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Are Markets Pricing in the Wrong Economic Story? · The Financial Exchange Show

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Speaker 1: making a donation Today. Face is the Financial Exchange with
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Speaker 1: Mike Armstrong and Mark Vandetti.
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Speaker 2: Good morning, Happy Tuesday, Welcome back to the Financial Exchange.
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Speaker 2: It's Mike, Mark and Tucker with you on a morning
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Speaker 2: where markets are actually improving.
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Speaker 3: Here we get the Dow off eighty eight.
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Speaker 2: Points, a little bit more than a little bit less
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Speaker 2: than one fifth of a percent. Nasdaks still leading the
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Speaker 2: way down, off more than like a third of a percent,
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Speaker 2: but that's far better than where we were just even
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Speaker 2: ten minutes ago. So some improvement in early trading in markets.
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Speaker 2: SMP down sixteen points or one quarter of one percent.
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Speaker 2: We'll be hearing from the likes of Walmart, John Deere,
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Speaker 2: and others this week. In earnings, we'll be getting some
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Speaker 2: more inflation rings. The Q four first read on Q
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Speaker 2: four GDP, Is that right, Mark, Yes, we'll be get
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Speaker 2: that reading as well. Oil markets are not seemingly reacting
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Speaker 2: a whole lot to around, partially closing the straight of
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Speaker 2: horror moves with West Texas Crewed moving down in price
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Speaker 2: by one and a half percent.
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Speaker 3: In the bond market, we've got yields.
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Speaker 2: On the ten year Treasury sitting at four point zero
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Speaker 2: five percent and nothing. Oh yeah, once again. In commodity markets,
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Speaker 2: wild things happening once again. We've got silver prices moving
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Speaker 2: down five bucks an ounce six and a half percent. There,
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Speaker 2: gold prices moving down one hundred and fifty five dollars
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Speaker 2: ounce three percent in early trading. There anything else kind
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Speaker 2: of catching your eyes?
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Speaker 3: Marketing?
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Speaker 4: So rates dropping pretty precipitously. Sure, what's the consensus? Is
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Speaker 4: there a little scrolling explanation there? Expectations that the Fed
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Speaker 4: will cut rates. That has that impacts obviously the short
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Speaker 4: end of the so called yield curve, maybe out to
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Speaker 4: ten years or so. So it could be that could
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Speaker 4: market processing the idea that the Fed will have room
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Speaker 4: to ease. A prominent Fed governor this morning said he
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Speaker 4: sees the possibility of several rate cuts. Don't ask me why,
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Speaker 4: but he he's accomplished academic too, He's probably good as reasons.
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Speaker 4: See the possibility of several rate cuts this year. That
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Speaker 4: puts pressure again on the front end of the curve.
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Speaker 4: That could be it.
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Speaker 2: Yeah, to your point, early February ten year, rates were
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Speaker 2: sitting around four and a quarter. We're now down to
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Speaker 2: almost four percent even. Yeah, multitude of factors, maybe nervousness
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Speaker 2: about markets, I.
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Speaker 4: Mean it AINTI economy, the economy is going like gangbusters
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Speaker 4: without really we're not exaggerating.
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Speaker 3: Yeah, the market story we're talking about this in the
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Speaker 3: first hour.
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Speaker 2: But the market story that's been dominating for the last
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Speaker 2: few weeks now has been interesting to me as well.
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Speaker 2: It's turned from oh, this AI stuff is overblown to know,
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Speaker 2: there's no way it's overblown. If we have these companies
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Speaker 2: spending six hundred and fifty billion dollars in AI build
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Speaker 2: out next year, but a bunch of the companies that
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Speaker 2: exist to day might not exist in the future, or
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Speaker 2: at least might not exist in the same fashion given
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Speaker 2: this new technology and its capabilities, which.
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Speaker 3: Is interesting to me.
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Speaker 2: That is a very different narrative than what was deployed
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Speaker 2: over the course of the last three years.
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Speaker 4: There are almost a couple different questions here. Mike, will
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Speaker 4: change the world Probably, yeah, I'll defer to the experts
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Speaker 4: on that the Internet changed the world. Will it change
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Speaker 4: the trend and growth? That's a bigger question, and that's
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Speaker 4: a rhetorical one. We don't know. Some enthusiasts say absolutely
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Speaker 4: it will. So what do I mean by change the
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Speaker 4: trending growth? Do you mind if I just briefly say, okay,
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Speaker 4: so twenty five years from now, will we be richer
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Speaker 4: than we otherwise would have been had AI not been invented?
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Speaker 4: And keep in mind that, or had AI not become
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Speaker 4: pervasive and integrated into everything, keep in mind that if
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Speaker 4: that doesn't happen, something else will. So to ask this
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Speaker 4: question differently, Mike, if the Internet hadn't been invented, would
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Speaker 4: we be as rich as we are today? Well, actually,
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Speaker 4: growth has slowed down a little bit from the late
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Speaker 4: twentieth century. Would it have slowed down even more without
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Speaker 4: the Internet? Or would something else have taken its place?
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Speaker 4: Would we instead of cured I mean, it seems silly
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Speaker 4: to even speculate about this. Would we have cured some
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Speaker 4: major cause of mortality, heart disease or something like that,
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Speaker 4: and those two are obviously not exclusive, But those investments
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Speaker 4: would have went somewhere else, something would have caused the
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Speaker 4: economy to grow. It's not clear that the Internet changed
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Speaker 4: the trend in GDP growth, which is what matters for
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Speaker 4: living standards, and it's not clear at this point. By analogy,
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Speaker 4: I hope this works that AI will change the trend
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Speaker 4: in GDP such that when we look back twenty five
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Speaker 4: years from now, you and me doing the show. Hopefully, well,
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Speaker 4: maybe at least one of us, we could say, yeah,
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Speaker 4: we're richer today, I ask.
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Speaker 3: Heart disease thing years.
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Speaker 4: Some things aren't looking things aren't looking good for either
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Speaker 4: one of us, probably especially me. But anyway, will we
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Speaker 4: be richer than we otherwise would have been? That's a
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Speaker 4: harder question. And that doesn't mean AI won't matter in
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Speaker 4: the intern It will certainly matter for the companies that
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Speaker 4: are put out of business by it, and for the
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Speaker 4: companies and people who own them that grow rich as
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Speaker 4: a result of it.
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Speaker 2: It seems to me equity investors are hypothesizing, yes, to
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Speaker 2: answer that question, the all be richer, but we will
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Speaker 2: be richer because of it, and they also seem to
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Speaker 2: be hypothesizing. Can't say that there's been a uniform theory
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Speaker 2: on this, but that there'll be a massive reshuffling of
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Speaker 2: the deck that I could killing.
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Speaker 4: Would you agree with that?
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Speaker 3: I think? I do? I do.
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Speaker 4: It's going to change the world, there's no doubt. Like
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Speaker 4: the Internet changed the world. Life's a lot different now
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Speaker 4: than it was in nineteen ninety.
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Speaker 2: What's been interesting is for the last couple of decades,
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Speaker 2: so technology in particular has been a.
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Speaker 3: Sector where there has.
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Speaker 2: Not been the same dominance by single companies over long
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Speaker 2: periods of time. Right, You think about the energy sector
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Speaker 2: and you go take a look at the major players there.
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Speaker 2: They are pretty much the same major players, although merged
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Speaker 2: together and traded five decades ago. Take a look at
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Speaker 2: tech and you think about who the major players were
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Speaker 2: in nineteen ninety and then two thousand, and then twenty ten,
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Speaker 2: and from really twenty ten through now. We have not
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Speaker 2: seen much in the way of a reshuffling on that front,
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Speaker 2: but there were completely different companies.
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Speaker 3: Right. IBM was top of the playhouse back in.
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Speaker 2: Nineteen ninety and barely is even worth mentioning in today's economy.
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Speaker 2: Will AI be the new reason that, Hey, that whole
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Speaker 2: deck gets reshuffled, and the wealth and the market creation
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Speaker 2: it's allocated elsewhere. That's been the trend for taps for
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Speaker 2: most of its history.
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Speaker 4: Isn't the safe answer to that? The radical answer, which
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Speaker 4: is yeah, probably, I can't tell you the winners will
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Speaker 4: be sure, but yeah, probably, But that doesn't mean will
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Speaker 4: be worse. This is a little bit yeah or but
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Speaker 4: this doesn't mean the average person will be better off.
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Speaker 4: And this sounds a little abstract but it's true, though,
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Speaker 4: if AI is not trend changing, like the Internet was
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Speaker 4: not trend changing. If you a plot a time so
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Speaker 4: called time series of GDP growth, and you look at
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Speaker 4: it the right way, you won't see a change in
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Speaker 4: the slope. You won't see GDP like took off in
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Speaker 4: the nineties because of the Internet. You'll see what looks
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Speaker 4: like a pretty uniform trend from nineteen forty seven, when
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Speaker 4: really good record keeping started. You can go back even
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Speaker 4: earlier if you look in the right place until today. Hey,
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Speaker 4: that's what's That's what's most confounding about all this. It
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Speaker 4: can be both life changing, but at the same time
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Speaker 4: in a per capita wealth sense, and maybe that's too
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Speaker 4: narrow in the same time, not living standard changing like
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Speaker 4: the Again, the Internet wasn't, even though we lived much
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Speaker 4: differently than we did.
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Speaker 2: In the same way that everybody's been theorizing about the
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Speaker 2: winners and losers in the AI space, everybody's been theorizing
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Speaker 2: about who the employee winners and losers are going to be.
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Speaker 2: What areas of the labor market are going to be
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Speaker 2: completely disrupted. We've got three separate pieces this morning. Muhammad
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Speaker 2: al Arian published one in the Financial Times talking about
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Speaker 2: how this time really could be different on jobs and
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Speaker 2: effectively saying that, hey, the jobs report that we got
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Speaker 2: last Wednesday was an in.
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Speaker 3: And of itself more or less a mirage.
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Speaker 2: It showed really strong growth, and you know what, the
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Speaker 2: revisions that came through and other revisions in the future
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Speaker 2: might wipe some of that away.
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Speaker 3: What is your take on.
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Speaker 2: Does Muhammad al Arian have a succinct view on what
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Speaker 2: he believes is happening with the US labor market or
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Speaker 2: is there really nothing here because we continue to get
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Speaker 2: piece after piece of people disagreeing about what the direction
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Speaker 2: is going to be the labor market because of Ai.
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Speaker 4: No, I think he's his arguments are coherent. I mean,
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Speaker 4: he is a PhD former academic, so he makes intellectually
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Speaker 4: sort of tight arguments. He's not all over the place. Sure,
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Speaker 4: he's a little bit bland at times. He kind of
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Speaker 4: summarizes conventional thinking and repackages it a little. So I
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Speaker 4: always come I always walk away from his pieces like
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Speaker 4: I just you know, like you do after Chinese food,
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Speaker 4: like I'm still Hungry's what's going on? So his his pieces,
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Speaker 4: his articles to me are like Chinese food, and I
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Speaker 4: don't nothing against Chinese food, which I love, we all
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Speaker 4: love it, but leave you a little bit wanting, and
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Speaker 4: his articles always do so with that sort of general comment. Yeah, Mike,
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Speaker 4: I mean he points out the things a lot of
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Speaker 4: people are talking about. Certain jobs will become redundant with AI. Yep, well,
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Speaker 4: no kidding, and as a result, you may seek He
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Speaker 4: talks about the decoupling that we talked about earlier in
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Speaker 4: the show today between GDP growth last year really stark
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Speaker 4: last year, zero to negative. Apparently new jobs is measured
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Speaker 4: by payrolls anyway, coupled with strong GDP growth. Wow, that
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Speaker 4: doesn't happen a lot. That actually happens out of coming
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Speaker 4: out of jobless during jobless recoveries, right, And that could
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Speaker 4: be a pattern.
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Speaker 3: If you will.
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Speaker 2: I guess my question is do you believe that it
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Speaker 2: can happen for the long term? Like I could see
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Speaker 2: this for a short term. But the narrative that seems
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Speaker 2: to be dominating right now is AI is going to
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Speaker 2: replace all of us and we're going to permanently have
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Speaker 2: higher unemployment.
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Speaker 3: And so there has never been a single technology that's.
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Speaker 4: Exactly exactly you get a level shift, not a chance.
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Speaker 4: This is what I was talking about earlier. If you
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Speaker 4: ever took a macro economics class, you learned the solo
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Speaker 4: growth model, named after the MIT economists who, among others,
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Speaker 4: popularized it. You get these one time changes in levels,
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Speaker 4: but not a change in the long term or steady
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Speaker 4: state if you prefer growth rate, and that's really what
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Speaker 4: he's getting at. I don't think it's going to be
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Speaker 4: a change in the trend growth rate, and I think
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Speaker 4: it would have to be for this to be unfolding over,
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Speaker 4: you know, a continually disruptive Now that said, there are
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Speaker 4: people who know a lot more about this than I do, certainly,
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Speaker 4: which is not saying much because I know so little
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Speaker 4: about the coding behind these AI models.
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Speaker 2: I tend to think there'll be higher industries of workers
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Speaker 2: who do not have that work anymore. Okay, and that's
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Speaker 2: gonna be a problem because we're garbage at retraining people
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Speaker 2: and we've seen them.
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Speaker 4: But it depends, though, go ahead, sorry, so no, please,
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Speaker 4: depends on what's happening elsewhere in the economy. If you
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Speaker 4: look at the number of typists, it went from a
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Speaker 4: million in nineteen seventy to virtually none today because they
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Speaker 4: were all replaced by Microsoft Word but there were other
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Speaker 4: things going on in the economy that was not disruptive
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Speaker 4: as a result. If there aren't other things, if this
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Speaker 4: is and this is what some people worry about, if
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Speaker 4: this is that pervasive and it displaces huge numbers of
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Speaker 4: people across multiple industries, there's not going to be any
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Speaker 4: place to absorb people who need to be repositioned.
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Speaker 2: Right, quick break, We've got a little bit of trivia
12:15
Speaker 2: coming up next here on the Financial Exchange.
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14:04
Speaker 2: I mentioned last segment the stocks were improving. We've turned
14:08
Speaker 2: to green now in all three major indices. Dow Jones
14:11
Speaker 2: up one hundred and twelve points, quarter of a percent,
14:13
Speaker 2: s and P up nine little bit more than a
14:15
Speaker 2: tenth of a percent, and NASDAC up nineteen points about
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Speaker 2: a tenth of a percent will be doing worrel Street
14:20
Speaker 2: Watch next segment and give a full update, but thought
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Speaker 2: worth mentioning that you have seen a reversal unfortune since
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Speaker 2: nine thirty this morning. Gen Z is locked out of
14:29
Speaker 2: home buying and putting its money in the market. So
14:32
Speaker 2: we've had this discussion before, but it's been a little
14:35
Speaker 2: while about Hey, what would you actually be better off
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Speaker 2: doing right, like buying a house, taking out a mortgage
14:42
Speaker 2: and experiencing the price appreciation on that home of the
14:45
Speaker 2: course of thirty years, or renting that entire time, having
14:48
Speaker 2: no control over your housing costs, but taking the difference
14:51
Speaker 2: and investing it in the market.
14:53
Speaker 3: And plenty of people have done this as well.
14:55
Speaker 2: And I think the study was what by Dow Jones
14:59
Speaker 2: finding that, Hey, after thirty years of monthly payments, the
15:03
Speaker 2: renter would have been wealthier by over a million dollars
15:07
Speaker 2: over the course of history, based on a four percent
15:09
Speaker 2: annual rate of appreciation on their home, which by the way,
15:12
Speaker 2: is kind of the higher end of expectations throughout history
15:15
Speaker 2: on single family residences. But it's an interesting case. And
15:19
Speaker 2: the Wall Street Journal puts together the idea that hey,
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Speaker 2: gen z actually is investing more, you know, based on
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Speaker 2: this lockout effect.
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Speaker 3: I'm not sure if that's the cause.
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Speaker 2: But the share of people twenty five to thirty nine
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Speaker 2: years old making annual transfers to investment accounts more than
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Speaker 2: tripled between twenty thirteen and twenty twenty three to fourteen.
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Speaker 3: Point four percent, So that seems to I don't know.
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Speaker 2: That seems to be indicate something to me about the
15:46
Speaker 2: popularity of investing, and it does follow along trends that
15:50
Speaker 2: we've seen from the likes of Robinhood and just more
15:52
Speaker 2: retail investors getting into investing post COVID. The problem is,
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Speaker 2: I'm not sure it will actually work out the way
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Speaker 2: that people are hoping if they are planning to beat
16:03
Speaker 2: out home ownership here, and I don't think that's actually
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Speaker 2: what people want to do, right. They pose it this
16:08
Speaker 2: way that hey, if you just sat there for thirty
16:10
Speaker 2: years and rented instead of bought a home and actually
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Speaker 2: invested the difference, you'd be better off.
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Speaker 3: Rarely is that anyone's true objective.
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Speaker 4: Yeah, I don't think it's one or the other, and
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Speaker 4: they don't say that it is, but they suggest that
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Speaker 4: it is.
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Speaker 2: Yeah, that's kind of my takeaway like, here's the problem
16:27
Speaker 2: that I see is everybody right now is saying that
16:32
Speaker 2: homes are too unaffordable, mortgage rates over six percent, and
16:36
Speaker 2: plenty parts of the country that happens to be true.
16:40
Speaker 2: My first question would be, okay, so how are you
16:42
Speaker 2: investing and is your goal to truly rent forever or
16:45
Speaker 2: are you just sitting out the housing market right now?
16:47
Speaker 2: Because if you're just sitting out the housing market right
16:49
Speaker 2: now and you're pouring all of your money into sports,
16:53
Speaker 2: gambling bets on polymarket, I'm not sure one that I
16:56
Speaker 2: consider that investing or two that those are going to
16:59
Speaker 2: work out favor if you need the money in the future.
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Speaker 2: Let's say you're even being more responsible, though by the
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Speaker 2: time housing becomes more affordable, your stock portfolio might not
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Speaker 2: be in a great position to uh support that decision
17:15
Speaker 2: to buy a home. Would be would be one of
17:17
Speaker 2: my concerns here. Rarely does somebody say I just want
17:20
Speaker 2: to be a renter for life.
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Speaker 4: Yeah, I mean, you buy when life circumstances compel you
17:25
Speaker 4: to buy, And if you think that could happen in
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Speaker 4: the next few years that you wouldn't you would tell
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Speaker 4: a client. I think, Mike, what those funds should be
17:33
Speaker 4: in some space.
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Speaker 3: Yeah, be intentional with your money.
17:35
Speaker 2: Line up, you know, line up your decisions with with
17:38
Speaker 2: where your actual needs are going to be. I think
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Speaker 2: would be would be the responsible answer there. But look,
17:43
Speaker 2: I think ultimately, but I.
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Speaker 4: Mean specifically, you don't put it in the market if
17:47
Speaker 4: you think you don't need it in a year. Right,
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Speaker 4: That's what I was trying to get at.
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Speaker 2: It would be a relatively sound strategy. And but but
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Speaker 2: I'm not sure that that's what's happening here and alaud
18:00
Speaker 2: regardless of how the money's getting invested. And I know
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Speaker 2: there's a bunch of trends now where people are using
18:05
Speaker 2: single day expiration options and a bunch of things that
18:09
Speaker 2: I don't think of as really investing.
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Speaker 3: No, that's speculation, it's speculation.
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Speaker 2: But I take as encouraging that twenty five to thirty
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Speaker 2: nine year olds are transferring more into investment accounts. They
18:22
Speaker 2: are seemingly learning lessons about markets and dabbling in a
18:27
Speaker 2: little bit more. I recognize that there can be a
18:29
Speaker 2: lot of downside too, but more experience is more experience.
18:33
Speaker 4: I mean, you think homes are expensive, take a look
18:35
Speaker 4: at stocks relative to earnings. No assets are cheap. You
18:38
Speaker 4: think I don't want to buy a house? What the
18:40
Speaker 4: price could fall? Equities are trade? Well, look, we got
18:44
Speaker 4: into this a little bit when we were talking about AI.
18:46
Speaker 4: If it's even if AI is transformative to the extent
18:50
Speaker 4: that it's enthusiasts think it will be, that could be.
18:52
Speaker 4: That isn't necessarily good news for publicly traded companies. So
18:57
Speaker 4: younger people trying to build wealth don't have a lot
19:00
Speaker 4: of good choices unless you assume some sort of explosive
19:04
Speaker 4: growth ratear that.
19:05
Speaker 2: Valuations don't matter, nor did twenty five to thirty nine
19:08
Speaker 2: year olds I'm putting myself in this bucket, really have
19:11
Speaker 2: any context for a major market recession and downturn like
19:15
Speaker 2: we saw in two thousand and eight.
19:18
Speaker 4: Yeah, that was a decade of virtues.
19:19
Speaker 3: Thirty nine years old.
19:20
Speaker 2: Then that was, you know, in story, very early twenties,
19:24
Speaker 2: and so it was a you know, particularly big lesson,
19:28
Speaker 2: but not for that group.
19:29
Speaker 3: Quick Break, Wall Street Watches.
19:30
Speaker 1: Next, bringing the latest financial news straight to your radio.
19:44
Speaker 1: Every day. It's the Financial Exchange on the Financial Exchange
19:48
Speaker 1: Radio Network. Time Now for Wall Street Watch a complete
19:54
Speaker 1: look at what's moving market so far today. Right here
19:57
Speaker 1: on the Financial Exchange Radio Network.
20:00
Speaker 5: Now some volatility by midday, with markets rebounding after tech
20:03
Speaker 5: was initially selling off as Wall Street prepares for a
20:06
Speaker 5: week that includes a look at fourth quarter GDP and
20:09
Speaker 5: the Fed's preferred measure of inflation, the core PCE index.
20:15
Speaker 5: Right now, markets are mixed. The Dow is edging seven
20:18
Speaker 5: points higher, mostly flat, s and P five hundred dipping
20:21
Speaker 5: by four points. Nasdaq is down by two tenths of
20:25
Speaker 5: one percent, or forty five points lower. RUSS two thousand
20:28
Speaker 5: flat dipping as well. Tenure Treasure reeled is flat at
20:32
Speaker 5: four point zero five two percent, and crude oil down
20:35
Speaker 5: about one percent, trading at sixty two dollars and thirty
20:39
Speaker 5: cents a barrel. We have yet another development on the
20:42
Speaker 5: deal four Warner Brothers Discovery, after Warner agreed to reopen
20:46
Speaker 5: negotiations with Paramount for a potential bidding war with Netflix.
20:51
Speaker 5: Netflix granted warners board a week to discuss Paramount's most
20:55
Speaker 5: recent proposal. Warner Brothers shares are up by two percent,
20:58
Speaker 5: Paramount stock is up by five percent in Netflix shares
21:02
Speaker 5: are dipping. Meanwhile, the Wall Street Journal report of the
21:05
Speaker 5: Genuine Parts the parent company to NAPA Autocare Centers plans
21:09
Speaker 5: to separate its autoparts business from its industrial parts unit
21:13
Speaker 5: into two separate public companies. That stock is tumbling by
21:17
Speaker 5: thirteen percent. Elsewhere, The Wall Street Journal is also reporting
21:21
Speaker 5: that activist investor Elliott Management has built a more than
21:24
Speaker 5: ten percent stake in Norwegian Cruise Line and plans to
21:28
Speaker 5: push four changes to turn the struggling cruise ship operator around.
21:33
Speaker 5: Norwegian stock is rallying by nine percent and shares in
21:36
Speaker 5: serial maker General Mills falling by seven percent now after
21:40
Speaker 5: the company cut its annual sales and profit outlook. I'm
21:45
Speaker 5: Tucker Silva and that is Wall Street Watch And in
21:47
Speaker 5: the previous segment we asked you the trivia question how
21:50
Speaker 5: many times did Michael Jordan retire from the NBA. That'll
21:54
Speaker 5: be three times. Chuck from Newton, Mass is our winner
21:57
Speaker 5: today taking on the Financial Exchange Show, t shirt congrass
22:01
Speaker 5: the Chuck and we play trivia every day here on
22:04
Speaker 5: the Financial Exchange. See complete contest rules at Financial Exchange
22:08
Speaker 5: Show dot com.
22:09
Speaker 2: Federal Reserve is set to loosen some US banking rules
22:13
Speaker 2: with the seemingly expressed purpose to boost mortgage lending.
22:17
Speaker 3: Thinking being more mortgage lending.
22:19
Speaker 2: More lenders willing to do it, lower interest rates to follow,
22:23
Speaker 2: and I the first thing I was talking to Mark
22:26
Speaker 2: about during the break was, Okay, how do we how
22:30
Speaker 2: do we measure?
22:31
Speaker 3: You know, where.
22:33
Speaker 2: Rates might be with less regulations. So here's how I
22:37
Speaker 2: thought about this. Immediately, I looked at the thirty year
22:40
Speaker 2: fixed rate mortgage average rate according to Mortgage News Daily
22:44
Speaker 2: right now six point zero four percent. The yield on
22:47
Speaker 2: the ten year Treasury, which we oftentimes quote as kind
22:50
Speaker 2: of leading where mortgage rates will go, is sitting at
22:53
Speaker 2: four point zero five percent. So we're at almost an
22:55
Speaker 2: exactly two percent spread between what the average mortgages getting
23:00
Speaker 2: originated for and the yield on the ten year Treasury.
23:03
Speaker 2: And so the obvious question to me was where has
23:05
Speaker 2: that been historically? And so good news is there's data
23:09
Speaker 2: on this, we can actually.
23:10
Speaker 3: Look at it.
23:11
Speaker 2: I'm most interested markt where were we in terms of
23:14
Speaker 2: that spread before the Great Financial Crisis, when pretty much
23:17
Speaker 2: all of these regulations about mortgage issuans and what banks
23:21
Speaker 2: were allowed to do went into place, or a lot
23:23
Speaker 2: of them did that they're talking about rolling back.
23:25
Speaker 3: Do we have the spread going back to that far?
23:28
Speaker 1: Like?
23:28
Speaker 3: Where were we in the nineties and two thousands.
23:30
Speaker 4: Yeah, sure, assuming this is the right way to look
23:33
Speaker 4: at it. And I haven't really, we haven't. You and I,
23:35
Speaker 4: Mike thought deeply about this, but it seems like a
23:36
Speaker 4: reasonable first pass. And we say spread, we just mean
23:39
Speaker 4: difference one minus the other. So we take the thirty
23:41
Speaker 4: year fixed rate, and we subtract from that the ten
23:43
Speaker 4: year yield.
23:45
Speaker 3: Like we just said, it's about two right now.
23:46
Speaker 4: Yeah, it's about two. Throughout the two thousands, up until
23:51
Speaker 4: the ga Up until the Great Financial and Global Financial Crisis,
23:54
Speaker 4: the so called GFC, it was about a point and
23:57
Speaker 4: a half, okay, And this is true throughout the twenty
24:00
Speaker 4: teens as well, slightly higher. But the mortgage market changed
24:05
Speaker 4: a lot after the GFC. It became less bank centric
24:09
Speaker 4: and more private lender and alternative lender centric. So it's
24:13
Speaker 4: a little strange to me that it wouldn't have changed
24:16
Speaker 4: fundamentally given the so that that suggested to me that
24:18
Speaker 4: maybe this doesn't pick up on the things we wanted to,
24:20
Speaker 4: but we'll go with it nevertheless as a first pass.
24:23
Speaker 4: And right now, like you said, Mike, it's it's elevated.
24:26
Speaker 4: If your standard is what it was in the PREGFC
24:30
Speaker 4: two thousands, and then the twenty tens slightly elevated. It
24:35
Speaker 4: was quite elevated. When the FED started to raise rates.
24:38
Speaker 4: Mortgage rates went up by more. The thirty year fixed
24:42
Speaker 4: rate mortgage interest rate went up by more than the
24:45
Speaker 4: ten year did so twenties you mean yeah, ex excuse me, yes,
24:48
Speaker 4: when the FED decided to kill inflation by raising rates.
24:51
Speaker 3: So maybe there's something here.
24:52
Speaker 2: I mean, the obvious danger here is these rules and
24:55
Speaker 2: regulations were put into place to prevent ohkay yea financial crisis.
25:00
Speaker 3: So I don't think we can go without saying.
25:01
Speaker 4: At center of a world near depression, yes, right.
25:04
Speaker 2: Yes, So specifically, the mortgage market caused the worst recession
25:09
Speaker 2: since the Great Depression, and we're talking about rolling back
25:11
Speaker 2: some of those Now. I will be the first to
25:13
Speaker 2: admit that oftentimes the pendulum swings too far and maybe
25:16
Speaker 2: some of these regulations do need to go. But just
25:19
Speaker 2: very important context to have when we talk about reducing
25:22
Speaker 2: regulation in mortgage markets.
25:24
Speaker 3: It might bring down mortgage rates, but it was also.
25:27
Speaker 2: The area of the market that sparked the biggest financial
25:29
Speaker 2: crisis since the Great Depression in one hundred years. So
25:33
Speaker 2: you know, just tread carefully, I think would be my
25:37
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28:26
Speaker 2: America fell out of love with the Sedan, and now
28:29
Speaker 2: Detroit wants to bring it back. I just don't think
28:32
Speaker 2: so what. I love a Sadan, But I mean I
28:37
Speaker 2: was talking about this with my sister, you know, we
28:39
Speaker 2: were talking about cars, and she's just like, yeah, I
28:42
Speaker 2: don't think I ever want to drive a Sedan again.
28:45
Speaker 3: She's talking about her commuter car, and she is.
28:48
Speaker 4: But people are clamoring for sorry for cheaper.
28:51
Speaker 3: Cars, right yeah, right, yeah.
28:53
Speaker 2: I hope that this is the direction things go back
28:55
Speaker 2: in the early twenty tens, the sales of cars versus
29:00
Speaker 2: trucks and SUVs, it was about fifty to fifty. Since then,
29:04
Speaker 2: it's been a straight, you know, gap that we have
29:07
Speaker 2: widened here where. According to Bloomberg, as of twenty twenty two,
29:12
Speaker 2: around sixty five percent of all vehicles sold were trucks
29:16
Speaker 2: and SUVs and less than a third were sedans of
29:19
Speaker 2: one sort or another. And we all sit here questioning
29:21
Speaker 2: why cars are so expensive, and it is ultimately just
29:24
Speaker 2: because of us, just plain and simple. We used to
29:28
Speaker 2: drive cheaper, smaller cars, and now we all demand bigger,
29:33
Speaker 2: four wheel drive, giant cars that cost more money if.
29:37
Speaker 4: Offered quality options. Well, yes it is. It's true that
29:41
Speaker 4: that's what American car makers have had the most success
29:45
Speaker 4: selling and are motivated to sell because of the massive margins.
29:50
Speaker 4: It's true that Toyota doesn't make a lot of money
29:52
Speaker 4: on the Corolla VW, doesn't make a lot of money
29:54
Speaker 4: on the Jetta, but it's also true that there's a
29:57
Speaker 4: robust market for those Look, I can't. I'm not going
30:00
Speaker 4: to say they could create demand if they wanted to,
30:03
Speaker 4: But that's what advertising's supposed to do. I don't know.
30:06
Speaker 4: Maybe it's time for a next generation to look. Yeah,
30:08
Speaker 4: I was gonna say next generation Taurus. I'm being a
30:11
Speaker 4: little sentimental, But think about the great American cars of
30:14
Speaker 4: the past thirty years. Chevy had some nice and still
30:16
Speaker 4: does has some nice Malibus, the Ford Taurus, Ford Fusion
30:20
Speaker 4: a good solid car Allied. Yeah, others they weren't so
30:24
Speaker 4: successful with so American automakers had a mixed record with
30:27
Speaker 4: Sedan's like Ford. Just like the problem is, Mike, when
30:30
Speaker 4: you stop making these things for.
30:31
Speaker 3: A while, you're bad at it. Yeah.
30:33
Speaker 4: Yeah, Like with anything, you need the institutional knowledge. I'm
30:37
Speaker 4: not sure they could just jump back into it. How
30:40
Speaker 4: do you build now? Maybe you just soa well, we're
30:41
Speaker 4: gonna put it on the Escape chassis, which they're actually
30:43
Speaker 4: phasing out. Sorry I'm jumping around now I'm talking about Ford.
30:46
Speaker 4: Maybe that's the easiest way in. We're just going to
30:48
Speaker 4: make a car version of the Escape like everybody else
30:51
Speaker 4: is doing with their crossovers, and and start there. I
30:54
Speaker 4: obviously don't have the answer. Would love to see it
30:56
Speaker 4: because I'd like to see more choice.
30:59
Speaker 3: We'll see.
31:00
Speaker 2: I mean, I just I hear people complain about expensive
31:02
Speaker 2: cars over and over, and you know, they blame it
31:05
Speaker 2: on regulation and you know, fuel requirements and all this stuff,
31:09
Speaker 2: and I look at it and I'm just like, it
31:11
Speaker 2: really just seems like consumer preference to me more than
31:13
Speaker 2: anything else.
31:14
Speaker 3: Let's take a quick break. When we come back, Stack
31:16
Speaker 3: Roulette is next.
31:17
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31:20
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32:26
Speaker 2: Uh, time for a bit of stackeru let here. We
32:28
Speaker 2: were talking earlier in the show about prices and businesses
32:34
Speaker 2: basically hinting that they are going to be raising prices
32:37
Speaker 2: and Levi Strauss McCormick spices among companies.
32:41
Speaker 3: That were interviewed. One area that if anybody has.
32:45
Speaker 2: Not already seen the story here, is worth mentioning has
32:49
Speaker 2: to do with consumer electronics. So whether it's the iPhone
32:53
Speaker 2: that Mark's being distracted on right now, or the computer
32:55
Speaker 2: in front of me, or pretty much everything that Tucker
32:58
Speaker 2: is using behind the board right now.
33:00
Speaker 3: Research Michael Research, Yeah, sure, I see what you're browsing.
33:05
Speaker 2: All of those devices are pretty much required to have
33:09
Speaker 2: what's referred to as DRAM dynamic random access memory. It's
33:12
Speaker 2: a pretty basic component to all of our electronics, but
33:18
Speaker 2: also absolutely required in order to operate. And from all
33:24
Speaker 2: the reports, there are massive shortages now of this specific
33:28
Speaker 2: type of product. Why, of course, because of the AI
33:31
Speaker 2: industry build out and how much of it is being
33:33
Speaker 2: bought up by the companies that are committing to spend
33:35
Speaker 2: six hundred and fifty billion.
33:36
Speaker 3: Dollars this year.
33:37
Speaker 2: So in reaction, we're hearing a few things. One Apple
33:41
Speaker 2: mentioned it in their most recent call that hey, they're
33:43
Speaker 2: going to see a margin hit if they don't raise
33:45
Speaker 2: prices on their iPhones because those products are becoming more expensive.
33:49
Speaker 2: Nintendo Sony is talking about delaying the rollout of a
33:52
Speaker 2: new gaming system, and several computer manufacturers are now eliminating
33:59
Speaker 2: moll of their kind of baseline laptops and computers here
34:03
Speaker 2: because the margins just aren't thick enough.
34:06
Speaker 3: And then also worth reporting that Costco has started.
34:10
Speaker 2: Removing all of the removable memory from their display devices
34:15
Speaker 2: in stores, just kind of acknowledging you know what we
34:19
Speaker 2: are dealing with now. So while all those other industries
34:22
Speaker 2: I'm really unsure of where prices go from my blue
34:24
Speaker 2: jeans and my Paprika consumer electronics, to me, seems very
34:30
Speaker 2: obvious where the prices are going, and there is no
34:34
Speaker 2: fighting that one like electricity and other supplies are in shortage,
34:38
Speaker 2: this is only going on with.
34:40
Speaker 4: This is one of the reasons why the effect on
34:43
Speaker 4: inflation of the AI revolution. If that's not too strong
34:46
Speaker 4: of a way to describe what's happening is ambiguous. It
34:50
Speaker 4: could be good, it could be bad. You just gave
34:52
Speaker 4: several examples of things happening exactly as you would expect
34:56
Speaker 4: them to happen. As AI soaks up resources, you've got
35:00
Speaker 4: prices elsewhere as resources become scarce. You were giving inputs
35:04
Speaker 4: as examples. But you could also give capital as an example.
35:07
Speaker 4: As AI soaks up and data center soak up capital,
35:11
Speaker 4: that pushes up rates and therefore pushes up the economies
35:14
Speaker 4: neutral if if you don't mind me using that concept,
35:18
Speaker 4: interest rate, and that makes the fed's job harder. In
35:20
Speaker 4: some ways, it's not obvious as Kevin Warre says that
35:23
Speaker 4: oh AI is going to revolutionize things, productivity will go up,
35:26
Speaker 4: therefore interest rates could come down. No, no, no, he's
35:28
Speaker 4: not thinking correctly about that, or not thinking at all.
35:31
Speaker 2: It is really interesting to me because that has been
35:33
Speaker 2: you know, consumer facing electronics have been an area of
35:37
Speaker 2: not disinflation, like deflation throughout.
35:39
Speaker 3: The course of the Yeah, they's gone out right cheaper
35:41
Speaker 3: twenty years.
35:42
Speaker 2: Right. We use this example all the time, but go
35:44
Speaker 2: walk around the same costco and look at the price
35:46
Speaker 2: of a eighty five inch television today. Compared to what
35:49
Speaker 2: that would have cost a decade ago. And you'll see
35:52
Speaker 2: what I'm talking about. What if we see that reversal, Right,
35:55
Speaker 2: how difficult would it be to keep inflation at two
35:57
Speaker 2: and a half percent if you have a whole bunch
36:01
Speaker 2: of the segment of consumer electronics increasing in keeping inflation.
36:04
Speaker 4: When you say keeping, I read that as long term,
36:07
Speaker 4: and that's the Fed's job. In the short term, you
36:09
Speaker 4: get these extreme relative price movements, the price of a
36:13
Speaker 4: TV relative to a price of shoes, stuff like that.
36:16
Speaker 4: That's not what you weren't saying this, But I'll just
36:18
Speaker 4: make the point. That's not what drives long term inflation.
36:21
Speaker 4: It is the supply of money that drives long term inflation.
36:24
Speaker 4: Like full stop.
36:26
Speaker 3: What do you have for us, sacred letmark average tax.
36:28
Speaker 4: Refund Mike, according to Bloomberg, two hundred bucks in the
36:31
Speaker 4: first few weeks of this filing season. Now, without a
36:34
Speaker 4: reference point, that may not mean much. So the average
36:38
Speaker 4: refund overall was about twenty three hundred bucks. So I'm
36:42
Speaker 4: going to round a little bit and say, you know,
36:45
Speaker 4: a ten percent, actually zero point seven percent increase in refunds.
36:51
Speaker 4: Even I'm not using the right baseline. There so refunds
36:54
Speaker 4: are up. I'm gonna round up and just call it
36:57
Speaker 4: like ten percent, and this is what you would have
36:59
Speaker 4: expected right now. And the changes in the tax.
37:01
Speaker 2: Bunch of changes in the tax code, including new carve
37:05
Speaker 2: outs for taxes on tips over time. And then the
37:08
Speaker 2: biggest one that I just see on a day to
37:10
Speaker 2: day basis is the new deduction for those over the.
37:13
Speaker 3: Age of sixty five.
37:14
Speaker 2: Again, to be clear, it has not made Social Security
37:17
Speaker 2: tax free, as was advertised by the Social Security Administration
37:22
Speaker 2: themselves at one point, but for a large portion of
37:25
Speaker 2: tax filers over the age of sixty five, they are
37:27
Speaker 2: seeing a big cut in taxes based on this, and
37:32
Speaker 2: it does genuinely reshape things. The ultimate question I think
37:37
Speaker 2: for this year, in terms of some market dynamics and
37:40
Speaker 2: the economy itself, is what happens with these new refunds.
37:43
Speaker 2: Right historic trend has been that we spend them. If
37:47
Speaker 2: we're particularly nervous about the economy, maybe we don't, But
37:51
Speaker 2: my guess would be this increase in tax refund season
37:55
Speaker 2: that we end up seeing get spent in pretty short order,
37:58
Speaker 2: and we will see what that does to price and
38:00
Speaker 2: everything else.
38:01
Speaker 3: As we close out the show.
38:03
Speaker 2: Markets have once again flipped into positive territory, with the
38:06
Speaker 2: nas that barely hanging on too gains up twenty points,
38:08
Speaker 2: or a tenth of a percent, but the Dow up
38:10
Speaker 2: one hundred and eight, or one fifth of a percent.
38:12
Speaker 2: We'll be back at it tomorrow, folks. Have a great
38:14
Speaker 2: rest of your day and we'll see you then