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Are global markets starting to catch up to the US? · The Financial Exchange Show

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Speaker 1: Lane and Mark Vandetti.
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Speaker 2: We made it. It's Friday. Welcome to this Friday version
1:13
Speaker 2: of the Financial Exchange. Paul Lane, Mark Vendetti, and Tucker
1:17
Speaker 2: Silver here with you as we kick off the show.
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Speaker 2: Markets in relatively mixed territory. The Dow Jones is off
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Speaker 2: over three hundred and ninety points at the moment, over
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Speaker 2: four hundred as we speak, and the S and P
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Speaker 2: five hundreds off abou zero point four percent. It's been
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Speaker 2: a relatively quiet week in terms of economic data. Last
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Speaker 2: week we had the inflation report. This week, we did
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Speaker 2: get Walmart's earnings on Thursday, and today we did get
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Speaker 2: some home sales data which we will dive into. But
1:46
Speaker 2: we kick off our show with a little bit of
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Speaker 2: a discussion on where markets stand. It's been about a
1:52
Speaker 2: month since President Trump was put into office. Were about
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Speaker 2: two months into the year or so. Take this with
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Speaker 2: a grain of salt, but there's a piece here from
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Speaker 2: Barons which goes over the performance of the S and
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Speaker 2: P five hundred the US stock market relative to some
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Speaker 2: of its international peers. And over the course of the
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Speaker 2: last decade, the S and P five hundred has significantly
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Speaker 2: outperformed international markets and traditionally when you talk to portfolio managers,
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Speaker 2: they've always been a sort of proponent of having a
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Speaker 2: twenty five percent or you know, the percentages can vary
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Speaker 2: of international exposure, but those areas of the market have
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Speaker 2: underperformed dramatically. Like I mentioned over the last decade. Year
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Speaker 2: to date, the S and P five hundred we sit today,
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Speaker 2: it's up a little over four percent through the first
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Speaker 2: two months of the years, which, to be clear, is
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Speaker 2: not too shabby at all coming off of two years
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Speaker 2: of twenty plus percent returns for the S and P
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Speaker 2: five hundred and twenty twenty three and twenty twenty four.
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Speaker 2: But it's European counterpart, the Eurostock Index six the euro
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Speaker 2: Stocks six hundred index is up about nine percent so
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Speaker 2: far in twenty twenty five, as well as the Hank
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Speaker 2: Saying Inga, which is up about thirteen percent. That is
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Speaker 2: for the Hong Kong Chinese stock market, and so mark
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Speaker 2: to me. The valuation piece has always been mentioned over
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Speaker 2: the course of the last several years. The S and
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Speaker 2: P five hundred currently trades at twenty three times on
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Speaker 2: a price to earnings basis. It's expensive. We've covered that
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Speaker 2: a lot on the show. While europe trades at seventeen
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Speaker 2: times price to earnings the European Stock Market Index and
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Speaker 2: the Chinese Hangsng Index is at about thirteen or fourteen.
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Speaker 2: So it's a very small sample size. I don't really
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Speaker 2: think there's a lot to take away here, but any
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Speaker 2: of your thoughts as to why we might be seeing
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Speaker 2: slightly higher performance from those areas of the market, you know,
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Speaker 2: granted only two months or so into.
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Speaker 3: The year here, well, I think you hinted at it, Paul.
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Speaker 3: One is that international relative to US has been badly
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Speaker 3: beaten up, so to speak. It's underperformed dramatically, not just
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Speaker 3: over the last five and ten years, but going back
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Speaker 3: to say nineteen ninety nine, a period if you take
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Speaker 3: your mark at that point from which international stocks should
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Speaker 3: have been reasonably well positioned. We know US stocks weren't
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Speaker 3: a bubble. They collapsed after that. Yet from nineteen ninety
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Speaker 3: nine to present, the outperformance of the S and the
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Speaker 3: let me just give you the totals, the cumulative performance
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Speaker 3: of the S and B five hundred thirty four hundred
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Speaker 3: percent three thousand, four hundred percent game versus a little
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Speaker 3: under five hundred percent for the MSCI. That's the Morgan
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Speaker 3: Stanley Capital International Developed Market Index, the so called IFA
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Speaker 3: Europe Australasia, which is a word I think they made up,
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Speaker 3: but we know what it means far east. So, whether
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Speaker 3: you look back twenty five or so, as I'm doing
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Speaker 3: here years or over more recent periods, the outperformance of
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Speaker 3: the US market has been staggering. And that's mostly though
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Speaker 3: not entirely, due to tech, the outperformance of the US economy.
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Speaker 3: Just keep in mind stocks are tied to company earnings
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Speaker 3: taking multiple, that is, pe expansion or compression out of
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Speaker 3: the equation for the moment. Stocks are driven by earnings,
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Speaker 3: which are in turn driven by economic growth, and economic
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Speaker 3: growth is surpassed. Economic growth here in the United States
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Speaker 3: has surpassed that in the developed world by about fifty
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Speaker 3: percent over the same period, so it's really an uneven
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Speaker 3: economic growth story. And then more recently, as you pointed out,
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Speaker 3: international stocks are looking cheap. Growth prospects for Europe don't
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Speaker 3: look terrific in the short term. They might even be
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Speaker 3: in recession in aggregate right now, but a little bit
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Speaker 3: of catch up is understandable. US stocks make up seventy
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Speaker 3: percent of global market cap right now. Twenty five years
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Speaker 3: ago that number was about fifty. So while US stocks
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Speaker 3: are dominant by any definition, you can't ignore international stocks
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Speaker 3: if you are if you're trying to build a well
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Speaker 3: diversified portfolio, Paul, they still make up a third, little
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Speaker 3: more than a third of the global opportunity set.
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Speaker 2: I want to spin back to a stat you quoted there.
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Speaker 2: So if over the last twenty five years investing in
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Speaker 2: the S and P five hundred, you would have seen
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Speaker 2: a thirty four x return on your investment versus five
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Speaker 2: times return for international was that right? Yes, Wow, that's
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Speaker 2: staggering twenty five years.
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Speaker 3: Yeah, you could add one to those numbers I'm giving you.
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Speaker 3: I'm using a tool called why charts, and you can
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Speaker 3: immediately calculate cumulative or aggregate percentage returns. That's where I'm
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Speaker 3: pulling this data from. So technically these are these are approximations.
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Speaker 3: But yeah, Paul, it's it's it's several fold difference between
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Speaker 3: US and developed market international over the past twenty five
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Speaker 3: years and over shorter periods, to US docks, as you
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Speaker 3: pointed out, have been overwhelmingly dominant.
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Speaker 2: It's interesting you made the point about the technology sector.
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Speaker 2: There are some concerns domestically that if you look at
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Speaker 2: the SMP five hundred, almost a third of it is
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Speaker 2: weighted towards tech companies. They really have taken, like you've said,
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Speaker 2: the lion's share of market caap whether you want to
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Speaker 2: look at and video over three trillion dollars marketcap Apple
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Speaker 2: and others out there. But if you look at the
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Speaker 2: euro stocks six hundred, the sector breakdown there, the waiting
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Speaker 2: to information technology is only about seven percent as of
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Speaker 2: the last quarterly report here, compared to thirty thirty plus
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Speaker 2: for the US. So it's interesting that you make that point.
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Speaker 2: It's backed up by the sector breakdowns that the US
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Speaker 2: has the lion's share of tech exposure. That's really what's
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Speaker 2: provided the growth of the last twenty five years. Less
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Speaker 2: so industrials, healthcare and financials, which are the highest weighted
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Speaker 2: sectors of the European market. We haven't seen the same
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Speaker 2: amount of growth there. And that actually segues into sort
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Speaker 2: of the next piece that is in the stack here
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Speaker 2: where the Bank of America is going over the valuation
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Speaker 2: metrics of the s and P five hundred, and by
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Speaker 2: any historical measure you look at, it's really expensive right now.
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Speaker 2: And one piece of it is this idea that the
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Speaker 2: tech sector has benefited over this twenty five year period
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Speaker 2: that we've been talking about, and even back the last
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Speaker 2: fifteen years from tremendous amount of growth and capital investment,
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Speaker 2: and what's claimed in this piece here less regulation. So
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Speaker 2: the piece that's being or the point rather that's being
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Speaker 2: made in this piece is that perhaps though the market
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Speaker 2: looks expensive, there's a bowl case in here based on
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Speaker 2: deregulation and Mark, the question I have to you is
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Speaker 2: what the heck would that mean for the financial sector.
8:37
Speaker 2: I know what the word means, but I just don't
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Speaker 2: understand how that's going to be such a big catalyst
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Speaker 2: to the financial sector. Like, someone give me an idea
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Speaker 2: of what that means. That would stimulate a tremendous amount
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Speaker 2: of business activity.
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Speaker 3: Yeah, that's key point. It might represent a one time boost.
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Speaker 3: So deregulating requiring that they imply I'm just repeating what
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Speaker 3: you said, but required that they comply with future with
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Speaker 3: fewer regulations. I don't know what that means either operationally.
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Speaker 3: To what you know, regulation of banks is a result
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Speaker 3: of successive financial regulatory structure as it exists today as
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Speaker 3: a result of successive financial crises that were sparked by
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Speaker 3: bank screwing up object fail.
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Speaker 2: Let's let them apart.
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Speaker 3: You know, this is this plain talk Paul today.
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Speaker 2: They needed the guardrails they needed, whether you want to
9:29
Speaker 2: use bumpers at a bowling alley or you know, they
9:31
Speaker 2: needed the guardrails and that's why they're in place. So
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Speaker 2: the argument, I guess would be made perhaps lowering capital
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Speaker 2: requirements or some of the ratios that they're subject to
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Speaker 2: in the stress tests that are run on I believe
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Speaker 2: a quarterly basis. But I just don't know how much
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Speaker 2: loosing that you'd be able to do with that, and
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Speaker 2: how much these banks would be willing to jump in
9:52
Speaker 2: head first to further risk up their balance sheet potentially
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Speaker 2: for more growth on the financial sector side.
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Speaker 3: And it doesn't I don't think, Paul, result in sustained
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Speaker 3: profit growth. It'll be a one time Suppose that the
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Speaker 3: new administration removes some of these shackles. They're going to
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Speaker 3: do it all at once, I assume, So you would
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Speaker 3: see a level a jump in profits as a result
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Speaker 3: of reduced costs of compliance, but that's all you get
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Speaker 3: out of it. It's a level shift. Then from there,
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Speaker 3: presumably they grow at the same rate they were previously,
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Speaker 3: so a one time revaluation of the sector might make sense.
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Speaker 3: But I don't think unless I'm missing something, and this
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Speaker 3: isn't financial stocks aren't my area, so I could be
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Speaker 3: missing something obvious, But I don't think you price in
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Speaker 3: higher or growing rates of growth indefinitely.
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Speaker 2: Certainly, we're going to take a quick break here on
10:47
Speaker 2: the Financial Exchange when we come back. We got some
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Speaker 2: home sales data fresh off the press here at ten o'clock.
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Speaker 2: When we come back from break, roomy diving into that
10:56
Speaker 2: as home sales drop sharply as prices hit an all
10:59
Speaker 2: time high for the month of January. We're covering that
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Speaker 2: right after this break.
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12:17
Speaker 2: As I mentioned before the break, we got some US
12:19
Speaker 2: housing market data and all indications from this most recent
12:23
Speaker 2: report that was released at ten o'clock this morning is
12:25
Speaker 2: that the US housing market continues to weaken. We saw
12:28
Speaker 2: sales of previously owned homes fall about five percent in
12:32
Speaker 2: the month of January from the prior month on a
12:35
Speaker 2: seasonally adjusted basis. Analysts out there from the National Association
12:40
Speaker 2: of Realtors we're expecting a two point six percent decline
12:43
Speaker 2: and like I said, we came in in or around
12:46
Speaker 2: five percent or so. We still have a period where
12:50
Speaker 2: we are facing higher mortgage traits. I know, relative to
12:53
Speaker 2: historical norms, they're not as high as what they they
12:55
Speaker 2: once were, but sitting in around seven percent or so
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Speaker 2: on the thirty year fixed mortgage. We really only touched
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Speaker 2: six percent early in the fall. But if we're taking
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Speaker 2: a look for the sales in January, they were two
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Speaker 2: percent higher than they were in January of twenty twenty four,
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Speaker 2: but we're still looking at close to a fifteen year
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Speaker 2: low here in terms of transaction volume. It will be
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Speaker 2: interesting to see what type of activity we get out
13:20
Speaker 2: of the spring housing market. There were a lot of
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Speaker 2: homes that were initially listed but peeled off the market,
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Speaker 2: and likely you'd think to be relisted come spring here
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Speaker 2: as we start to head into the high season. The
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Speaker 2: median price of a home sold in the month of January,
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Speaker 2: also important to note throughout the United States, is up
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Speaker 2: to a median price of three hundred and ninety six
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Speaker 2: nine hundred dollars. That's a four point eight percent increase
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Speaker 2: from the year before, the highest price we've ever seen
13:47
Speaker 2: for a month of January. Mark thoughts on any of
13:51
Speaker 2: the housing data there.
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Speaker 4: Do we lose mark looks like we mark this.
13:58
Speaker 2: So irritated he didn't even want to drop in his
14:03
Speaker 2: two cents on where we sit from the housing market,
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Speaker 2: We're in an interesting place at the moment where a
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Speaker 2: lot of builders out there have a tremendous amount of uncertainty. Recently,
14:14
Speaker 2: we saw an index that tracks their overall confidence in
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Speaker 2: the home building sector and it had come down much
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Speaker 2: lower from where it was previously. I believe it's rated
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Speaker 2: on a fifty, being a solid complacency for the confidence
14:30
Speaker 2: in the housing market. The number that we received earlier
14:32
Speaker 2: this week was somewhere between forty two or forty three,
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Speaker 2: which is a negative and more contractionary view of the
14:40
Speaker 2: housing market. There's many concerns that builders continue to juggle. One,
14:45
Speaker 2: you have the idea that there could be potential tariffs
14:49
Speaker 2: put in place on Canada and Mexico. Twenty five percent
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Speaker 2: of materials used in the building process are imported from
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Speaker 2: Canada and Mexico. So we'll get more information on what
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Speaker 2: the tariffs will look like come March first, if they
15:03
Speaker 2: actually do go into effect. But that plus you also
15:08
Speaker 2: have a lot of undocumented immigrant workers that could potentially
15:13
Speaker 2: not be part of the construction industry if they are
15:17
Speaker 2: deported or scrutiny is placed on them. They make up
15:20
Speaker 2: about thirteen percent of the construction workforce. So those two factors,
15:25
Speaker 2: concerns about tariffs and potential being hit on items like
15:30
Speaker 2: lumber and other items in the building process, plus undocumented
15:34
Speaker 2: immigrants being not as a significant part of the construction
15:38
Speaker 2: labor force could lead to some trepidation here on the
15:41
Speaker 2: home builder side of things. Mark, are you back with me?
15:44
Speaker 3: I am thanks. You know what really brings this all
15:48
Speaker 3: home for me? If you look at it's a simple
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Speaker 3: stat I think. If you look at home price growth
15:54
Speaker 3: since the end of twenty nineteen, so more or less
15:57
Speaker 3: the COVID era to the present twenty to now, using
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Speaker 3: the Case Shiller National Home Price Index, home prices have
16:04
Speaker 3: appreciated nationally now, some markets a little more, others a
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Speaker 3: little less, by a little over fifty percent nationally, according
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Speaker 3: again to the Case Shiller index. Is that sustainable? Well,
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Speaker 3: it's beyond any rate of increase that we've ever seen.
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Speaker 3: We don't have good data going back very long, but
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Speaker 3: it beats any period for which this index has been
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Speaker 3: in existence, with the exception, maybe of the housing bubble,
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Speaker 3: though it's awfully the housing bubble of the early two thousands,
16:31
Speaker 3: though it's awfully close. Is it sustainable? Wages over the
16:34
Speaker 3: same period, up twenty five percent. I'm using their average
16:38
Speaker 3: hourly earnings. Neither one of these series are adjusted for inflation,
16:41
Speaker 3: so you can compare them. Said, so, to sum up
16:43
Speaker 3: first two points, home prices have appreciated more than twice
16:47
Speaker 3: as much as earnings have increased by the average hourly
16:51
Speaker 3: earnings measure. So you might ask, well, maybe it's population pressure.
16:56
Speaker 3: Is it an influx of of citizens legal or otherwise,
17:02
Speaker 3: or is it something else demographic related? And I don't
17:06
Speaker 3: see that in the data. All population since January twenty twenty.
17:10
Speaker 3: Now these are people who've you know, signed the guest book,
17:13
Speaker 3: so there may be some people who aren't here legally missing,
17:16
Speaker 3: but populations up three percent overall. All these numbers are
17:20
Speaker 3: cumulative since twenty twenty. Again, population up three percent, home
17:25
Speaker 3: price is up over fifty percent. Average hourly earnings are
17:28
Speaker 3: a proxy for wages up twenty five percent. To me,
17:32
Speaker 3: the trend in home prices relative to these fundamental measures
17:36
Speaker 3: of economic expansion and wealth doesn't seem sustainable, right.
17:44
Speaker 2: But the supply side, though, that's the most confounding piece
17:48
Speaker 2: is how do you I get it? Historically these trend
17:52
Speaker 2: in increases is just absurd. But no one is able
17:56
Speaker 2: to logically explain how the supply side is going to
17:59
Speaker 2: be solved anytime soon. And the problem is it's such
18:03
Speaker 2: a fragmented, localized market that, like you know, we could
18:06
Speaker 2: sit here and talk about what to do in New
18:07
Speaker 2: England that greatly differs from what someone in Texas or
18:11
Speaker 2: the Sun Belt would be doing in terms of new
18:13
Speaker 2: home construction. Not to mention the other sort of phantom
18:17
Speaker 2: costs that buyers are dealing with is that you've got
18:20
Speaker 2: insurance costs that have surged fifty two percent since twenty twenty.
18:23
Speaker 2: That significantly has an impact on monthly housing expenses. Obviously
18:28
Speaker 2: everything that went on in California in terms of the wildfires,
18:31
Speaker 2: we had a bad hurricane season, and these issues don't
18:34
Speaker 2: seem like they're going away. The home insurance market is
18:37
Speaker 2: going to be more and more challenging to navigate. So
18:40
Speaker 2: you have buyers that have home prices like you've mentioned
18:43
Speaker 2: mark that have gone up fifty percent. You've got interest
18:46
Speaker 2: rates significantly higher than they were in twenty twenty and
18:49
Speaker 2: twenty twenty one, with a thirty year fixed mortgage sitting
18:51
Speaker 2: at six pointy eight five percent today, and you've got
18:54
Speaker 2: insurance costs that have served fifty percent since twenty twenty,
18:57
Speaker 2: a cocktail that leads to very little affordability, and unfortunately
19:02
Speaker 2: you don't have a tremendous amount of builder demand. There's
19:06
Speaker 2: certainly some uncertainty there that I was alluding to earlier,
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Speaker 2: So it doesn't spell a very rosy picture for the
19:13
Speaker 2: US housing market. Perhaps I'm proven wrong. Come this spring
19:17
Speaker 2: and it's more robust than we anticipate, But we're gonna
19:20
Speaker 2: have to wait and see till we get that data.
19:22
Speaker 2: We're going to take a quick break here on the
19:24
Speaker 2: Financial Exchange. When we come back, Wall Street watching much
19:27
Speaker 2: more right after this break.
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19:55
Speaker 1: today right here on the Financial Exchange Radio Network.
19:59
Speaker 4: Following and yesterday selloff, markets today are extending their loss
20:04
Speaker 4: as modestly as Wall Street witnessed a substantial rally in
20:07
Speaker 4: global markets, especially in China, driven by Ali Baba's strong
20:11
Speaker 4: results from its AI strategy. Investors are also reacting to
20:15
Speaker 4: news surrounding United Health, weighing on the doo right now.
20:19
Speaker 4: The Dow is down by about eight tenths of a
20:22
Speaker 4: percent or three hundred and sixty four points, SMP five
20:26
Speaker 4: hundred is down about two thirds of a percent or
20:29
Speaker 4: thirty eight points, and the Nasdaq is down by seven
20:31
Speaker 4: tenths of a percent or one hundred and forty points.
20:34
Speaker 4: RUSSA two thousand is down nearly six tenths of a
20:37
Speaker 4: percent or thirteen points. Ten year Treasury reel pulling back
20:40
Speaker 4: by three basis points, now at four point four to
20:43
Speaker 4: six percent, and crude oil down nearly two percent lower
20:48
Speaker 4: on the day, trading just above seventy one dollars barrel.
20:53
Speaker 4: United Health is taking a hit of over eight percent
20:56
Speaker 4: so far today on the heels of a report from
20:58
Speaker 4: The Wall Street Journal that the Justice Department has launched
21:02
Speaker 4: an investigation into the healthcare giants medicare billing practices in
21:06
Speaker 4: recent months. The investigation is reportedly examining United Health's practices
21:11
Speaker 4: for recording diagnoses that trigger extra payments to its medicare
21:16
Speaker 4: advantage plans. Meanwhile, The Financial Times is reporting that a
21:20
Speaker 4: Japanese group, including a former prime minister, plans to approach
21:24
Speaker 4: Tesla about investing in Nissan. Nissan shares jumped over nine
21:29
Speaker 4: percent on the news. Sticking with the auto space, where
21:33
Speaker 4: evmaker Rivian posted its first quarter of gross profit, though
21:38
Speaker 4: much of that was driven by sales of regulatory credits
21:40
Speaker 4: to other auto companies rather than EV sales, rivn shares
21:45
Speaker 4: pulling back by six percent. Elsewhere, shares an energy drink
21:49
Speaker 4: maker Celsius surging by twenty three percent after the company
21:54
Speaker 4: beat fourth quarter earnings and revenue expectations. Furthermore, Celsius agreed
21:59
Speaker 4: to buy competitors Alani New for one point eight billion dollars.
22:04
Speaker 4: Fintech company Block reported a top and bottom line miss
22:07
Speaker 4: in the previous quarter, sending shares in the parent company
22:10
Speaker 4: of cash App and Square down by fifteen percent and
22:14
Speaker 4: drop Box down by thirteen percent after the software company
22:18
Speaker 4: said it expects at one and a half percent decline
22:21
Speaker 4: in paying.
22:22
Speaker 2: Users this year.
22:24
Speaker 4: I'm Tucker Silvan, that's Wall Street Watch.
22:27
Speaker 2: In the prior segment, we were diving into some of the
22:30
Speaker 2: home sales data that we got this morning here at
22:32
Speaker 2: ten am. What we saw from the January report is
22:34
Speaker 2: existing homes decrease by five percent in September, reaching a
22:38
Speaker 2: seasonally adjusted rate of four point zero eight million units.
22:43
Speaker 2: And we saw the national media and existing home price
22:46
Speaker 2: up to three hundred and ninety six nine hundred to
22:48
Speaker 2: five percent increase from the prior year. And Mark, you
22:51
Speaker 2: had one last thought on the supply side of things
22:53
Speaker 2: as we look at the housing market as a whole.
22:55
Speaker 3: Yeah, the one point I wanted to make, Paul, And
22:58
Speaker 3: this is going to sound counterintuitive, probably a little nuts,
23:01
Speaker 3: so feel free to say this is nuts. But it's
23:04
Speaker 3: really hard to disentangle supply from demand. For example, if
23:08
Speaker 3: I gave everybody a million dollars, and I didn't come
23:11
Speaker 3: up with this example, I'm just going to adapt it
23:13
Speaker 3: to this context. If I gave everybody a million dollars,
23:16
Speaker 3: you might see demand for I don't know, homes go
23:18
Speaker 3: up or cars or anything. If you were looking at
23:21
Speaker 3: the market from the other side, though, it might look
23:23
Speaker 3: like a supply problem. It might look like we're not
23:25
Speaker 3: making enough cars, not building enough homes. You can't necessarily
23:30
Speaker 3: just looking at transactions. This is a really subtle point,
23:33
Speaker 3: and it took me a long time to understand it.
23:36
Speaker 3: So don't be surprised that this doesn't sound consistent with
23:39
Speaker 3: your experience or common sense. But just looking at transactions
23:43
Speaker 3: and activity, it's impossible to tell. Is difficult to tell
23:47
Speaker 3: whether you have a excess demand problem on your hands
23:51
Speaker 3: or too little supply. Now we know inventory in historical
23:54
Speaker 3: terms is low, but those measures are always relative to demand.
23:59
Speaker 3: They always quote months of inventory, right, that's probably one
24:02
Speaker 3: of the more prominent statistics.
24:05
Speaker 2: Right.
24:06
Speaker 3: My point is it's you never really know. And this
24:08
Speaker 3: relates to the inflation we experienced in twenty twenty one.
24:13
Speaker 3: It really started in twenty twenty, blossomed for lack of
24:17
Speaker 3: a better word, in twenty twenty one and twenty twenty two.
24:19
Speaker 3: Of course, the debate rages now in economics. Was it
24:22
Speaker 3: a supply problem we're COVID related constraints on shipping and
24:26
Speaker 3: other things strangling the economy, or was it a demand problem?
24:31
Speaker 3: Did government put too much stimulus into the economy putting
24:35
Speaker 3: pressure on already constrained supply. Economists are going to argue
24:38
Speaker 3: about that for years. My guess is, in five or
24:42
Speaker 3: ten years, if we have a big dip or two
24:44
Speaker 3: in the economy, which is almost inevitable. It'll take care
24:47
Speaker 3: of those so called housing supply problem and nobody will
24:51
Speaker 3: be wringing their hands over it. I just don't know,
24:55
Speaker 3: and have thought don't.
24:56
Speaker 2: I just don't know how you can't make the argument
24:58
Speaker 2: it's a supply issue. To that seems just crystal clear.
25:02
Speaker 2: Post two thousand and eight, it's been the country's been
25:05
Speaker 2: under developed in terms of the housing construction. So to me,
25:09
Speaker 2: you mentioned some of the trends in population growth, plus
25:12
Speaker 2: the fact that you've underdeveloped from a building perspective over
25:15
Speaker 2: the last ten to fifteen years. To me, it's just
25:17
Speaker 2: screams supply. That's it.
25:21
Speaker 3: Sure, there is that element, Paul, absolutely, But what if
25:23
Speaker 3: the economy is still running too hot? I know this
25:26
Speaker 3: is my favorite theme. I bang this drum every time
25:30
Speaker 3: I appear here on the Financial Exchange. But what if
25:34
Speaker 3: this is just another symptom like frothy stock market valuations,
25:38
Speaker 3: like persistent core inflation, like consumption and other areas that
25:43
Speaker 3: continues to run above trend. What if this is just
25:47
Speaker 3: another example of excess demand in the economy that the
25:51
Speaker 3: FED hasn't done enough to address. That thought sort of
25:55
Speaker 3: sort of bounces around in my head.
25:57
Speaker 2: We will see as we get more and more data
26:00
Speaker 2: and see how the housing market trends over the course
26:02
Speaker 2: the next couple of months. Mark helped me understand something
26:05
Speaker 2: here on this next piece from the Wall Street Journal,
26:07
Speaker 2: Elon Musk is looking to audit the Federal Reserve, and
26:13
Speaker 2: I was asked about this on one of my radio
26:14
Speaker 2: calls this morning. It's hard for me to really put
26:18
Speaker 2: in a whole lot of contacts here other than obviously
26:21
Speaker 2: we know that he's been looking to cut costs and
26:24
Speaker 2: try to increase transparency and eliminate bureaucracy across the government.
26:29
Speaker 2: But the idea of auditing the Federal Reserve, to me,
26:32
Speaker 2: it's already subject to annual financial audits by external auditors.
26:36
Speaker 2: They submit reports to Congress and testify regularly. What's the
26:41
Speaker 2: deal with this?
26:43
Speaker 3: Okay, My kinfoil hat view on this is that this
26:46
Speaker 3: is the first step to a White House takeover of
26:49
Speaker 3: the FED. I firmly believe that that's just my imagination running.
26:54
Speaker 3: Why we all have our little conspiracy theories that we like.
26:57
Speaker 3: But you know, I don't think it's too much of
26:58
Speaker 3: a stretch. The President has said he thinks he should
27:00
Speaker 3: set interest rates. So this to me is the first
27:03
Speaker 3: step in infringing on FED independence. They'll find something that
27:07
Speaker 3: they can't immediately explain, they'll claim it's a massive scandal,
27:11
Speaker 3: and then the President will move in and put himself
27:13
Speaker 3: on the FOMC. That's my Friday Morning indulging a conspiracy
27:18
Speaker 3: theory interpretation. A more grounded point I think to make
27:22
Speaker 3: about this is that the FED is self funding. You
27:24
Speaker 3: could eliminate it tomorrow. It would actually cost the government
27:27
Speaker 3: money Histora, and by self funding, I mean they use
27:31
Speaker 3: the FED owns treasuries. They own a lot of treasuries.
27:35
Speaker 3: They use the interest on those to pay everybody's salary
27:38
Speaker 3: and all the great researchers that they have, and to
27:40
Speaker 3: keep the lights on, etc. They don't get anything from Congress.
27:45
Speaker 3: It doesn't cost the federal government a dime. You could
27:47
Speaker 3: eliminate the FED, as I said, tomorrow and it would
27:49
Speaker 3: actually cost the government money. So does Musk know this?
27:54
Speaker 3: I'm not sure people have documented cases of him claiming
27:58
Speaker 3: that there are Social Security beneficial year He's who were
28:00
Speaker 3: one hundred and fifty years old still getting benefits. He
28:03
Speaker 3: didn't seem to know that the database that they use.
28:06
Speaker 3: When the date of birth lacks of value, the database
28:09
Speaker 3: defaults eighteen seventy five, which would mean that a lot
28:12
Speaker 3: of people look like they are one hundred and fifty
28:14
Speaker 3: who aren't. Musk didn't seem to know that, So I
28:16
Speaker 3: guess my point is he may not understand that the
28:18
Speaker 3: FED is self funding. My more sinister take on this,
28:22
Speaker 3: for what it's worth, is this is the first step
28:23
Speaker 3: in a FED takeover by the administration.
28:26
Speaker 2: I just don't know if on a Friday, I'm willing
28:29
Speaker 2: to go that far. But I like how you presented
28:32
Speaker 2: the both sides of the argument there, with the tin
28:34
Speaker 2: hat and the more grounded approach in terms of.
28:38
Speaker 1: Oh your way too.
28:39
Speaker 3: If you would agreed with that, I'd be really concerned.
28:41
Speaker 3: You're one of the more level headed people I've ever met,
28:44
Speaker 3: wise beyond your the on your years.
28:46
Speaker 2: I have been on a lot of day call and
28:48
Speaker 2: nightcuil over the course of the last week, So anything
28:50
Speaker 2: is possible, And it is and it is Friday. We're
28:52
Speaker 2: going to take a quick break here on the financial exchange,
28:55
Speaker 2: but when we come back, we're we're talking about a
28:56
Speaker 2: couple more issues here, whether it's the the US Treasury
29:01
Speaker 2: long term debt sales, talking about Treasury Secretary Besson and
29:05
Speaker 2: his commentary, as well as the US and its demands
29:08
Speaker 2: for Ukraine to sign a minerals deal. That's right after
29:11
Speaker 2: this break here on the Financial Exchange text us at six.
29:14
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29:17
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29:22
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29:44
Speaker 2: The US doubles down on the demand that Ukraine sign
29:48
Speaker 2: its minerals deal. So what's been going on here is
29:51
Speaker 2: a bit of a rising war of wards between President
29:54
Speaker 2: Trump and President Zelensky from the Ukraine regarding a mineral
29:59
Speaker 2: right now deal that would be worth hundreds of billions
30:02
Speaker 2: of dollars to the US. Basically, I believe it was
30:05
Speaker 2: Treasury Secretary Best that had proposed had met with Zelensky
30:10
Speaker 2: in person and had requested that he sign a deal
30:13
Speaker 2: that would give fifty percent of a list of Ukrainian
30:17
Speaker 2: natural resources, the US economic share and participation in those,
30:22
Speaker 2: and so we'll just look at this from an economic standpoint.
30:26
Speaker 2: The argument being made here is one hundred billion dollars
30:28
Speaker 2: of military support has gone to Ukraine over the course
30:31
Speaker 2: of the last three years funding the war efforts, and
30:33
Speaker 2: it's the idea behind the deal is to extract some
30:36
Speaker 2: value financially out of the Ukraine, specifically targeting some of
30:41
Speaker 2: these valuable minerals that it has a large resource of
30:44
Speaker 2: throughout the European region. Mark Yeah, I'm.
30:48
Speaker 3: A little surprised by all the pearl clutching people think
30:52
Speaker 3: it's so unseemly that we asked Ukraine for some compensation.
30:56
Speaker 3: This is a totally normal thing to do. The only
30:59
Speaker 3: reason we went in too World War one, or a
31:01
Speaker 3: big reason is a kid you learn we did it
31:03
Speaker 3: to make the world saye for democracy. But in reality,
31:06
Speaker 3: American companies were telling Wilson if we if the Allies lose,
31:11
Speaker 3: we lose a lot of money. World War two, we
31:15
Speaker 3: loan the Brits a lot of money. I think it
31:16
Speaker 3: took them until the nineties or the two thousands to
31:19
Speaker 3: pay it off. So there's nothing unusual about asking for compensation.
31:23
Speaker 3: Now you could argue that one should go about it
31:25
Speaker 3: a little differently. We allegedly put a piece of paper
31:27
Speaker 3: in Zelenski's face and said, you know, sign this or
31:31
Speaker 3: without a bashole cabinet. Yeah, you know it's Ukraine may
31:37
Speaker 3: have worth up to twelve trillion dollars in critical minerals lithium, graphite, cobalt, titanium.
31:44
Speaker 3: I'm obviously reading off the report here, so it's it
31:46
Speaker 3: seems to me that'd be a legitimate topic of discussion.
31:50
Speaker 2: We'll see how that plays out.
31:51
Speaker 3: But you know, Paul, it's not a big part of
31:53
Speaker 3: our GDP. Even if they get if they gave us
31:55
Speaker 3: a six hundred billion dollar check today, that's that's about
31:59
Speaker 3: one point five percent of the United States annual output.
32:02
Speaker 2: Important in there, Yeah, absolutely absolutely.
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33:25
Speaker 2: Treasury Secretary Scott Besson has stated that the US is
33:29
Speaker 2: along long away from boosting longer term debt sales. The
33:34
Speaker 2: FED is going through a quantity of tightening program where
33:37
Speaker 2: they're letting these longer term treasuries roll off their balance sheet.
33:41
Speaker 2: They were the biggest buyers of these securities during the
33:45
Speaker 2: COVID era, and we can argue that it went on
33:47
Speaker 2: for too long the amount of purchases from a quantitative
33:50
Speaker 2: easing perspective, But the Treasury Secretary is noting that that's
33:54
Speaker 2: one of the factors as to why they we will
33:57
Speaker 2: not be boosting longer term debt sales here mark in
33:59
Speaker 2: the near term.
34:01
Speaker 3: Yeah, this is really the primary function of the Treasury
34:03
Speaker 3: Secretary to ensure that the debt issued by the US
34:07
Speaker 3: government is absorbed by the market without causing any impact. Ideally,
34:14
Speaker 3: you don't want to move interest rates every time you
34:16
Speaker 3: sell debt. There's always a little bit of movement, but
34:19
Speaker 3: you don't want anything inordinately disruptive. And I know that's vague,
34:23
Speaker 3: but that's sort of the name of the game. So
34:24
Speaker 3: the challenge is always, suppose they have to raise one
34:27
Speaker 3: hundred billion in a month. Do we issue treasury bills
34:30
Speaker 3: very short term debt, the type of stuff that ends
34:32
Speaker 3: up in a money market fund, or do we issue
34:34
Speaker 3: longer term bonds. The rates on the two right now
34:37
Speaker 3: are very similar, but there are implications you need to
34:42
Speaker 3: roll that debt over. Obviously, if you finance it using
34:45
Speaker 3: short term instruments. So the question on Besent's mind and
34:49
Speaker 3: others every day is do we think short term interest
34:51
Speaker 3: rates relative to long term interest rates? Are they going
34:54
Speaker 3: up or down? We talk about it daily on the
34:59
Speaker 3: Financial Exchange, but it's just sort of trivia for us.
35:02
Speaker 3: For the United States long term financial position, it's kind
35:05
Speaker 3: of life and death.
35:07
Speaker 2: Yeah, we sit right now with the tenyure US Treasury
35:09
Speaker 2: at four point four to five percent, and it got
35:11
Speaker 2: as high as about four point eight percent and as
35:14
Speaker 2: low as three seven five earlier this fall. So it's
35:18
Speaker 2: something that is worth falling the longer end and the
35:21
Speaker 2: shorter end of the curve on the interest rates side
35:23
Speaker 2: of things. And certainly Scott Besson's role is important. But
35:27
Speaker 2: no major changes, it seems like, in terms of a
35:29
Speaker 2: shake up there with issuing more longer term treasury debt
35:34
Speaker 2: mark Any thoughts here on this radical proposal that is
35:39
Speaker 2: getting some headway headline coverage on Bloomberg with one hundred
35:43
Speaker 2: year non tradable, zero coupon bonds as a way to
35:47
Speaker 2: refinance our debt structure. Again another story. Yes, yeah, makes
35:52
Speaker 2: my head spin a little bit.
35:53
Speaker 3: No, you would do It's it's not unusual. I think
35:55
Speaker 3: Disney issued a private company different context, but Disney issued
35:59
Speaker 3: on or your bond at one point. I think other
36:01
Speaker 3: corporations may have to. Other governments have done it. The
36:04
Speaker 3: Brits used to do. They used to have perpetual I
36:06
Speaker 3: think they call them consoles or something anyway, So it's
36:10
Speaker 3: not unusual, Paul, for a government to issue a very
36:12
Speaker 3: long duration bond. Again, it comes down to do you
36:15
Speaker 3: think you can finance the government's debt more chiefly cheaply?
36:19
Speaker 3: Excuse me by by doing so. You always have your
36:22
Speaker 3: eye the Treasury Secrety does. Secretary does on the average
36:26
Speaker 3: rate of interest that the government is paying, and we're
36:28
Speaker 3: right now paying three point three percent on average two
36:33
Speaker 3: holders of US bonds over time. That can't be higher
36:37
Speaker 3: than the economy's rate of growth. Otherwise debt spirals out
36:41
Speaker 3: of control. Slightly different point, but something else the Treasury
36:44
Speaker 3: Secretary has to be mindful of.
36:46
Speaker 2: Yeah, the share of interest payments is relative to our
36:49
Speaker 2: budget is increasing because of that dynamic that you just
36:52
Speaker 2: alluded exactly right, it's a great point, exactly, and so
36:54
Speaker 2: that's something that we have to continue to monitor and
36:57
Speaker 2: really hasn't been something that's been an area of focus
37:00
Speaker 2: at all over the last gz ten to fifteen years
37:03
Speaker 2: when we've been in this very suppressed low interest rate environment,
37:06
Speaker 2: both on the longer end and shorter end of the
37:09
Speaker 2: curve here. So that's just something that is being mentioned
37:13
Speaker 2: about at the moment. We'll see if it gets any
37:17
Speaker 2: traction in terms of meeting. It's something that they're going
37:20
Speaker 2: to be looking they've discussed preliminarily, but no real action
37:25
Speaker 2: on it here at the moment, but we'll keep you
37:27
Speaker 2: apprized of any changes as we we hear more. Taking
37:31
Speaker 2: a look at some of the market indices and their
37:33
Speaker 2: performance today, the Dow Jones is off three hundred and
37:36
Speaker 2: ninety seven points, are close to a full percent. The
37:39
Speaker 2: S and P five hundred is sitting off two thirds
37:42
Speaker 2: of a percent. The Nasdaq here is off over you know,
37:46
Speaker 2: point seventy five percent, or one hundred and fifty five points.
37:49
Speaker 2: If we look at the US Tenure Treasury that is
37:52
Speaker 2: off about four basis points as the investors continued awigh
37:56
Speaker 2: the state of the US economy, it's sitting at four
37:58
Speaker 2: point four or five percent, and US West Texas Intermediate
38:02
Speaker 2: oil down two percent today at seventy one dollars a barrel.
38:06
Speaker 2: That's all the time that we have for the first
38:08
Speaker 2: hour here on the Financial Exchange. We're gonna take a
38:10
Speaker 2: quick break, but when we come back, we've got much
38:12
Speaker 2: more to cover right after this