushing and Dolan. Cushing and Dolan and
• 35:44
  Speaker 1: or Armstrong Advisory may contact you offering legal or investment services.
• 35:47
  Speaker 1: Cushing and Armstrong do not endorse each other and are
• 35:49
  Speaker 1: not affiliated.
• 35:50
  Speaker 2: I'm sorry. When Tucker started that, he goes, you know,
• 35:54
  Speaker 2: leaving your IRA to your children. And I go, ah,
• 35:58
  Speaker 2: that's nothing. How about leaving your board seat to your kid?
• 36:01
  Speaker 2: You know, like.
• 36:03
  Speaker 3: Some high expectations. He's got to serve for a quarter
• 36:05
  Speaker 3: century to even be in Buffett's category here.
• 36:08
  Speaker 2: Right? Can we bet?
• 36:14
  Speaker 3: Is there a betting market on how long Howard will
• 36:16
  Speaker 3: serve as chairman of the Berkshire Hathaway board?
• 36:19
  Speaker 2: I'm sure there's a prediction market out there. But it
• 36:23
  Speaker 2: really has shades of King Charles assuming the throne at 74.
• 36:30
  Speaker 2: It's got the same kind of vibe. It's like, well,
• 36:32
  Speaker 2: normally you'd be retiring then, but... In this family. Here's
• 36:37
  Speaker 2: some more responsibility. Good luck, Howie. Let's see. What do
• 36:42
  Speaker 2: we want to talk about here? In this family, you're
• 36:45
  Speaker 2: just coming into your stride. Toys R Us. They're going
• 36:49
  Speaker 2: to have 120 new stores opening across the U.S. this
• 36:52
  Speaker 2: holiday season. Thrilled to see this. So they've got a
• 36:56
  Speaker 2: partnership with Go Retail Group.
• 36:58
  Speaker 3: I don't know who.
• 36:59
  Speaker 2: go retail group is. Uh, but, uh, listen, they went
• 37:04
  Speaker 2: through a bankruptcy back in 2017. Uh, the name I
• 37:08
  Speaker 2: believe was bought during the bankruptcy auction or like licensed
• 37:11
  Speaker 2: to someone else. So it's not really the same company.
• 37:13
  Speaker 2: It's just all of the, what's the drafts name again, Gerald, Jeff, Jeff,
• 37:18
  Speaker 2: I think Jeffrey, the giraffe, Jeffrey sounds right. Uh, but, uh,
• 37:23
  Speaker 2: I guess what I'm wondering on this is, so there,
• 37:27
  Speaker 2: They're talking about opening 120 stores for the holiday season.
• 37:32
  Speaker 2: The holiday season's here. Is this going to be like
• 37:36
  Speaker 2: Spirit Halloween?
• 37:37
  Speaker 3: So, one, I think these plans were probably in place
• 37:39
  Speaker 3: for a while, and I don't believe that they anticipated
• 37:42
  Speaker 3: diesel prices at $ 6. 45 a gallon. This could be done
• 37:45
  Speaker 3: before it starts. Like, honestly, this could be absolutely crushed
• 37:49
  Speaker 3: before it even begins.
• 37:51
  Speaker 2: What is Go Retail Group? I gotta find out, like,
• 37:55
  Speaker 2: what they actually do. About Go Retail Group. Here we go.
• 37:59
  Speaker 2: For 30 years, they've been building something special. Okay, like,
• 38:02
  Speaker 2: what do you actually own? So they got Toys R Us, Calendars.com,
• 38:08
  Speaker 2: Attic Salt.
• 38:09
  Speaker 3: Yeah, this is done.
• 38:11
  Speaker 2: Snoozables. Attic Salt. Tiny Headed Kingdom. What the hell is
• 38:16
  Speaker 2: Attic Salt? Kobioto Sweethearts. And Toys R Us. Good luck.
• 38:22
  Speaker 2: We'll be back in a few.