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Why has gold been on a stunning rise this year? · 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 Vandetti.
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Speaker 2: Chuck, Mark and Tucker with you, and as we kick
1:15
Speaker 2: things off here, we got stocks rebounding from yesterday's modest
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Speaker 2: decline with a modest rebound. Dare I say the S
1:26
Speaker 2: and P five hundred's up point four percent twenty eight points,
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Speaker 2: the Dow is up about a quarter percent ninety six points,
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Speaker 2: and the Nasdaq can posit up one hundred and fifty
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Speaker 2: nine points, almost three quarters of a percent. So we
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Speaker 2: again pretty quiet week and equity trading overall, just not
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Speaker 2: a ton of movement there. Ten Yere Treasury also holding
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Speaker 2: pretty stable, down one basis point to four point one
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Speaker 2: point one seven percent. National average for thirty year fixed
1:52
Speaker 2: rate mortgage is at six point thirty eight unchanged from yesterday.
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Speaker 2: So you basically have not seen much movement in mortgage
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Speaker 2: markets or in rates in the last few days. One
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Speaker 2: place that you are seeing quite a bit of movement,
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Speaker 2: and we're gonna talk honestly a lot about this today
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Speaker 2: is in gold, which continues to just be, you know,
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Speaker 2: just heading basically straight up for the last month and
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Speaker 2: a half or so, now up another sixty two dollars
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Speaker 2: announced to four thousan sixty six and forty cents and
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Speaker 2: then taking a look through, Actually it's not even the
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Speaker 2: biggest move we're seeing in commodities. Silver's up a couple
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Speaker 2: percentage points, Platinum up three percent. In palladium has been
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Speaker 2: absolutely ripping the last month as well. It's up thirty
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Speaker 2: percent over that time and up seven percent today to
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Speaker 2: new all now actually, you know, sorry, palladium is not
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Speaker 2: new all time highs, just new fifty two week highs
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Speaker 2: that you're seeing there. Oil also moving up today West
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Speaker 2: Text Inner Mediate up seventy four cents of barrel to
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Speaker 2: sixty two forty seven TRIPA national average for gas prices
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Speaker 2: nationwide continues to hover in that three ten to three
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Speaker 2: twenty range. We're down at touch over the last week,
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Speaker 2: going from three sixteen to three eleven, So you've seen
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Speaker 2: some improvement there, and maybe we get a chance to
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Speaker 2: finally break out to the downside and get a little
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Speaker 2: bit close to three dollars because we've been in this
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Speaker 2: range for gosh almost all the year between three ten
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Speaker 2: and three twenty. Maybe we get a little bit of
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Speaker 2: additional relief with the pumpin head down towards three dollars
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Speaker 2: a gallon in the coming days, let's talk about gold here, Mark,
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Speaker 2: because quite honestly, what we are seeing from gold this
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Speaker 2: year is impressive. But in the last month month and
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Speaker 2: a half, I guess since mid August has been really
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Speaker 2: impressive as well. So gold started this year at about
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Speaker 2: twenty six hundred bucks an ounce. It's sitting here now
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Speaker 2: at over four thousand, So you're up north of fifty
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Speaker 2: percent year to date now. And in particular, we've seen
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Speaker 2: almost a twenty percent move in the last month and
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Speaker 2: a half now in gold after consolidating sideways over the
4:03
Speaker 2: course of the summer. And what do we think this
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Speaker 2: means when we look at the picture here, Mark.
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Speaker 3: Well, there are a lot of reasons that researchers site
4:15
Speaker 3: for a rise in gold. It might for gold's recent assent.
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Speaker 3: It might be most helpful to think about it from
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Speaker 3: through the lens of what are people trying to hedge?
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Speaker 3: What does gold represent? Why would you hold it? Aside
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Speaker 3: from its industrial use? There's some intrinsic demand for the
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Speaker 3: metal because it's used in things, but beyond that, why
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Speaker 3: would you hold it? Some people cite it's inflation hedging properties.
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Speaker 3: So the record there is very mixed. It went up
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Speaker 3: in the seventies when inflation was high, so people tend
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Speaker 3: to remember that and forget about the fact that gold
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Speaker 3: is not very highly correlated, doesn't move in the same
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Speaker 3: direction at the same time as inflation, at least in
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Speaker 3: the period since, so it's inflation hedging properties are kind
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Speaker 3: of questionable. The most persuasion argument I've seen is that
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Speaker 3: gold is an alternative as opposed to an alternative currency.
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Speaker 3: An alternative the dollar to the euro and to the
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Speaker 3: end and other currencies which could be debased as governments
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Speaker 3: print more to finance deficits over time. You might want
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Speaker 3: to think about gold as a safe asset generally, and
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Speaker 3: as an alternative to say, US treasuries and other very
5:21
Speaker 3: high quality sovereign bonds. So one thing of note is
5:25
Speaker 3: that real interest rates have been coming down at the
5:28
Speaker 3: same time I'm using tips yields as my proxy there
5:30
Speaker 3: trading inflation track and security yields for real rates, at
5:35
Speaker 3: the same time gold has been going up.
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Speaker 2: That's recent.
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Speaker 3: The longer term correlation is also positive. It's not overwhelming,
5:42
Speaker 3: but it's it's it's it's significant, and it's it's it's
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Speaker 3: conspicuously positive. So my best guess is Chuck A. Little
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Speaker 3: bit of randomness, a little bit of whatever's boosting all metals,
5:53
Speaker 3: a little bit of safe ass set money safe asset
5:57
Speaker 3: excuse me, demanded by safe asset, I mean something that
5:59
Speaker 3: will be money good in a crisis, safe asset demand
6:03
Speaker 3: relative to say, US treasuries. Maybe a combination of all
6:06
Speaker 3: those things, in a little bit of speculative, a frenzy
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Speaker 3: type behavior too. There's always that element.
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Speaker 2: I tend to think that I don't think there's anything
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Speaker 2: in the last year that's random chance when it comes
6:20
Speaker 2: to gold. Yeah, I don't think this is in particular
6:24
Speaker 2: in the last couple months. I think this is one trade.
6:31
Speaker 2: I know. A lot of times on our show, I
6:33
Speaker 2: try to say, hey, like there could be like multiple
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Speaker 2: reasons for this and that, and it's usually in the
6:37
Speaker 2: context of you know, moves that we might see. We
6:40
Speaker 2: talked about it a lot with interest rates and you know, treasuries,
6:44
Speaker 2: and you know people like to say, oh, like whenever
6:46
Speaker 2: you know yields go up, well, that's because people are
6:48
Speaker 2: nervous about the debt. They never say anything when it
6:50
Speaker 2: goes down, like did people become unnervous about the debt? No,
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Speaker 2: they didn't. In this case, the reason why I think
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Speaker 2: there's something that we can say conclusively about gold is
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Speaker 2: because it's not happening over a short period of time
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Speaker 2: days or weeks. It's happened over the course of the
7:08
Speaker 2: full year. And it's also not just happening in the
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Speaker 2: in dollar terms, we're seeing gold rocketing up. You will
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Speaker 2: get all the major world currencies. Gold is appreciating dramatically
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Speaker 2: versus the yen. It's appreciating dramatically versus the Euro, versus
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Speaker 2: the yuan, versus the Australian dollar, the Canadian dollar, the rupee.
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Speaker 2: I mean you go through like the major like seven
7:29
Speaker 2: eight world currencies that get used in you know, the
7:32
Speaker 2: vast majority of transactions in the world, and gold is
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Speaker 2: strengthening versus all of them. And then you look at
7:41
Speaker 2: the actions that are being taken across the world and
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Speaker 2: like we'll just do like hoping our a little airplane
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Speaker 2: and go like on a little trip. You can head
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Speaker 2: over to the EU and all they're talking about is, Yep,
7:53
Speaker 2: we're gonna print five hundred billion dollars in additional defense
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Speaker 2: spending and we'll figure out how to do it. And
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Speaker 2: we're on like the sixty eighth French government. This year now.
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Speaker 2: I mean like it's it's like, okay, there's there's something there. Right.
8:08
Speaker 2: You go and you take a look at Japan and
8:11
Speaker 2: they just put in place leadership that is basically like, hey,
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Speaker 2: we want abinamis, but more like, throw another log on
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Speaker 2: the fire, and who cares if inflation is, you know,
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Speaker 2: with the highest we've seen it in Japan in decades.
8:27
Speaker 2: Toss another log on the fire, and let's see what happens.
8:31
Speaker 2: In the United States, we're sitting here and we're saying,
8:33
Speaker 2: you know what, maybe six to eight percent annual deficits
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Speaker 2: aren't that bad. You know, maybe maybe we can live
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Speaker 2: with that. That'll be fine. You go to China, they're
8:43
Speaker 2: printing trillions of you wan to try to bail out
8:46
Speaker 2: bad loans within the country, and this and that. You
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Speaker 2: go across the board and there is this unrestrained fiscal
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Speaker 2: impulse of well, you know what, let's just run it
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Speaker 2: hot and spend our way out of you know, whatever
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Speaker 2: the problem might be. Like, this is not a US phenomenon,
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Speaker 2: it's not a europe phenomenon, it's not a Japan, it's
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Speaker 2: in everywhere phenomenon. And Gold is sniffing that out in
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Speaker 2: my opinion, and now specifically, market participants are sniffing out, hey,
9:17
Speaker 2: if you're not sure, if you kind of look at
9:22
Speaker 2: and you go, well, we don't really like any of
9:24
Speaker 2: these currencies. They're all kind of a mess and there's
9:28
Speaker 2: nowhere to hide. The place that people start to look
9:32
Speaker 2: is in stuff like gold and other precious metals. And
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Speaker 2: those markets, by the way, are minuscule compared to the
9:40
Speaker 2: amount of money that slashes around in currencies, and that's
9:43
Speaker 2: why it doesn't take much to move gold fast.
9:47
Speaker 3: True institutional investors haven't really held gold as part of
9:50
Speaker 3: the like I'm talking. When I say institutional, I mean
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Speaker 3: pensions endowments. You could put four one k's in there too,
9:54
Speaker 3: but I'm thinking about pools of money governed by a board.
9:58
Speaker 3: So pensions endowments, including multi eployer pensions. Maybe you're a plumber,
10:01
Speaker 3: pipe fitter, carpenter, whatever you're in the New England Carpenter's
10:04
Speaker 3: pension fund for example, or whatever region you reside in.
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Speaker 3: They're making those allocations. They're small, but they're making those allocations.
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Speaker 3: Now it's a little bitty it's a little idyo bit
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Speaker 3: of insurance into an asset that doesn't yield any Look,
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Speaker 3: I don't really get gold, but I shouldn't because I'm
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Speaker 3: a traditional researcher. It has no yield. Its value is
10:22
Speaker 3: sort of psychological, and I'm not diminishing. Sure, I'm saying
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Speaker 3: that's the attractive element, but so is the value of
10:28
Speaker 3: US treasuries to an extent, as a safe asset, you
10:31
Speaker 3: believe in the full faith and credit of the US government.
10:33
Speaker 3: You believe that in a period of acute turmoil, geopolitical, economic, whatever,
10:39
Speaker 3: gold will retain value. Never mind, how the heck are
10:41
Speaker 3: you gonna exchange it for anything without getting killed and
10:44
Speaker 3: getting it?
10:45
Speaker 2: You know, people don't you know, I mean actually killed.
10:48
Speaker 3: Well, yeah, if I'm walking around with a sack of gold,
10:50
Speaker 3: someone a lot tougher than me, which wouldn't take long
10:52
Speaker 3: to find, it's gonna take it from me. So I
10:54
Speaker 3: don't know what people think they're gonna do with it,
10:55
Speaker 3: and negresses. Yeah, you know, just use me as an
10:57
Speaker 3: example walking around with a sack of gold. You get
11:00
Speaker 3: the idea very quickly about vulnerable. Does it have a
11:03
Speaker 3: big dollar sign on it like Scrooge mcdoc. Yeah, their
11:06
Speaker 3: coins are falling out because it's.
11:08
Speaker 2: Yeah, yeah, I've got a monocle and a big sack
11:10
Speaker 2: of money and twisting your mustache.
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Speaker 3: So I'm with you. I ticked off a bunch of
11:16
Speaker 3: causes to start this segment, Chuck, but I'm with you.
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Speaker 3: I think it's acknowledgment that deficits are big and getting bigger,
11:23
Speaker 3: that the debt is going to at some point be
11:24
Speaker 3: unmanageable and consume us all that governments are gonna have
11:27
Speaker 3: to inflate these debts away. Gold is a natural hedge
11:30
Speaker 3: against very bad I think you called it a stupidity
11:32
Speaker 3: hedge or something like that somebody did, And I like
11:35
Speaker 3: that hedge against bad policy, and there's a lot of
11:37
Speaker 3: bad policy going around right now, particularly here in the US.
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Speaker 2: So I think that when when we look at the
11:43
Speaker 2: action that we're seeing, and in particular the summer, I
11:47
Speaker 2: can't tell you how many people I heard from the summer,
11:49
Speaker 2: they're like, man, gold, gold went up, but it's not
11:52
Speaker 2: really doing anything, and stocks are ripping, like, is is
11:55
Speaker 2: this the time to like get rid of gold? And
11:59
Speaker 2: my answer it was kind of consistently. Look, things tend
12:01
Speaker 2: to correct in two different ways. The first is they
12:05
Speaker 2: can correct through price, which is the one that you
12:07
Speaker 2: don't want to see it's thing goes parabolic up and
12:10
Speaker 2: goes parabolic down, and you're like, well, I'm glad that
12:14
Speaker 2: we did that. It was it was fun, but it
12:15
Speaker 2: wasn't that fun because I have exactly what I started with.
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Speaker 2: The other way that things tend to correct is through time,
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Speaker 2: and what gold went through this summer was a correction
12:24
Speaker 2: in time where you go and you take a look
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Speaker 2: at where it was in mid April, and it had
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Speaker 2: gotten to about thirty two hundred bucks an ounce. It
12:32
Speaker 2: never really went below their aside from one or two
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Speaker 2: days in May, it continued to kind of bounce off
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Speaker 2: like thirty four fifty an ounce for most of the
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Speaker 2: summer on the top side, so it was five to
12:43
Speaker 2: six percent trading range, and then as soon as it
12:45
Speaker 2: got a little bit of momentum in late August, it
12:48
Speaker 2: has been off to the freaking races since then. And
12:52
Speaker 2: it's not to say that like that's where it's going again,
12:55
Speaker 2: like there are Here's the thing about gold, It has
12:58
Speaker 2: long periods of really crappy performance punctuated by short periods
13:03
Speaker 2: like this where it is incredibly explosive.
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Speaker 3: What does that sound like? By the way, any insurance policy.
13:08
Speaker 2: Yes, which is exactly what it is.
13:10
Speaker 3: You bleed, you bleed, you bleed, and then.
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Speaker 2: And so the big thing with gold is, hey, once
13:16
Speaker 2: it goes through one of these explosive periods, it does
13:19
Speaker 2: not give you a chance to get back in until
13:22
Speaker 2: it finally does say, Okay, this is over, Like this
13:25
Speaker 2: is what we've seen historically. So I think there's something
13:29
Speaker 2: really interesting that's happening here. It's not just a US phenomenon.
13:33
Speaker 2: This is a worldwide thing that we are seeing. And
13:38
Speaker 2: that's why I think you're getting a lot of focus
13:41
Speaker 2: and news on this side of things with the price
13:44
Speaker 2: of It. Quick break here and when we come back,
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15:18
Speaker 2: Piece in the Financial Times, it's titled brace for a
15:23
Speaker 2: Market melt up, and melt up is one of those terms.
15:26
Speaker 2: It's kind of nebulous, like I don't think there's a
15:29
Speaker 2: formal definition for melt up. And furthermore, why does it
15:33
Speaker 2: melt up like nothing? When you when something melts, gravity
15:39
Speaker 2: makes it fall. So I don't know where this term
15:43
Speaker 2: came from either and it's like it's so hot so
15:46
Speaker 2: they have to melt but they're gonna melt up, so
15:51
Speaker 2: I don't poop poo. The idea of this in that
15:53
Speaker 2: with with where we are right now, I think ultimately
15:58
Speaker 2: like we keep getting a bunch of like everyone's out
16:01
Speaker 2: there being like, well, this has to fall apart sometime.
16:04
Speaker 2: This has to fall apart sometime, And the time when
16:06
Speaker 2: things usually fall apart is when the last people are like,
16:09
Speaker 2: well it can't fall apart now, and you know, maybe
16:12
Speaker 2: we haven't gotten there yet. But it's also you just
16:14
Speaker 2: look at the calendar and just from a mechanical standpoint,
16:18
Speaker 2: you start getting towards your end and mark. You know
16:21
Speaker 2: this from being in the institutional management business, where you
16:25
Speaker 2: start getting towards you know, November and December, and every
16:28
Speaker 2: fund out there is just trying to make their bogies
16:30
Speaker 2: by year end. They're all chasing performance to try to
16:32
Speaker 2: get that last bit. It's why we have, you know,
16:34
Speaker 2: terms like the Santa Claus Rally and stuff like that,
16:37
Speaker 2: is that you get this you know tailwind of managers
16:40
Speaker 2: just chasing into year end. And there's a very real
16:43
Speaker 2: case that you could sit here and be like, yeah,
16:46
Speaker 2: there's still a bunch of money that got pulled off
16:48
Speaker 2: to the sidelines, you know in April when people got nervous,
16:52
Speaker 2: and institutions might try to, you know, make that up
16:54
Speaker 2: because hedge fund performance this year hasn't been great and
16:57
Speaker 2: maybe that chases the s and P five hundred, like
16:59
Speaker 2: five I've to ten percent higher in the next few
17:02
Speaker 2: months or so. There's a very reasonable case to be
17:06
Speaker 2: made there. The countercase is that everyone in their grandmother
17:11
Speaker 2: is now talking about this melt up, and that gets
17:13
Speaker 2: me kind of interested in being like, oh, melt up,
17:16
Speaker 2: Like that's you know, that's that's interesting. Why why do
17:18
Speaker 2: all of you think that at this particular point in time,
17:21
Speaker 2: after stocks have already run forty percent plus from the
17:25
Speaker 2: April lows.
17:27
Speaker 3: Yeah, it is I think a normal last phase of
17:33
Speaker 3: an exuberant bowl market for there to be a final pop,
17:39
Speaker 3: and that for reasons that you cited that makes sense.
17:45
Speaker 3: Of course, a bubble pops at its peak. It has to.
17:49
Speaker 3: By definition, you know, what's the catalyst going to be?
17:53
Speaker 3: I don't find the.
17:54
Speaker 2: Bubble doesn't pop. Is it really a bubble?
17:56
Speaker 3: Yeah? Was it a bubble to begin with?
17:57
Speaker 2: Right?
17:58
Speaker 3: And by bubble we should define that just mean when
18:00
Speaker 3: something departs so much from fundamentals, and fundamentals mean what
18:04
Speaker 3: you would value, in the case of a particular stock,
18:06
Speaker 3: what you would value it at using a reasonable estimate
18:09
Speaker 3: of future cash flows and the rate of return you
18:12
Speaker 3: require to compensate you for the risk. With those two things,
18:15
Speaker 3: you can bring the stream of dividend payments or the
18:18
Speaker 3: eventual return of the eventual appreciation you experience when you
18:23
Speaker 3: sell the security. You can bring those back to the
18:24
Speaker 3: present literally a present value, compare that to what the
18:28
Speaker 3: stock is paying today, and voila, you get a reasonable
18:31
Speaker 3: estimate of fair value. You can compare that to current value,
18:34
Speaker 3: and if something is way out of whack relative to
18:36
Speaker 3: fair value, you might call that a bubble. Personally, I
18:39
Speaker 3: see a lot of signs of serious excess. Of course,
18:43
Speaker 3: I blame the Federal Reserve, which is responsible for financial conditions,
18:46
Speaker 3: and it is baffling to me that they're easing into
18:48
Speaker 3: an environment where financial conditions are about as loose as
18:51
Speaker 3: they can get. Stocks continue to hit record highs, and
18:53
Speaker 3: gold is telling us all something. As you pointed out,
18:56
Speaker 3: I happen to agree with that. Honest people can disagree,
18:59
Speaker 3: but gold appears to be telling us something, and the
19:03
Speaker 3: value of other metals and assets appear to be too.
19:05
Speaker 3: I don't think it's a coincidence that gold stocks, home
19:07
Speaker 3: prices are all hitting all time highs. I left a
19:10
Speaker 3: bunch of things out. Financial conditions are as loose as
19:12
Speaker 3: they've ever been, underlying inflation remains elevated. I don't think
19:17
Speaker 3: those things are a coincidence. Ultimately, that is the Fed's problem.
19:22
Speaker 2: Let's take a quick break. When we return, we've got
19:25
Speaker 2: the Trivia answer, and we've got Wall Street.
19:28
Speaker 5: Watch, bringing the latest financial news straight to your radio.
19:43
Speaker 5: 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. A complete look at
19:53
Speaker 1: what's moving markets so far today right here on the
19:56
Speaker 1: Financial Exchange Radio Network.
19:58
Speaker 4: Markets are rebund saying after yesterday's pullback as the government
20:03
Speaker 4: shutdown continues into its second week. Right now, the Dow
20:07
Speaker 4: is up three tenths of one percent, or one hundred
20:10
Speaker 4: and thirty eight points, SMP five hundred, up half a
20:13
Speaker 4: percent or thirty three points, NASDAC up three quarters of
20:17
Speaker 4: one percent or one hundred and sixty nine points. Russell
20:19
Speaker 4: two thousands up nearly seven tenths of one percent, tenyure
20:23
Speaker 4: treasurreel down one basis point at four point one one
20:26
Speaker 4: seven percent, and crude oil up nearly two percent higher,
20:30
Speaker 4: trading at sixty two dollars and eighty two cents a barrel.
20:34
Speaker 4: Well after its two and a half percent loss yesterday,
20:37
Speaker 4: Oracle shares are rebounding about half a percent today. Oracles
20:41
Speaker 4: recent pullback was driven by a report by The Information
20:44
Speaker 4: saying the company's margins from its cloud business we're weaker
20:48
Speaker 4: than an analysts were forecasting, and that Oracle is losing
20:50
Speaker 4: money on some of its deals to rent out Nvidia chips. Meanwhile,
20:55
Speaker 4: Equifact shares a rising nearly two percent after the company
20:59
Speaker 4: said it would cut prices for mortgage scores. This comes
21:02
Speaker 4: after fair Isaac last week said it would sell credit
21:05
Speaker 4: scores directly to mortgage lenders by passing credit bureaus like Equifax. Elsewhere,
21:12
Speaker 4: Tesla unveiled stripped down versions of his best selling SUV
21:15
Speaker 4: and DAN. However, the lower prices don't quite cover the
21:19
Speaker 4: recently expired seventy five hundred dollars EV tax credit. The
21:23
Speaker 4: standard Model three costs about thirty seven thousand dollars, while
21:26
Speaker 4: the standard model Y costs about forty thousand dollars. Tesla
21:30
Speaker 4: stock is edging higher on the day. Ast Space Mobile
21:34
Speaker 4: announced to deal with for Horizon to provide its customers
21:37
Speaker 4: with sell service from Space beginning in twenty twenty six,
21:42
Speaker 4: sending that stock jumping by ten percent. Verizon down modestly
21:46
Speaker 4: in third quarter earning season will kick off tomorrow morning
21:50
Speaker 4: as Pepsi and Delta will post their results ahead of
21:52
Speaker 4: the open. Major banks including JP Morgan, Chase, Wells Fargo,
21:56
Speaker 4: and Goldman Sachs will follow on Tuesday of next week.
22:01
Speaker 4: I'm Tucker Silvan. That is Wall Street Watch, and in
22:04
Speaker 4: the prior segment, we asked you the trivia question, what
22:07
Speaker 4: is the name of Ralstein's popular children's book series. That's,
22:11
Speaker 4: of course, Goosebumps. Emily from Westbrook Main And there's our
22:15
Speaker 4: winner today taking on my Financial Exchange Show T shirt.
22:18
Speaker 4: Congrats Emily, and we play trivia every day here in
22:20
Speaker 4: the Financial Exchange. See complete contest rules at Financial Exchange
22:24
Speaker 4: Show dot com.
22:25
Speaker 2: Market's talk a little bit about housing. First, we got
22:28
Speaker 2: a piece from the Wall Street Journal. Homeowners are pouncing
22:30
Speaker 2: on the tiniest drop in mortgage rates they did for
22:33
Speaker 2: about a couple of weeks and then they've kind of,
22:37
Speaker 2: you know, said okay, like all the people who wanted
22:40
Speaker 2: to refinance kind of did, and so it's just the
22:45
Speaker 2: blooms off that roa. So as an example, there's an index.
22:48
Speaker 2: It's called the NBA Mortgage Refinance Index. It's run by
22:51
Speaker 2: the Mortgage Bankers Association, as you would expect from the name,
22:55
Speaker 2: and it measures uh, it's just an arbitrary number. Higher
23:00
Speaker 2: means there's more activity, and lower means there's there's less.
23:03
Speaker 2: So on September fifth, the reading on it was oney
23:09
Speaker 2: ten for the refinance index. Don't you don't need to
23:12
Speaker 2: know what that means. It doesn't mean that there were
23:14
Speaker 2: a thousand refinances. It's compared to some arbitrary date in
23:17
Speaker 2: the past, and whatever the reason why, the reason the
23:23
Speaker 2: reading on September fifth was on thy ten. We then
23:26
Speaker 2: saw interest rates drop heading into the FED meeting, and
23:30
Speaker 2: for the next two weeks the reading was about sixteen hundred.
23:34
Speaker 2: So there's a sixty percent bump in refinancing activity for
23:37
Speaker 2: two weeks. The most most recent reading, my goodness, I
23:41
Speaker 2: can't do anything. This segment, the most recent reading came
23:45
Speaker 2: out this week and it's back down to eleven hundred
23:48
Speaker 2: and eighty, so mortgage refinances have declined twenty five percent
23:53
Speaker 2: since that two week boom. And this also coincides with
23:58
Speaker 2: mortgage rates going back up like quarter percent. So we're
24:01
Speaker 2: in a very interest rate sensitive environment right now. And
24:06
Speaker 2: I also think that when you look at the NBA
24:09
Speaker 2: Purchase Index, which they have as well, that's up very
24:12
Speaker 2: modestly from the summer, about six seven percent right now.
24:18
Speaker 2: But the other piece that you have to look at,
24:19
Speaker 2: and this is data that we don't get from the NBA.
24:21
Speaker 2: You get it from other sources. The dollar value, the
24:26
Speaker 2: average size of the mortgage being taken out is smaller
24:30
Speaker 2: than at this time last year, which means that home
24:32
Speaker 2: prices are not moving up because you would be borrowing
24:36
Speaker 2: more if they were generally the trend that we've seen.
24:39
Speaker 2: So I think we're in a very rate sensitive environment
24:43
Speaker 2: that quite honestly, in order to get the housing market
24:45
Speaker 2: really moving, I think that national thirty year average has
24:49
Speaker 2: to be somewhere in the five and a half percent range,
24:52
Speaker 2: about three quarters of a percent below where it is today,
24:55
Speaker 2: and you kind of extrapolate, Okay, what needs to happen
24:57
Speaker 2: for rates to get there. The ten year treasury probably
25:01
Speaker 2: has to get down into the three five, three six range.
25:04
Speaker 2: Which of the ten year treasury is there, probably means
25:07
Speaker 2: something's really wrong in the economy, and I don't know
25:10
Speaker 2: that that really helps the housing market.
25:12
Speaker 3: Then, so big lenders must know what these trigger points
25:15
Speaker 3: are because they know what their book of business consists of.
25:18
Speaker 3: They know when people typically refinance. When I can save
25:21
Speaker 3: two hundred bucks a month or more, that's my signal
25:23
Speaker 3: to jump in there. Yeah, they know who in their
25:26
Speaker 3: book that would apply to. Therefore they must know what
25:29
Speaker 3: the thresholds are, so they're ready for this. Yes, that's
25:33
Speaker 3: not really that's just a more of a question slash
25:37
Speaker 3: slash observation. Okay, So that's one thing that occurs to me.
25:44
Speaker 3: Banks know when this activity is going to pick up
25:47
Speaker 3: and when it's unlikely to I guess the other thing
25:50
Speaker 3: is people did seem to pounce. Was that more than
25:54
Speaker 3: was that activity more than would have been expected by
25:57
Speaker 3: big banks given the drop in rates, or was thattable?
26:00
Speaker 3: If it was predictable, then people are behaving as usual.
26:03
Speaker 3: I think this is the point I was trying to make,
26:04
Speaker 3: which I got lost as I was pro bose it's fine. Yeah,
26:08
Speaker 3: thanks you too, kind.
26:09
Speaker 2: Just keep going.
26:10
Speaker 3: Okay, No, we have no choice. So is that more
26:14
Speaker 3: than would have been predicted by banks modeling? If so,
26:17
Speaker 3: does that suggest people might think that that was a fleeting,
26:22
Speaker 3: A just a fleeting, a revisiting of rates in them
26:29
Speaker 3: we have dropped like sixty three or something. Thirty year
26:32
Speaker 3: fixed rate was somewhere around there.
26:33
Speaker 2: Got down to six for a couple. Okay, it was
26:35
Speaker 2: lower than that. Excuse me.
26:36
Speaker 3: So it went from like six mid sixes to very
26:39
Speaker 3: low sixes. People pounced? Does that mean people think rates
26:42
Speaker 3: are more likely to go up and stay up? In
26:44
Speaker 3: other words, was the little frenzy of activity there more
26:46
Speaker 3: than their models would have predicted. I don't know why
26:49
Speaker 3: I'm asking this question because we can't answer it, but
26:51
Speaker 3: that would be interesting to me. We just don't have
26:52
Speaker 3: the data, folks.
26:54
Speaker 2: Armstrong Advisory Group is going to be hosting a seminar.
26:58
Speaker 2: We have one tomorrow, but honestly, if you don't have
27:01
Speaker 2: plans for tomorrow yet, you can obviously join us at
27:03
Speaker 2: Margarita Hill Resort, Cape cod then. But we're also hosting
27:07
Speaker 2: another one on October sixteenth, this one at the Showcase
27:10
Speaker 2: Superlucks in Chestnut Hill. There's also gonna be a live
27:14
Speaker 2: broadcast of the Financial Exchange, so you can come and
27:16
Speaker 2: say hi to Mike and I and watch us as
27:18
Speaker 2: we broadcast the show there, and then afterwards we're gonna
27:23
Speaker 2: be going through discussion of some key economic topics and
27:26
Speaker 2: taking a Q and A from the audience as well.
27:29
Speaker 2: It's at the Showcase Superlucks in Chestnut Hill on October sixteenth.
27:33
Speaker 2: That's a week from tomorrow. It's gonna rain all week
27:37
Speaker 2: next week. Come inside and join us because you might
27:40
Speaker 2: learn something and you'll get to stay out of the
27:42
Speaker 2: rain too, which is always a positive when it's fifty
27:44
Speaker 2: degrees outside. Again, Showcase Superlucks and Chestnut Hill on October sixteenth.
27:50
Speaker 2: Eight hundred three nine three four zero zero one is
27:54
Speaker 2: the number to call, or you can reserve a spot
27:56
Speaker 2: at Armstrong Advisory dot com. That number again is eight
28:00
Speaker 2: hundred three nine three four zero zero one.
28:04
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
28:07
Speaker 1: registered investment advisor. Nothing in the ad or in any
28:09
Speaker 1: Armstrong guide a specific financial, legal or tax advice. Consult
28:12
Speaker 1: your own financial tax into state planning advisors before making
28:15
Speaker 1: any investment decisions. Armstrong make contact you to offer investment
28:18
Speaker 1: advisory services.
28:20
Speaker 2: A couple weeks ago, we talked about the First Brand's bankruptcy.
28:23
Speaker 2: They are in auto parts manufacturer. They make brands such
28:27
Speaker 2: as fram oil, filters, and other things that you might
28:30
Speaker 2: know from your vehicles. And basically, the long story short
28:35
Speaker 2: is they took on way more debt than anyone thought
28:38
Speaker 2: they had and now they can't pay it all back,
28:40
Speaker 2: which is usually how bankruptcy happens, except for like the
28:43
Speaker 2: way more debt than anyone thought they had. Creditors through
28:46
Speaker 2: the summer thought they had like six billion in debt.
28:48
Speaker 2: It's turning out they might have like twelve to fifteen billion.
28:52
Speaker 2: No one's entirely sure because a lot of it was
28:54
Speaker 2: off balance sheet and done through these repo agreements, and
28:56
Speaker 2: it's just it's a mess. Jeffries, one of their credit
29:00
Speaker 2: funds has about seven hundred and fifteen million dollars of
29:03
Speaker 2: exposure linked to First Brands, making them one of the
29:06
Speaker 2: largest creditors. And look, this is not the housing crisis.
29:13
Speaker 2: I don't think it's the housing crisis.
29:15
Speaker 3: A you sound less confident than you did a week ago.
29:18
Speaker 2: Here's the thing. When you just have one company where
29:24
Speaker 2: this happens. It can be a fluke, it can be
29:27
Speaker 2: an off chance that there's something going on. There was
29:32
Speaker 2: also the Tricolor bankruptcy just before that, also in the
29:35
Speaker 2: auto space, a dealer and finanswer in that space, and
29:40
Speaker 2: so you start to look around and say, huh, is
29:45
Speaker 2: there something happening that's starting in the auto sector that
29:47
Speaker 2: might like spill out from there. Just because now that
29:52
Speaker 2: you're like starting to see what's going on with this
29:54
Speaker 2: First Brands bankruptcy, the questions that are on everyone's mind
29:58
Speaker 2: who's in that private credit space, whether it's auto related,
30:02
Speaker 2: art related, hotel related, invoice related, whatever it is. Everyone
30:07
Speaker 2: out there is sitting around looking going, well, what's this
30:13
Speaker 2: thing that I own worth? And do I want to
30:17
Speaker 2: keep it on my books or do I want to
30:18
Speaker 2: try to sell it off to someone? And how much
30:22
Speaker 2: are they going to pay me for it if I
30:23
Speaker 2: can get it off my books? And that, to me,
30:25
Speaker 2: it's not reminiscent of two thousand and eight, it's reminiscent
30:29
Speaker 2: of two thousand and seven, because remember things started bubbling
30:33
Speaker 2: up in early two thousand and seven in subprime. It
30:36
Speaker 2: wasn't until eighteen months later that things really blew up.
30:39
Speaker 3: Yeah, I agree to me. It is reminiscent of seven We.
30:44
Speaker 3: Not you and I, but we. The industry were asking
30:47
Speaker 3: questions of hedge fund and other managers at the time,
30:51
Speaker 3: what is your exposure to this? And they couldn't answer
30:54
Speaker 3: that question fully because no one analyst. And when I
30:58
Speaker 3: say analyst, I mean the person in an investment manager
31:00
Speaker 3: who evaluates investment for purchase and is ultimately responsible for
31:04
Speaker 3: its performance. They own it and they live and die
31:07
Speaker 3: by it. They don't see the whole picture. They just
31:09
Speaker 3: see the last couple of links in the chain. They
31:12
Speaker 3: don't understand, not because they're not bright. They are, but
31:15
Speaker 3: because nobody can see every link in the chain, you
31:19
Speaker 3: don't know what the cash flows you are getting are
31:22
Speaker 3: ultimately dependent upon. So it would be like Chuck, I
31:26
Speaker 3: loan money to you. What I didn't know because I
31:28
Speaker 3: can't see two links from me.
31:31
Speaker 2: I can only see you.
31:32
Speaker 3: Is that Tucker owes you money and that's how you're
31:35
Speaker 3: going to make the payments to me. You could call
31:38
Speaker 3: this off balance sheet, just call it a tangled web
31:41
Speaker 3: of interconnected obligations. It's hard to get to the root
31:45
Speaker 3: of the source of the cash flows for the sucker
31:47
Speaker 3: that you own. Now you are a triple A rated credit,
31:52
Speaker 3: you're a highly credit worthy borrower. I have no problem
31:54
Speaker 3: any money to you. What I didn't know is that
31:56
Speaker 3: you lent money to some non credit worthy I'll pick
32:00
Speaker 3: on Tucker and Lois here. You lent money to them
32:05
Speaker 3: getting lunch ons.
32:09
Speaker 2: Like, what did I do?
32:10
Speaker 3: I just need an example. You can't see more than
32:13
Speaker 3: one or two links down the chain, so you don't
32:15
Speaker 3: understand what's backing up the cash flows of the thing
32:17
Speaker 3: that you own.
32:17
Speaker 2: You don't even know what your exposures are.
32:19
Speaker 3: So you call asset managers in environment like this, you
32:21
Speaker 3: call a goldmansa actually call it him. Go what's your exposure?
32:24
Speaker 3: They say, just we don't have any that we're aware of.
32:26
Speaker 3: But as it turns out, because of the chain analogy
32:29
Speaker 3: that I'm using, everybody's exposed. This may be contained or
32:33
Speaker 3: it could be contagious.
32:35
Speaker 2: We don't just don't know which.
32:36
Speaker 3: See, we don't know whether it's contained or contagious at
32:39
Speaker 3: this point, and.
32:40
Speaker 2: That's the piece that is going to take some time
32:43
Speaker 2: to unfold here. So this may end up being a
32:46
Speaker 2: nothing burger in the broader economy. My intenna are up
32:50
Speaker 2: on it, though, Chuck.
32:51
Speaker 3: Combine this with soaring goal prices, easy financial conditions, stock
32:55
Speaker 3: market at record highs, home prices at record highs, elevated inflation,
33:00
Speaker 3: reckless fiscal policy. The confluence of things here has the
33:04
Speaker 3: potential for some very ugly outcomes.
33:07
Speaker 2: Quick break when we return Stack Roulette.
33:10
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33:48
Speaker 4: Well, this year's DAV five K is sold out, but
33:50
Speaker 4: you can still help our great American heroes. The race
33:53
Speaker 4: is Saturday, November eighth, Castle Island, and you can visit
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34:00
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34:18
Speaker 2: Mark, I got to talk about someone who shares your
34:21
Speaker 2: your name. Unfortunately, Mark Andresen, the venture capitalist, he gave
34:29
Speaker 2: an interview the other day. This was in a conversation
34:34
Speaker 2: with where was it was on the company's Stripe has
34:38
Speaker 2: a podcast called Cheeky Pint. I guess, oh boy, I
34:44
Speaker 2: don't know why stripes a payment processing company, and I
34:48
Speaker 2: just want to read, you know, a couple of quotes here.
34:52
Speaker 2: He says. The other great economic fallacy that I see
34:54
Speaker 2: everywhere is the idea that AI is going to somehow
34:57
Speaker 2: be this hyper successful thing, this hyper excel of productivity.
35:00
Speaker 2: They'll change everything and destroy all the jobs and yet
35:03
Speaker 2: still going to lead to people being eviscerated and being
35:05
Speaker 2: poor and not having anything. He says, even if it
35:08
Speaker 2: played out like that right, the result will be hyper
35:11
Speaker 2: deflation of prices, which is the thing that people miss.
35:14
Speaker 2: So in that environment, the price of business services will
35:16
Speaker 2: collapse and things that today cost a lot of money
35:18
Speaker 2: will suddenly be all cheaper free. Now he's not wrong
35:22
Speaker 2: about that piece of it, But what he's wrong about
35:24
Speaker 2: is the fact that the reason they'll be cheaper freeze
35:25
Speaker 2: because there's no demand for them. And if you are
35:30
Speaker 2: a business that fires everyone, how do those people make
35:34
Speaker 2: a living going forward? So again, I don't think a
35:40
Speaker 2: lot of this is particularly well thought out. I always
35:43
Speaker 2: hear people talk about deflation as if it's this good thing,
35:47
Speaker 2: and people don't remember that when there was actual deflation
35:50
Speaker 2: in the US historically basically every couple of years in
35:54
Speaker 2: the seventeen and eighteen hundreds, it was typically as a
35:58
Speaker 2: result of massive gaps in demand that resulted in tremendous
36:03
Speaker 2: job loss and hardship blake. When we think about deflation,
36:06
Speaker 2: were we think of it in terms of, well, I
36:08
Speaker 2: maintain my job, but the things that I buy get cheaper,
36:11
Speaker 2: when in reality, the reason that deflation usually happens is
36:14
Speaker 2: that a large number of people lose their jobs and
36:16
Speaker 2: purchasing power and can't buy those things anymore. And that's
36:21
Speaker 2: why deflation has historically been a thing. I don't think
36:25
Speaker 2: anyone can make a convincing argument that deflation is something
36:28
Speaker 2: that is actually good.
36:30
Speaker 3: No, Andreson has no idea what he's talking about. He
36:33
Speaker 3: may be a genius in his little domain. But anybody
36:36
Speaker 3: who took a few undergraduate economics courses could explain why
36:39
Speaker 3: deflation is bad. We did have deflation in the early
36:43
Speaker 3: stages of the Great Depression. We stayed on the gold standard.
36:45
Speaker 3: The FED could not pump enough money into the economy
36:47
Speaker 3: as a result, and debts, the real value of debt exploded.
36:51
Speaker 3: So you don't want deflation.
36:52
Speaker 4: If you owe debt, it's quite bad for you.
36:55
Speaker 2: And we've got a little bit of that in the
36:56
Speaker 2: United States.
36:57
Speaker 1: Yeah, just a bit.
36:59
Speaker 3: Yeah, we want the opposite. With a federal reserve that
37:01
Speaker 3: can print money, you won't have deflation ever. So again,
37:05
Speaker 3: I don't really know. This is the problem with reasoning.
37:07
Speaker 3: Without a modeling in your head, you say like preposterous things.
37:10
Speaker 3: You can criticize economists for their models, but they at
37:12
Speaker 3: least require that they think kind of rigorously and consistently,
37:15
Speaker 3: and they give them something a test against the real world. Look,
37:19
Speaker 3: AI could result in a productivity miracle, that's true, But
37:22
Speaker 3: deflation or even disinflation or low inflation doesn't follow from that.
37:27
Speaker 3: Those things are determined by whoever controls the money supply.
37:30
Speaker 3: Maybe it'll be the Fed, maybe it'll be the White House,
37:32
Speaker 3: if the President has his way. That's it's not money
37:37
Speaker 3: is not The rate of inflation does not emerge from
37:41
Speaker 3: real economic activity. It's determined by the entity that has
37:44
Speaker 3: control over the supply of money in the long run.
37:46
Speaker 2: Taking a look at markets as we had towards the
37:48
Speaker 2: top of the hour, the Dow is up one hundred
37:49
Speaker 2: and ninety points, s and p is up thirty eight,
37:52
Speaker 2: Nasdaq up one hundred and ninety one. So we've got
37:55
Speaker 2: a broad based rally taking place today, negating yesterday's life loses. Ultimately,
38:02
Speaker 2: heading into day nine of government shutdowns, there's still no
38:05
Speaker 2: government economic day that's going to be provided, which means
38:08
Speaker 2: no weekly job was claims tomorrow. So we won't be
38:10
Speaker 2: able to talk about that on tomorrow's show because it
38:13
Speaker 2: does not exist. But we got a whole lot more
38:16
Speaker 2: that we're going to talk about then. To all of
38:18
Speaker 2: you who are gonna join us at Margaritaville Resort, Cape
38:20
Speaker 2: cod looking forward to seeing you tomorrow, and we'll put
38:24
Speaker 2: on a great show