Latest / The Financial Exchange Show / Why you should be more concerned about the labor market than inflation

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Why you should be more concerned about the labor market than inflation · The Financial Exchange Show

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  Speaker 1: donation today. This is the Financial Exchange with Chuck Zada,
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  Speaker 1: and Mark Fandetti Chuck.
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  Speaker 2: Mark Tucker with you here today, and I gotta tell you, like,
• 1:14
  Speaker 2: kicking off this week, we saw that it was going
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  Speaker 2: to be a busy week of economic data in the
• 1:19
  Speaker 2: start of Q four earning season, and so that there
• 1:21
  Speaker 2: was a lot going on there. I think the other
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  Speaker 2: piece that I want to make sure we touch on
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  Speaker 2: today is, you know, we're now officially two full weeks
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  Speaker 2: into twenty twenty six, and I find it, you know, interesting,
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  Speaker 2: not in any like predictive sense, but just in a
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  Speaker 2: sense of, hey, what's happened so far to be able
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  Speaker 2: to look at markets and be like, what are the
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  Speaker 2: key themes that markets might be picking up on or
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  Speaker 2: not picking up on, and how we're you know, things moving,
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  Speaker 2: because I think that what we're seeing in them is
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  Speaker 2: kind of interesting over you know, this very short time period.
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  Speaker 2: That doesn't asscessarily mean anything's going to continue, but we're
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  Speaker 2: seeing some stuff that's a little bit unusual. Not unusual
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  Speaker 2: in a bad way, but just different. Again, the market
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  Speaker 2: has risen, you know this year. Prior to today, the
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  Speaker 2: SMP was up I think around one point six one
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  Speaker 2: point seven percent. So again I'm not saying like anything
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  Speaker 2: bad is happening. What I'm saying is there's some stuff
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  Speaker 2: happening in terms of where that growth is being driven from.
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  Speaker 2: That's a little bit interesting to me, and so I
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  Speaker 2: want to make sure that we touch on that. But
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  Speaker 2: we'll kick things off today with a look at some
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  Speaker 2: of the economic data that we've received in the last
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  Speaker 2: two days. Starting with we have the French called in fleshole.
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  Speaker 2: I don't actually know what the French were for, I
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  Speaker 2: don't speak French, but inflation. We got the consumer price
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  Speaker 2: index data yesterday. We got the producer price index data today.
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  Speaker 2: And the first thing that you have to realize when
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  Speaker 2: looking at this and I realized this as I started
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  Speaker 2: looking at the releases today, just because again like you
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  Speaker 2: wouldn't expect this. Yesterday's CPI report was for the month
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  Speaker 2: of December. Today's producer price index report was for the
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  Speaker 2: months of October and November, because they're still catching up
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  Speaker 2: from the government shutdown, and so, like you, you look
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  Speaker 2: at this and you're just like, what, what gives man?
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  Speaker 2: When can we get to the point where we actually
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  Speaker 2: just have consistently, you know, time series economic data that's
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  Speaker 2: out there. But I digress. The CPIDITY yesterday on the surface,
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  Speaker 2: I would say pretty good. Under the surface, a little concerning,
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  Speaker 2: but nothing awful. What I mean by that headline, inflation
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  Speaker 2: came in at point three percent for the month. CORE
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  Speaker 2: came in at point two. So you say, okay, if
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  Speaker 2: CORE is you know, better, more predictive of long term trends.
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  Speaker 2: CORE coming in at point two is reassuring the Cleveland Fed,
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  Speaker 2: as they do after each and every CPI release, calculates
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  Speaker 2: the median CPI and trimmed mean those both came in
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  Speaker 2: at point three, which is hotter than you'd like to see.
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  Speaker 2: That's you know, three and a half to four percent
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  Speaker 2: annual inflation, depending on how you want to compound it.
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  Speaker 2: And so I think overall the inflation picture is, hey,
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  Speaker 2: it's better than it's been over the last four years.
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  Speaker 2: There still is work that needs to be done, But
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  Speaker 2: because of where the labor market is, I'm just not
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  Speaker 2: sure that inflation is the biggest concern on my mind
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  Speaker 2: personally over the next three to four months. Your thoughts, Mark, I.
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  Speaker 3: Don't know where the labor market is. I'll defer to
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  Speaker 3: labor economists. The consensus among experts in this area, researchers
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  Speaker 3: seems to be that the evidence for a slowdown is
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  Speaker 3: pretty compelling, so I'll defer to them on that. I
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  Speaker 3: think it's an open question as to whether it's a
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  Speaker 3: typical slowdown that is a prelude to broader economic problems
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  Speaker 3: like recession, or just the normalization after the frantic base
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  Speaker 3: of labor market indicator growth from twenty twenty one to
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  Speaker 3: twenty twenty four.
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  Speaker 1: Ish.
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  Speaker 3: We know inflation. We don't know that. I say again,
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  Speaker 3: it's an open question. What we do know is that
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  Speaker 3: underlying inflation remains elevated. You talked about median or trim mean.
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  Speaker 3: Those are two different ways of removing outliers from your calculation.
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  Speaker 3: We do it that way because maybe removing food and
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  Speaker 3: energy isn't a good way to get at the trend
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  Speaker 3: in inflation. Maybe those two things matter, but maybe in
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  Speaker 3: some months removing insurance prices or cell phone prices is
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  Speaker 3: median and trim mean, eggs, beef, whatever, whatever you think
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  Speaker 3: is freaky couches and not represent audio visual equipments. Yeah,
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  Speaker 3: whatever you think might not. Whatever you think might be
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  Speaker 3: fluky and not under the control, not the result of
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  Speaker 3: what the Fed's doing, which is what long term inflation is.
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  Speaker 3: It's the result of what the FED does. They control
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  Speaker 3: the supply of money, thus inflation in the long term
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  Speaker 3: median inflation, I'll use that as my proxy for trend
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  Speaker 3: went up by over three percent last year three point
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  Speaker 3: one percent, to be exact, trem mean was a little
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  Speaker 3: bit less, so underlying inflation's elevated chuck, you could say
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  Speaker 3: we have an inflation problem. Three percent doesn't freak me
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  Speaker 3: out personally. I think the economy can operate okay with
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  Speaker 3: three two I do two. I fight four five percent inflation,
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  Speaker 3: but I get nervous when.
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  Speaker 2: We start talking four and five.
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  Speaker 3: Yeah, I hear you.
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  Speaker 2: A couple of reasons. Number one, it is noticeably more
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  Speaker 2: uncomfortable for people. Number two, you're only one, you know,
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  Speaker 2: weird weekend in the Middle East away from four and
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  Speaker 2: five turning into you know, seven to eight very quickly.
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  Speaker 2: So I think that having a little bit of cushion
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  Speaker 2: before you get there is a good thing, because as
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  Speaker 2: we've seen, things can turn quickly, you know, from a
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  Speaker 2: geopolitical perspective. So ultimately, when looking at the inflation picture,
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  Speaker 2: I think it's not ideal, but I don't find it
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  Speaker 2: overly problematic at the moment in terms of the pace
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  Speaker 2: what you will hear from people. And this is when
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  Speaker 2: we get into you know, the difference between the rate
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  Speaker 2: of inflation that we're seeing we can talk about as
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  Speaker 2: being manageable. The price level, though, is something that can
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  Speaker 2: still be very uncomfortable for people because this, you know,
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  Speaker 2: two and a half to three percent gain that you've
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  Speaker 2: seen is on top of very hot inflation the last
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  Speaker 2: four to five years, and so people are feeling that
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  Speaker 2: they don't have relief from it, which the bad news.
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  Speaker 2: And I hate to be the bearer of bad news,
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  Speaker 2: but prices in the aggregate very rarely go down, and
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  Speaker 2: when they do, it's usually for very bad reasons, meaning
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  Speaker 2: demand has collapsed in the economy is in the toilet.
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  Speaker 2: And I know people want to talk about, you know,
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  Speaker 2: the idea of, hey, why can't we get deflation, you know,
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  Speaker 2: wouldn't that be great? No, generally, when you talk about deflation,
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  Speaker 2: it's a horrible thing that took us like one hundred
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  Speaker 2: and fifty years to rid ourselves of in the US
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  Speaker 2: economy and generally caused some of the most severe down
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  Speaker 2: it turns on a regular basis. During the eighteen hundreds
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  Speaker 2: in particular, well, when.
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  Speaker 3: You're on a gold standard. You don't control the money supply,
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  Speaker 3: so you don't control the level. You don't control the
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  Speaker 3: price level or changes in the price level, so the
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  Speaker 3: gold under the gold standard. It's interesting if you look
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  Speaker 3: at annual inflation is likely to be negative, as positive
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  Speaker 3: deflation was as common as inflation. Since more or less
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  Speaker 3: World War Two, we've only had inflation, and the economy
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  Speaker 3: can adjust to that, particularly in the digital age, when
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  Speaker 3: it's very easy to change prices. But some prices are sticky.
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  Speaker 3: And by the way, this is a little bit of
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  Speaker 3: a technical aside, the only reason monetary policy works is
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  Speaker 3: because some prices are sticky. It's the only way you
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  Speaker 3: can fool the economy into growing when all you're doing
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  Speaker 3: is printing money. We take that for granted, but that's
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  Speaker 3: operating in the background of all these conversations that people have.
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  Speaker 3: I was going to say that researchers have, but they're
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  Speaker 3: broader than that about the rate of inflation.
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  Speaker 2: Yeah, I feel like we often we often don't talk
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  Speaker 2: enough about what's referred to as basis risk, which is, hey,
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  Speaker 2: what are the ideas that you are basing you know,
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  Speaker 2: your actions on, and and why do you do what
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  Speaker 2: you do? Like as an example, like the basis for
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  Speaker 2: breathing in is you get oxygen into your body, which
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  Speaker 2: is why if you are like underwater and can't breathe,
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  Speaker 2: your body triggers that response and says breathe in because
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  Speaker 2: it's oh, this will get me oxygen. No, it won't,
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  Speaker 2: and that's why you you drown. In the investing world,
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  Speaker 2: when we talk about basis risks, it's like, look, what
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  Speaker 2: do we believe to be true that forms the basis
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  Speaker 2: for how we make investment decisions. And there are a
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  Speaker 2: lot of these that are unexamined that I think you're
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  Speaker 2: kind of interesting to look at in the way that
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  Speaker 2: you just you know, brought up there.
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  Speaker 3: Yeah, so it's not it's not odds. A lot of
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  Speaker 3: this stuff isn't intuitive. No, the relationship between money and inflation,
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  Speaker 3: it's not one for one and it's not short term.
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  Speaker 3: It's long term. So people get excited me about the
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  Speaker 3: money supply, but in the short term that relationship broke
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  Speaker 3: down a long time ago, is very unreliable. There are
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  Speaker 3: other examples that just aren't intuitive. You have to sort
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  Speaker 3: of learn them and then see them in the jada
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  Speaker 3: to believe them.
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  Speaker 2: Let's take a quick break here. When we return, let's
• 10:18
  Speaker 2: talk a little bit about the US economy. In twenty
• 10:21
  Speaker 2: twenty six. President Trump looking to try to run the economy,
• 10:25
  Speaker 2: how to generate more economic activity? Does he have a
• 10:29
  Speaker 2: chance to do so? And what does it mean for
• 10:31
  Speaker 2: all of us?
• 10:33
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  Speaker 2: Peace in the Wall Street Journal by greg Ip Trump
• 11:37
  Speaker 2: wants to run the economy hot. There's a good chance
• 11:40
  Speaker 2: he'll succeed. And basically what this is talking about is
• 11:43
  Speaker 2: that when you look at the three levers that Washington
• 11:46
  Speaker 2: has to impact growth. He mentions fiscal policy the relative
• 11:51
  Speaker 2: levels of taxes and spending, monetary policy generally setting interest rates,
• 11:56
  Speaker 2: and credit policy how easy is it for people to borrow?
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  Speaker 2: And when you look at the key tenants of the
• 12:03
  Speaker 2: first year of this Trump term, the things that stand
• 12:07
  Speaker 2: out are fiscally, you have the government committing to lower
• 12:13
  Speaker 2: taxes and overall basically the same level, if not higher
• 12:17
  Speaker 2: levels of overall spending. The priorities shift from administration to administration.
• 12:22
  Speaker 2: But when you look at it, there was no noticeable
• 12:25
  Speaker 2: down shift in the annual deathsit last year. In fact,
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  Speaker 2: it was larger than the year before, just because this
• 12:31
  Speaker 2: is kind of the way that things move absent any change.
• 12:36
  Speaker 2: And it's very clear that the president wants to see
• 12:40
  Speaker 2: lower interest rates and the Fed by the way, like
• 12:43
  Speaker 2: for all the talk about you know what Jay Powell
• 12:45
  Speaker 2: and his crew may or may not do, let's not
• 12:48
  Speaker 2: forget the Fed actually has cut interest rates over the
• 12:51
  Speaker 2: last three four months now, so you have lower interest
• 12:54
  Speaker 2: rates that are coming through as well. The piece of
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  Speaker 2: this where I think there is is something that has
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  Speaker 2: the potential to throw a wrench in the gears is
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  Speaker 2: when it comes to credit availability and access. In that
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  Speaker 2: there's talk in this piece about you know, regulators reducing
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  Speaker 2: you know, some more onerous rules for banks and lenders
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  Speaker 2: in order to encourage them to lend more money, which
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  Speaker 2: is not wrong, like that's that's what's happening. But the
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  Speaker 2: piece that I don't think we have a ton of
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  Speaker 2: information about is the more opaque world that we've talked
• 13:30
  Speaker 2: about for the last several months now of private credit,
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  Speaker 2: which is not credit that is generated and lent through
• 13:37
  Speaker 2: traditional banking networks, but rather more direct lending made by
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  Speaker 2: large institutions to either you know, small to mid sized
• 13:46
  Speaker 2: companies or you know, and private credit can companies any
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  Speaker 2: one of a million different things. And we don't really
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  Speaker 2: know how big that industry is, We don't know how
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  Speaker 2: much money is involved in it. And we don't know
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  Speaker 2: how that may have changed in the last six months
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  Speaker 2: as a result of some of the private credit issues.
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  Speaker 2: And so I think that given that that impulse is
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  Speaker 2: uncertain on the credit side, I don't think we have
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  Speaker 2: a clear and conclusive picture of exactly what's developing there
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  Speaker 2: right now.
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  Speaker 3: There's a little bit of irony here because Trump's trying
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  Speaker 3: to do what Biden did. Biden and his advisors wanted
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  Speaker 3: to run a high pressure economy. The pushback came from
• 14:20
  Speaker 3: economists who said you were pushing overall demands sometimes called
• 14:23
  Speaker 3: aggregate demand, ahead of in terms of growth rate, the
• 14:27
  Speaker 3: growth rate of the economy's productive capacity, sometimes called aggregate supply.
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  Speaker 3: So you had this mismatch. Biden's advisors didn't care. They said,
• 14:34
  Speaker 3: We're going to flood the economy with stimulus. FED had
• 14:37
  Speaker 3: rates at zero. What you got was inflation demand. Now,
• 14:41
  Speaker 3: you could say there were supply issues as well, but
• 14:43
  Speaker 3: it's always hard to tell which curve. All you see
• 14:45
  Speaker 3: is the intersection of those two things. You can't always
• 14:47
  Speaker 3: tell which curve is moving.
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  Speaker 2: And the magnitude of the shift here is smaller than
• 14:52
  Speaker 2: the magnitude of the.
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  Speaker 3: Wa Yeah, I guess because Biden, he really overfilled the bathtub.
• 14:57
  Speaker 3: To use one famous economists analogy.
• 15:01
  Speaker 2: I guess analogy.
• 15:04
  Speaker 3: He's been canceled.
• 15:05
  Speaker 1: I don't even want to bring the guy out.
• 15:06
  Speaker 3: Larry Summers, Oh, Larry erld yeah, yeah, which, yeah.
• 15:09
  Speaker 2: I wish that Larry was short for Larald, like Harry
• 15:12
  Speaker 2: is for Harold, but it's not.
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  Speaker 3: He probably wants to change his name at this point.
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  Speaker 3: So the question is, again, there's irony here. They use
• 15:23
  Speaker 3: the phrase high pressure economy. I talked to colleagues at
• 15:25
  Speaker 3: the time who said, no, no, we're just we're just
• 15:28
  Speaker 3: pulling forward a few They made all kinds of convoluted, sure,
• 15:32
  Speaker 3: convoluted justifications for what Biden was doing. None of them
• 15:36
  Speaker 3: added up, And as it turns out, the critics were right.
• 15:39
  Speaker 3: We were both printing too much money and spending too
• 15:41
  Speaker 3: much money. Arguably we're doing the same thing here. I
• 15:44
  Speaker 3: don't know if we'll get the types of shocks that
• 15:47
  Speaker 3: caused inflation to go all the way up to nine
• 15:49
  Speaker 3: percent in twenty twenty two, because some of that was
• 15:53
  Speaker 3: bad luck as well. But we're really pushing the envelope here.
• 15:57
  Speaker 2: And you could make a case and look, there are
• 16:00
  Speaker 2: dozens of different things that you know, impact all of
• 16:03
  Speaker 2: these markets that are out there. But you could make
• 16:07
  Speaker 2: a case that, look, even though equities aren't feeling any
• 16:10
  Speaker 2: of that pressure right now, even though the bond market's
• 16:13
  Speaker 2: not feeling any of that pressure right now, you could
• 16:16
  Speaker 2: make a case that the release valve where it's being
• 16:18
  Speaker 2: seen is in precious metals, which have gone absolutely parabolic
• 16:22
  Speaker 2: over the last several months. And so if you looked
• 16:26
  Speaker 2: at again, they're also you know, these are things that
• 16:30
  Speaker 2: are now being picked up by you know, internet trading
• 16:32
  Speaker 2: forms and stuff like that and have become memes in
• 16:34
  Speaker 2: and of themselves. So it's hard to untangle, you know,
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  Speaker 2: one cause, you know, for the effect that we're seeing,
• 16:41
  Speaker 2: but if you wanted to, you know, make a case for, hey,
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  Speaker 2: we're not seeing it in the economy in terms of
• 16:47
  Speaker 2: you know, inflation hasn't ramped up to that level yet
• 16:50
  Speaker 2: and equities and bonds aren't feeling it, no, but precious
• 16:54
  Speaker 2: metals have gone absolutely parabolic in the last three months,
• 17:00
  Speaker 2: and maybe that's the release valve where it's being seen
• 17:02
  Speaker 2: to this point, and maybe that ends up spilling over
• 17:04
  Speaker 2: to other areas at some point in the future.
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  Speaker 3: You do see rising long term rates and forward markets.
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  Speaker 3: Forward markets filter out the short term drag on longer
• 17:13
  Speaker 3: rates from FED rate cuts. What I'm trying to say
• 17:17
  Speaker 3: in plain English is you might counter, you might add
• 17:20
  Speaker 3: to the point you just made with something of the
• 17:22
  Speaker 3: effect of, well, the ten your treasure is not moving much.
• 17:24
  Speaker 3: Why are and and five or five years so called
• 17:26
  Speaker 3: brain inflation break evens, which use they're not really moving
• 17:30
  Speaker 3: at all. They're not, but they never have. They didn't
• 17:33
  Speaker 3: they didn't predict. No, they don't know.
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  Speaker 2: Even when you had, they didn't do anything.
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  Speaker 3: Now, markets can be brain dead until you are on
• 17:39
  Speaker 3: the precipice of like an abyss or I guess you know,
• 17:43
  Speaker 3: a climb if you're talking about inflation. So, but there
• 17:46
  Speaker 3: are segments of markets that are signaling trouble. You mentioned
• 17:50
  Speaker 3: precious metals. Another are forward long term interest rates, which
• 17:54
  Speaker 3: are a way of answering the question, what is the
• 17:56
  Speaker 3: market think the ten year treasury will be ten years
• 17:59
  Speaker 3: from now? Ten year ten year forward rate is is
• 18:02
  Speaker 3: the way you refer to that, and those rates are arising.
• 18:06
  Speaker 2: The other piece is this is not a uniquely US
• 18:10
  Speaker 2: phenomenon that we're seeing as well. Hardly this is happening
• 18:14
  Speaker 2: all over the globe, which is why in other markets
• 18:18
  Speaker 2: like you are seeing long term bond yields ripping higher
• 18:21
  Speaker 2: consistently over the last year. Look what's been going on
• 18:24
  Speaker 2: in Japan in particular, where it's been just this relentless
• 18:28
  Speaker 2: upward push on interest rates over that time period. So
• 18:32
  Speaker 2: this is not a phenomenon that is unique to the
• 18:35
  Speaker 2: United States. If you look at precious metals and yen terms,
• 18:38
  Speaker 2: precious metals in euro terms, precious metals in Yuan terms,
• 18:42
  Speaker 2: precious metals in who am I leaving out for major
• 18:45
  Speaker 2: currencies in the Australian dollar, precious metals in Canadian dollar terms,
• 18:52
  Speaker 2: they're they're, you know, to to borrow the phrase from
• 18:55
  Speaker 2: the kids, they're mooning. That means going up, not you
• 18:58
  Speaker 2: know it used to something.
• 18:59
  Speaker 5: I know.
• 18:59
  Speaker 2: It's it's not the old use, it's the new one.
• 19:02
  Speaker 2: But they're like in every major currency, you're seeing precious
• 19:06
  Speaker 2: metals going nutty. And so it tells you there's something
• 19:10
  Speaker 2: happening across the board here. It is not just a
• 19:14
  Speaker 2: US phenomenon that we are seeing. Let's take a quick break.
• 19:19
  Speaker 2: When we return, we do have some bank earnings to
• 19:22
  Speaker 2: get too, so we'll touch on those and then also
• 19:26
  Speaker 2: what's going on in the mortgage market, good news for
• 19:29
  Speaker 2: buyers heading into the spring buying season at the moment.
• 19:41
  Speaker 1: Like us on Facebook and follow us on Twitter at
• 19:43
  Speaker 1: TFE show. Breaking business news is always first right here
• 19:48
  Speaker 1: on the Financial Exchange Radio Network. Time now for Wall Street.
• 19:53
  Speaker 1: Watch a complete look at what's moving markets so far
• 19:56
  Speaker 1: today right here on the Financial Exchange Radio ne Work.
• 20:00
  Speaker 4: Markets are pulling back as Wall Street sifts through more
• 20:03
  Speaker 4: economic data points this morning, including December retail sales in
• 20:06
  Speaker 4: the November producer Price Index that both mostly came in
• 20:09
  Speaker 4: line with estimates. We also have a fresh batch of
• 20:12
  Speaker 4: banks reporting fourth quarter earnings right now. The Dow is
• 20:17
  Speaker 4: down over half a percent two hundred and sixty one
• 20:20
  Speaker 4: points lower, SMP five hundred now down eight tens of
• 20:22
  Speaker 4: a percent or fifty six points lower, Nasdaq selling off
• 20:26
  Speaker 4: one point two percent or two hundred and eighty one
• 20:29
  Speaker 4: points lower, Russell two thousand edging about a tenth of
• 20:31
  Speaker 4: a percent higher, Tenure tread reeled down two basis points
• 20:35
  Speaker 4: at four point one four to four percent in crude
• 20:38
  Speaker 4: oil up nearly one percent higher, Training at sixty one
• 20:41
  Speaker 4: dollars and sixty seven cents a barrel. Bank of America
• 20:44
  Speaker 4: reported better than expected fourth quarter earnings this morning, driven
• 20:48
  Speaker 4: by consumer spending, where the bank's profit increased twelve percent.
• 20:52
  Speaker 4: The bank also said spending on debit and credit cards
• 20:54
  Speaker 4: rose six percent, while delinquencies of over ninety days on
• 20:58
  Speaker 4: credit cards fell to one point two seven percent versus
• 21:02
  Speaker 4: one point three five percent a year ago. However, Bank
• 21:05
  Speaker 4: of America down by four percent. Wells Fargo also reported
• 21:09
  Speaker 4: this morning, with the lenders net income per share disappointed,
• 21:12
  Speaker 4: sending that stock down nearly five percent. City Group saw
• 21:16
  Speaker 4: its quarterly profit and revenue decline, but still top forecast
• 21:19
  Speaker 4: that stock down by two percent outside of bank earnings.
• 21:23
  Speaker 4: Netflix shares down one percent following reports that the streaming
• 21:26
  Speaker 4: giant is preparing an all cash bid for Warner Brothers
• 21:29
  Speaker 4: Discovery Studios in HBO Max streaming business. This development comes
• 21:34
  Speaker 4: as Paramount efforts a competing offer, and shares in Trip
• 21:37
  Speaker 4: dot Com sinking fifteen percent after Reuters reported that Chinese
• 21:42
  Speaker 4: market regulators are investigating the travel website over monopolistic practices.
• 21:47
  Speaker 4: I'm Tucker Silvan. That is Wall Street Watch, and remember
• 21:50
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• 21:53
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• 21:56
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• 21:59
  Speaker 4: missed right here on the Financial Exchange Radio network. Just
• 22:02
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• 22:07
  Speaker 2: Don't you just get a kick out of the line.
• 22:09
  Speaker 2: Chinese regulators investigating the company on concerns about what was it,
• 22:14
  Speaker 2: monopolistic practices. Oh yeah, that's why they're investigating them, I'm sure,
• 22:20
  Speaker 2: because they're so concerned about monopolistic practices.
• 22:23
  Speaker 3: Yeah, that was.
• 22:26
  Speaker 2: It was easy you come up with a better justification.
• 22:28
  Speaker 3: It was easier to mock other countries' institutions before we
• 22:31
  Speaker 3: started prosecuting FED chairmen on trumped up charges. But yeah,
• 22:36
  Speaker 3: it is funny. I'm just I'm laughing a little more
• 22:39
  Speaker 3: nervously about other countries Banana republic practices than I used to.
• 22:43
  Speaker 3: Forgive me.
• 22:44
  Speaker 2: Let's talk a little bit about Bank of America. They
• 22:47
  Speaker 2: reported earnings this morning along with who was it, West
• 22:52
  Speaker 2: Cargo and City Group, and again, as Tucker said, like
• 22:56
  Speaker 2: all three of these companies, like the earnings were generally fine.
• 22:59
  Speaker 2: Bank Erica was good. Here's what's interesting to me about
• 23:03
  Speaker 2: what's going on with the banks right now, is JP
• 23:07
  Speaker 2: Morgan reported yesterday earnings were good. Company's falling. Bank of
• 23:11
  Speaker 2: America reported earnings today, earnings were fine. Company is following,
• 23:15
  Speaker 2: as Tucker said, Wells Fargo reported earnings today. Hold on,
• 23:20
  Speaker 2: I'm just pulling them up just to make sure that
• 23:22
  Speaker 2: I get you the exact number here. Stock is falling,
• 23:25
  Speaker 2: getting about five percent. City Group report at earnings today.
• 23:28
  Speaker 2: Stock is falling.
• 23:31
  Speaker 5: Now.
• 23:31
  Speaker 2: Look, banks were getting a lot of love coming into
• 23:33
  Speaker 2: this year, Like there was a lot of chatter about, well,
• 23:36
  Speaker 2: financials are where you want to be for twenty twenty six,
• 23:38
  Speaker 2: like all you know, there's all that you know, hullabaloo.
• 23:41
  Speaker 2: So some of this is just hey, earnings, you know,
• 23:44
  Speaker 2: and expectations, the collision course that you always end up on. Okay,
• 23:48
  Speaker 2: if you're not good enough to justify the price, then
• 23:50
  Speaker 2: you know you've got a short term pullback here. But
• 23:53
  Speaker 2: I can't help but look at the broader picture for
• 23:58
  Speaker 2: financials so far this year, where again it's it's been
• 24:02
  Speaker 2: two weeks. So let's not make too much of this,
• 24:04
  Speaker 2: but let's make a little of it. JP Morgan, Bank
• 24:08
  Speaker 2: of America, Wells Fargo, City all down, Visa, MasterCard, American Express,
• 24:12
  Speaker 2: Capital One all down, like basically anything related to consumer
• 24:16
  Speaker 2: credit is getting hit even though they're telling you their
• 24:18
  Speaker 2: credit portfolios are just fine, Like they're not telling you
• 24:22
  Speaker 2: there's anything wrong that's going on there. The places that
• 24:26
  Speaker 2: are doing well in financials to start the year capital
• 24:29
  Speaker 2: markets related companies, Goldman, Sachs, Morgan, Stanley, Schwab, Robinhood, you
• 24:34
  Speaker 2: know those types of companies. The financial data providers are
• 24:37
  Speaker 2: all in good shape. But like the insurance companies are
• 24:41
  Speaker 2: all getting whacked so far this year as well. So
• 24:44
  Speaker 2: just trying to untangle what's going on here, it's a
• 24:48
  Speaker 2: little bit complicated, especially because the regional banks haven't reported
• 24:53
  Speaker 2: earnings yet. But all the major ones that are in
• 24:56
  Speaker 2: the S and P five hundred truest Financial usb PN
• 25:00
  Speaker 2: see fifth third, like all those you know, mid size banks,
• 25:05
  Speaker 2: they're all positive for the year so far. So it's
• 25:08
  Speaker 2: kind of like, Okay, your big banks are getting whacked
• 25:10
  Speaker 2: after earnings. Your credit card companies are getting hit on
• 25:14
  Speaker 2: most likely you know, concerns about you know, credit card
• 25:16
  Speaker 2: interest rates obviously, and insurance companies. I don't really know
• 25:20
  Speaker 2: what gives It's like, I don't think there's been any
• 25:22
  Speaker 2: news about insurance companies this year and then you got
• 25:26
  Speaker 2: regionals that are you know up, So it's kind of
• 25:28
  Speaker 2: just like what the heck is going on here, which
• 25:31
  Speaker 2: brings me to a broader point about this overall market,
• 25:35
  Speaker 2: which is the interesting thing is that year to date
• 25:40
  Speaker 2: Microsoft's down, and videos down, broad Calms down, Apples down,
• 25:45
  Speaker 2: Tesla's down, Meta is down. It's a lot of firepower
• 25:48
  Speaker 2: that you're missing. This is before you even get to
• 25:50
  Speaker 2: like your software companies like Salesforce and into it in
• 25:53
  Speaker 2: service now in Adobe that are you know down significantly
• 25:56
  Speaker 2: as well. Despite that, S and P five hundred up
• 26:01
  Speaker 2: about a one and a half percent in the first
• 26:03
  Speaker 2: two weeks.
• 26:04
  Speaker 1: Of the year.
• 26:04
  Speaker 2: Not not as much now with you know pullback happening
• 26:06
  Speaker 2: today so called about you know, three quarters of a percent,
• 26:10
  Speaker 2: But historically the last couple of years, the S and
• 26:13
  Speaker 2: P has gotten into trouble when anything other than tech
• 26:16
  Speaker 2: has tried to lead. And I'm not it's not like
• 26:19
  Speaker 2: a causation thing necessarily, It's just that it's like, look,
• 26:25
  Speaker 2: when thirty percent of your market cap is chewed up
• 26:27
  Speaker 2: in a handful of tech companies, if they're falling, it's
• 26:31
  Speaker 2: kind of hard for the index as a whole to
• 26:33
  Speaker 2: move up even if everything else is moving in the
• 26:35
  Speaker 2: right direction. The two times that we've seen the index
• 26:39
  Speaker 2: kind of break in the last couple of years August
• 26:42
  Speaker 2: of twenty four where we had that you know, failed
• 26:44
  Speaker 2: rotation into small caps and everything else, and then we
• 26:47
  Speaker 2: got Jen mcgeddon where you know, we came in and
• 26:50
  Speaker 2: the S and P was you know, getting crushed on
• 26:52
  Speaker 2: a Monday, and the yen was down like ten percent
• 26:53
  Speaker 2: and everyone was like, what happened here? So that was
• 26:56
  Speaker 2: one of them. The other instance was Q one into
• 27:01
  Speaker 2: Q two of last year, where hey, tech stocks kind
• 27:03
  Speaker 2: of took the back seat again they were saying, okay,
• 27:05
  Speaker 2: something else can lead, and again not like a causation thing,
• 27:09
  Speaker 2: but we got the unexpected terrorf announcements this and that,
• 27:12
  Speaker 2: and next thing, you know, markets fell flat on their
• 27:14
  Speaker 2: face again. So forgive me if I'm just a little
• 27:18
  Speaker 2: nervous that, hey, when everything else is trying to lead
• 27:21
  Speaker 2: right now, the last two times that markets have had
• 27:26
  Speaker 2: issues in the last couple of years have been in
• 27:30
  Speaker 2: these kinds of situations. I'm not saying it will or won't,
• 27:32
  Speaker 2: because like you never know, but I'm just a little bit,
• 27:36
  Speaker 2: you know, concerned because the last couple of times we've
• 27:40
  Speaker 2: seen market leadership not be mag seven and big tech
• 27:45
  Speaker 2: things have broken down over the coming months, not permanently,
• 27:48
  Speaker 2: but just like you had, like problems, and that's undeniable.
• 27:52
  Speaker 3: Yeah, I think something like half the growth over the
• 27:54
  Speaker 3: past few years. And this is back of the end.
• 27:58
  Speaker 3: This is mental, back of the envelope. So it's it's
• 28:00
  Speaker 3: gonna be a.
• 28:01
  Speaker 2: Little bit off.
• 28:01
  Speaker 5: You have a mental envelope. Yeah, and it has a back.
• 28:05
  Speaker 5: There's a backside to it, front and a back. Wonderful
• 28:08
  Speaker 5: really reaching here. Take this with a huge grain of salt.
• 28:11
  Speaker 5: The four metaphors in one.
• 28:13
  Speaker 3: Yeah, I'm really piled. I really piled. I'm surprised I
• 28:16
  Speaker 3: could keep those straight. I actually don't think I did.
• 28:19
  Speaker 2: It's kind of a hail Mary. Now, anyways, continue.
• 28:27
  Speaker 3: Most of I'm gonna say half the growth has come
• 28:29
  Speaker 3: from expanding multiples, the growth in P two E price
• 28:35
  Speaker 3: to earnings and most of that that is responsible for
• 28:39
  Speaker 3: about half the appreciation and equity markets over the past
• 28:42
  Speaker 3: few years, and most of that again, don't have the
• 28:45
  Speaker 3: data in front of me, but sure, I think this
• 28:48
  Speaker 3: is a safe statement. Most of that has come from
• 28:50
  Speaker 3: tech and AI adjacent companies.
• 28:52
  Speaker 1: Yea.
• 28:53
  Speaker 3: So if that stops, where's the growth in my now?
• 28:57
  Speaker 3: I don't think pe multiples can grow much more. They're
• 28:59
  Speaker 3: already at extreme levels, people said differently. People are already
• 29:03
  Speaker 3: paying more than they ever have with the exception of
• 29:05
  Speaker 3: the very peak of the dot com bubble. For future earnings,
• 29:09
  Speaker 3: they're they're more optimistic, is one way. That's just a
• 29:13
  Speaker 3: proxy for optimism more like exuberance. Without that engine, you're
• 29:19
  Speaker 3: gonna need real earnings growth from elsewhere in the economy.
• 29:22
  Speaker 2: Let's take a quick break. When we return, let's talk
• 29:25
  Speaker 2: about mortgage rates after this.
• 29:27
  Speaker 1: Breaking business news as it happens only here on the
• 29:31
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• 29:38
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• 29:40
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• 29:44
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• 29:55
  Speaker 2: According to the Mortgage Bankers Association, the contract rate on
• 29:58
  Speaker 2: an average thirty year more has dropped seven basis points
• 30:01
  Speaker 2: last week to six point one eight percent. That is
• 30:03
  Speaker 2: the lowest since September of twenty twenty four and one
• 30:06
  Speaker 2: of the lowest since twenty twenty two. So obviously you've got,
• 30:11
  Speaker 2: you know, some increased activity as a result of that.
• 30:14
  Speaker 2: And what I will tell you is Look, if you
• 30:16
  Speaker 2: happen to be, you know, one of the real estate
• 30:18
  Speaker 2: agents who listens to our show, you're probably going, yeah,
• 30:23
  Speaker 2: let's let's keep it just like this for another, you know,
• 30:26
  Speaker 2: three months, and everything will be great, because the last
• 30:29
  Speaker 2: thing that you want is, you know, any kind of
• 30:31
  Speaker 2: rebound in mortgage rates. And now you're backup in the
• 30:33
  Speaker 2: mid six is heading into the spring buying season. So
• 30:36
  Speaker 2: I think that ultimately, the lower mortgage rates go. Look,
• 30:39
  Speaker 2: this is basic math. The lower mortgage rates go, the
• 30:43
  Speaker 2: smaller the pool of people that feel locked in by
• 30:46
  Speaker 2: their mortgage, which means more inventory, more turnover, and more
• 30:50
  Speaker 2: activity in the housing market.
• 30:52
  Speaker 3: I don't know, it's not clear to me what the
• 30:54
  Speaker 3: overall effect of lower rates in the short term. We
• 30:57
  Speaker 3: just pumped two hundred billion into mortgage markets, and that
• 31:00
  Speaker 3: money that's.
• 31:00
  Speaker 2: Well, we haven't even done it yet. Yeah, well, it's
• 31:02
  Speaker 2: just the expectation of it.
• 31:04
  Speaker 3: Yeah, My markets are forward looking, so all assets are
• 31:07
  Speaker 3: forward looking, So it the effects of it will permeate
• 31:10
  Speaker 3: into other asset classes to it a lot of equities,
• 31:12
  Speaker 3: and but it'll be very very brief. In fact, that
• 31:15
  Speaker 3: flash in the pan may have already happened, but it's
• 31:18
  Speaker 3: difficult to say what the overall economic effects of it
• 31:21
  Speaker 3: will will be lower or higher home prices. I assume
• 31:24
  Speaker 3: higher because it increases demand. But to your point, that
• 31:26
  Speaker 3: may also unlock some borrow some borrowers.
• 31:30
  Speaker 2: Yeah, it may provide additional inventory, and so I think that, Look,
• 31:36
  Speaker 2: I'm not constructive, this is a good one. I'm not
• 31:40
  Speaker 2: constructive on housing construction this year, but I am constructive
• 31:45
  Speaker 2: on higher housing activity of existing homes because of some
• 31:50
  Speaker 2: of these factors that we've talked about. So more transactions happening.
• 31:54
  Speaker 2: But I still think that builders are going to be
• 31:56
  Speaker 2: pulling back because of what lower prices throughout most of
• 32:01
  Speaker 2: the country is going to mean for their margins and
• 32:05
  Speaker 2: wanting to protect those margins.
• 32:08
  Speaker 4: This is a message for families who've been putting off
• 32:10
  Speaker 4: their estate planning from the elder law attorneys at Cushing
• 32:13
  Speaker 4: and Dolan. One of the biggest myths about long term
• 32:15
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• 32:19
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• 32:22
  Speaker 4: a health crisis hits and a loved one needs nursing
• 32:25
  Speaker 4: home care, many families panic can start writing checks for
• 32:28
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• 32:31
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• 32:36
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• 32:40
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• 32:43
  Speaker 4: for Procrastinators. It breaks down what the five year look
• 32:46
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• 32:51
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• 32:55
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• 33:01
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• 33:05
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• 33:09
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• 33:14
  Speaker 1: The proceeding was paid for and the views expressed are
• 33:16
  Speaker 1: solely those of Cushing and Dolan. Cushing and Dolan and
• 33:19
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• 33:22
  Speaker 1: Cushing and Armstrong did not endorse each other and are
• 33:24
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• 33:25
  Speaker 2: The Wall Street Journal reporting that the Trump administration is
• 33:29
  Speaker 2: taking aim at home builders stock buybacks. The big thing
• 33:34
  Speaker 2: here I'll read from this on this In an interview
• 33:38
  Speaker 2: with the Wall Street Journal, President Trump's Federal Housing Finance
• 33:41
  Speaker 2: Agency Director Bill Polti question repurchases made by homebuilders when
• 33:46
  Speaker 2: discussing the administration's plan to lower housing costs. Quote, they're
• 33:50
  Speaker 2: making in some cases more money than they've ever made,
• 33:52
  Speaker 2: and they're buying back stock like never before. It's something
• 33:55
  Speaker 2: that we're studying, you know, how much money they're spending
• 33:57
  Speaker 2: on buybacks. He hinted a penalty for companies that didn't
• 34:01
  Speaker 2: help the administrations push, adding that support for the government
• 34:03
  Speaker 2: back mortgage finance firms Fanny May and Freddie Mac shouldn't
• 34:06
  Speaker 2: be used to fund buybacks at the expense of Americans
• 34:08
  Speaker 2: who need to get in homes. So there's there's a
• 34:13
  Speaker 2: lot to unpack here. But ultimately, home builders like I
• 34:16
  Speaker 2: often like talk about things in terms of, hey, let's
• 34:19
  Speaker 2: let's understand the incentives that are out there that lead
• 34:22
  Speaker 2: to why different decisions are being made. As an example,
• 34:27
  Speaker 2: I might think that it's completely crazy to spend all
• 34:29
  Speaker 2: of this money building data centers and stuff. But if
• 34:32
  Speaker 2: you're a big tech you say, look, I'll try to
• 34:33
  Speaker 2: spend a couple hundred billion dollars and if this pans out,
• 34:35
  Speaker 2: there's multiple trillions of dollars in revenue and that's great.
• 34:40
  Speaker 2: So I understand the incentives that lead you to make
• 34:42
  Speaker 2: that decision. Kind of like back in two thousand and five,
• 34:45
  Speaker 2: I understand why every banker out there was trying to
• 34:49
  Speaker 2: get their hands on as many mortgage backed securities as
• 34:51
  Speaker 2: possible so they could sell them, because I understood the
• 34:53
  Speaker 2: financial incentives, even if it clearly looked bad. In this case,
• 35:00
  Speaker 2: when we look at home builders, they're sitting there right
• 35:03
  Speaker 2: now saying, Okay, in the places where we do the
• 35:06
  Speaker 2: most building Florida, Georgia, Texas, Arizona, home prices are now
• 35:12
  Speaker 2: falling year over year. Rather than trying to build in
• 35:17
  Speaker 2: those areas and face lower margins, they say, we're not
• 35:21
  Speaker 2: going to build as much and we're going to return
• 35:25
  Speaker 2: capital to shareholders instead, because that's the safer play for
• 35:29
  Speaker 2: us in order to notver extend ourselves. What it is,
• 35:33
  Speaker 2: and I'm this is one place where I think it
• 35:36
  Speaker 2: makes perfect sense. If you are going to build less,
• 35:40
  Speaker 2: it's going to have long term impacts on affordability. But
• 35:43
  Speaker 2: the reason that we are here today is not because
• 35:46
  Speaker 2: homebuilders had too many buybacks last year. It's because we
• 35:51
  Speaker 2: didn't build enough housing over ten fifteen years, and we're
• 35:57
  Speaker 2: now in a position where we don't have enough housing
• 35:59
  Speaker 2: stifle to start from. And on top of that, then
• 36:03
  Speaker 2: we also pumped a whole bunch of money in the
• 36:05
  Speaker 2: economy and it tends to go towards real estate because
• 36:07
  Speaker 2: real estate is heavily tax advantaged. Whether it's talking about
• 36:10
  Speaker 2: personal residents, investment properties, whatever it might be, it's one
• 36:13
  Speaker 2: of the most tax efficient places that you can go.
• 36:16
  Speaker 2: And it's that way because we've generally decided over the
• 36:19
  Speaker 2: last eighty years that we do want a funnel Americans
• 36:22
  Speaker 2: taxpayer money into supporting real estate. Otherwise you wouldn't have
• 36:26
  Speaker 2: the mortgage interest deduction, depreciation for owning rental properties, and
• 36:30
  Speaker 2: all this other stuff that makes it a tremendous tax
• 36:34
  Speaker 2: advantaged vehicle for parking your money in.
• 36:38
  Speaker 3: This is perplexing. What we really need is sustainable economic growth,
• 36:41
  Speaker 3: and government can do a lot to foster that. And
• 36:43
  Speaker 3: by sustainable I mean not too hot and not too cold.
• 36:47
  Speaker 3: Government can spend less during expansions to help keep interest
• 36:51
  Speaker 3: It can borrow and spend less during recessions to help
• 36:53
  Speaker 3: keep interest rates down. It can cut maybe unnecessary regulations.
• 36:57
  Speaker 3: The Trump administration's trying to do some of that, but
• 36:59
  Speaker 3: they're feeling miserably when it comes to the main tool
• 37:02
  Speaker 3: at their disposal to improve affordability, which is cut government spending.
• 37:07
  Speaker 3: I'll go on my usual free market rant here and
• 37:09
  Speaker 3: then let markets figure the rest out. Their instinct is
• 37:12
  Speaker 3: to intervene to correct prior failures resulting from previous interventions
• 37:16
  Speaker 3: and just goof things up further, and it's really frustrating.
• 37:20
  Speaker 2: You can't fix affordability through increased intervention. You can do
• 37:27
  Speaker 2: it in a short term, but it comes with very
• 37:29
  Speaker 2: bad long term costs.
• 37:30
  Speaker 3: But there are tools that they're disposable at their disposal,
• 37:33
  Speaker 3: namely cutting spending and in responsible monetary policy. Those are
• 37:36
  Speaker 3: the main levers, as you pointed out earlier, that the
• 37:38
  Speaker 3: federal government can pull to influence the economy that they
• 37:42
  Speaker 3: seem to have sort of given up honor forgotten about,
• 37:44
  Speaker 3: maybe because they're hard.
• 37:46
  Speaker 2: It's uh, look o, the things that tend to work
• 37:50
  Speaker 2: for improving affordability more competition, you knows, less regulation, fewer
• 37:55
  Speaker 2: barriers to entry. They take time to bubble out, like,
• 37:59
  Speaker 2: they're not quick, and I think, look, we're a society
• 38:02
  Speaker 2: that likes quick answers on stuff, and the quick ones
• 38:05
  Speaker 2: aren't usually best for these kinds of things and governments,
• 38:08
  Speaker 2: whether city, state, you know, or national, they're not great
• 38:12
  Speaker 2: at being able to help these things. More often than not,
• 38:15
  Speaker 2: they tend to be problematic there. Quick Break Hour two
• 38:19
  Speaker 2: coming up.