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Earnings Season Will Test the AI Spending Boom · 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's Chuck, Mike, and Tucker with you here. And as we...
• 1:17
  Speaker 2: kick things off on Columbus Day. We've got one of
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  Speaker 2: these weird days where stock market is open, the bond
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  Speaker 2: market is closed.
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  Speaker 3: Banks are closed.
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  Speaker 2: But bond ETFs trade.
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  Speaker 4: Yeah, which is, do they just hold enough cash to
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  Speaker 4: be able to satisfy? Yeah, I guess that doesn't really matter, right?
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  Speaker 2: Again, it's just one of those things where It's how
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  Speaker 2: it works, and it's fine. But the big story that
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  Speaker 2: we've got is this week is the start of earnings season.
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  Speaker 2: And it's exciting that we're finally into earnings season because, honestly,
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  Speaker 2: the news flow for the last month has been just
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  Speaker 2: kind of like... It's not that we've been looking for stuff.
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  Speaker 2: There's plenty of it. Don't get me wrong, there's plenty
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  Speaker 2: going on.
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  Speaker 1: But....
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  Speaker 3: Yeah, bonds have been imploding.
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  Speaker 2: Yes, there's been plenty happening. But I'm particularly interested because
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  Speaker 2: of what we saw last week from some of the
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  Speaker 2: companies that are on the early side of the reporting list.
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  Speaker 2: We're talking about companies like Delta and so forth, where, okay,
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  Speaker 2: they're starting to give us some clues as to what's
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  Speaker 2: going on. And again, you don't want to read too
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  Speaker 2: much into one or two companies, but you sit there
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  Speaker 2: and you say, Okay, like, there's some signs of a
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  Speaker 2: couple things. The first is continued inflation. Yep. The second
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  Speaker 2: is that people are continuing to pay those higher inflated prices.
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  Speaker 4: And.
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  Speaker 3: Consumers specifically, but businesses too.
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  Speaker 2: Yeah, I mean, again, like you look at the data,
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  Speaker 2: who we've had reporting, it's more on the consumer side
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  Speaker 2: of things.
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  Speaker 3: Sure.
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  Speaker 2: And I think the third piece is, okay, is that
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  Speaker 2: going to be able to continue? And this is the
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  Speaker 2: place where, again, so far, and again, very, very small
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  Speaker 2: number of companies in a small number of areas. The
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  Speaker 2: question is a little bit more ambiguous as far as, yeah,
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  Speaker 2: we don't really know.
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  Speaker 3: Yeah, the last.
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  Speaker 4: frankly, last several years, but especially the last few quarters,
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  Speaker 4: the earnings that we've heard from major corporations have been
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  Speaker 4: at the, I guess, with the backdrop of just the
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  Speaker 4: ever-growing AI spend. And that's really bled into areas that,
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  Speaker 4: you know, traditionally aren't all that related to the AI spend.
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  Speaker 4: At the same time, though, we are seeing a consumer that,
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  Speaker 4: while seemingly cash-strapped, while, you know, increasing their levels of debt,
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  Speaker 4: is not really slowing down in terms of their willingness
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  Speaker 4: to spend. And so you have a few different areas
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  Speaker 4: of this economy that don't seem all that price sensitive.
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  Speaker 2: Part of this is because when you look at where
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  Speaker 2: the consumer spending is coming from, there's a shifting profile
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  Speaker 2: of where it is. It's no longer, and again, it's
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  Speaker 2: not that it's ever exclusively been driven by wages or
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  Speaker 2: But because of baby boomers retiring and because of the
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  Speaker 2: fact that they rely on things like portfolio income and
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  Speaker 2: Social Security income for their spending as opposed to earned income,
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  Speaker 2: a slowdown in the labor market like we've seen over
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  Speaker 2: the last 18 months or so is not something that
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  Speaker 2: has the same impact on consumer spending that it would
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  Speaker 2: have in the 1990s as an example. So I think
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  Speaker 2: you're trying to interpret it through a number of different lenses.
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  Speaker 2: And there are a bunch of different things happening to
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  Speaker 2: change the overall picture as it relates to, hey, can
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  Speaker 2: this consumer spending continue? Because in the 1990s, if you
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  Speaker 2: saw trends like, okay, you know, you've got, you know,
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  Speaker 2: slowing hiring and slowing wage growth. that would typically be okay,
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  Speaker 2: like consumer spending's got to give. And in today's world,
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  Speaker 2: where the wealth is more concentrated in a smaller number
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  Speaker 2: of people, and that number of people is largely responsible
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  Speaker 2: for the increases in consumer spending, it might not be
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  Speaker 2: as dependent on wage growth as it previously was to continue.
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  Speaker 3: As far as what matters to the market, though, right?
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  Speaker 4: If there's one thing from this earnings season that matters
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  Speaker 4: to overall U.S., and frankly, global equity markets, it would
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  Speaker 4: be is anyone going to be punished for their continued
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  Speaker 4: AI spend or rewarded for pulling back on their AI spend?
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  Speaker 4: That's two sides of the same coin, right? Is any
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  Speaker 4: company out there going to say, you know what, we
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  Speaker 4: can't continue to build out these data centers at the
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  Speaker 4: same pace and their stock price goes up? Or does
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  Speaker 4: a company say we're expanding our debt issuance by X
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  Speaker 4: numbers of billions of dollars and their stock price gets
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  Speaker 4: punished because investors start to turn on that narrative. We
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  Speaker 4: have not seen any signal of that yet, other than,
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  Speaker 4: you know, small things here and there.
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  Speaker 3: But that's to me, right, the piece.
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  Speaker 4: That matters for this stock market as a whole is,
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  Speaker 4: are investors at some point going to turn on the
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  Speaker 4: giant AI build-out and the promised profits to come? And
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  Speaker 4: I have a tough time believing that's going to be
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  Speaker 4: this quarter.
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  Speaker 2: If they are going to, And I'll say it's an if,
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  Speaker 2: because we don't know. If they are going to, I
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  Speaker 2: remain convinced that the next 18 months is critical. End
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  Speaker 2: of this year, all of 27, Q1 of 28. And
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  Speaker 2: there was an interesting chart that made its way through
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  Speaker 2: the Twittersphere over the course of the last few days.
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  Speaker 2: It's a chart from A16Z, who A16Z is a hedge fund.
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  Speaker 2: They used to be known as Andreessen Horowitz, but they
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  Speaker 2: shortened it to A16Z because there are 16 letters between
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  Speaker 2: the A and Z in Andreessen Horowitz, and they wanted
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  Speaker 2: to rebrand. So now they're A16Z, which I actually think
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  Speaker 2: is quite clever. As someone whose last name starts with
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  Speaker 2: Z and ends with A, I would be Z3A if
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  Speaker 2: I started a hedge fund.
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  Speaker 3: Better than Horowitz Plus.
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  Speaker 1: Yes.
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  Speaker 2: Well, that would imply that by losing Andreessen, they got
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  Speaker 2: rid of a minus, which would be a lot.
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  Speaker 3: I just couldn't remember the first name that you gave,
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  Speaker 3: but yeah, sure.
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  Speaker 2: So, here's the chart that they shared, and I'm going
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  Speaker 2: to share a visual in auditory form with you.
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  Speaker 3: Perfect.
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  Speaker 2: It's like when you're in college and you started hearing
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  Speaker 2: the color purple.
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  Speaker 3: Yeah, let me just... Get my mind ready for it.
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  Speaker 2: Yeah, it's like that. So here's the deal.
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  Speaker 3: Got my X and Y axis. I'm ready.
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  Speaker 2: If you look through a chart that shows from the
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  Speaker 2: end of 2025 through the middle of 2026, what you
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  Speaker 2: saw was that the rental price of an NVIDIA chip
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  Speaker 2: pretty consistently tracked the spending of tokens produced by those
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  Speaker 2: chips by NVIDIA. companies that produce tokens for the AI ecosystem.
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  Speaker 2: So remember, a token is a unit of input or
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  Speaker 2: output for a model. And what you have seen is
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  Speaker 2: that rental prices basically track token prices for the first
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  Speaker 2: six months of the year. In the last three months now,
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  Speaker 2: the interesting thing that we've seen is that rental prices
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  Speaker 2: for chips have moved up modestly. But token prices have
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  Speaker 2: fallen dramatically. There's been this divergence that's happened. And this
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  Speaker 2: is potentially a problem because the whole idea behind renting
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  Speaker 2: a GPU, a computer chip, an NVIDIA chip, again, you
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  Speaker 2: wouldn't typically rent just one. You'd rent thousands or hundreds
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  Speaker 2: of thousands. The idea behind renting them is, okay, we're
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  Speaker 2: going to pay X for that rental and we can
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  Speaker 2: produce Y tokens that we can sell for Z in
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  Speaker 2: order to make money. If the money received for each
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  Speaker 2: token is now smaller relative to those rentals, it suggests
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  Speaker 2: a divergence in pricing. And this is the thing that
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  Speaker 2: you have to, that I think you have to consider as,
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  Speaker 2: it's one of two things. It's either the canary in
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  Speaker 2: the coal mine or it's the canary in the coal mine.
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  Speaker 3: Got it.
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  Speaker 2: Like if this holds, this is really a problem. And
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  Speaker 2: here's why. Let's look at the oil market just as
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  Speaker 2: an example. When we look at oil futures right now,
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  Speaker 2: what we see is that oil futures curves are in
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  Speaker 2: a state of what we call backwardation, where the prices
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  Speaker 2: closest to today are higher than the prices a year ago.
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  Speaker 3: From now.
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  Speaker 2: Brent crude for December is at 107. Brent crude for
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  Speaker 2: December of 27 is at 84, which means normally, You're
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  Speaker 2: in the other state, Contango, where the reason why futures
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  Speaker 2: prices are generally higher the longer you go out isn't
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  Speaker 2: because prices are projected to increase. It's because you've got
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  Speaker 2: all these carrying costs and things like that. So if
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  Speaker 2: you're holding a barrel of oil, Mike, and I say, hey,
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  Speaker 2: can you sell that to me six months from now?
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  Speaker 2: You say, okay, you've got to pay more than today,
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  Speaker 2: not because it's going to cost more in the future,
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  Speaker 2: but you've got to pay to hold that, you've got
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  Speaker 2: to pay the insurance on it, you've got to run
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  Speaker 2: the upkeep on your facilities, and so, okay, great, you're
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  Speaker 2: going to pay more. Today, in the oil market, we've
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  Speaker 2: got current prices way higher than a year from now. Now,
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  Speaker 2: that doesn't mean oil is going to be cheaper a
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  Speaker 2: year from now. It does mean that there's such a
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  Speaker 2: premium being demanded for oil today... that people are saying,
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  Speaker 2: screw it, I need those barrels now, and so I
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  Speaker 2: need you to deliver this, even if it's at a
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  Speaker 2: huge premium. What's interesting, the rental contracts that are out
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  Speaker 2: there are long-term rental contracts. No one signs up to
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  Speaker 2: rent a GPU for a week. You can't do that.
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  Speaker 2: They're long-term contracts. But you have spot prices for what's
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  Speaker 2: produced by them, tokens, that are diverging heavily to the downside.
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  Speaker 2: It's the opposite of a backward-aided market. Spot is saying, hey,
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  Speaker 2: these aren't worth anything. And the long-term market is saying, okay, well,
• 11:34
  Speaker 2: if you want these longer term, you're going to have
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  Speaker 2: to pay more for them. Which normally in a commoditized
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  Speaker 2: market is a hugely bearish development for that commodity. Is
• 11:44
  Speaker 2: that how this actually develops? I don't know. But as
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  Speaker 2: someone who's looked at a lot of commodity charts this year,
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  Speaker 2: it's screaming to me that there's a potential problem in
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  Speaker 2: the next 18 months. We'll see if there is. Let's
• 11:59
  Speaker 2: take a quick break. When we return, let's talk a
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  Speaker 2: little bit about the latest in oil markets over the weekend.
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  Speaker 2: We've got news out of Russia and Ukraine. We've got
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  Speaker 2: news out of the Middle East. And so we will
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  Speaker 2: head over there after this.
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• 12:52
  Speaker 2: All right, let's start with the good news for energy prices.
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  Speaker 2: The good news is that the hurricane that was making
• 12:59
  Speaker 2: its way through the Gulf late last week ended up
• 13:04
  Speaker 2: making landfall much closer to the Florida panhandle than New Orleans.
• 13:10
  Speaker 2: And so as such. the disruptions to the refiners in
• 13:13
  Speaker 2: the area, relatively limited in the broad scheme of things. Obviously,
• 13:20
  Speaker 2: still quite a bit of damage down in the area,
• 13:22
  Speaker 2: and that matters clearly to the communities impacted by this.
• 13:28
  Speaker 2: But for folks who were watching this, concerned about the
• 13:32
  Speaker 2: potential impact on energy prices, as we noted over the
• 13:35
  Speaker 2: course of the week, the things started to drift east,
• 13:37
  Speaker 2: and that meant that you didn't run into those worst-case
• 13:41
  Speaker 2: scenarios there. So dodging somewhat of a bullet on the
• 13:47
  Speaker 2: energy price side of things. Over the weekend, starting I
• 13:51
  Speaker 2: believe it was late Friday and then into yesterday, two
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  Speaker 2: different pieces of news announced by the president. The first,
• 13:59
  Speaker 2: the president announcing on Friday plans to buy– basically several
• 14:05
  Speaker 2: months of Russian diesel exports. And then yesterday, the president
• 14:10
  Speaker 2: put out a post on Truth Social that Russia and
• 14:15
  Speaker 2: Ukraine had agreed to an energy truce. which both sides
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  Speaker 2: have then subsequently denied to this point.
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  Speaker 4: And energy truce simply being that both sides would see
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  Speaker 4: strikes on each other's energy infrastructure, which, to your point,
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  Speaker 4: both have since denied.
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  Speaker 2: So I think this puts us into a position where
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  Speaker 2: it's clear that the president is trying to get the
• 14:37
  Speaker 2: cost in particular of diesel down, given the fact that
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  Speaker 2: the Friday announcement was for imports of diesel, which... if
• 14:44
  Speaker 2: we're being honest, we don't even know if Russia has
• 14:47
  Speaker 2: the capability to export that diesel right now.
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  Speaker 3: Right.
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  Speaker 4: He's doing what he's been doing since the beginning of
• 14:52
  Speaker 4: this war, which is trying to talk down energy prices
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  Speaker 4: of all different sorts.
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  Speaker 2: But Russia has had a voluntary export ban in place.
• 14:59
  Speaker 2: And by voluntary, I mean like Russia decided to do
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  Speaker 2: this several months ago because they don't have enough diesel
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  Speaker 2: to power their domestic economy. They've actually had to import
• 15:09
  Speaker 2: both diesel and gasoline from over the course of the
• 15:12
  Speaker 2: summer and early fall. And so I'm unclear as to
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  Speaker 2: whether Russia even has the ability to export the amount
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  Speaker 2: of deal that is claimed in this, just because they
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  Speaker 2: haven't been exporting any for a while because they need
• 15:27
  Speaker 2: it domestically.
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  Speaker 4: In any case, we've seen about a 3% price swing
• 15:31
  Speaker 4: on crude oil this morning. We did start the morning, Tucker,
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  Speaker 4: I don't know if you have the exact mark, but
• 15:36
  Speaker 4: I think we were down 1% to 1.5% on West
• 15:37
  Speaker 4: Texas crude. We're currently now up 1.9 percent from where
• 15:42
  Speaker 4: we were on Friday. And so you've got this pretty
• 15:45
  Speaker 4: big price swing that's been going on today on, again,
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  Speaker 4: I think investors initially being swayed by the president's words.
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  Speaker 4: But those are it's not having the staying power that
• 15:57
  Speaker 4: it did back in March and April of this year,
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  Speaker 4: I guess, would be my takeaway about what the president
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  Speaker 4: is announcing.
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  Speaker 2: It can't because it's just inventory like inventories are so
• 16:08
  Speaker 2: depleted right now. And we're in such a steep part
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  Speaker 2: of the demand curve, especially for products. But even on
• 16:13
  Speaker 2: the crude side that there's just no margin for error
• 16:18
  Speaker 2: at this point. And given the escalations over the weekend
• 16:20
  Speaker 2: in the Middle East, where you now have, you know, again,
• 16:26
  Speaker 2: north of a dozen ships that have been targeted by
• 16:28
  Speaker 2: the Iranians in the last week. On top of that,
• 16:32
  Speaker 2: the Houthis out of Yemen have struck the Saudi capital's
• 16:37
  Speaker 2: airport in successive days to the point where the airport's
• 16:41
  Speaker 2: now closed.
• 16:42
  Speaker 4: Speaking of which, in unsurprising news of the day, Delta
• 16:45
  Speaker 4: Airlines was supposed to debut their Saudi Arabia service. Now
• 16:50
  Speaker 4: they are delaying that launch until March.
• 16:53
  Speaker 2: So, again, like, you've got some real problems that are
• 16:57
  Speaker 2: developing on this, and... Really, when you look at the
• 17:02
  Speaker 2: situation broadly, it's until you get the cessation of any
• 17:06
  Speaker 2: conflict in the Middle East and any conflict between Russia
• 17:10
  Speaker 2: and Ukraine, it is tough to see a world in
• 17:14
  Speaker 2: which the prices for products that we consume out of
• 17:19
  Speaker 2: those regions improves. It's just not... You can move things
• 17:23
  Speaker 2: around from one place to another, but there's no way
• 17:27
  Speaker 2: to physically increase production enough to offset what is being
• 17:32
  Speaker 2: either destroyed or simply taken offline because of, you know,
• 17:36
  Speaker 2: fears of being targeted.
• 17:39
  Speaker 3: And, you know, we haven't even brought up the legal
• 17:41
  Speaker 3: aspects of this.
• 17:43
  Speaker 4: Immediately upon the president's announcement of the purchase of the
• 17:45
  Speaker 4: Russian diesel, there was a pretty bipartisan congressional push back
• 17:50
  Speaker 4: on that, saying that it would violate sanctions that they
• 17:53
  Speaker 4: had put in place.
• 17:54
  Speaker 2: You mean the law that was signed like two weeks ago?
• 17:56
  Speaker 3: Right, that one.
• 17:56
  Speaker 1: Yes.
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  Speaker 4: Even if the Russians were willing to sell us diesel,
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  Speaker 4: it's unclear if Congress would allow it to be imported.
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  Speaker 4: In any case, you know, taking a look around at
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  Speaker 4: energy markets, like I mentioned, crude oil prices up a
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  Speaker 4: good 2% today. West Texas crude sitting at $ 93.
• 18:13
  Speaker 3: 63 per barrel.
• 18:14
  Speaker 4: Brent sitting at $ 106.
• 18:16
  Speaker 3: 86.
• 18:17
  Speaker 4: Over onto the refined products, we are seeing national average
• 18:21
  Speaker 4: for a gallon of gas.
• 18:21
  Speaker 3: At $ 4. 36 and the.
• 18:22
  Speaker 4: National average for a gallon of diesel, at $ 6. 27, which
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  Speaker 4: is down from that all-time high we reached back in
• 18:33
  Speaker 4: September of $ 6.
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  Speaker 3: 53.
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  Speaker 2: Front month diesel futures not moving on the day. Remember,
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  Speaker 2: this announcement was, the diesel import announcement was late on Friday. Basically,
• 18:44
  Speaker 2: the market's looking at this and saying, okay, we're not
• 18:47
  Speaker 2: sure if there's anything meaningful there, just because even if
• 18:52
  Speaker 2: you believe that Russia can export that diesel, and even
• 18:55
  Speaker 2: if you believe that the U.S. would import it, It
• 18:58
  Speaker 2: works out to about 100,000 barrels of diesel a day.
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  Speaker 3: The U.S.
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  Speaker 2: Uses 3.6 million.
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  Speaker 3: Got it.
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  Speaker 2: It's like, again, now, look, again, with where we are
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  Speaker 2: in the demand curve, that still can mean that things
• 19:13
  Speaker 2: can get cheaper if you can actually deliver it because
• 19:16
  Speaker 2: of just how steep that curve is right now. But
• 19:20
  Speaker 2: markets are kind of shrugging this off and saying, okay,
• 19:23
  Speaker 2: it's either not going to happen or it's not going
• 19:25
  Speaker 2: to make a big difference. Let's take a quick break.
• 19:28
  Speaker 2: When we come back, let's talk a little bit more
• 19:30
  Speaker 2: about this in terms of a major impact on local
• 19:33
  Speaker 2: communities relating to high diesel costs.
• 19:39
  Speaker 1: Like us on Facebook and follow us on Twitter at
• 19:42
  Speaker 1: TFE Show. Breaking business news is always first right here
• 19:46
  Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
• 19:51
  Speaker 1: Street Watch, tracking the stocks, the data, and the headlines
• 19:55
  Speaker 1: driving markets so far today, right here on the Financial
• 19:58
  Speaker 1: Exchange Radio Network.
• 19:59
  Speaker 5: Wall Street's readying for a busy week ahead that includes
• 20:01
  Speaker 5: two inflation reports and big bank earnings. Energy prices also
• 20:05
  Speaker 5: remain in focus. after Ukraine claimed Russia struck its energy infrastructure,
• 20:10
  Speaker 5: despite President Trump declaring an energy ceasefire between the two countries.
• 20:16
  Speaker 5: Right now, the Dow is up 0.5% or 254 points.
• 20:18
  Speaker 5: S & P 500 is down modestly, only down 6 points.
• 20:20
  Speaker 5: NASDAQ is off about 0.3% or 106 points lower. Russell
• 20:21
  Speaker 5: 2000 is down about 0.25%. Bomb market is closed today
• 20:33
  Speaker 5: in observance of Columbus Day. Crude oil is up 2%,
• 20:37
  Speaker 5: trading at $ 93 a barrel, while Brent is trading at
• 20:40
  Speaker 5: $ 107 a barrel. We have an update on Starbucks' reported
• 20:44
  Speaker 5: interest in Chipotle after the coffee chain shut down. Those
• 20:47
  Speaker 5: rumors in a statement this morning confirming it is not
• 20:51
  Speaker 5: buying Chipotle. Chipotle shares are down 3%, while Starbucks is
• 20:55
  Speaker 5: up by 1%. Meanwhile, the Wall Street Journal reported that
• 20:58
  Speaker 5: Amazon is in talks to acquire AI startup Descartes in
• 21:01
  Speaker 5: a deal that could be worth about $ 7 billion. Descartes'
• 21:05
  Speaker 5: software makes it easier for developers to switch between different
• 21:09
  Speaker 5: AI chips. Wall Street Journal also reported that quantum computing
• 21:13
  Speaker 5: company IonQ agreed to an all-stock deal to buy cybersecurity
• 21:16
  Speaker 5: firm Elicity for up to $ 1.
• 21:18
  Speaker 3: 3 billion.
• 21:18
  Speaker 5: And tomorrow morning, Ahead of the opening bell, we'll see
• 21:22
  Speaker 5: big bank earnings from JPMorgan Chase, Goldman Sachs, Wells Fargo,
• 21:26
  Speaker 5: and Citigroup. Outside of banks, Johnson & Johnson, UnitedHealth, and
• 21:30
  Speaker 5: Domino's will also report in the morning. I'm Tucker Silva,
• 21:34
  Speaker 5: and that is Wall Street Watch.
• 21:39
  Speaker 2: Domino's Pizza would qualify as big pizza, right?
• 21:42
  Speaker 1: Oh, sure. Yeah.
• 21:43
  Speaker 3: The biggest pizza, perhaps.
• 21:45
  Speaker 2: Billion-dollar company.
• 21:46
  Speaker 3: That's it.
• 21:50
  Speaker 2: If you can be the biggest pizza company in the world,
• 21:54
  Speaker 2: or at least in the U.S., probably the world, because
• 21:56
  Speaker 2: let's be honest, if you're the biggest pizza chain in
• 21:58
  Speaker 2: the U.S., you're the biggest pizza company in the world.
• 22:00
  Speaker 4: There could be a pizza company in China that's getting
• 22:03
  Speaker 4: up there.
• 22:03
  Speaker 2: We would have heard of them, though.
• 22:04
  Speaker 3: Yeah, probably.
• 22:06
  Speaker 2: We know about Luckin' Coffee. I have not heard about
• 22:10
  Speaker 2: the Chinese Domino's. Now, again, as you said, I haven't
• 22:14
  Speaker 2: been looking for them, but.
• 22:17
  Speaker 2: If you get to be the biggest pizza company in
• 22:19
  Speaker 2: the world, and that means that you're worth a billion dollars,
• 22:25
  Speaker 2: is that really, you know, you do a billion in sales.
• 22:28
  Speaker 2: They're worth 12 billion, but it's like, it just tells
• 22:31
  Speaker 2: you about how like tight the margins still are in
• 22:35
  Speaker 2: the restaurant business where again, for, you know, all the
• 22:40
  Speaker 2: crap that people might give dominoes, like they are the
• 22:43
  Speaker 2: biggest pizza company out there and they do $ 5 billion
• 22:46
  Speaker 2: in revenue a year. And they get a two X
• 22:49
  Speaker 2: multiple on that basically. And that's as good as it
• 22:52
  Speaker 2: gets because the margins, even for them, you know, you
• 22:55
  Speaker 2: get to like mid teens generally is kind of like
• 22:58
  Speaker 2: where they tend to live a lot of the time.
• 23:00
  Speaker 2: Recently it's been a little bit better, but it's kind
• 23:03
  Speaker 2: of like, okay, like that's it. And there's only so
• 23:05
  Speaker 2: many pizzas you can eat.
• 23:06
  Speaker 1: Yeah.
• 23:07
  Speaker 4: You think no offense to any of the local small
• 23:09
  Speaker 4: mom and pop pizza shops. And I, I'm not a
• 23:12
  Speaker 4: paid spokesperson of Domino's, but it's become my go-to.
• 23:16
  Speaker 2: I've heard that.
• 23:17
  Speaker 3: Yeah, it's become my go-to.
• 23:19
  Speaker 2: I've heard that.
• 23:20
  Speaker 3: I'm quite happy with it.
• 23:21
  Speaker 2: Let's talk a little bit about this piece from the
• 23:23
  Speaker 2: Boston Globe here. And we've talked about high diesel prices
• 23:28
  Speaker 2: that have been seeping into all parts of American life
• 23:32
  Speaker 2: in the last couple months in particular as they've moved
• 23:35
  Speaker 2: to new all-time highs. One place that this is starting
• 23:39
  Speaker 2: to show up now is in municipal budgets because... You've
• 23:42
  Speaker 2: got kids that you've got to get to school, and
• 23:44
  Speaker 2: the way that you get a lot of them to
• 23:45
  Speaker 2: school is in buses. And those buses are diesel. And
• 23:51
  Speaker 2: so here's the problem. Massachusetts, just as an example, a
• 23:53
  Speaker 2: year ago, diesel was $ 3. 83. Today, it's $ 6.
• 23:56
  Speaker 1: 33.
• 23:56
  Speaker 2: That's $ 2. 50 more per gallon. Peabody is an example. Public
• 24:02
  Speaker 2: schools are expected to spend an extra unanticipated $ 100, 000 for
• 24:05
  Speaker 2: diesel this academic year. Now, again, that's one town. And
• 24:11
  Speaker 2: so you can extrapolate this out and you're looking at it,
• 24:13
  Speaker 2: you're going, okay, like, how do we cover these costs?
• 24:16
  Speaker 2: And in a lot of towns, you might have some
• 24:18
  Speaker 2: kind of rainy day fund or overage in the budget
• 24:20
  Speaker 2: that you can slide around, but then you can't use
• 24:22
  Speaker 2: it somewhere else. So for example, if you end up
• 24:26
  Speaker 2: having a bad winter. Have you pulled money from DPW
• 24:30
  Speaker 2: in order to get extra plows out on the roads?
• 24:33
  Speaker 2: And now you've got to figure out how to finance that.
• 24:36
  Speaker 2: And basically where I'm going with this is it would
• 24:38
  Speaker 2: not be surprising if a lot of municipalities need to
• 24:42
  Speaker 2: do some either extra borrowing or play around with property
• 24:45
  Speaker 2: taxes when it comes to the next fiscal year.
• 24:48
  Speaker 4: You also wonder, I would imagine bus contracts, for instance,
• 24:52
  Speaker 4: are locked in pretty far ahead of time. And I
• 24:55
  Speaker 4: do wonder, are there... Again, municipalities, you'll see it on
• 24:58
  Speaker 4: the debt issuance side, on companies that are running buses
• 25:02
  Speaker 4: and other types of infrastructure, though. Do you have some
• 25:06
  Speaker 4: going out of business out of a problem acquiring diesel
• 25:10
  Speaker 4: fuel and satisfying those contracts that they have with municipalities?
• 25:13
  Speaker 4: Because every town doesn't run their bus system. Here in Needham,
• 25:17
  Speaker 4: I know we outsource it to a big bus company,
• 25:20
  Speaker 4: and I would imagine they negotiated that contract nine months ago.
• 25:25
  Speaker 2: So this is something that, again, is going to be
• 25:30
  Speaker 2: becoming more of a story as we go through the winter.
• 25:33
  Speaker 2: Because remember, fiscal years for most towns, July 1st to
• 25:36
  Speaker 2: June 30th. So as you go through this one and
• 25:39
  Speaker 2: start to set up, you know, whether it's union negotiations
• 25:42
  Speaker 2: for a following year or school budgets for a following year,
• 25:45
  Speaker 2: this is going to become something that matters.
• 25:48
  Speaker 3: I would imagine schools aren't primarily heated on diesel. Old ones,
• 25:52
  Speaker 3: I'm sure, are.
• 25:53
  Speaker 4: But I would think that most of them are going
• 25:56
  Speaker 4: on gas.
• 25:57
  Speaker 2: I have no idea.
• 25:58
  Speaker 3: Neither do I.
• 25:59
  Speaker 2: I have no idea.
• 26:00
  Speaker 4: I would just be surprised if the majority of schools
• 26:05
  Speaker 4: in Massachusetts couldn't get access to nat gas.
• 26:07
  Speaker 3: But yeah, in any case, who knows?
• 26:10
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• 27:07
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• 27:09
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• 27:11
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• 27:14
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• 27:17
  Speaker 4: By the way, I think I misspoke there. Obviously, schools
• 27:20
  Speaker 4: would not use diesel to heat their buildings. They would
• 27:22
  Speaker 4: use home heating fuel, oil.
• 27:25
  Speaker 2: Six of one, half dozen of another.
• 27:26
  Speaker 3: It's pretty much the same thing, but I misspoke there.
• 27:29
  Speaker 2: Listen, I'm sure there are some schools somewhere that do
• 27:32
  Speaker 2: use diesel to heat their facilities.
• 27:34
  Speaker 4: Sure.
• 27:36
  Speaker 2: You can use just about anything. I'm sure that if
• 27:38
  Speaker 2: you look in some rural communities, you probably have wood
• 27:42
  Speaker 2: and coal that get used.
• 27:43
  Speaker 3: I'm not kidding. For real.
• 27:47
  Speaker 2: There's all kinds of things. When you look at the
• 27:49
  Speaker 2: age of a lot of municipal infrastructure, it wouldn't surprise
• 27:52
  Speaker 2: me that basically any heating source that exists, there's a
• 27:55
  Speaker 2: school somewhere that's using it. Piece in the Wall Street Journal.
• 28:00
  Speaker 2: Why economists think higher bond yields are here to stay.
• 28:04
  Speaker 2: Why do they, Michael?
• 28:05
  Speaker 4: Well, because of all the pressures that are forcing them
• 28:09
  Speaker 4: upwards do not seem like they are likely to abate.
• 28:11
  Speaker 4: I think it's easier to kind of think through and
• 28:14
  Speaker 4: answer what wouldn't be needed in order to bring yields
• 28:17
  Speaker 4: back down rather than trying to argue like, hey, this
• 28:19
  Speaker 4: is why they're here to stay. To me, if you're
• 28:21
  Speaker 4: going to get yields down, you need a combination of
• 28:24
  Speaker 4: two things. One would be a really gloomily economic outlook.
• 28:29
  Speaker 4: And even that might not be enough, right? You need
• 28:32
  Speaker 4: that combined with some sort of action on the level
• 28:37
  Speaker 4: of government debt to GDP or just the amount of
• 28:41
  Speaker 4: debt issuance by the United States government and companies globally.
• 28:44
  Speaker 4: On the corporate side of things, you could get that
• 28:47
  Speaker 4: if the narrative changes and the outlook looks dimmer, then
• 28:50
  Speaker 4: they're going to stop borrowing so much money and spending
• 28:52
  Speaker 4: it on different infrastructure projects because they're not going to
• 28:54
  Speaker 4: see the same outlook that they otherwise would. But in
• 28:58
  Speaker 4: addition to that, you have how much debt issuance by
• 29:01
  Speaker 4: the federal government this year, Chuck?
• 29:02
  Speaker 3: 3.3%.
• 29:02
  Speaker 4: $ 4 trillion or something like that?
• 29:04
  Speaker 2: About $ 3. 25 trillion, somewhere in that ballpark.
• 29:07
  Speaker 3: So, to me, those are two combined factors, right?
• 29:10
  Speaker 4: I mean, the government slowing its spending down is a
• 29:13
  Speaker 4: bit like turning the Titanic.
• 29:16
  Speaker 3: It takes a real.
• 29:18
  Speaker 2: It's actually worse than that. The Titanic could turn slowly.
• 29:23
  Speaker 2: In the last 25 years, there is no evidence that
• 29:26
  Speaker 2: we even have seen the iceberg, let alone that the
• 29:28
  Speaker 2: ship can turn.
• 29:29
  Speaker 1: True.
• 29:30
  Speaker 3: And on the.
• 29:32
  Speaker 4: AI side of things, which is where all the other
• 29:35
  Speaker 4: debt issuance is coming from and all of the economic
• 29:38
  Speaker 4: activity is coming from it. just does not seem to
• 29:41
  Speaker 4: be sensitive to, at least right now, to what consumers
• 29:44
  Speaker 4: are demanding or what energy prices are reflecting or anything else.
• 29:49
  Speaker 4: And so I do get to that point where, yeah, okay,
• 29:52
  Speaker 4: I can see a path. It's difficult for me to
• 29:55
  Speaker 4: see a path where interest rates come down precipitously based
• 29:58
  Speaker 4: on those two factors.
• 30:00
  Speaker 2: The other thing that I want to say on this
• 30:02
  Speaker 2: is this piece is all about relative expectations. Look at
• 30:09
  Speaker 2: that title, Why Economists Think Higher Bond Yields Are Here
• 30:14
  Speaker 2: to Stay. And the interesting part to me is, Mike,
• 30:17
  Speaker 2: if you asked people, let's say that you read this
• 30:20
  Speaker 2: piece back in 2000, just as an example. If you
• 30:24
  Speaker 2: read that title back in 2000, Higher Bond Yields Are
• 30:27
  Speaker 2: Here to Stay, you'd be like, Oh, the 10-year is
• 30:30
  Speaker 2: going to be like 7% to 9%. Awesome. Because... Well, no,
• 30:34
  Speaker 2: not awesome. Because before 2000, the 10-year Treasury, the only
• 30:42
  Speaker 2: time it had ever been below 4%, the last time
• 30:48
  Speaker 2: it had been below 4% was 1962.
• 30:49
  Speaker 1: So.
• 30:53
  Speaker 3: Relative expectations are important there.
• 30:54
  Speaker 4: In 2000, you might have been hoping for like 5%
• 30:57
  Speaker 4: interest rates.
• 30:58
  Speaker 3: Correct.
• 30:58
  Speaker 2: They got down back in 98 after long-term capital management
• 31:02
  Speaker 2: blew up. You got down to like 444, I think
• 31:05
  Speaker 2: was the low that you hit. But the idea of
• 31:09
  Speaker 2: higher bond yields then would have been like, oh, the
• 31:11
  Speaker 2: 10-year is going to be at like 7% or 8%
• 31:13
  Speaker 2: because the 10-year spent most of the 90s somewhere between
• 31:15
  Speaker 2: 6% and 8%. That's kind of where it lived. Today,
• 31:21
  Speaker 2: we've got the 10-year at five and a quarter. So
• 31:24
  Speaker 2: I think the question is like, what does higher yields
• 31:27
  Speaker 2: actually mean? Does it mean, hey, we're just getting back
• 31:31
  Speaker 2: to what's been more historically normal, like maybe yields in
• 31:34
  Speaker 2: this five to 7% range for the 10-year? Does it
• 31:37
  Speaker 2: mean going to like eight to 10%? Does it mean
• 31:41
  Speaker 2: just higher than the 2010s and maybe we get back
• 31:45
  Speaker 2: to like three to 5%? These are things to consider,
• 31:48
  Speaker 2: but I think the point that I will make Given
• 31:51
  Speaker 2: the absence of the things Mike suggests, a slower economy
• 31:54
  Speaker 2: and consistently better inflation, seeing a 10-year anywhere below 3%
• 32:01
  Speaker 2: would seem to be a near impossibility for me, absent
• 32:05
  Speaker 2: a huge catastrophe in the economy. And I think expecting
• 32:10
  Speaker 2: my personal expectations, I think anywhere between, if you look
• 32:14
  Speaker 2: over the next decade, if you told me the 10-year
• 32:17
  Speaker 2: averaged anywhere between... 4.5% and 6.5% during that time. I
• 32:23
  Speaker 2: think that's a reasonable range.
• 32:25
  Speaker 4: By the way, if it does hit that 6.5% mark,
• 32:28
  Speaker 4: that means that mortgage rates are probably approaching 10%.
• 32:32
  Speaker 2: No, the historical spread is like 1.6%. So mortgage is
• 32:36
  Speaker 2: probably around 8%, but with the extra premium now, probably 8.5%
• 32:38
  Speaker 2: to 9%. That's kind of what you're looking at. So
• 32:42
  Speaker 2: we'll see how things develop here.
• 32:44
  Speaker 1: But.
• 32:46
  Speaker 2: Again, the trajectory of consistently lower rates that started in
• 32:49
  Speaker 2: the early 80s and went through 2020, that trend is broken.
• 32:54
  Speaker 2: And I got to be honest, I don't think it's
• 32:56
  Speaker 2: coming back anytime soon. Quick break here. When we return,
• 33:03
  Speaker 2: let's see. Let's talk a little bit about what we're
• 33:04
  Speaker 2: seeing in the housing market next.
• 33:07
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• 33:34
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• 33:46
  Speaker 2: Peace in the Wall Street Journal. Home sellers are starting
• 33:49
  Speaker 2: to blink on prices. That's bad for builders. And it's
• 33:53
  Speaker 2: very simple. We don't often think of it in these terms.
• 33:55
  Speaker 2: But remember, anytime that you are a builder building a home, you,
• 33:59
  Speaker 2: just like a new car manufacturer, are competing against used
• 34:04
  Speaker 2: car manufacturers, to extend the analogy. And so, look, if
• 34:08
  Speaker 2: used home prices, I know we call them existing homes,
• 34:11
  Speaker 2: but they're used. Make no mistake about it. Used car sellers.
• 34:14
  Speaker 3: Used car sellers.
• 34:16
  Speaker 2: I'm saying used home.
• 34:17
  Speaker 3: I know, but nobody manufactures used cars. I would. Okay,
• 34:21
  Speaker 3: go on.
• 34:22
  Speaker 2: Is this car new? No, it's been used.
• 34:24
  Speaker 3: By who? Me.
• 34:25
  Speaker 4: It's made of entirely recycled materials. Yes, it's... Tires have 15,000
• 34:31
  Speaker 4: miles on them. Right out of the factory.
• 34:32
  Speaker 3: Yes, it's... Sorry.
• 34:37
  Speaker 2: The stick that you see in there is actually from...
• 34:40
  Speaker 2: But in any case, look, when existing home prices go down,
• 34:46
  Speaker 2: it puts pressures on builders because people ultimately have a
• 34:49
  Speaker 2: choice as to whether or not they have to buy
• 34:51
  Speaker 2: a new home or an existing one. And so it's
• 34:57
  Speaker 2: something where as the existing home prices start to fall,
• 35:01
  Speaker 2: for builders to clear their inventory, they have to offer
• 35:04
  Speaker 2: steeper incentives, which then in turn impacts their profit, which
• 35:07
  Speaker 2: in turn impacts their decision for housing.
• 35:09
  Speaker 4: How much are we going to build in the future?
• 35:13
  Speaker 4: All housing is regional, right? It's local, in fact. And
• 35:17
  Speaker 4: were this happening, the home price seller capitulation here in
• 35:21
  Speaker 4: the Northeast, I don't think it would be much of
• 35:23
  Speaker 4: an issue for the folks like Lenar and KB Home
• 35:25
  Speaker 4: because they don't build any homes here in the Northeast. What,
• 35:29
  Speaker 4: in fact, we're seeing is that sellers are needing to
• 35:32
  Speaker 4: lower prices in areas like Florida, in Texas, in really
• 35:36
  Speaker 4: the entire Sunbelt area, Arizona to a lesser degree, but
• 35:39
  Speaker 4: still there as well. And, uh, those are the specific
• 35:43
  Speaker 4: areas where, yeah, these giant home builders can easily get
• 35:47
  Speaker 4: approval to get these projects done. There's space to build,
• 35:50
  Speaker 4: there's a ready availability of labor to build them.
• 35:54
  Speaker 3: And, uh, the zoning rules are a lot easier to
• 35:56
  Speaker 3: deal with than up here in the Northeast.
• 35:58
  Speaker 4: And so it is, uh, Yeah, this mismatch that we
• 36:02
  Speaker 4: are seeing in no small part due to interest rates.
• 36:05
  Speaker 2: And so just as an example, Lenar, who you mentioned,
• 36:09
  Speaker 2: if you look at their gross profit margin, it's now
• 36:14
  Speaker 2: down to about 16%. The last time it was that low,
• 36:19
  Speaker 2: you've got to go back to Q3 of 2011. And remember,
• 36:22
  Speaker 2: 2011 was.
• 36:27
  Speaker 2: Not a good year economically. It wasn't 2009 and 2008,
• 36:32
  Speaker 2: but it was bad. Lenard generally sits with its gross
• 36:35
  Speaker 2: margins somewhere in the, for much of the 2015s, like 25%.
• 36:40
  Speaker 2: And again, this is gross margin. And they got up
• 36:43
  Speaker 2: as high as like 29% when the market was going
• 36:46
  Speaker 2: crazy in 2022. But if you then look at operating
• 36:50
  Speaker 2: margins and the impact that you see there, Operating margins
• 36:53
  Speaker 2: for Lennar are down to 5%. The last time they
• 36:55
  Speaker 2: were there, again, you got to go back to 2012
• 36:57
  Speaker 2: in this case, instead of normally they sit somewhere between
• 37:00
  Speaker 2: like 9% and 12% margins. So when you have to
• 37:04
  Speaker 2: give these bigger discounts, you say, okay, I'm making less
• 37:07
  Speaker 2: on each home I sell. One way that you can
• 37:10
  Speaker 2: offset that is by saying, hey, if I sell fewer homes,
• 37:13
  Speaker 2: will it allow me to ramp up you know, my
• 37:17
  Speaker 2: margins because of supply and demand. But even there, remember,
• 37:20
  Speaker 2: you're still competing against a much larger supply of existing homes.
• 37:24
  Speaker 2: And so there's only so much you can do by
• 37:25
  Speaker 2: cutting down the number of lots you buy and properties
• 37:28
  Speaker 2: you put up.
• 37:30
  Speaker 4: Yeah, and these home builders face other issues than just demand.
• 37:33
  Speaker 4: You've got labor costs that are almost certainly up. We've
• 37:36
  Speaker 4: talked about the portion of foreign-born labor that performs these
• 37:39
  Speaker 4: construction projects.
• 37:41
  Speaker 2: Copper's through the roof, plastic's through the roof.
• 37:44
  Speaker 3: To me it looks like fewer homes being built for
• 37:45
  Speaker 3: the next several.
• 37:46
  Speaker 2: Years feels like that and yeah which.
• 37:49
  Speaker 4: Is on top of you know a decade of lost
• 37:51
  Speaker 4: building during the 2010s and doesn't really spell a good
• 37:54
  Speaker 4: news for anybody that.
• 37:55
  Speaker 3: Wants more home affordability i don't think.
• 37:57
  Speaker 2: We still haven't seen a huge shift in permits they're
• 37:59
  Speaker 2: still running right around that 1.4 million uh annualized in
• 38:03
  Speaker 2: terms of uh construction that's not all single family obviously
• 38:07
  Speaker 2: a lot of that is multi-family but housing starts have
• 38:10
  Speaker 2: taken a little bit of a downturn in the last
• 38:12
  Speaker 2: few months. So maybe that's where we're seeing it first.
• 38:15
  Speaker 2: And then the permit side will actually follow. Let's take
• 38:18
  Speaker 2: a quick break here. Hour two coming up in just
• 38:20
  Speaker 2: a little bit.