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What If We've Been Getting Inflation Wrong? · The Financial Exchange Show

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  Speaker 1: This is the Financial Exchange with Chuck Zada and Mark Vandetti.
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  Speaker 3: It's Chuck, Mark, and Tucker with you here. And as
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  Speaker 3: we kick things off, we've got stocks ripping higher today.
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  Speaker 3: with the S & P up about 1.25%. Dow's up 2.5%.
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  Speaker 3: NASDAQ Composite was up 2%, but now up just 1.3%.
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  Speaker 3: Tech stocks giving back some of their early gains as
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  Speaker 3: we go through the morning. CNBC has a red chyron
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  Speaker 3: on the website that says breaking, but it doesn't say
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  Speaker 3: anything there, so I'm not sure what the new breaking...
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  Speaker 3: It's literally breaking. I believe you mean broken.
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  Speaker 2: Thank you.
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  Speaker 3: Yeah, I appreciate that. Do we have a sound for
• 1:49
  Speaker 3: the opposite of a car crash on a bit?
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  Speaker 4: No.
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  Speaker 3: We need something that's like a plane taking off or
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  Speaker 3: something like that. Like something that's, you know, nice. So anyway,
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  Speaker 3: in any case, what you have here, obviously midterm elections
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  Speaker 3: happened yesterday. And the clear outcome that was clear by 9.30,
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  Speaker 3: 10 p.m. last night is that Democrats are going to
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  Speaker 3: have control of both houses of Congress. Congress, both chambers
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  Speaker 3: of Congress, rather. And I think a big chunk of
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  Speaker 3: this rally is simply the fear that there would be
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  Speaker 3: a contested election that drags out for days and weeks
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  Speaker 3: and is, you know, a mess. That's off the table.
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  Speaker 3: And so you've got this, you know, implied volatility crush
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  Speaker 3: that's happening where, you know, any fear that was built
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  Speaker 3: up in the VIX is being burnt off as people
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  Speaker 3: exit those hedging trades. And I think that's why you've
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  Speaker 3: got the rally that's happening in equities today. Bonds also
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  Speaker 3: catching a little bit of a bid. Ten-year treasury down 4.4
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  Speaker 3: basis points to 4.906. Dollar is falling as well, down 0.35%
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  Speaker 3: to 101.365. Gold, on that weaker dollar, catching a strong
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  Speaker 3: bid for the first time in weeks, up $ 118 an ounce.
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  Speaker 3: We'll see if we can hold those gains. It really
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  Speaker 3: has not been able to hold anything for the last
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  Speaker 3: several months. But, hey, I've yet to find any... Well, no,
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  Speaker 3: actually some stocks do go to zero, but I've yet
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  Speaker 3: to find any commodity price that actually goes to zero.
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  Speaker 3: They might, like, you know... We'll have to do some
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  Speaker 3: research on that, Mark. This would be a fun one. Like,
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  Speaker 3: has there ever been a commodity whose pricing has gone
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  Speaker 3: to zero? Like, for an extended period, aside from, like,
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  Speaker 3: oil going negative in 2020.
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  Speaker 1: Yeah.
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  Speaker 3: This is an interesting one. I don't know the answer,
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  Speaker 3: but we'll do some research on it.
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  Speaker 1: Oil.
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  Speaker 3: Oil. Continuing its slide from earlier this week, West Texas
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  Speaker 3: Intermediate down $ 4. 27 a barrel to $ 91.
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  Speaker 4: 82.
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  Speaker 3: Brent down $ 4.
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  Speaker 2: 46 to $ 99.
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  Speaker 4: 14.
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  Speaker 3: What do you got for me, Mark?
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  Speaker 2: Sperm whale oil. Spermaceti. Didn't they call it that? Anybody
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  Speaker 2: from New Bedford?
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  Speaker 3: Yep.
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  Speaker 2: I bet you nobody would pay for that. We could
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  Speaker 2: check Costco, but.
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  Speaker 3: Whale oil price history. Let's see if this does anything
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  Speaker 3: in Google.
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  Speaker 2: Specifically, who's got a lamp that they still power by
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  Speaker 2: whale oil or something like that? Technically, probably a commodity.
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  Speaker 3: Here we go. I've got this is from... Uh, where
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  Speaker 3: is this? Here we go.
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  Speaker 2: You don't want to check Craigslist for this, by the way.
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  Speaker 3: The blended whale oil price. So I don't have sperm
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  Speaker 3: whale oil. I have a blend because I search for,
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  Speaker 3: you know, it's, you don't have like, uh, you know,
• 4:33
  Speaker 3: single vineyard or anything like that, but you've got a
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  Speaker 3: blend and it looks like I got it. I got
• 4:41
  Speaker 3: to see where this chart is from. I have no
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  Speaker 3: idea if this source is reputable, but it seems okay.
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  Speaker 3: It's something called Thundersaid Energy. They're a research consultant. Definitely fine.
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  Speaker 3: Let's see.
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  Speaker 2: IT's calling right now.
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  Speaker 3: Oh, no, this is great, actually. This actually looks pretty legitimate.
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  Speaker 3: They have... Okay, this is from 1805 to 1904. So, like,
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  Speaker 3: the relevant period where this matters. The whale oil price...
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  Speaker 3: In 1805 was....
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  Speaker 1: Is this.
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  Speaker 3: Oh, no, here we go. I got to use the
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  Speaker 3: right-hand side. It looks like about 60 cents a gallon.
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  Speaker 3: So whale oil was expensive back... I mean, 60 cents
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  Speaker 3: a gallon in 1805. That's crazy.
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  Speaker 2: I don't even know how to translate that.
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  Speaker 3: We don't even have inflation data that can get us
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  Speaker 3: all the way back there, I don't think.
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  Speaker 2: I certainly don't.
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  Speaker 3: It peaked... In 1863, at about $ 1. 75 a gallon for
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  Speaker 3: whale oil.
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  Speaker 2: Yeah, Lincoln took a lot of heat.
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  Speaker 3: Pun intended.
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  Speaker 1: Ah, nice.
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  Speaker 3: No, it was not. What do you mean?
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  Speaker 2: Sorry, no, my pun was not intended.
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  Speaker 3: Oh, you're burning the whale oil.
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  Speaker 2: No, no, you picked up on it. I didn't even
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  Speaker 2: think of that.
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  Speaker 3: Just literally taking the heat away from people. And then
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  Speaker 3: it promptly fell from $ 1. 75 down to about $ 0. 40 by 1904.
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  Speaker 3: And then, of course, electricity. Yeah, so.
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  Speaker 2: kind of wild so today i guess my point is
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  Speaker 2: does anything go to zero yeah maybe sperm oil i
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  Speaker 2: don't know why i keep saying sperm oil but because
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  Speaker 2: spermaceti was a valued quite valuable commodity.
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  Speaker 3: I guess the question that i would ask there is
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  Speaker 3: did the supply side or demand side dry up first
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  Speaker 3: because that would influence you know like if if it
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  Speaker 3: was illegal to sell it i don't.
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  Speaker 2: Think it became illegal not in that era Maybe the
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  Speaker 2: Japanese still do it.
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  Speaker 3: But by the end of it, like... 1900. Who stopped first,
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  Speaker 3: the buyers or the sellers?
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  Speaker 2: Nothing was illegal in 1900. You gave your kids cocaine
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  Speaker 2: for breakfast. Got them ready for school.
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  Speaker 3: Mark Vendetti, everyone. Gonna save that one. It's a good one.
• 6:55
  Speaker 3: That's a good one.
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  Speaker 2: Brush your teeth with it. Send the kids off to
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  Speaker 2: school with it.
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  Speaker 3: No, it is wild just when you look at some
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  Speaker 3: of the stuff people did health-wise back then. What do
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  Speaker 3: you got? Nope, go for it. You can't stop now.
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  Speaker 2: Nah, it's not that funny.
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  Speaker 3: Okay. In any case, so you've got markets reacting to
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  Speaker 3: midterms yesterday, and that is basically the driving force behind
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  Speaker 3: what we're seeing right now. Let's take a quick break.
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  Speaker 3: When we come back, Bloomberg's done something very interesting. Again,
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  Speaker 3: I throw those words around occasionally, so this is not
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  Speaker 3: the only time that I have. But they did something
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  Speaker 3: interesting as it relates to inflation, and I want to
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  Speaker 3: talk about it right after this break.
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  Speaker 3: So I saw this a couple days ago, and I'm
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  Speaker 3: glad that Tucker put this in here. Anna Wong, who's
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  Speaker 3: an economist with... Well, not an economist. She's the chief U.S.
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  Speaker 3: economist with Bloomberg. So, you know, she's high up on
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  Speaker 3: the totem pole. She had tweeted out something a couple
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  Speaker 3: days ago on Monday that Bloomberg had built what they
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  Speaker 3: call the Bloomberg Price Project. And basically what happened here,
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  Speaker 3: the story that she tells is... 18 months ago was
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  Speaker 3: liberation day where we were going to have all of
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  Speaker 3: these tariffs that were imposed and Bloomberg wanted to be
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  Speaker 3: able to actually track what was going on with prices
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  Speaker 3: in response to tariffs. And there just wasn't anything out
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  Speaker 3: there that had real time data granular enough for them
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  Speaker 3: to be able to figure it out. Like the, the
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  Speaker 3: work that the folks at the BLS do on CPI
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  Speaker 3: is fine, but it's monthly and it's, you know, using
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  Speaker 3: a lot of formulas to figure it like, you know, OK,
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  Speaker 3: it's not actually tracking like the changes of like homes
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  Speaker 3: in any month is an example. It's tracking, you know,
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  Speaker 3: this owner adjusted rent and it lags it over months
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  Speaker 3: so that it's smoothed out in this and that. So
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  Speaker 3: Bloomberg started building a tariff inflation tracker and there were
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  Speaker 3: a ton of people working on this, I guess. And
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  Speaker 3: what they ended up doing instead was as it grew,
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  Speaker 3: they were like, Oh, well, we can, you know, build
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  Speaker 3: this to, you know, incorporate, you know, a larger swath
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  Speaker 3: of products and this and that. And I'm guessing they've
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  Speaker 3: used quite a bit of artificial intelligence to do so
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  Speaker 3: because you just couldn't do stuff at this scale this
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  Speaker 3: quickly previously. But now, They've built this Bloomberg price project
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  Speaker 3: that covers 87% of the items in the CPI basket
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  Speaker 3: across both goods and services, and they're continuing to add
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  Speaker 3: more items to it. And they collect prices from credit
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  Speaker 3: card transactions, e-commerce sites, grocery stores, pharmacies, rental listings, corporate data,
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  Speaker 3: prices on Bloomberg of different commodities and this and that,
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  Speaker 3: government records. And they have a ton of detail there.
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  Speaker 3: that they can get to. So just as an example,
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  Speaker 3: on CPI, you can drill down to uncooked beef steaks
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  Speaker 3: as an item. Well, in the Bloomberg Prices Project, not
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  Speaker 3: only can you drill down to, you know, uncooked beef steaks,
• 11:01
  Speaker 3: which are my favorite kind of beef steaks, obviously. I disagree.
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  Speaker 3: I'm kidding. But they actually have, okay, here's what's actually
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  Speaker 3: happened on the price of different cuts of meat. in
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  Speaker 3: the last year. So as an example, strip steaks, very popular,
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  Speaker 3: up 14.1% in the last year. Top round, down 7%.
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  Speaker 3: Bone-in ribeyes, down 23%. Porterhouses, up 2.1%. T-bones, down 0.2%.
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  Speaker 3: Flank steak, flat over the last year. So they have
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  Speaker 3: all this data that they're collecting on And I got
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  Speaker 3: to be honest, it's really cool to see what they
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  Speaker 3: are doing here. And the other thing that's interesting on this,
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  Speaker 3: I'll quote here, economists often focus on the trimmed mean,
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  Speaker 3: which excludes outliers. We talk about this a lot. Mark is,
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  Speaker 3: I won't say the one who introduced me to the
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  Speaker 3: trimmed mean, but Mark is the one who converted me.
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  Speaker 2: I do a lot of trimming.
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  Speaker 3: He converted me to the trimmed mean. And the Cleveland
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  Speaker 3: Fed's trimmed mean calculation, widely followed among economists, groups product
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  Speaker 3: into 45 aggregates before excluding the extremes. So it's 45
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  Speaker 3: segments that they put it into. The BPP makes it
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  Speaker 3: possible to cull the outliers at a level of over 30,000
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  Speaker 3: individual products. So it's far broader in grabbing, you know,
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  Speaker 3: a bigger sample there.
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  Speaker 1: Hmm.
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  Speaker 3: I'm not saying it's better, but I'm saying that it is.
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  Speaker 2: I don't know, I don't know.
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  Speaker 3: Here's what's interesting to me. The BPP's trimmed mean shows
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  Speaker 3: the underlying pace of inflation at 2.2% through October... already
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  Speaker 3: close to the Fed's 2% target and below the 2.7
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  Speaker 3: reported by the Cleveland Fed. So again, this doesn't mean
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  Speaker 3: that this measure is better. It's different. It still is
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  Speaker 3: not capturing exactly the level of inflation. It still doesn't
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  Speaker 3: include a number of things. But I'm always a fan of, hey,
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  Speaker 3: is there a way that we can try to get
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  Speaker 3: better data and show us the methodology and show us
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  Speaker 3: what you're doing? And Great. We can throw it into
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  Speaker 3: the mix with these other inflation measures because I don't
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  Speaker 3: think any of them are 100% right. But the more
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  Speaker 3: data points you get, the more confirmation you can get
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  Speaker 3: in terms of, hey, has this actually turned or is
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  Speaker 3: this just noise for the month?
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  Speaker 2: Depends on why you're using it. We'll know in five
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  Speaker 2: years when we know the trend in actual inflation, which
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  Speaker 2: over time converges to what I'll call core inflation. I
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  Speaker 2: don't mean ex-food and energy. I mean I guess I
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  Speaker 2: just mean the trend in inflation. But you can only
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  Speaker 2: measure that with time. We can test their very sophisticated,
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  Speaker 2: arguably computationally expensive method. And there is always this trade-off.
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  Speaker 2: It's in computer science, but it's in economics, too, because
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  Speaker 2: it's so quantitative.
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  Speaker 1: Sure.
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  Speaker 2: Is it worth the computational expense, the labor? And with AI,
• 13:52
  Speaker 2: that gets cheaper, but there's still cost. You've got to
• 13:54
  Speaker 2: buy computing power.
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  Speaker 1: Right.
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  Speaker 3: I mean, they've had an actual labor. They've had a
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  Speaker 3: team of people working on this for a year.
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  Speaker 2: And a half developing it. Does it on the margin
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  Speaker 2: improve your forecast accuracy? There are very straightforward, widely employed
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  Speaker 2: ways to measure that. If it is found that this
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  Speaker 2: better captures the trend in inflation, then... then you follow
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  Speaker 2: that up with, okay, how much better and is it
• 14:18
  Speaker 2: worth the cost? That will depend on who's using it.
• 14:23
  Speaker 2: If it does do a better job of capturing... So
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  Speaker 2: the Fed is interested in inflation that it creates. It's
• 14:31
  Speaker 2: not necessarily interested in the transitory, you know, the shocks
• 14:34
  Speaker 2: that come and go. Because they don't have control over those, right?
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  Speaker 3: Sure, yeah.
• 14:39
  Speaker 2: So they want, if it... If the reason that the
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  Speaker 2: trimming outliers, whether you trim the top eight and the
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  Speaker 2: bottom 12 percent or trim the top to everything but
• 14:51
  Speaker 2: the one in the middle, the so-called median to arrive
• 14:54
  Speaker 2: at median CPI, that's useful because it makes the measure
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  Speaker 2: robust to the shocks that hit inflation. month over month
• 15:04
  Speaker 2: and they come from all kinds of different places so
• 15:06
  Speaker 2: you don't want to discriminate you don't want to just
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  Speaker 2: exclude food and energy that gives the fed a better
• 15:10
  Speaker 2: sense for the effect it's having on the economy is
• 15:13
  Speaker 2: it growing the money supply too quickly or too slowly
• 15:15
  Speaker 2: if this indeed does a better job and i gotta
• 15:17
  Speaker 2: think it would sure if you can if you could
• 15:20
  Speaker 2: split goods into more and more bins you get a
• 15:23
  Speaker 2: better your trim is more accurate your trim is crude
• 15:28
  Speaker 2: at the cpi expenditure category level arguably So this creates
• 15:33
  Speaker 2: finer gradations. So I would expect a little bit of improvement.
• 15:36
  Speaker 2: I would not have expected as big a divergence as
• 15:38
  Speaker 2: you said, 2.7 versus 2.2, was it, for their very
• 15:43
  Speaker 2: granular measure? That's bigger than I would have thought, and
• 15:46
  Speaker 2: that's very suggestive.
• 15:48
  Speaker 3: It also might be something where the answer might be, okay,
• 15:52
  Speaker 3: let's examine the two methodologies, see where the divergence is
• 15:55
  Speaker 3: that could explain that. It could be something where, hey,
• 16:00
  Speaker 3: BLS is imputing results for X, Y, and Z, and
• 16:04
  Speaker 3: Bloomberg's collecting them directly.
• 16:06
  Speaker 2: Oh, I thought they were taking from the expenditure categories
• 16:08
  Speaker 2: of CPI and then just... I thought they were trying
• 16:11
  Speaker 2: to mimic CPI's method as much as possible.
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  Speaker 3: I don't know.
• 16:15
  Speaker 2: But just doing it with more bins, if you like,
• 16:17
  Speaker 2: more categories?
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  Speaker 3: They might not be able to in some ways.
• 16:20
  Speaker 2: Who cares?
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  Speaker 3: Why am I— Well, if you're just going to try
• 16:22
  Speaker 3: to mimic CPI, why would you do it?
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  Speaker 2: Well, because you can get— with more granularity, that would get
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  Speaker 2: you a more accurate read on trend inflation. So we
• 16:30
  Speaker 2: want to keep the expenditure— I' m sorry, I've got to keep
• 16:33
  Speaker 2: asking why the heck are we getting into this in
• 16:34
  Speaker 2: such detail— Well, because it's interesting, right?
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  Speaker 3: Well, it is interesting.
• 16:37
  Speaker 2: I mean, from the listener's point of view.
• 16:39
  Speaker 3: I mean, being able to accurately measure inflation is really
• 16:43
  Speaker 3: important to being able to develop policy.
• 16:46
  Speaker 2: They're doing God's work. And if there's value in what
• 16:49
  Speaker 2: they're doing, the Fed will adopt the approach. Maybe that's
• 16:52
  Speaker 2: where I should have just left it.
• 16:53
  Speaker 3: Yeah. And look, this is something where a lot of
• 16:58
  Speaker 3: the statistics that we use to make economic decisions right
• 17:01
  Speaker 3: now are very much still stuck in the 1940s. A
• 17:06
  Speaker 3: lot of this stuff was developed in World War II
• 17:10
  Speaker 3: in order.
• 17:10
  Speaker 2: To help with the war effort. Yeah, GDP came out
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  Speaker 2: of the 30s. We needed to figure out what was
• 17:13
  Speaker 2: going on with industrial production and stuff like that.
• 17:15
  Speaker 3: Yeah, yeah, yeah. You look at the EIA. We got
• 17:19
  Speaker 3: EIA data on crude oil and distillates and gasoline inventories
• 17:26
  Speaker 3: in the U.S. this morning. The reason that report started
• 17:28
  Speaker 3: was trying to manage the flow of of energy products
• 17:32
  Speaker 3: during World War II throughout the country to make sure
• 17:34
  Speaker 3: that we were getting it to the places that we
• 17:36
  Speaker 3: needed for shipping off with the troops so they could
• 17:39
  Speaker 3: have oil, gas, and diesel that they needed in order
• 17:42
  Speaker 3: to operate. Like, that.
• 17:45
  Speaker 3: The University of Michigan, the Consumer Sentiment Survey, that's now
• 17:48
  Speaker 3: just a steaming pile of crap since the methodology change.
• 17:53
  Speaker 3: The reason they put it in place was to try...
• 17:55
  Speaker 3: The reason that the University of Michigan was the ones
• 17:59
  Speaker 3: who did this, it was basically the center of the
• 18:01
  Speaker 3: war planning effort. The economics department at University of Michigan
• 18:05
  Speaker 3: helped win World War II. The problem is now they
• 18:09
  Speaker 3: kind of screwed up the methodology and it's useless, which
• 18:11
  Speaker 3: is why... I always talk about that report and I'm like,
• 18:13
  Speaker 3: this was like one of the crown jewels of, again,
• 18:17
  Speaker 3: like sentiment reporting is what it is, but like that,
• 18:21
  Speaker 3: that university of Michigan economics department, you can literally point
• 18:24
  Speaker 3: to and be like helped win world war two.
• 18:27
  Speaker 2: I didn't know that.
• 18:27
  Speaker 3: And now like it's, it's become not saying that the
• 18:30
  Speaker 3: department is bad. It's just like the methodology changes. Like, Oh,
• 18:35
  Speaker 3: like I don't even want to pay attention to this anymore.
• 18:37
  Speaker 2: We, uh, yeah, I had no idea.
• 18:39
  Speaker 3: Yeah, so many of our statistics have come out of... Well,
• 18:43
  Speaker 3: that I know.
• 18:44
  Speaker 2: I didn't know Michigan's involvement specifically.
• 18:46
  Speaker 3: Yeah, University of Michigan was critical to developing the economic
• 18:51
  Speaker 3: understanding of what was going on. What do you mean?
• 18:55
  Speaker 2: Well, we can get into it offline. I'm going to
• 19:00
  Speaker 2: ask a silly question.
• 19:01
  Speaker 3: Never mind. Never mind. Never mind. We'll just move on.
• 19:08
  Speaker 2: For my question, I mean, don't talk about whatever you'd like, obviously.
• 19:11
  Speaker 3: No, no problem. So in any case, let's take a
• 19:13
  Speaker 3: quick break here. We've got Wall Street Watch coming up.
• 19:17
  Speaker 3: We'll also talk a little bit about what we're seeing
• 19:19
  Speaker 3: in housing. And then I do want to pull this
• 19:22
  Speaker 3: one forward. We've got to talk about CVS and what
• 19:24
  Speaker 3: they announced today because it's a doozy.
• 19:40
  Speaker 1: Bringing the latest financial news straight to your radio every day.
• 19:44
  Speaker 1: It's the Financial Exchange on the Financial Exchange Radio Network.
• 19:50
  Speaker 1: Time now for Wall Street Watch. Tracking the stocks, the data,
• 19:54
  Speaker 1: and the headlines driving markets so far today. Right here
• 19:57
  Speaker 1: on the Financial Exchange Radio Network.
• 19:59
  Speaker 4: Markets staging a strong rally in reaction to the midterm
• 20:02
  Speaker 4: blue wave where Democrats won majorities in both The House
• 20:06
  Speaker 4: and Senate right now, the Dow is up over 1,200 points,
• 20:09
  Speaker 4: nearly 2.5% higher. S & P 500 up about 1.5%
• 20:10
  Speaker 4: or 108 points up. NASDAQ up 1.5% or 380 points higher.
• 20:12
  Speaker 4: Russell 2000 is up over 1%. 10-year treasury yield pulling
• 20:24
  Speaker 4: back four basis points at 4.906%. Crude oil down 4%
• 20:29
  Speaker 4: at $ 92 a barrel, while Brent is down 4.5% at
• 20:34
  Speaker 4: $ 98 a barrel. Defense stocks are among the biggest losers
• 20:37
  Speaker 4: on the day as investors assess the Democrat sweep. RTX,
• 20:40
  Speaker 4: Northrop Grumman, and Lockheed Martin are all down anywhere between
• 20:43
  Speaker 4: 3% and 6%. Tesla and SpaceX also seeing losses. in
• 20:48
  Speaker 4: reaction to the election results, as many of the newly
• 20:51
  Speaker 4: elected candidates have positions against rapid data center buildouts. Shares
• 20:55
  Speaker 4: in both stocks are down about 4%. Meanwhile, McDonald's posted
• 20:59
  Speaker 4: mixed third quarter results, where its earnings beat expectations, but
• 21:02
  Speaker 4: revenue came up short. The fast food giant also reported
• 21:05
  Speaker 4: a slight decline in same-store sales. However, the stock is
• 21:09
  Speaker 4: up by 5%. Wayfair's revenue grew at the fastest pace
• 21:14
  Speaker 4: since the pandemic-driven pandemic, E-commerce boom, sending shares up by 11%.
• 21:19
  Speaker 4: And CBS Health announced it would split into two separate
• 21:23
  Speaker 4: publicly traded companies by the first half of 2028, ultimately
• 21:28
  Speaker 4: reversing its $ 78 billion acquisition of Aetna and separating its
• 21:32
  Speaker 4: retail pharmacy business. CBS down by 12%. More on CBS
• 21:37
  Speaker 4: coming up here with Chuck and Mark. I'm Tucker Silva,
• 21:41
  Speaker 4: and that is Wall Street Watch.
• 21:42
  Speaker 3: Margarita piece in the Wall Street Journal opinion section is
• 21:45
  Speaker 3: titled Time to Face the Social Security Crisis. And here's
• 21:49
  Speaker 3: the deal. The senators who were elected last night, regardless
• 21:54
  Speaker 3: of party, they are going to be on the job
• 21:56
  Speaker 3: when the Social Security Trust Fund runs out of money
• 21:59
  Speaker 3: in 2032. It's the. the job you've chosen is a
• 22:03
  Speaker 3: six-year term, you're on the hook for that one. So
• 22:07
  Speaker 3: here's the deal. We can figure out how to fix this,
• 22:11
  Speaker 3: and it's actually not that hard. It does require some
• 22:14
  Speaker 3: sacrifices from whatever groups we choose to make those sacrifices. Usually,
• 22:20
  Speaker 3: they happen to be young people, which I think kind
• 22:22
  Speaker 3: of sucks, but it is what it is. We just
• 22:23
  Speaker 3: pass the burden on to them and gee, maybe that's
• 22:26
  Speaker 3: why young people are so, like, upset about this is
• 22:28
  Speaker 3: that we've just been passing the burden down to them,
• 22:30
  Speaker 3: you know, for the last 25 years, and, you know, gee, thanks.
• 22:33
  Speaker 2: Yeah, maybe just don't tell them.
• 22:36
  Speaker 3: They'll figure it out. They're not dumb. They're not dumb, Mark. Like,
• 22:39
  Speaker 3: that's the thing. Like, again, like, they may be immature,
• 22:43
  Speaker 3: they may like to party, but they're not dumb. Just like,
• 22:47
  Speaker 3: you know, they're going to grow into 65-year-olds just like
• 22:51
  Speaker 3: the 65-year-olds today did.
• 22:52
  Speaker 2: Yeah, but their time horizon is so long, like, that
• 22:56
  Speaker 2: they'll discount it heavily, and that should numb the pain. Plus,
• 23:00
  Speaker 2: if you assume gradually increasing life expectancies up to a limit,
• 23:05
  Speaker 2: they might appreciate, well, I'll still collect over as many years,
• 23:08
  Speaker 2: I'll just start collecting later.
• 23:09
  Speaker 3: It makes them feel like crap, though.
• 23:11
  Speaker 2: You think so?
• 23:13
  Speaker 3: I know so. As an example, during the run-up to
• 23:18
  Speaker 3: the passage of the Affordable Care Act, I was in
• 23:21
  Speaker 3: my 20s. And one of the provisions of the Affordable
• 23:24
  Speaker 3: Care Act, it narrowed the ratio of how much more
• 23:30
  Speaker 3: health insurance could charge people over age 65 relative to
• 23:33
  Speaker 3: those in their 20s. I forget exactly how much it
• 23:36
  Speaker 3: narrowed it by, but basically the premise is very simple. Hey,
• 23:39
  Speaker 3: health care is way more expensive in your 60s than
• 23:41
  Speaker 3: it is in your 20s, and the way to balance
• 23:43
  Speaker 3: that is by making 20-year-olds pay more for health insurance
• 23:45
  Speaker 3: and allowing 65-year-olds to pay less. That's how they would
• 23:48
  Speaker 3: try to balance the thing out. Well, again, like if
• 23:52
  Speaker 3: you do that, you're basically saying, OK, we know that
• 23:55
  Speaker 3: baby boomers vote. And so we're going to make them
• 23:57
  Speaker 3: pay less for their health care. And we know that
• 24:00
  Speaker 3: millennials don't vote. And so we're going to make them
• 24:03
  Speaker 3: pay more. And unfortunately, this has just kind of been
• 24:06
  Speaker 3: the norm for the last 20 years now. It's again,
• 24:09
  Speaker 3: like as another example, this required minimum distributions from retirement accounts.
• 24:15
  Speaker 3: Do you know what the age used to be to
• 24:17
  Speaker 3: take required minimum distributions?
• 24:18
  Speaker 2: It was 70 and a half for years.
• 24:19
  Speaker 3: 70 and a half, exactly. Do you know what it
• 24:20
  Speaker 3: is now?
• 24:21
  Speaker 2: Like 75 or something?
• 24:23
  Speaker 3: 73, and it's moving to 75 in the next couple
• 24:25
  Speaker 3: of years. That is a whole bunch of taxes that
• 24:28
  Speaker 3: retirees don't need to pay because we're pushing that RMD
• 24:31
  Speaker 3: age back. And instead, do you know what we've done?
• 24:34
  Speaker 3: It's a case where the person inheriting that IRA, most
• 24:38
  Speaker 3: likely who's going to be a millennial or a young
• 24:40
  Speaker 3: Gen Xer, they now have to take the money out
• 24:43
  Speaker 3: within a 10-year period instead of over their lifetime, meaning
• 24:47
  Speaker 3: they likely get bumped into higher tax brackets and have
• 24:49
  Speaker 3: to exhaust that tax advantage fund sooner. And so once again,
• 24:52
  Speaker 3: we're making the younger people pay in order to make
• 24:54
  Speaker 3: the baby boomers happy. As a millennial, I'm a little
• 24:58
  Speaker 3: bitter about it, to be honest. Like, not a lot,
• 25:02
  Speaker 3: but a little. You know, it's just like, What are
• 25:04
  Speaker 3: we doing here?
• 25:06
  Speaker 2: You know?
• 25:07
  Speaker 3: So when it comes to social....
• 25:09
  Speaker 2: Sorry.
• 25:10
  Speaker 3: No, no, no.
• 25:10
  Speaker 2: I was waiting for Tucker to snicker because you threw
• 25:13
  Speaker 2: in a Tucker Carlson.
• 25:15
  Speaker 1: What are we doing here?
• 25:16
  Speaker 3: What's going on? What's going on here?
• 25:17
  Speaker 2: Is this who we are now?
• 25:19
  Speaker 3: Is this who we are now?
• 25:20
  Speaker 2: Yes, it is. We've been for 60 years. People who
• 25:22
  Speaker 2: vote drive policy. And we cater to the needs of
• 25:26
  Speaker 2: the elderly. That's one of the things that a lot
• 25:30
  Speaker 2: of people think is noble.
• 25:31
  Speaker 3: Every generation has these things. But it's, well, no, again,
• 25:36
  Speaker 3: the RMD thing is not catering to help the elderly.
• 25:40
  Speaker 3: It is very much pandering to help the elderly. Let's
• 25:44
  Speaker 3: call a spade a spade. The only people this is
• 25:47
  Speaker 3: helping are people that have accumulated large sums in IRAs
• 25:51
  Speaker 3: and don't need the help. If you don't have an IRA,
• 25:55
  Speaker 3: it doesn't help you.
• 25:55
  Speaker 2: This is like the least of it. I'm not saying
• 25:57
  Speaker 2: it's not worth raising awareness about.
• 26:02
  Speaker 3: I could give more examples if you want.
• 26:04
  Speaker 2: Entitlements are the biggest. The solution's been obvious my entire life.
• 26:08
  Speaker 3: Yes, and we don't do anything about it. Because we just, again,
• 26:12
  Speaker 3: we don't want to upset.
• 26:13
  Speaker 2: People in their 60s. Was it even an issue this
• 26:15
  Speaker 2: campaign season? I didn't. Democrats talk about it, to my knowledge.
• 26:19
  Speaker 3: This is now migrated, though. So, again, I know it
• 26:21
  Speaker 3: feels like I'm ripping on baby boomers, and I am.
• 26:24
  Speaker 3: So if you're a baby boomer, you're right.
• 26:26
  Speaker 2: Right to Chuck.
• 26:27
  Speaker 3: Yes, it's me. But here's the thing. This is migrated
• 26:30
  Speaker 3: to be something that every generation is doing now, because
• 26:32
  Speaker 3: all of us now only want the good things and
• 26:35
  Speaker 3: none of the bad. Because up until 2000... No, no, Mark.
• 26:38
  Speaker 2: Okay, sorry, I'm not going to interrupt.
• 26:39
  Speaker 3: Up until 2000... You could legitimately say, hey, regardless of
• 26:44
  Speaker 3: party in power and regardless of ideology, we did the
• 26:47
  Speaker 3: right thing fiscally. People forget Reagan raised taxes. People forget.
• 26:52
  Speaker 2: I mean, business, a few business taxes in 82. And
• 26:56
  Speaker 2: he did it as governor, too.
• 26:57
  Speaker 3: Mark, he raised taxes like yes or no, true or false.
• 27:00
  Speaker 2: Did he sign a bill that raised taxes? You make
• 27:02
  Speaker 2: it sound like he raised marginal income tax rates, which
• 27:04
  Speaker 2: he did.
• 27:05
  Speaker 3: Ronald Reagan raised taxes. Yes or no.
• 27:06
  Speaker 2: He raised some corporate taxes.
• 27:08
  Speaker 3: So, yes, he raised taxes.
• 27:10
  Speaker 2: What president?
• 27:10
  Speaker 3: George H.W.
• 27:11
  Speaker 1: Bush.
• 27:11
  Speaker 3: Did he raise taxes or no?
• 27:14
  Speaker 2: Did he raise any tax rates? Yes. I don't think so.
• 27:16
  Speaker 3: Yes, he raised income tax rates.
• 27:18
  Speaker 2: I'm sorry, W? Yes.
• 27:19
  Speaker 3: No, H.W.
• 27:20
  Speaker 4: Oh, H.W.
• 27:21
  Speaker 2: Oh, geez, yeah.
• 27:22
  Speaker 1: The 1990s.
• 27:22
  Speaker 3: I know, exactly.
• 27:23
  Speaker 2: The Dick Darman deal, yeah.
• 27:24
  Speaker 3: Okay.
• 27:25
  Speaker 2: Infamous.
• 27:25
  Speaker 3: So you had two Republicans in a row that raised taxes.
• 27:28
  Speaker 3: Bill Clinton, did he cut welfare spending?
• 27:31
  Speaker 2: He ended welfare as we knew it.
• 27:33
  Speaker 3: Correct. Again, all of this going against party ideology. For
• 27:37
  Speaker 3: 20 years you had that because, hey, we had to
• 27:39
  Speaker 3: figure things out fiscally. And everything was fine. There was
• 27:41
  Speaker 3: an immediate need in the case.
• 27:45
  Speaker 2: Since George W.
• 27:45
  Speaker 3: Bush, it has been, forget about it. Let's just do
• 27:50
  Speaker 3: the fun stuff. Now, to be fair, with W., the
• 27:54
  Speaker 3: big thing, when you talk about Medicare Part D and
• 27:56
  Speaker 3: stuff like that, prescription drug benefits... You could make a
• 27:59
  Speaker 3: case that that actually helped us to get out of
• 28:02
  Speaker 3: the tech bubble-induced recession by throwing some more money into
• 28:06
  Speaker 3: the puzzle from a fiscal standpoint. But it's basically just
• 28:10
  Speaker 3: been a complete train wreck fiscally for the last 25 years.
• 28:15
  Speaker 3: And this is reflected everywhere. The only thing that we've
• 28:19
  Speaker 3: done on Social Security recently, and I'm not saying that
• 28:21
  Speaker 3: this is inherently wrong. I'm just saying that it is.
• 28:25
  Speaker 3: We made it easier for people on public pensions to
• 28:28
  Speaker 3: get the benefits that they were previously denied because of
• 28:31
  Speaker 3: the double dipping stuff. And so, again, it's resulting in
• 28:36
  Speaker 3: the Social Security trust fund being drawn down faster. We
• 28:39
  Speaker 3: didn't do anything to fix the revenue side of that.
• 28:41
  Speaker 3: So what's happened?
• 28:41
  Speaker 2: Have we lost financial literacy or lost our sense of
• 28:44
  Speaker 2: civic responsibility and intergenerational equity? How do we get from
• 28:48
  Speaker 2: Eisenhower to where we are now?
• 28:50
  Speaker 3: I don't know. I don't know, but we only want
• 28:53
  Speaker 3: the good things and we never want to pay for it.
• 28:56
  Speaker 3: And this is across parties. There's not a party that
• 28:59
  Speaker 3: has a monopoly on this. You look at it, and again,
• 29:03
  Speaker 3: it's two sides of the same coin. It's, okay, we're
• 29:06
  Speaker 3: either voting to increase spending or decrease taxes, and that's
• 29:11
  Speaker 3: how you end up running 6% deficits in peacetime. Which
• 29:15
  Speaker 3: is all a fancy way of saying that I don't
• 29:17
  Speaker 3: know if we're actually going to face the Social Security
• 29:19
  Speaker 3: crisis until 2031, because no one needs to right now,
• 29:21
  Speaker 3: and we just keep punting it. But folks, the Armstrong
• 29:23
  Speaker 3: Advisory Group does have a guide titled Paying for Healthcare
• 29:26
  Speaker 3: in Retirement. It is about all of the stuff you
• 29:30
  Speaker 3: need to be aware of as you navigate one of
• 29:32
  Speaker 3: the biggest expenses you'll have in retirement, whether you're talking
• 29:35
  Speaker 3: about Medicare, whether you're talking about retiring before Medicare eligibility age.
• 29:39
  Speaker 3: and how to navigate that. This guide helps you to
• 29:42
  Speaker 3: work through it. Again, the guide is titled Paying for
• 29:45
  Speaker 3: Healthcare in Retirement, and there are two ways to request it. First,
• 29:48
  Speaker 3: you can call 800-393-4001. Second, you can go to armstrongadvisory.com.
• 29:50
  Speaker 1: Again, 800-393-4001.
• 29:50
  Speaker 3: 4001 or go to armstrongadvisory.com.
• 30:01
  Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
• 30:04
  Speaker 1: registered investment advisor. Nothing in the ad or in any
• 30:06
  Speaker 1: Armstrong guide is specific financial, legal, or tax advice. Consult
• 30:09
  Speaker 1: your own financial, tax, and estate planning advisors before making
• 30:12
  Speaker 1: any investment decisions. Armstrong may contact you to offer investment
• 30:15
  Speaker 1: advisory services.
• 30:16
  Speaker 3: Let's take a quick break. When we return, we'll talk about, well,
• 30:20
  Speaker 3: trying to figure out what the heck CVS is doing
• 30:23
  Speaker 3: right after this.
• 30:24
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• 31:01
  Speaker 3: All right, Mark, we've now officially got a new contender
• 31:05
  Speaker 3: for not worst merger in history, but top five worst
• 31:13
  Speaker 3: merger in history. Back in June of 2016, CVS announced that,
• 31:20
  Speaker 3: I'm sorry, 17, they announced that they were going to
• 31:23
  Speaker 3: be buying Aetna, the health insurer, And they were going
• 31:28
  Speaker 3: to bring them under one umbrella. And the whole promise was, hey,
• 31:31
  Speaker 3: like you've got your pharmacy and now we'll have these
• 31:34
  Speaker 3: minute clinics and Aetna and it's going to drive all
• 31:36
  Speaker 3: these economies of scale and vertical integration. And we'll have
• 31:39
  Speaker 3: so much great health care data that we can price
• 31:41
  Speaker 3: everything great and it'll be amazing. And here's the deal.
• 31:47
  Speaker 3: CVS today is they announced that they're going to unwind
• 31:53
  Speaker 3: this because it hasn't been working. for the last 10 years.
• 31:58
  Speaker 3: And look, you can go back to, again, when this
• 32:02
  Speaker 3: was announced. But again, just looking at 10 years ago,
• 32:06
  Speaker 3: I'll actually expand the range just so I can see
• 32:08
  Speaker 3: the full thing. So back in the middle of 16,
• 32:13
  Speaker 3: this jumped the stock up to a share price of
• 32:15
  Speaker 3: about $ 106 a share. It's never been above $ 111 since then.
• 32:21
  Speaker 3: and trades today at $ 79.
• 32:22
  Speaker 2: 90.
• 32:22
  Speaker 3: Now you can say, well, I picked up some dividends
• 32:26
  Speaker 3: along the way, and that's great that you're collecting your
• 32:29
  Speaker 3: 3% dividend, but you don't hold a stock for 10
• 32:31
  Speaker 3: years for a 3% dividend. You could have just bought
• 32:33
  Speaker 3: a treasury back then and done that with less risk
• 32:36
  Speaker 3: and volatility and headache. So again, I think you look
• 32:42
  Speaker 3: at this now, and it very much is up there.
• 32:47
  Speaker 3: It's not AOL Time Warner, because... Neither of these companies
• 32:52
  Speaker 3: effectively has ceased to exist. They just haven't realized any
• 32:55
  Speaker 3: profit or anything like that from it. There's been no...
• 32:59
  Speaker 3: There's been no... What's the word I'm looking for when
• 33:02
  Speaker 3: you're adding something to something? Synergies? No. Addition? No, not that. Yes,
• 33:08
  Speaker 3: that's the word. There's been no accretiveness.
• 33:10
  Speaker 2: It's like a game show.
• 33:11
  Speaker 3: Yes, thank you. You get the boat after this one.
• 33:15
  Speaker 3: And it hasn't been accretive to earnings in any way.
• 33:18
  Speaker 3: It's just been like a drag there. And so to me,
• 33:21
  Speaker 3: this feels very much like AT & T DirecTV. of
• 33:25
  Speaker 3: two companies that just don't really fit together, but they're
• 33:28
  Speaker 3: trying to shoehorn them in, and hey, we just gave
• 33:31
  Speaker 3: up and we ended up, this isn't going to work.
• 33:33
  Speaker 2: This seemed like a more plausible rationale for synergies, to
• 33:36
  Speaker 2: use another business school term.
• 33:39
  Speaker 3: It did.
• 33:39
  Speaker 2: I didn't mock it.
• 33:42
  Speaker 3: It didn't strike me as... It seemed like a perfectly
• 33:46
  Speaker 3: reasonable idea. That's what I mean, yeah. You could understand
• 33:50
  Speaker 3: why they thought it would work, But I struggle to
• 33:53
  Speaker 3: figure out, was it just an execution problem? How much, again,
• 33:58
  Speaker 3: the deal finally closed, I think, a year later. Within
• 34:02
  Speaker 3: two years, you had COVID hitting, and so did that
• 34:05
  Speaker 3: dramatically change how people visit pharmacies? Maybe that doomed it
• 34:08
  Speaker 3: just as it was starting to pick up. There are
• 34:11
  Speaker 3: some things that you can look at and say, hey,
• 34:13
  Speaker 3: was there a problem that they didn't foresee? But ultimately...
• 34:18
  Speaker 3: It didn't work, and now, again, CVS giving up, and
• 34:21
  Speaker 3: CVS stock down 12% today on the news. So it's
• 34:24
  Speaker 3: kind of like, well, this is a sunk cost, but
• 34:27
  Speaker 3: it still isn't going to be good for any of
• 34:28
  Speaker 3: these units going forward either. Sometimes you unwind a merger,
• 34:34
  Speaker 3: and you're like, oh, great, this is going to be
• 34:36
  Speaker 3: better for shareholders, and so the stock goes up. This
• 34:39
  Speaker 3: is like, well, it didn't work, but now it's going
• 34:43
  Speaker 3: to be worse.
• 34:44
  Speaker 2: Yeah, they could have rolled it out a little better, maybe.
• 34:47
  Speaker 3: Yeah, so it just has been messy, and look, sometimes
• 34:51
  Speaker 3: that's how it goes. These don't always work out.
• 34:54
  Speaker 2: No, you're right. Normally you accompany this with some really
• 34:57
  Speaker 2: upbeat sort of hype about why both units will function better.
• 35:01
  Speaker 3: Yeah, exactly. Think about when GE split up a few
• 35:04
  Speaker 3: years ago.
• 35:04
  Speaker 2: None of that here. It's like, this is over.
• 35:06
  Speaker 3: Like, when GE split up, it was like, oh, like,
• 35:09
  Speaker 3: here's GE Healthcare and why we're excited there. And here's
• 35:12
  Speaker 3: GE Aerospace. Brilliantly spun. And it's been great. Like, all
• 35:15
  Speaker 3: the units, I think, have just ripped since then. Yeah,
• 35:18
  Speaker 3: you don't... This one, you're kind of like.
• 35:19
  Speaker 2: There's none of that here.
• 35:20
  Speaker 3: Well, and part of it is just like, why do
• 35:22
  Speaker 3: I want to own a bunch of pharmacies? Like, that's
• 35:25
  Speaker 3: not a growing, exciting business anymore.
• 35:30
  Speaker 2: Yeah.
• 35:31
  Speaker 3: And health insurers... Gosh, if you want to talk about
• 35:34
  Speaker 3: one thing that people are upset about these days, it's
• 35:36
  Speaker 3: health insurance. Not sure that's going to be a huge winner.
• 35:39
  Speaker 3: So I think part of it is just like, how
• 35:42
  Speaker 3: do you spin this when neither of these businesses have
• 35:47
  Speaker 3: reasonable growth prospects that look exciting in the near future? Like,
• 35:53
  Speaker 3: how do you reinvent pharmacies at this point? It's by
• 35:57
  Speaker 3: mail order and there's already companies doing that. Right.
• 36:00
  Speaker 2: You know, competing with Amazon.
• 36:01
  Speaker 3: Yeah. which, good luck with that. What else you got
• 36:04
  Speaker 3: for me, Mark?
• 36:05
  Speaker 2: Are you worried about the future of data centers, given
• 36:09
  Speaker 2: yesterday's results? You've got governors elect Texas and Ohio saying
• 36:16
  Speaker 2: they want a moratorium on these suckers.
• 36:19
  Speaker 3: This is interesting to me, and I don't have a
• 36:23
  Speaker 3: firm view on it yet, but here's how I've thought
• 36:26
  Speaker 3: about it. Whenever you're building out a new technology, you
• 36:31
  Speaker 3: can never have enough of it until you finally realize, crap,
• 36:34
  Speaker 3: we built too much.
• 36:35
  Speaker 1: Right?
• 36:36
  Speaker 3: Like, it's with the railroads, with the internet, it's, we
• 36:38
  Speaker 3: never have enough, we never have enough.
• 36:40
  Speaker 2: You don't know what demand's gonna be.
• 36:40
  Speaker 3: Oh no, we have way too much. You know, it's
• 36:43
  Speaker 3: just like, you get to that point and you're like, ooh,
• 36:45
  Speaker 3: we overbilled.
• 36:46
  Speaker 2: It's like you don't know how many people come to
• 36:47
  Speaker 2: the party, so you order a number of platters of wings.
• 36:50
  Speaker 3: Well, you have like a party a week, and the
• 36:52
  Speaker 3: first one you order 100, and it's fine, and then
• 36:54
  Speaker 3: the next party more people show up, and eventually you
• 36:56
  Speaker 3: get to a point where you're like, well, I ordered
• 36:57
  Speaker 3: a million wings, but only 500,000 people showed up, and
• 36:59
  Speaker 3: so I had 500,000 wings left.
• 37:00
  Speaker 1: Yeah.
• 37:03
  Speaker 3: So the interesting thing about this is if you are
• 37:07
  Speaker 3: going to get at the state level some real teeth on,
• 37:10
  Speaker 3: and I haven't looked at any of these moratoriums to
• 37:12
  Speaker 3: know whether they have any teeth or whether they're just symbolic.
• 37:14
  Speaker 3: They're not fleshed out. I don't know.
• 37:15
  Speaker 2: They're vague campaign promises.
• 37:17
  Speaker 3: But here's the thing. If you have widespread enough moratoriums,
• 37:21
  Speaker 3: they can prevent you from doing the overbuilding, which on
• 37:24
  Speaker 3: one level is good because then you don't go through
• 37:27
  Speaker 3: the boom bus the same way. The boom isn't as high.
• 37:31
  Speaker 3: The downside to that is it keeps the cost of
• 37:33
  Speaker 3: the technology higher, which prevents the market from clearing at
• 37:37
  Speaker 3: the actual market price, which is not good. It's basically
• 37:41
  Speaker 3: like putting rent control in place, and now you've got
• 37:44
  Speaker 3: less construction of what people want, which is housing, and
• 37:47
  Speaker 3: so it drives the price higher. So I don't love...
• 37:52
  Speaker 3: what it means from that perspective, because you're not going
• 37:54
  Speaker 3: to get the actual pricing that you would on the product,
• 37:57
  Speaker 3: but you might prevent the boom-bust cycle from being as
• 37:59
  Speaker 3: destructive as it would be to capital.
• 38:01
  Speaker 2: It might cause an equity market crash, but not a
• 38:03
  Speaker 2: broader financial crisis. Correct. I like this.
• 38:08
  Speaker 3: I'm workshopping it still, but this is where I am
• 38:10
  Speaker 3: as of this morning. Let's take a quick break for
• 38:12
  Speaker 3: the rest of the day. We're going to see you tomorrow,
• 38:14
  Speaker 3: and a lot more to dig into then.